Most water cooler conversations in February are centred on Budget expectations. Political play seems to have ensured that the finish line for GST is moved a little further (behind 1 April 2016) and so few more laps will have to be run before the race is finally completed. So, the Finance Minister may use Budget 2016 as a perfect opportunity to bring in changes in the current service tax regime thereby aligning it with GST.
For instance, it is expected that the Government may further raise the rate of service tax to 16% – 17% to bridge the gap between current service tax rate and proposed GST rates. Also the Budget may rationalize the exemptions currently available under service tax to align with the minimal proposed exemptions under GST. With the increase in rate and taxable base widened, Budget may also alter other areas to keep up with its mantra of ease of doing business. For e.g. service tax exemption threshold may also be raised from the current limit of 10 lacs to a more substantial limit of 25 lacs.
This will provide respite to small businesses (by keeping them outside the service tax net and reducing compliance cost) and allow the indirect tax administration to play vigilante on bigger Another foremost area where changes are expected is the CENVAT Credit regime. Since elimination of the cascading effect of taxes and availability of seamless credit is one of the significant feature of GST, the restrictions/limitations at present imposed on the availment of CENVAT credit (such as restrictive definition of input and input service, availment of credit within 1 year etc.) are contrary to philosophy of GST. Such restrictions/unnecessary qualifications 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. Government may expressly clarify that such credit is wholly permissible and there is no requirement of reversal. Another topic that beckons change is taxability of ‘intermediary services’. While globally such services of facilitating or arranging sourcing of goods and services is treated as export, such services are liable to service tax in India where intermediary is located in India even though the service recipient is located outside India and payment is received in foreign exchange. 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 the 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 especially with very restricted advance ruling options. On the topic of 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. Accordingly, the advance ruling options should be liberalised. On the procedural front, Government may consider increasing the time limit for revision of returns from the current deadline of 90 days.
Problem of lack of provision for adjustment of service tax paid on bad debts may also be rectified. There are cases where, basis 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 the 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 would appear that ease of doing business and laying further ground work for GST would be the two cornerstones on which service tax changes would be based in Budget 2016.