The pledge to implement GST by 1 April 2010 has been deferred for a later date. Therefore, in this budget, the policy makers may take steps to align the existing indirect tax scheme with the proposed GST structure.
Central Sales Tax (CST) would be the biggest impediment for the proposed GST structure. CST being a non-creditable levy stands as a stumbling block in the smooth flow of credit across the supply chain. Though the rate of CST has been reduced from 4 to 2 per cent over the past years, the uncertainty in time frame vis--vis complete phase out of CST still continues.
Phasing out of Central Sales Tax (CST) is an important indirect tax reform expected in the present budget by the industry. However, considering the fiscal loss suffered by the Government due to reduction of the rate of CST in the past years, the phasing out of CST is likely to be deferred by the Government until, its negotiation with the State Governments on the implementation of GST.
Another reform can be expected in the place of supply rules for determining export of services. The taxability under the proposed GST structure would be guided by the place of supply rules proposed to be framed thereunder. Under the said rules, the taxability would differ on the basis of supplies made by a business to business (B2B) and business to customer (B2C). The glimpses of these rules can be seen under the existing rules for export of services.
As per the present rules, a service can be treated as exported outside India if it is established that the services are used outside India. Establishing the situs of the intangible activity i.e. service has been subject to litigation by the tax department. A departmental circular had clarified that the meaning of the phrase used outside India should be understood vis-a-vis the other conditions prescribed for specific services.
Given the clarification issued by the department, the condition of used outside India has virtually become redundant. To avoid any unnecessary disputes, the policy makers should consider deletion of the condition of used outside India and align the provisions with the expected place of supply rules under the GST regime.
While the country admits tax friendly policies for exporters, the poor administration clearly blurs the perspective. The exporters of goods and services are eligible to claim refund of the tax paid on its procurements. Though various clarifications/directions have been issued for speedy disposal of refund application, the tax administration have shown reluctance in granting refunds and posed unnecessary hurdles before the exporters in claiming the refund. This budget should consider laying stringent guidelines for the tax administrators for grant of the refund claim to the exporters.
IT industry has contributed significantly to the growth of the Indian economy. The greed for taxing this sector has resulted in double taxation of software i.e. levy of both VAT and service tax. Under the present scheme, electronic transfer of IT software in India attracts both service tax under the taxable service category of Information Technology Software Services and VAT as software can be treated as goods.
To avoid litigation, the IT industry opts to pay both service tax and VAT on the same supply of software, which leads to an overall increase in the cost of software. To remove this irregularity, the definition of ITSS should be amended to clearly exclude packaged software from the ambit of service tax law. Further, the definition of off-the-shelf and customized software should also be inserted to avoid any disputes.
The present indirect tax rate structure imposes tax under various legislations at different rates. For example, while service tax is imposed at rate of 10.3 percent, excise duty is payable at the rate of 8.24 percent. In this budget the policy makers should takes steps to harmonize the tax rates and align the same with the proposed GST rate.
Lastly, certain sectors suffer miscellaneous levies, like, research & development cess, automobile cess and so on. The forthcoming budget may seek to remove these levies which would not only reduce the cost of goods/ services but would also help in nearly achieving the scheme of proposed GST structure.
Broadly, these issues are not just critical for efficient administration of existing indirect taxes, but also imperative for smooth transition from the existing indirect tax regime to a competitive and flawless GST regime the country is eagerly awaiting.