Expectations from Budget '11 - other indirect taxes
February, 07th 2011
Previous articles in this column had addressed the possible expectations from Budget 2011 on service taxes, with respect to the service tax rate, the resolution of the several complexities in service tax law as well as the possible extension of the tax to certain new services. This article discusses the expectations from Budget 2011 on the other taxes and, in particular, the central excise duty.
At the outset, let us consider the expectations with respect to possible changes in the tax rates and the present set of exemptions. Considering the present inflationary pressures in a difficult macroeconomic environment, it is likely that the rate of basic customs duty, could be brought down. Surely, the present duty structure on oil will undergo changes, given the present high prices and the significant quantities of oil imports. In any event, median customs duties must be brought down, if we are to reach ASEAN levels in the near future.
In addition to the basic customs duty, there is also an expectation around the special additional duty (SAD) of 4%, which is supposed to countervail the sales tax/VAT. It is now recognized that the present position with regard to availment of credits in relation to the SAD are inadequate, in that these are not presently admissible to service providers, unlike manufacturers. Further, the position relating to refunds of SAD to traders/resellers are extremely cumbersome and result in significant blockage of funds. In the light of this, and as a possible measure to mitigate the inflationary pressures on imported goods, it is likely that the SAD could be completely abolished.
As a corollary to this, there could be an attempt to rationalise the number of exemptions in the present customs duty regime, so as to ensure the desired broadbasing of the tax.
On excise duty, it is not expected that the typical rate of 10% will be brought down to say 8%, as it was only recently that it went back up to 10%, as a partial rollback of the stimulus programme. It is however moot as to what the inflationary situation could bring about on excise rates. On the central sales tax, it is expected that the rate could be reduced to 1% from the existing rate of 2%, prior to the introduction of the already delayed GST.
With respect to exemptions and thresholds, it is expected that the product specific central excise exemption list would be trimmed, in order to broaden the base of the tax, and that the threshold exemption limit under the central excise could be lowered from the current level of Rs. 1.50 crore. This would result in generating revenues for the Central Government in the next fiscal besides being a step towards bringing about a common threshold for goods and services under the proposed GST regime.
Another issue is with respect to the disparity in the various provisions of central excise and service tax laws. There are, presently, different procedures and adjudicating processes prescribed under the respective statutes. In addition, disparities also exist on the admissibility of input tax credits to manufacturers/service providers. These relate to both raw materials as well as capital goods.
Further, the wordings of the CENVAT Credit provisions are the subject matter of prolonged litigation in the courts and this needlessly takes up enormous time and effort on the part of the assessees and the department. It is understood that there may therefore be a major attempt to align the provisions of central excise and service tax law, possibly even through a uniform tax code relating thereto.
Budget 2011 could also resolve the issue pertaining to coverage of services under Rule 6(5) of the CENVAT Rules. As per the provisions of the Rule, full credit can be availed in respect of 16 specified services notwithstanding that they are used in both exempt and taxable goods and services. The rationale for allowing full credit on these services was that they are general in nature and are required for routine business operations and that it is difficult to estimate the proportion of these services used for taxable and exempt streams. It is interesting to note that there has not been any addition to the list of these golden services from the time of inception of such a list in 2004, even though the number of taxable services has increased from 53 in 2004 to the 116 presently in force. It is therefore hoped that Budget 2011 would substantially expand the list of services covered under Rule 6(5 ).
The issue of admissibility of CENVAT credit on capital goods has been an area of concern for trade and industry. Presently, this credit can be availed only up to 50% in the year of acquisition of the capital goods and the balance in the subsequent year, notwithstanding the fact that the entire amount of duty has been paid over in the first year itself. In a classical VAT system, no distinction is typically made between capital goods and raw materials, as regards availment of credits. The phased availment is, in any event, not linked to the useful life of the underlying assets. The rationale is further diluted in the light of the fact that safeguarding provisions exist anyway, which require payment of duty equivalent to the amount of CENVAT credit availed on capital goods, in case they are removed as such from the premises of the manufacturer/ service provider. Given that CENVAT credit has to be reversed if capital goods are disposed off under various scenarios, it seems reasonable that full credit be available in the year of receipt and use.
It can be seen that there is enough and more to be done around customs and excise duties. It is hoped that Budget 2011 will attempt to accomplish as much as possible in regard to these taxes.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers