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Indirect taxes: Not tailored for a perfect fit
March, 04th 2013

Budget 2013 seems to have embarked on the path of ‘inclusive growth’. The Finance Minister P. Chidambaram has announced an array of measures to arrest the slow rate of economic growth and counter the dwindling fiscal deficit. The proposals appear to focus on three broad themes: Stability in the tax environment, tax on the ‘super rich’ in a bid to achieve some degree of social equality, and broad-basing tax compliance to enhance the tax-GDP ratio and address fiscal deficit. The themes are apparent in the indirect tax proposals, with no change in the merit tax rate across customs, central excise and service tax; addressing the need for a stable tax environment for industry as against the speculated increase in rates to align with proposed GST (Goods and Services Tax) rates; limited changes in specific tax rates largely targeted at the luxury goods segment; and introduction of amnesty scheme under service tax along with other enabling provisions to enforce tax compliance by industry.

The crucial industry expectation of a confirmed date and roadmap for introduction of GST met with disillusionment. The only positive sign was the announcement of CST (Central Sales Tax) compensation for States, which may provide some impetus to the efforts to get States on board. However, the Finance Minister did indicate that a majority of States are in favour of GST and efforts are under way for early introduction of a draft constitutional amendment bill and GST legislation.

The already reeling automobile sector has suffered a blow with the increase in custom duties on imported luxury motor vehicles, cars of specified value and engine capacities, and old cars, and an increase in excise duty on privately owned SUVs. The tobacco sector received a jolt with an 18 per cent increase in excise duty on cigarettes and cigars. Mobile phones would be costlier with excise duty raised from 1 per cent to 6 per cent on retail price exceeding Rs 2,000. The textile industry is breathing easy with the re-introduction of excise duty exemption on manufacture of branded garments. The semiconductor industry would see an opportunity for local manufacturing with the increase in custom duties on imported set-top boxes from 5 per cent to 10 per cent. The aerospace maintenance, repair and overhaul (MRO) industry has reason to cheer with customs duty exemptions extended to aircraft parts.

Non-taxable services under the negative list now include vocational courses offered by institutes affiliated to the State council of vocational training, and testing activities related to agriculture and agricultural produce. Eating out would become expensive with air-conditioned restaurants chargeable to service tax. Other services such as providing public vehicle parking and renting of immovable property by educational institutes would attract service tax. In the construction space, abatement for payment of service tax has been reduced from 75 per cent to 70 per cent for units with carpet area exceeding 2000 sq. ft or value exceeding Rs 1 crore.

To encourage compliance and broaden the tax base, a one-time amnesty scheme has been proposed, waiving off interest and penalty on voluntary declaration and payment of service tax and immunity from any other proceedings. In a much-awaited relief on determining tax positions, the advance ruling facility has been extended to resident public limited companies and new businesses undertaken by existing manufacturers, including cenvat credit of input services used in manufacture of goods.

In a move that would raise eyebrows, the power of CESTAT (Customs, Excise and Service Tax Appellate Tribunal) to grant stay has been limited to a maximum of 365 days, after which the stay shall stand vacated even if the case is pending for no fault of the assessee. This comes as a second rude shock to assesees after a recent circular from the Central Board of Excise and Customs saw tax officers embark on demand recovery in matters awaiting grant of stay. Adding to the distress is the introduction of punitive measures, amending the arrest provisions to make certain offences non-bailable under customs and excise, and personal liability up to Rs 1 lakh has been prescribed for directors and officials for specified wilful actions under service tax.

Overall, the budget is a mix of positive and negative offerings. The lack of clear direction on GST has slowed the momentum of indirect tax reforms. Budget 2013 will be remembered for its sober measures rather than big-ticket indirect tax reforms.

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