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Service tax rate to climb to 14%?
February, 17th 2007

Mr S. Madhavan

Can we expect the Budget to reduce the excise duty on cars, other than small cars, from 24 per cent to, say, 16 per cent? Unlikely, says Mr S. Madhavan, Leader Indirect Tax Practice, PricewaterhouseCoopers.

"The differential excise duty regime for cars was introduced only last year," he reasons. "As regards excise duty rates, there is no reduction that is anticipated from the current 16 per cent rate, which is typically applicable," foresees Mr Madhavan. It is in fact feared that several goods, which are charged to the 8 per cent concessional rate of excise duty, will become chargeable at 16 per cent.

On the service tax front, too, there can be northward movements, initiated from North Block. "There is a possibility that the Government would increase the service tax rate to 14 per cent, as a step towards convergence of all federal indirect taxes to the targeted 16 per cent rate," predicts Mr Madhavan. As if to balance, there can be good news as regards thresholds. For, "it is possible that, based on the prevalent levels of exemptions in the State VAT (value added tax), the Budget may increase the threshold from the present Rs 4 lakh to Rs 8 - 10 lakh."

However, it must be kept in mind that the intent is to broaden the service tax base as well, he alerts.

Because `this is a trade off that the Government needs to make'. Mr Madhavan is of the view that the Budget may delineate the contours of the service tax regime whereby both the Centre and the State will, in parallel, and on a mutually exclusive basis, tax an appropriate list of services. Here is more about indirect taxes, from his recent interaction with Business Line:

On customs duty.

It is expected that customs duty rates will trend down to a range between 7.5 per cent and 10 per cent. Indeed, this is manifest in the reductions in duty rates that were effected on January 22. The intent is to clearly go down to ASEAN (Association of Southeast Asian Nations) levels in the next year or so, in order also to facilitate the Indo-ASEAN trade agreement, which is now very much in the offing.

On the proposed pruning of customs and excise exemptions.

On customs, the present fairly long list of end-use-based exemptions is expected to be significantly pruned. Certainly, not all exemptions will be discontinued and a limited set of exemptions will continue. These will typically relate to our international commitments, such as information technology products, and those goods which are not manufactured indigenously or are predominately imported for every day mass consumption.

On the excise front, it is again likely that the Budget would tackle product-related exemptions while leaving untouched the very significant area-based exemptions from excise, such as those applicable to Jammu & Kashmir, Himachal Pradesh, Uttaranchal and the north-eastern States, since it was only very recently that these exemptions, which were originally scheduled to be in force up to March 31, 2007, were extended by another three years. The big news is, therefore, that the Budget, while it will tackle product-related exemptions in customs and excise, will leave untouched the significant area-based excise exemptions.

On the move towards GST (goods and services tax).

In the last Budget, the Government had set out its commitment to introduce a national level Goods & Services Tax (GST) from April 1, 2010. The Union Budget 2007 is expected to, therefore, reiterate the Government's commitment to the GST by setting out a specific road map for its introduction. The idea of a uniform VAT/GST across goods and services by 2010 reinforces the need for harmonisation, of the two taxes that operate, at the federal level, i.e. the CENVAT and the service tax, in terms of both a single rate as well in terms of a single tax code.

A harmonisation of these two taxes would remove the duality of goods and service taxation at the federal level. This is urgent and it is hoped that this year's Budget will shed light on this important initiative.

On possible reduction in CST (Central Sales Tax) rate.

The Centre and the States have reached broad agreement on both the phase out of the CST and on the compensation package for the States, at the meeting of the Empowered Committee of State Finance Ministers held on January 3, The planned reduction of one per cent in the CST rate should be implemented with effect from April 1, 2007 as a first step towards its complete abolition by April 1, 2010. This is expected to be announced in this year's Budget.

D. Murali

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