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« Indirect Tax »
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Quick Reactions To The Budget Proposals On Indirect Taxes
March, 01st 2016

The Economy Survey, tabled by Finance Minsiter in the Lok Sabha on 26.02.2016 describes  India as a refuge of stability and an outpost of opportunity at a time of global turbulence and volatility. The targeted growth for 2016-17 is pegged at 7-7.5 per cent , put out in the Economic Survey, does not paint a very glowing picture of the economy. After estimating a 7.6 % growth for the current fiscal, the numbers are no doubt conservative, because they imply a slowdown next year.  The economy grows, but slowly. Yet it is one of the fastest growing economies with growth rate more than double of global rate.

Economic Survey 2015-16 highlights need for more investment in human capital, expresses concern at declining educational outcomes, emphasizes importance of improving efficiency in delivery of services in the health sector.

Economy Highlights

  • Global economy has a slower growth @ 3.1% in 2015
  • Indian economy still strong @7.6 economic growth dispute global crises
  • Tax to GDP ratio 10%
  • CPI inflation moderate @ 5.4%
  • Focus on transform India
  • Tax reforms seen as one of the major pillars of Budget

The risks of further global slowdown and turbulence are mounting. This complicates the task of economic management for India. It has three serious implications. First, India must strengthen our firewalls against these risks by ensuring macroeconomic stability and prudent fiscal management. Second, since foreign markets are weak, India must rely on domestic demand and Indian markets to ensure that India’s growth does not slow down. And third, India must continue with the pace of economic reforms and policy initiatives to change the lives of our people for the better. The survey spells out short term as well as long term objectives. While maintaining macro stability, India needs to find domestic sources of demand to keep the growth going.

The Union Budget 2016-17 is focussed on 'Transform India' theme having transformative agenda which includes –

  1. Agriculture and Farmers’ Welfare: with focus on doubling farmers’ income in five years;
  2. Rural Sector: with emphasis on rural employment and infrastructure;
  3. Social Sector including Healthcare: to cover all under welfare and health services;
  4.  Education, Skills and Job Creation: to make India a knowledge based and productive society;
  5. Infrastructure and Investment: to enhance efficiency and quality of life;
  6. Financial Sector Reforms: to bring transparency and stability;
  7. Governance and Ease of Doing Business: to enable the people to realise their full potential;
  8. Fiscal Discipline: prudent management of Government finances and delivery of benefits to the needy; and
  9. Tax Reforms: to reduce compliance burden with faith in the citizenry.

One good thing about the Budget is that for the first time, role of tax payers in nation building has been acknowledged (Para 117 of speech). The tax proposals, both direct and indirect, are aimed at the following major reform areas :

  1. Relief to small tax payers.
  2. Measures to boost growth and employment generation.
  3. Incentivizing domestic value addition to help Make in India.
  4. Measures for moving towards a pensioned society.
  5. Measures for promoting affordable housing.
  6. Additional resource mobilization for agriculture, rural economy and clean environment.
  7. Reducing litigation and providing certainty in taxation.
  8. Simplification and rationalization of taxation.
  9. Use of Technology for creating accountability.

So far as indirect taxes are concerned, they are expected to yield a net revenue gain of ₹ 20670 crores. On Indirect Taxes, no major changes have been proposed in customs and excise law (except changes in duty structure).

Some changes have been made in customs and excise duty rates on certain inputs, raw materials, intermediate products etc, besides simplifying procedures so as to reduce cost and improve competitiveness in sectors like capital goods, information technology, defence, textile, mineral, fuels / oils, chemicals, paper, newsprint, maintenance, repair and over hauling of aircraft or ship etc. Excise duty has been exempted for ready mix concrete. Excise duty of one percent without input tax credit or 12.5 percent with input tax credit has been levied on articles of specified jewellery items. Excise duty on tobacco products has been enhanced by 10 to 15 percent.

In Service Tax, some exemptions have been introduced but they may not have major impact on ordinary assessee. These exemptions are generally related to social welfare schemes meant for weaker sections / rural welfare.

Highlights of Service Tax related changes

  • Introduction of new cess w.e.f. 1.6.2016 called Krishi Kalyan Cess (KKC) @0.50%  on all taxable services
  • KKC to be cenvatable
  • Effective Service Tax rate would be 15 percent including 0.50%. Swachh Bharat Cess and 0.50% Krishi Kalyan Cess
  • Assignment by the Government of the right to use radio frequency spectrum and its subsequent transfer to be treated as taxable service and not as sale of intangible goods.
  • Interest rates rationalized / reduced
  • Dispute resolution scheme to be introduced
  • New benches of CESTAT
  • Cenvat Credit Rules simplified

Exemption has also been provided to annuity services provided by National Pension Scheme and Employees Provident Fund Organization, construction of affordable houses upto 60 square meters under any scheme of Central or State Government including any PPP scheme, reducing Service Tax to 1.4% of premium on specified single premium annuity insurance.

Certain exemptions have been withdrawn in relation to transport of passengers by roadway / cable / car etc; construction  / erection / commissioning etc for mono rail or metro; services provided by senior advocate to advocate or by a person represented on an arbitral tribunal to arbitral tribunal. Further, negative list entry which covers services of passengers with or without accompanied belongings, by a stage carriage is proposed to be omitted and taxed after abatement @ 60 percent but without benefit of input credit.

In order to reduce litigation and create an environment of trust, a dispute resolution mechanism has been proposed which is indeed a welcome step. Another major step announced is to create eleven new benches of indirect tax Tribunal (CESTAT). Cenvat Credit Rules are also being amended so as to improve credit flow, reduce. compliance burden, reduce litigation in Cenvat issues and enable smooth input tax credit distribution.

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