7 steps that can boost indirect tax revenue, GDP growth
February, 19th 2016
India lowered its GDP growth projection for the current year to between 7-7.5 percent from the earlier forecast of 8.1-8.5 percent. Currently, besides the worry of the Chinese slowdown, there is apprehension that the US fourth quarter may not be as good as the rest of the year. The US slowdown could be far more adverse to global economy than even the Chinese slowdown.
For 2015-16, indirect tax collections are way ahead of targetFor 2015-16, indirect tax collections are way ahead of target
According to the government, the outlook is challenging, and without reforms GDP growth next year is unlikely to be significantly greater than this year. The mid-year review report of the economy that the Union Finance Minister Arun Jaitley tabled in Parliament said the sharp and continuing decline in GDP is a cause for concern. The slowdown will pose a challenge to meeting the fiscal deficit target of 3.9 percent of GDP and will also place a stress on tax revenue collections.
For 2015-16, indirect tax collections are way ahead of target. The direct tax collection is slightly behind but is narrowing down on the target. So, overall tax collection this year is reasonably comfortable. As per the above report the improvement in buoyancy reflects improved tax administration, especially in relation to indirect taxation. In spite of the likely improved tax administration, the tax payers have significant expectations from this year’s Budget.
Every budget is treated as a policy document formulating the government’s economic reform agenda. While much of the limelight last year was absorbed by GST, the BJP government made some significant changes in the existing framework of indirect taxes. The changes were focused primarily on Make in India, encouraging investments, reducing compliance and litigation, improving tax administration and enhancing revenue collection. The ensuing paragraphs summarise the Budget expectations for FY 2017 of various industries:
Manufacturing sector: The players expect a revival policy and action plan, simplification of compliance considering the multiple state tax legislations, reduction in central sales tax rate to 1 percent and no increase in service tax rate. The industry expects the government to continue encouraging local production by addressing sector-specific issues of inverted duty structure by reducing basic customs duty and SAD on inputs/ intermediates. It is expected that Budget 2016 will provide many more Indirect tax incentives to domestic manufacturers to boost 'Make in India' and ease of doing business in India.
Pharma industry: Life-saving drugs used for oncology and critical care/ ICU are expected to be exempted from excise duties. The excise duty rate on APIs at 12.5% leads to an inverted duty structure where the excise duty is paid at concessional rate of 6%. APIs being the principal raw material, reduction in duty of APIs could follow a logical sequence to an inverted duty structure. A clarification is expected on the coverage of medical services provided by clinical establishments considering the fact that the Department is raising service tax demand on Hospitals for providing infrastructure to Doctors.
Real Estate: There is a double taxation on the construction contracts where the contractors end up paying both service tax and VAT on the same value. It is expected that value chargeable to service tax and VAT, is aligned. This would act as a stimulus to the much desired growth in Real Estate Sector.
IT & ITES industry: Generally the BPO/ KPO export most of their services and qualify for refund of service tax paid. Presently there are restrictions of availment of credit such as rent-a-cab services, employee general insurance, etc., which leads to a significant cost to the industry. It is expected that the said anomaly is checked. Further, recently the Central Board of Excise and Customs has issued a Circular for speedy disbursal of pending service tax refund claims. The Circular is expected to make the entire process of refund claims faster and transparent.
E-commerce industry: The CST Act specifically states that tax shall be collected by the state from where the movement of goods commences. Due to revenue collection pressures and the lack of understanding of the nuances of the e-commerce industry, the VAT authorities are pushing market place companies to register and undertake compliances in multiple States. Recently the Sate authorities proposed to cast responsibility on e-commerce companies to deduct TDS on the amount payable to sellers for sales affected by them.
The compliance challenges faced by the e-commerce industry during their initial days continued during 2015 and no visible efforts were seen to address them in the future. It is expected that market place players, being service providers, are specifically covered under the service tax law and are clearly excluded from the definition of ‘dealer’ under the State VAT legislation.
Tourism: Presently Service Tax is applicable on renting of Rooms and Air Conditioned Restaurants despite the fact that these transactions attract Luxury Tax and VAT. There is an element of double taxation where the same value attracts Service Tax, VAT and Luxury Tax. The total tax outflow for a person is more than 20%. This significantly impacts the Hospitality Industry which is already facing the general slowdown of the global economy. It is expected that value chargeable to service tax, luxury tax and VAT, are defined in a manner that double taxation is avoided.
CENVAT chain and cascading effect of taxation: It is widely expected by the tax payers that changes will be made in the CENVAT rules to address anomalies in the current credit provisions including widening the definitions of inputs and input services. This will address the issue that non-eligible credits form part of the cost of goods and services on which final tax is paid, lead to tax on tax situation.
Parting considerations: The rigorous pre-budget consultations process piloted by the FM and his team of policymakers is already in motion, ahead of the announcement of the Budget 2016-17 on 29 February this year. During his opening remarks at the recent pre-budget consultation meeting, the FM implied that the focus of this year’s budget could revolve around inclusive growth and the social sector. The representatives from sectors like financial services, IT, SME, agriculture, education and healthcare, laid before the FM their ideas and earnest expectation and these have only set expectations pounding for positive changes. Hence the biggest expectation from this year’s Budget is the tangible resolution of significant issues that tend to hinder GDP growth.