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Indirect tax reforms to look for in Budget 2009
July, 06th 2009

Taxes are no longer a revenue-earning tool, but are increasingly regarded as a valuable aid in shaping the economy through industry-specific and other policies, observes B. Sriram, a senior tax professional in Ernst & Young. He cites, as example, the recent stimulus packages that offered a temporary reduction in excise duty and service taxes.

Significant milestones in indirect tax reforms, in recent years, include the introduction of the concept of CENVAT (formerly MODVAT) and the implementation of state-wise Value Added Tax (VAT), with the aim of reducing multiple rates and the cascading effect of taxes, mentions Sriram.

Adoption of transaction value in excise and customs, and progressive reduction in customs duty rates to harmonise the same with ASEAN rates are other such reforms, he adds, during the course of a pre-Budget interaction with Business Line, over the email. However, he is not happy that the tax administration continues to practise bureaucratic arbitrariness with least regard to the more taxpayer-friendly policies.

Budget 2009, says Sriram, could be considered as reform-oriented if the following key issues are addressed: Mechanism to ensure that there are no leakages in credit eligibility on the taxes paid on input/ input services; efficient tax exemption/ refund/ rebate route for exporters; elimination of the inverted duty structures in excise duty; aligning of rates/ systems in the indirect taxes for migration towards GST; and introduction of the GST Bill in the Budget session to ensure that the deadline of April 1, next year, is maintained.

Excerpts from the interview.

On credit entitlement.

The objective of the CENVAT credit scheme is to ensure that there is no cascading of taxes. The definition of input service in the CENVAT Credit Rules (though a bit vaguely worded) extends the eligibility to even services such as share registry, and credit rating, to name a few.

There should be no room for any ineligibility as regards service tax paid on input service for producing goods or providing services. However, Tribunals and Courts are flooded with meaningless interpretations. The need of the hour is a proactive tax administration which quickly provides clarifications to settle controversies, weed out ambiguities and thus stem litigations.

Further, certain industries suffer from an inverted duty structure which results in credit accumulation, with no scope for its utilisation; one example is the textile sector. Crores of rupees are stuck in the books of these companies as credit, with no hope of the same being enjoyed. As a result, business entities are forced to factor in the indirect taxes as a cost in any transaction though, ideally speaking, the same should not enter the cost stream but only act as a pass-through.

On refunds/ rebates for exporters.

Exporters continue to face difficulties in obtaining refunds and rebates which in turn makes their business uncompetitive in the international trade. Further, under the current tax structure, manufacturers of exempted goods are not allowed to avail credit of tax/ duty paid on inputs and input services. There is no mechanism for recoupment of such taxes, when the exempt goods are exported, and therefore the tax paid becomes a cost.

On the duplication of tax.

One unaddressed area is the growing attempts of the Centre and the States seeking to tax the same transaction. The consumption of any economic activity will be either in the form of sale of goods or provision of service. The Constitution of India has empowered the States to tax the sale of goods (other than inter-state sale, imports and exports) and the Union to tax the inter-state sale, imports and exports of goods besides provision of service.

In the absence of a definition of service in the service tax law, and the resultant ambiguity, both the Centre and the States vie to tax the same transaction.

Technological advancements result in more complex tax issues. A classic example is the attempt of the State Governments seeking to tax the telecom service as sale/ deemed sale of goods, and the Centre wishing to tax the same as service.

Finally, the apex court clarified (at least on the infrastructure portion of telecom service) that there is no deemed sale and that only the Centre was vested with powers to tax in this case. The residual issues arising out of the above such as whether the sale of prepaid SIM cards, value-added services such as wallpapers and ringtones, are to be treated as goods or services are still being grappled with at various levels of litigation. Other complex issues relate to software, IPRs etc.

The dispute between the Centre and the States is to some extent understandable, but what really pains are the disputes that arise even between two central taxes, namely excise duty and service tax.

Typical examples are the attempts of both the excise and the service tax authorities wishing to tax, say, installation charges of machinery in the hands of a manufacturer; and applicability of service tax even on packaged software (which is liable to excise duty).

All hopes are now pinned on GST, which is expected to eliminate many of systemic/ interpretational issues of the current day indirect taxes.

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