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What's likely on the indirect tax front
January, 10th 2007
Abolition of CST is top on the list of possible Budget priorities


Budget 2007 is only weeks away. What can we look forward to in the area of indirect taxes? Abolition of Central Sales Tax (CST) is top on the list of possible Budget priorities, foresees Mr D. Arvind, Executive Director, heading the indirect tax practice at Deloitte Haskins & Sells, Mumbai. He is a Chartered Accountant, company secretary and a Certified Investment Analyst, and a regular speaker on his specialisation at different forums. Here is his take on a few questions from Business Line, about the likely proposals that may be unveiled on February 28.

Why is it urgent to abolish CST?

This is because, abolition of CST will not only help in a smoother transition towards the GST (goods and services tax) regime, but will also be a reprieve for the industry burdened with a tax in respect of which no credit is available. Alternatively, a reduction in the tax from 4 per cent to 2 per cent can be an effective step in this direction.

What about the customs front?

Additional duty of customs in lieu of VAT (value-added tax)/ sales tax is to be synchronised with the CST structure. A reduction in the peak rate of customs duty especially in the case of FMCG (fast moving consumer goods) would adversely impact the domestic manufacturers of those goods as the Indirect tax costs in India are on the rise.

On the taxation of services.

A much-awaited clarification is in respect of the export of services as contemplated in Rule 3 (c) of the Export of Service Rules, 2005. The Government should frame definitive guidelines in respect of the interpretation of the words `used' and `delivered'.

In terms of Section 66A and the Import of Rules, it is understood that the taxable service provided from out a country other than India and received by a person in India is to be taxed in the hands of the service recipient.

However, notification No 22/2005 dated June 7, 2005 exempts the taxable service provided outside India and consumed outside India in the course of sailing a ship. By virtue of the exemption notification confusion is caused as to whether the services that are not specifically exempted but consumed outside of India would be taxable. Clarification is due in respect of the import of services.

The provisions of the Foreign Trade Policy need to be harmonised with the amalgamated Cenvat Credit Rules, 2004 in order to ensure that manufacturers are not prejudiced vis--vis the service providers as regards the availment of credit scrips under the Serve from India Scheme.

Currently, small service providers providing taxable service of value not exceeding Rs 4 lakh in any financial year are exempt from service tax. An increase in the threshold exemption level is needed from the existing Rs 4 lakh to Rs 10 lakh to reduce the burden of tax administration.

Anything likely about SEZ (special economic zones) sops?

In respect of the tax sops available to SEZs, though the Board of Approval has recommended the activities that can be carried out by the SEZ developer (vide a recommendation letter issued on September 21, 2006) pertaining to the non-processing zone, clarification is required to list the activities, which enjoy exemptions in the processing and the non-processing zone.

Excise expectations?

A reduction in the Central Excise Duty from the current average mean rate of 16 per cent to 14 per cent will make it commensurate with the apparent idea of going for comprehensive GST targeted for the year 2010 by the Finance Ministry. Clarifications need to be given as to whether the report by the CBEC (Central Board of Excise and Customs) on job work valuation is going to be implemented in the excise regime so as to remove the impending fear in the minds of the manufacturers.

D. Murali

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