Indirect taxes rewind of 2015 and expectations from 2016
January, 15th 2016
The year 2015 was touted as the year of introduction of the single biggest Indirect tax reform India has witnessed - Goods and Services Tax ('GST). The path was laid for introduction of GST in 2014 itself when the Constitution (122nd Amendment) Bill, 2014 for ushering in GST was tabled in Lok Sabha.
Since the beginning of Financial Year 2015-16, the industry was looking forward to introduction of GST as the government had been pegging it as a pro development reform which would increase India's gross domestic product and positively impact ease of doing business. The first step towards integration of myriad Indirect taxes was complete when the GST Bill received Lok Sabha's assent in the budget session in May 2015. Due to political log jam, the government was unable to resolve the impasse over GST till the end of the year.
While much of the limelight in the last year was absorbed by GST, we saw the BJP government making some significant changes in the existing framework of Indirect taxes. The changes were focussed primarily on encouraging investments, reducing compliance and litigation, improving tax administration and enhancing revenue collection.
At the Service tax front, the biggest impact was the change in the Service tax rate from 12 per cent to 14 per cent and introduction of the Swachh Bharat Cess of 0.5 per cent on all services. To garner more revenue from Service tax, the base was expanded to include services of amusement and entertainment events, construction contracts for government/ ports/ airports and services of mutual fund agents and distributors.
One of the key changes in Service tax was introduction of the concept of aggregators.Aggregators who are intermediary platform providers like Ola, Uber etc. were made liable to pay Service tax under reverse charge mechanism. The intention of introducing the concept of aggregator was to ensure ease of tax administration and prevent tax leakages.
The VAT authorities once again failed to understand the nuances of the e-commerce industry and were pushing market place companies to register and fulfil VAT compliance in multiple states. A recent proposal was discussed by the state authorities to cast responsibility on e-commerce companies to deduct TDS on the amount payable to sellers for sales affected by them. The compliance challenges faced by the e-commerce industry during their initial days continued during 2015 and no visible efforts were seen to address them in the future.
The mobile phone industry was seen grappling with the issue of VAT rate payable on chargers sold along with cell phones. The Supreme Court in the case of State of Punjab &Ors vs. Nokia India Private Limitedheld that battery charger sold along with phones is not part of the cell phone but an accessory and liable to VAT at higher rate of 12.5 per cent in Punjab.
The industry also witnessed a slight increase in the rate of Excise duty and Customs duty from 12.36 per cent to 12.5 per cent and 28.85 per cent to 29.44 per cent respectively. The most significant change was amendment in the notification for claiming exemption of CVD on certain excisable goods including mobile phones to promote 'Make in India' campaign. The Supreme Court in the case of SRF Ltd. vs Commissioner of Customs (Import & General) held that the benefit of exemption granted to certain excisable goods with the condition not to avail Cenvat credit can be extended to importers. The Apex Court decision benefitted importersand brought them at par with local manufacturers. The government, to propagate 'Make in India' issued a prospective notification clarifying that the benefit to be available to local manufacturers.
The government's intention of encouraging local production could be seen throughout the year by addressing sector-specific issues of inverted duty structure by reducing basic customs duty and special additional duty on inputs/ intermediates. The industry expects similar trends to follow even in 2016.
In a bid to reduce litigations in Indirect tax, enable speedy dispute resolution and facilitate trade, the government recently raised the threshold limit for filing appeals before CESTAT and High Courts to INR 10 lakhs and INR 15 lakhs respectively.
While many of the changes in 2015 came as a much needed relief; the industry still has immense expectations from the budget 2016 for further simplifying the Indirect tax environment in India.The government is expected to push the paddle on clearance of the Bill in Rajya Sabha in the budget session and a simultaneous release of the draft GST Act in public forum to give industry sufficient time to prepare for implementation.
It is highly likely that changes will be made in the Cenvat rules to address anomalies in the current regime including widening the definitions of inputs and input services. The government should come up with a model Cenvat credit mechanism for a smoother transitioning to GST.
The government may also consider fully removing SAD to provide the much needed impetus to local manufacturers and the IT industry to overcome the inverted duty structure which was partially addressed last year. We are hopeful that budget 2016 will provide many more Indirect tax incentives to domestic manufacturers and service providers to boost 'Make in India' and ease of doing business in India.