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Indirect Taxes In 2016
January, 15th 2016

The year is set up with a lot of expectations on the tax front. The current Government is over 18 months and one budget old, and therefore is believed to have sufficient first-hand experience in fiscal matters. Indirect taxes are touted to be the surf-board for reforms – both in terms of improving the ease of doing business in India, as well as giving a hard push to the various programs (like ‘Make in India’) initiated by the Government.

The obvious first is introduction of Goods and Services Tax or GST. This reform is critical because it addresses the key tenets of tax – simplicity, certainty, widening of tax base, elimination of double tax and transparency. In addition, one of the key aspects that GST addresses is “neutrality”. Today’s tax structure is fragmented and creates distortions. GST has the potential to usher in labour & capital neutrality (no cascading), geographical neutrality (common market), trade neutrality (Make in India), supply chain neutrality, product neutrality, and transaction/finance neutrality. A well designed and implemented GST can help reduce the tax burden on products, and at once improve the Tax-GDP ratio.

This is a significant change; a merger of 20+ indirect tax regulations into one melting pot, with a common legal and administrative framework. Trade and industry will have to have a fresh approach to indirect taxes – they would be called upon to review their existing business and supply chain models, identity and capitalize on opportunities created by GST, and address and mitigate threats. At the minimum, they would also have to gear up their systems and processes to meet the ‘asks’ of GST.

The timeline for implementing GST is not certain as of now. The Government has shown strong intent to introduce this change in the current calendar itself – interestingly, as GST is an indirect tax, it need not have a start date as 1 April (first date of the fiscal year). Therefore, the Government may possibly be aiming, in my view, for a 1 October 2016 roll out (given the process of approvals is likely to at least take time upto July/ August 2016).

The second, in my view, would be the steps taken to prepare for GST. With a change so significant, the Governments (both State and Centre) are likely to update existing regulations so that they get more aligned to GST principles. For example, the Centre may withdraw excise duty exemptions on a list of products as the proposal in GST is to keep such exemptions to the minimum. Also, procedures and compliance requirements may be updated to get closer to the requirements under GST.

The third could be an independent, yet connected, reforms agenda for the ‘Make in India’, ‘Start up India’, and ‘Skill India’ programs. Some of these programs are also interlinked, like the success of Make in India in a way depends on the success of Skill India. The benefits could either be tax breaks or ease of compliances. For example, there is a possibility of Government providing fiscal incentives to qualifying training institutes under the Skill India mission (that aims to impart skills to 500 million people by 2022).

The fourth agenda could be taking active steps to reduce litigation or pendency thereof. It could start with changing the culture of appealing every order in favour of the tax payer and disputing only merit cases. This has been recently done in a couple of direct tax rulings and the same may be implemented for indirect taxes as well. Further, the Government is also likely to make suitable (prospective) amendments on contentious tax provisions so that future litigation can be addressed. I also expect that the Government would focus hard on operationalizing some if the recent proposals such as increasing the benches of courts and other appellate authorities, automation and non-intrusive risk based assessments.

Overall, in my view, 2016 has the potential of being the point of inflexion for indirect taxes. Even if the start date for GST is not within calendar 2016, the year would see significant traction on the subject. I expect that at the minimum the drafts of GST regulation will get substantially settled during this year. It will see extensive interaction between the industry and the Government on debating the design, framework and operational aspects of GST. The year would also see changes that are linked to ushering in GST. Moreover, an impetus is likely to be provided to the key programs run by the Government to bolster investments, deepen the human capital, and improve the ease of doing business.

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