Interim budget: Hits and misses for indirect taxes
February, 25th 2014
Over the past decade, indirect taxes have played an increasingly important role in the economic growth and revenues of India. Most of the indirect taxes such as service tax, value-added tax (VAT) and excise duty have also undergone substantial changes in the last decade in terms of legislative changes, broadening of tax base and rationalization of rates.
With the services sector being one of the biggest contributors to gross domestic product of India in recent times, there has been a corresponding expansion in service tax in terms of scope and revenue. Since its inception in 1994, the list of services on which service tax was levied increased from three to 119 in 2012. Currently, the positive list-based regime has been scrapped by the government and a negative list-based approach is applicable, where all activities undertaken for consideration by one person for another are taxable, except for the negative list entries and exemptions. The negative list-based approach has further broadened the tax base, with almost all activities undertaken by businesses coming within the service tax ambit. Thus, the growth of the services sector in India has also resulted in an impetus in the service tax scope and revenue.
Another important development is the introduction of the VAT regime on sale of goods, instead of the erstwhile sales tax regime. The sales tax regime involved the cascading effect of taxes, since it was a turnover tax levied at each leg of the supply chain without any deduction for the tax paid on earlier stages. Presently, all states in India have replaced their sales tax legislation with the VAT regime. The implementation of VAT has gone a long way in not only reducing the cascading effect of taxes, but also resulted in increase in revenue due to larger compliances, broader coverage and more revenue security for the government. This is also in line with practices being followed in other countries.
The indirect tax rates have also undergone substantial changes in the last decade. While the customs duty and excise duty rates have shown a downward trend, VAT and service tax rates have increased.
The year 2004 saw the integration of input credit of excise duty and service tax paid on goods and services by businesses, where the input credit pertaining to goods and services was now considered as a common pool. This was a significant measure since input credit is a fundamental principle of indirect taxes. Prior to 2004, the credit for all the above was being governed by separate rules. The Modvat Credit Scheme (later replaced by Cenvat Credit Rules, 2002) under the Central Excise Act and Section 94(2)(ee) [later replaced by the Service Tax Credit Rules, 2002] of the Finance Act were finally integrated and formulated into the Cenvat Credit Rules, 2004. This was a welcome change that resulted in a more effective and efficient utilization of input credit by the industry towards their output liabilities.
The aforesaid changes in policy and rates have consequently amended the administration and procedures of these indirect taxes. A favourable change over recent years has been that the tax administrators have shifted from a manual mode to an online mode for undertaking the compliances. For instance, in central excise and service tax, the automation of central excise and service tax portal was introduced around four years back, where assessees can obtain registration, file returns, file service tax refund claims, etc., online. Further, most states have also started online portals for undertaking VAT compliances such as Karnataka, Maharashtra, Andhra Pradesh, etc., where the compliances can be done online. This has significantly reduced the time, cost and effort put in by businesses on tax compliances.
Another recent, but undesirable trend is the increase in indirect tax litigation that has taken place. Due to the substantial changes in law brought about recently, there are more taxpayers approaching courts to challenge the constitutional validity of the provisions. Further, the tax department is also increasingly initiating legal proceedings against taxpayers mostly due to pressure of revenue. While efforts have been made to make legislation simpler, and frequent circulars are issued to clarify the legal provisions, it has not had the desired impact on tax litigation.
In short, it can be seen that most of the recent changes made in indirect tax laws are intended to be a precursor towards the introduction of a combined goods and services tax (GST). However, given that there is still no definite timeline for implementation of GST, how far these changes would facilitate the implementation of GST remains a question.