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Holistic rationalisation of indirect taxes needed
February, 16th 2008
In relation to excise duty, all major players in the industry have advocated a reduction in the current rate of 16 per cent to 14 per cent.


The upcoming Budget may not make many fundamental changes in the present indirect tax regime, but we may still expect that the Finance Minister will address some of the prevailing anomalies, which have been a cause of distress among the industry at large. Thus opines Mr S. Harishanker, National Head, Indirect Tax, Tax and Regulatory Services, KPMG.

"This year's Union Budget also has the onerous task of embodying suitable amendments to ensure that we are a step closer to GST (goods and services tax)," he adds, during the course of a recent e-mail exchange with Business Line.

Excerpts from the interview:

On the GST path.

The forthcoming Budget would hopefully reaffirm India's commitment to the proposed transition to GST by defining a concrete roadmap for the requisite indirect tax reforms. With higher compliance rates ensuing in enhanced revenue collections, a holistic rationalisation of the indirect tax regime is the need of the hour.

At the very outset, the Union Budget 2008 is expected to embody a more definitive roadmap for GST implementation. In pursuance of the proposed switchover, a reduction is expected in the Central Sales Tax (CST) rate from the currently applicable rate of 3 per cent to 2 per cent.

There are also speculations regarding removal of the existing exemptions/concessions under GST. A gradual phase-out of such exemptions, starting from this year's Budget, would be more viable from the industry's perspective rather than an abrupt end to the same.

On Customs duty.

Talking of Customs duty, while some rationalisation is warranted in cases where the duty structure is inverted, a further reduction in the peak rate of Customs duty may not be viable in the light of the appreciating value of rupee against dollar, which has anyway resulted in relatively cheaper imports.

However, this non-reduction may result in a sharper duty cut on many key products in the following year if the Government intends to keep up with its currently planned strategy of bringing the average peak rate down to 5 per cent by 2010.

Another recent development which merits consideration is entitlement of refund of the entire Additional Duty of Customs (ADC) component paid by traders importing goods into India for the purpose of subsequent sale.

However, an exemption of ADC, instead of refund mechanism, may be more conducive to a taxpayer-friendly regime.

On service tax.

Service tax has always been amongst the key areas of focus every year. One can fairly expect a further widening of the tax-net owing to the inclusion of certain new services primarily to negate the impact of phasing out of CST.

For instance, there are whispers surrounding the taxability of certain services rendered in relation to amusement parks, healthcare, education and legal services.

However, it remains to be seen as to what kind of services would eventually become taxable, given the socio-political pressures and the fact that majority services are already within the ambit of the current net.

Further, the forthcoming Budget should remedy certain prevailing anomalies in the service tax regime.

For instance, while specific exemptions have been provided in relation to certain services rendered to the Government in performance of its statutory functions, various other services rendered in the like fashion continue to be taxable.

A comprehensive exemption to all such services procured or used for a common objective is desirable, rather than granting exemption under specific service categories. This would help achieve homogeneity in the service tax laws.

On Cenvat credit.

As regards Cenvat credit, the current regime restricts the availability up to 20 per cent in a situation where `separate records' are not maintained towards taxable and exempt goods/services. However, the regulations lack an elucidation of what the term `separate records' refers to, which has lead to an ambiguity.

The Union Budget should incorporate a simple method for attributing input service tax to taxable and non-taxable/exempt output.

Further, it would be desirable to specifically carve out the exact scope of input services that are eligible for Cenvat credit, as this issue is at present not free from ambiguity. A clear example of this is credit availability in respect of services such as outward transportation, which has always been a subject matter of litigation.

On excise duty.

In relation to excise duty, all major players in the industry have advocated a reduction in the current rate of 16 per cent to 14 per cent. Talking of sector specifics, there are numerous proposals seeking reduction in the currently applicable duty rates.

Key sectors include textile manufacturing which has experienced the negative impact of rupee appreciation over last year, and which is also expecting restoration of exemptions in relation of specific capital goods, withdrawn last year.

The petroleum sector has sought review of the duty structure on oil and oil products and has proposed a floating tariff regime, owing to sharp rise in crude oil prices.

The Indian automobile industry has also urged a slash in the current duty rate of 24 per cent on cars, multi-utility vehicles, and petrol-driven goods transport vehicles.

Further, a duty cut has also been sought on certain other specific items like processed foods, pesticides, drugs, medicines which are subject to a 16 per cent duty.

However, before announcing any such reductions, the Government should surely keep in mind the likely structure in the forthcoming GST regime.

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