Finance minister Arun Jaitley is expected to hike service tax rates in order to bring closer to proposed GST regime. At the same time, the government needs to take steps for boosting local manufacturing and expand the tax payers’ base. Sachin Menon, national head of indirect tax, KPMG in India, talks about Budget expectations in an interview with Siddhartha P Saikia.

How much do you expect service tax rates to be hiked in the forthcoming Budget?

Recently, the committee headed by chief economic advisor Arvind Subramanian has recommended a standard GST rate of 16.9 to 18.9%. Logically, no government would want to make such a steep increase in service tax rate at one go in a GST regime. Therefore the government may look at hiking the service tax rate before introduction of GST by 1-2% so that the further increase under GST regime would not look that steep.
Would you expect the finance minister to tweak tax structures to push Make in India campaign?

It is expected that the finance minister may fine-tune the tax structure so as to give impetus to the domestic manufacturer including removal of customs duty exemption on more products. However, it is unlikely that budget will provide any new exemptions to domestic manufacturers. How ever, the government is expected to take steps to rectify the distortion in the current CENVAT regime such as correction of inverted duty structure, removal of restrictions’ on input credit, etc.

Do you think credit rationalisation will be a positive step towards GST?

At present, the availment and utilisation of CENVAT credit is subject to various conditions and has many exclusions such as expense towards setting up factory or office premises, construction, works contract, renting of cab, staff welfare expenses, etc. This leads to additional cost for the manufacturers and service providers and results in tax cascading.

As we are moving towards the GST regime, there is a need to broaden the input tax credit base so as to reduce the cascading effect of taxes, which in turn will reduce prices in the hands of the end customer. It is expected that the government shall take steps in this direction in this budget by allowing CENVAT credit on all the business related expenses as a step towards GST. The industry will welcome such a step, even if excise duty is slightly increased to neutralise the loss of revenue as the net impact will be zero to the tax payer.

What steps do you expect government will take to increase tax payer base?

At present, the threshold limit under excise law is R1.5 crore, whereas the same under the service tax law is only R10 lakh. As a road map towards introduction of GST, it is expected that government may reduce the gap between the two thresholds gradually. Accordingly, the threshold under excise law is expected to be reduced by R25-50 lakh and service tax threshold may be increased to R25 lakh thereby rationalise the tax payer base. Apart from the above measures, it is important that stringent policies be brought into effect to track evasions and bring them under the tax net such as connecting all tax payer data bases of income tax, customs, RBI, etc., to the GSTN data base to track evasion. The increased reliance by the government on digital platforms is a step towards expanding the tax payer base, promote transparency, cut down physical interaction with the administrators, plugging corruption and evasions

Do you think the clarity on levy of service tax/VAT on IT software and other intangibles will be a significant step towards ease of doing business in India?

The classification of IT software and other intangible products are presently under litigation due to conflicting interpretation by the state and central governments. At present the tax payer end up paying tax twice on the price of software and intangibles under state VAT as well as Service Tax law on the same transaction as both central and state governments adopt conflicting stand on this issue. This causes an additional tax burden on this industry and consumers. The government should take a considered view to avoid such double taxation of IT software products/intangibles and introduce a comprehensive tax policy to avoid double taxation. This will be significant step towards addressing the trust deficit in the mind of the tax payer, promote ease of doing business in India, reduce unwanted litigation and provide certainty on tax treatment of a given business transaction.
In any case, with the introduction of GST regime, it is expected that the said controversy may come to an end provided the GST rate on goods and services are kept at par.