The Budget proposes numerous changes in both direct and indirect taxes which can fit the label of creative incrementalism. The direct tax changes, while incremental, do indeed amount to a substantial reform. The government proposes to reduce corporate tax rate from 30 per cent to 25 per cent, phase out selective incentives, defer the general anti-avoidance rules (GAAR), and implement place of effective management and control (POEM) test for determining whether companies carrying on businesses outside India are subject to tax in India. With these proposals, the government will have implemented substantial parts of the Direct Taxes Code (DTC), obviating the need to proceed with what is left in the DTC Bill.

In contrast, the indirect tax proposals, while numerous and in some cases substantial, constitute just a patchwork, designed to address the anomalies of the current system. Rather than obviating the need for a major reform, they point to the urgency of the big bang reform, i.e., the GST. The measures proposed are neither a substitute for GST, nor helpful in paving the way for it. For example, to address the inverted duty structure, which adversely affects manufacturing in India (such as of mobile phones), and incentivises import of finished goods, the Budget reduces or eliminates duties on inputs for use in electronics manufacturing. Excise duty on mobile phones has been increased from 6 per cent to 12.5 per cent to reduce the bias in favour of imported mobiles. Duty concessions have been extended to imports of naptha, iron and steel, copper and brass scrap, which are inputs to further manufacturing.

To garner more revenues, the service tax base has been expanded to include all services provided by the government, other than selected services such as water supply, public health and slum improvement. The tax base has also been expanded to include services provided to governments by way of construction, repairs and maintenance. There are complex changes in the scope of entertainment services, most of which will now become taxable with the exception of admissions to exhibitions of cinematographic film, circus, recognised sporting events and theatrical performances. In the area of e-commerce, aggregators of services, such as Uber, will now be required to account for tax on the services, even if operating from outside India.

There are other changes in excise and service tax base and rates, such as those for peanut butter, flavoured and condensed milk, air travel, services of mutual fund agents, soft drinks and tobacco. The biggest change is the increase in service tax rate from 12.36 per cent to 14 per cent, and by a further 2 per cent to fund the Swachh Bharat Abhiyaan. This increase could prove to be a damper for investment and economic growth, as a large part of it is collected from B2B transactions and is not fully creditable to businesses. It will also add to the production and distribution costs.

The sheer magnitude of these changes is indicative of the imperfections and anomalies of our current indirect tax regime. Though well intentioned, they fail to provide lasting solutions. They call for a comprehensive revamp of the current regime through the introduction of GST. The Finance Minister reaffirms the introduction of this landmark reform in 2016, but the roadmap is still missing. Without it, the business community will not be able to plan for transition to the new regime. A mere reaffirmation of the date is too little, too late. Without any clarity on the compliance rules and procedures, it will be challenging for them to design the compliance framework for GST.