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A Budget that may simplify the indirect tax system
February, 04th 2016

With the introduction of the Goods and Services Tax (GST) regime missing the target date of April 1, 2016, one would expect the government to use the window of the Union Budget to bring in changes in the current indirect tax regime, which can be seen as a step forward towards GST.

The government must bring in measures to revive industrial growth and facilitate a smooth transition to the new tax regime. In the previous Budget, as a step towards GST, certain changes were brought about—increase in the rate of service tax, doing away with education cess, correction of inverted duty structure, etc—and we can expect the Budget proposals to further these efforts.

The industry expects that key amendments shall be proposed in the current tax regime itself in the ensuing Budget, which are in consonance with ‘Make in India’ and ‘ease of doing business’ campaigns of the central government.

First, in order to take the rates of service tax closer to the rates envisaged in GST, service tax may be increased marginally by the government from the current level of 14.5%. There have been resentments to the periodical upward revisions in the rate of service tax and, therefore, the government could consider keeping the tax incidence on end-consumer-based services such as telecom, restaurants, air travel, life insurance, etc, at same level by suitably adjusting the levels of abatement or by other means. Further, considering the increase in various cost indices and the transition to GST, the current threshold limit under service tax may be increased from R10 lakh to R25 lakh.

Second, the government may address another significant area of concern to the industry, which is the availability of CENVAT credit. Keeping in mind the principles of GST, industry is hopeful that the definition of input service will be widened so as to allow credit of input taxes on all costs incurred in relation to business, such as cost of civil works for setting up a factory or premises of service provider, rent-a-cab service availed for business purposes, etc. In fact, when we operate a negative-list-based service tax regime, there is no reason for a restrictive CENVAT credit regime. Again, credit availability needs to be extended to Swachh Bharat Cess (SBC) and accumulated education cess and secondary and higher education cess as on February 28, 2015, and May 31, 2015. Else, it leads to tax cascading. Service tax on import of service under reverse charge mechanism should be allowed to be paid through CENVAT credit, which will lead to reduction in cash outflows and compliance costs. These measures could support ‘Make in India’ initiative.

Third, over the last 20 years, transactions of import/export between related entities have increased. The existing mechanism of examination of such transactions by the Special Valuation Branch (SVB) in Custom House has proved cumbersome and has not evolved with time. There are uncertainties over passing of assessment/renewal orders by the SVB, resulting in importers making extra duty deposits, whose refund results in delays. It is time the government reorganises the SVB in accordance with the requirement of modern-day governance practices and introduces steps such as Advance Pricing Agreements.

Fourth, industry hopes that the government would go ahead with its slated objective of enhancing ‘ease of doing business’, clarifying certain grey areas in provision of service tax laws. Industry expects that, in order to bring an end to disputes, clarifications are issued regarding scope and coverage of intermediary services, taxability of liquidated damages, payment to expats, simplifying the definition of exports, etc.

On the sales tax side, it was envisioned that the rate of Central Sales Tax (CST) would be reduced from 2% to 1% in 2009 and phased out with GST. But now, with the delay in introduction of GST, it is imperative that at least the rate of CST be reduced to 1% immediately.

Overall, 2016 can be the year of change for indirect taxes. Though the date for introduction of GST is not clear, the year should see significant progress on the subject. The Constitutional Amendment Bill should sail through in the Budget session and, ahead of that, the draft of GST regulation should be finalised and released to public for comments. The government can use the Budget as an opportunity to introduce key changes in the current indirect tax regime, addressing industry concerns and demonstrating its intention to create a positive environment for industrial growth ahead of introduction of GST.

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