The finance ministry is contemplating several reforms in the indirect tax space, even as the Goods and Services Tax (GST) has been caught in a political tussle.
There is a possibility that the exemption threshold for payment of service tax will be hiked. This will be good news for many small independent service providers, ranging from consultants to interior designers. But the government is also considering a balancing act by lowering the exemption threshold limit for excise.
At present, if the aggregate value of services does not exceed Rs 10 lakh in a financial year, the service tax provider can claim exemption. Under excise laws, small-scale industries enjoy exemption if the goods cleared from their factories during a financial year are valued at Rs 1.5 crore or less. While no final decision have been taken yet, the service tax exemption threshold limit could be hiked from Rs 10 lakh to Rs 25 lakh. "It will be very difficult to reduce the threshold limit under excise at one go to Rs 25 lakh, but there will be some palatable adjustment," said a government source.
This exercise is viewed by tax experts as a move towards GST. While the GST threshold will be decided by the GST Council only after the Act is introduced, there has been a thinking in the past that taxpayers with an annual turnover of Rs 25 lakh or less will not fall within the GST ambit.
It will be a welcome move if the threshold limit of Service Tax is increased, a lot of small service providers will get relief from it..Ashutosh KhaitanSee All CommentsAdd Comment
These revisions in threshold limits are likely to be introduced in the coming budget, together with a pruning of exemptions both under service tax and excise. "The negative and exemption lists under service tax (relating to services that are not taxable) are limited. However, hundreds of goods enjoy exemption from central excise. This list is likely to see a significant overhaul," said a government source.
A report submitted last December by the Arvind Subramanian Committee had suggested standard GST rates of 17-18%, a lower rate of 12% for certain goods and services (like medicines, clothing), and a higher 'sin tax' rate for goods like luxury cars and aerated beverages. It also suggested that exemptions be confined to a few merit goods (such as food, power, education, health). The exercise to carve out a list of exemptions has already commenced and could come in handy for the 2016 budget.Government officials admit that there is some leeway for increasing the service tax rates, from the present 14.5% to around 16%, but the issue is not yet on the discussion table. In the last budget, finance minister Arun Jaitley had proposed to levy Swacch Bharat Cess at a rate of 2% or less on all or certain services, if the need arises. A 0.5% cess was introduced with effect from November 15 last year. A hike in service tax rates, if any, is unlikely to be by way of a cess, sources said.In a move that could benefit India Inc, discussions are on to widen the base for cenvat credit. Cenvat credit allows manufacturers or service providers a set-off of the taxes paid on the inputs or the input services that are used while manufacturing the final products or providing the output service. In the recent past, several telecom service operators have been denied cenvat credit for the duties paid by them in relation to telecom towers and high courts have taken varying views. Or, as rent-a-cab services used by a company (not engaged in this business) is specifically out of the ambit of cenvat credit, many companies, especially in the IT sector, that avail of such services for their employees are unable to get a credit.
"Widening the availability of input tax credit will boost both the manufacturing and service sectors. While the GST would help ensure a seamless credit structure for input taxes, as it is unlikely to be introduced as of April 2016. Redressal of any input tax related hiccups in the existing system will be a boon," said Bipin Sapra, indirect tax partner at EY.