Most water-cooler conversations in February are centred on Budget expectations. The finance minister may use Budget FY17 as an opportunity to bring in changes in the service tax regime, aligning it with GST. The government may raise the rate of service tax to 16-17% to bridge the gap between the current service tax rate and proposed GST rates. The Budget may rationalise exemptions available under service tax to align with the minimal proposed exemptions under GST. With the increase in rate and taxable base widened, the Budget may alter other areas to keep up with its mantra of ease of doing business. For example, service tax exemption threshold may be raised from the current Rs 10 lakh to a more substantial Rs 25 lakh. This will provide respite to small businesses.
An area where changes are expected is CENVAT credit. Since elimination of the cascading effect of taxes and availability of seamless credit is one of the features of GST, the restrictions/limitations at present imposed on the availment of CENVAT credit are contrary to the philosophy of GST. Such restrictions should ideally be done away with and all costs in relation to business activities should be allowed as credit.
There is also a need to clarify ambiguity surrounding interpretation of Rule 6(3A) of CENVAT Credit Rules, 2004. The current rule doesn’t expressly provide that inputs and input services used exclusively for taxable service should not be considered for reversal of credit. The government may clarify that such credit is wholly permissible and there is no requirement of reversal.
A topic that beckons change is taxability of ‘intermediary services’. While globally such services of facilitating or arranging sourcing of goods and services are treated as export, these services are liable to service tax in India. Ideally, the Budget should place such services in line with the global practice by treating them as exports.
Another hitch causing (un)ease in doing business for service providers is high interest rates of 18% to 30%. This vitiates service providers’ ability to litigate genuine tax positions on interpretative issues. The high interest cost acts as a colossal deterrent. On advance rulings, options under service tax are available only in case of proposed business operations. This prohibits most existing business players from enjoying the benefit of upfront certainty on tax positions. So, advance ruling options should be liberalised. On the procedural front, the government may consider increasing the time limit for revision of returns from the current deadline of 90 days.
The problem of lack of provision for adjustment of service tax paid on bad debts may also be rectified. There are cases where, based on the issuance of invoice or completion of service as per the Point of Taxation Rules, 2011, service tax payment is made, but service charges collection could not be made from service recipients. In such a scenario, service charges become bad debts for which the service tax law does not provide any adjustment.
All in all, it appears that ease of doing business and laying further groundwork for GST would be the two cornerstones on which service tax changes would be based in Budget FY17.