BackUnion Budget 2015-16: An indirect tax perspective
With respect to services, there has been some attempt to broadbase taxes and reduce exemptions
Premium(Manpreet Romana/AFP)
From an indirect tax perspective, the general sentiment in most pre-budget polls was that there would be major indirect tax related reforms for facilitating the implementation of goods and services tax (GST) next year. The reiteration of 1 Apri, 2016 as the date of implementation of the much awaited indirect tax reform is indeed heartening. Steps such as merging education cesses with the main levies of central excise and service tax and increase in rate of service tax have been introduced as steps aligning the existing tax regime with the proposed GST structure. However, further details relating to the evolving GST framework and status of the draft GST legislation for providing much needed insights to the industry were notably missing.
In line with the Make in India initiative, major amendments involved rationalization of excise duties to 12.5% and increase in the service tax rate to 14%, with the education cess/secondary and higher education cess element being subsumed within the main levies. This is the first time since the implementation of service tax law in 1994 that service tax rates have exceeded mean excise duty rates on goods.
However, there are other ramifications of these proposals worth noting. While there has been an attempt to address the inverted duty structure and credit accumulation for various industries, the higher service tax rate is likely to undo some of the goods work and lead to accumulation of credit for manufacturers. Elimination of education cesses is a step in the right direction, transition issues do not seem to have been addressed. For instance, the question of utilization of accumulated credits on education cess are not dealt with in these proposals.
With respect to services, there has been some attempt to broadbase taxes and reduce exemptions, as the negative/ exemption list of services has been trimmed. Going forward, all services provided by the government to business entities would be taxed. Withdrawal of exemption of service tax on services of construction of ports and airports is likely to lead to increased cost of these infrastructure projects. However, with the increase in the service tax base, corresponding increase in expansion of the input credit base has not been announced.
From the perspective of customs, there has always been a debate on the duty rate on passenger cars in a completely knocked down condition. Going forward this debate is likely to extend to commercial vehicles as the concept of CKD has been extended to commercial vehicles.
The proposed Swachh Bharat Cess has open issues around its credit and possible cascading effect which need to be clarified.
With respect to dispute resolution, an attempt has been made to rationalise penalty provisions. As a welcome measure, the penalty provisions applicable on excise, customs and service tax have been restructured by introducing different slabs of penalty in situations where fraud/ intention to evade taxes is present and in those where fraud/ intention to evade is not present. The budget proposals seeks to restrict penalty in situations where demand and interest has been paid within 30 days from the issue of SCN/ order. It is interesting to note that in cases where no concealment is involved, penalty up to 10% can still be imposed. However, no measures for reducing frivolous and excessive tax demands have been announced.
All in all, it seems that a lot of work around reforms and measures has been deferred as the recommendations of the Tax Administration Reform commission have not found their way in the budget proposals yet. Developments post the budget would be keenly watched.
Rajeev Dimri is leader-indirect tax, BMR & Associates LLP.
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