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Focus on indirect tax reforms
February, 18th 2010

Given the uncertainty about the timing of introduction of goods and services tax (GST), it is essential that during the transition period, existing indirect taxes continue to function efficiently. Thus, it is critical for policymakers to focus on the core issues concerning existing indirect taxes in Budget 2010.

Firstly, the legislators need to reach a firm decision on the fate of central sales tax (CST). Although the CST rate has been brought down from 4% to 2%, the timeframe within which the legislators propose to completely phase out CST is uncertain .

Phasing out CST is important for smooth implementation of GST. Since credit of CST is not available against state VAT liability , the levy of CST hinders the smooth flow of credit across the supply chain, as envisaged by the GST concept. The policymakers should consider completely phasing out CST in Budget 2010 as a step towards the implementation of GST.

Secondly, various cess such as R&D cess and automobile cess should be eliminated, as they increase costs and compliance for taxpayers. Revenues from these cess are used ostensibly for development of respective sectors. The purpose for which these cess are used may be achieved from a separate allocation of other government revenue.

The removal of these cess would also be consistent with the GST concept of a single tax subsuming various indirect taxes.

Thirdly, one of the primary issues being faced by exporters, particularly from a service tax perspective, is to prove that their services qualify as exports. The condition of used outside India for a service to qualify as export has been the subject matter of litigation by the tax department.

In a recent circular, the department has clarified that the meaning of the term used outside India should be understood in the context of the characteristics of the particular category under the export rules in which that service falls.

By this interpretation, given that the term use has to be interpreted in the light of other conditions prescribed for a service to qualify as export, that makes the condition of use outside India redundant. Accordingly, in Budget 2010, the legislators may consider going a step further and remove altogether the condition of use outside India .

Another key issue related to export of services is essentially procedural in nature, but is critical as it significantly impacts the cash flow of exporters. This is the grant of refund of service tax to exporters, whether of tax paid on output services or cenvat credit of input services.

There is no streamlined procedure for granting refunds to exporters and divergent practices are followed by the authorities in various tax jurisdictions.

Further, the procedure prescribed is extremely cumbersome leading to tremendous delays and litigation nullifying the entire purpose of the refund scheme. A clear and transparent procedure needs to be implemented in the Budget that is mandatorily followed consistently across all jurisdictions and results in speedy grant of refunds to exporters.

Lastly, another aspect that has scope for improvement is the eligibility of assessees to file advance rulings seeking clarification on a particular tax issue. This scheme should be available to even Indian resident assessees so that they have an effective forum for resolution of their queries.

Currently, this scheme is applicable to assessees proposing to undertake a business venture in India. The applicability may be widened to include business activities that have already been commenced by the assessees. In addition, there are indirect tax issues that are specific to certain industries.

For instance, dual levy of Customs duty and service tax on import of software. Despite notifications clarifying this issue, importers face significant problems in the implementation of this notification.

Thus, there are significant issues on administration of current indirect tax system that need to be addressed in the upcoming Budget. However, the biggest challenge before the policymakers is to ensure that such amendments are aligned with the proposed GST model to pave way for its successful implementation.

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