Budget 2011 ushered in a series of changes from an indirect tax perspective. The dominant objective underpinning these changes appears to have been the transition towards goods and services tax (GST). Another common economic policy thread that is discernible from several of these changes is the taxing of high end-consumption.
Early in his speech, the finance minister pointed out that the constitutional amendment Bill would be tabled in this session. This initial statement of intent was followed by maintenance of uniformity in the median rates of excise duty and service tax in order to smoothen the transition to GST.
The move towards uniformity of rates continued when, in line with the enhancement of the value-added tax (VAT) rate slab of 4-5% in most states, excise duty on goods hitherto chargeable to excise duty at 4% was enhanced to 5%. Further, amendments have been introduced in the CENVAT Credit Rules, 2004, to remove ambiguity vis-a-vis eligible inputs and input services for credit availment—another move that keeps transition to GST in sight.
Moving to the second underlying objective of taxing high-end consumption, two new taxable service categories have been proposed to be introduced, (a) services by air-conditioned restaurants having liquor licence; and (b) short-term accommodation in hotels, clubs, inns, guesthouses, etc.
Further, the taxable service category of services provided by clinical establishments has been enhanced to include any services provided by a clinical establishment having central air-conditioning and more than 25 beds for in-patient treatment.
Also, the taxable category of legal services has also been broadened significantly and now excludes only those legal services that are provided by individuals to other individuals. Clearly, the intent is to levy tax on consumption of high-end hospitality and medical facilities as well as high-end legal services.
Enhancement in the scope of existing taxable categories have also been done for several services, the most important of them being business support services. The enhancement in the scope of business support services is particularly critical because, with this change, business support services as a taxable service category has effectively become a comprehensive enough residuary category for taxation of services.
The idea underlying the foregoing of enhancements appears to be ensuring that most conceivable services come under the service tax net. This enhancement of the service tax net, too, has a resonance in the context of roll-out of GST. Given that most conceivable services would be in the service tax net now, the idea of transitioning to a negative list-based taxation of services has gained fresh significance. The finance minister has proposed a public debate on this.
Streamlining tax administration appears to have been a key driver as well. In a move of immense significance, Point of Taxation Rules, 2011, have been introduced with a broad objective of moving towards an accrual-based methodology for service taxation as opposed to the extant cash-based one. As per the rules, service tax would be payable on the earliest of the following events: provision of service, billing, collection.
While, from a broad policy perspective, this is an welcome move, in the short term, it would resolve some of the open points under the current service tax regime, and simultaneously provide a precursor to the taxation of supply of services under the proposed GST; certain aspects in these rules may add to the complexities too. For example, there is lack of clarity as to how would bad debts, discounts, cancellation of invoices, etc., would be treated under these rules.
From a streamlining of tax administration perspective, another major change is the introduction of the concept of self-assessment under the Customs Act. That this is a welcome move towards a trust-based compliance system is also evident from the fact that small-scale service providers with a turnover of less than Rs60 lakh have been kept out of the purview of service tax audit.
Strict penalty for default is a logical corollary of a trust-based compliance system. Accordingly, for the first time, prosecution provisions, including provisions for imprisonment for default, have been introduced in service tax. Also, the penal provisions under service tax have been restructured to encourage self-correction and maintenance of accurate transaction records.
In summation, the indirect tax proposals primarily appear to be a testimony of the government’s seriousness to implement GST.
(Sudipta Bhattacharjee, manager, BMR Advisors, contributed to the column.)