In line with pre-Budget expectations, Budget 2008 has not ushered in any dramatic changes in the indirect tax structure in India.
In terms of indirect tax rates, the peak basic customs duty (BCD) and service tax rates remain unchanged at 10% and 12%, respectively. As announced earlier, the finance minister has proposed that the concessional Central sales tax (CST) rate will be reduced to 2% from 1 April, subject to the states agreeing to a compensation mechanism in lieu of the reduced rate.
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The general excise duty rate has been reduced from 16% to 14%. This has been supplemented by significant excise duty reductions in specific sectors such as pharma, automobiles, and paper and paperboard. These rate reductions could have a mildly anti-inflationary effect.
On service tax, as in earlier budgets, a few new taxable service categories such as information technology (IT), software services, stock and commodity exchange services and supply of goods without transferring right to possession and effective control have been made taxable. Further, the threshold limit for small service providers has been increased from Rs8 lakh to Rs10 lakh. One significant change has been the increase in the rate for works contracts under the composition scheme from 2% to 4%.
On customs duty, there have been minor changes in rates of the basic customs duty of specific products such as life-saving drugs, specified parts of set-top boxes, some inputs for IT hardware, etc. Also, the basic customs duty on specified project imports has been reduced from 7.5% to 5%.
Separately, as a sector, the IT sector appears to be adversely impacted by the indirect tax proposals, with an increase in excise duty levied on packaged software and levy of service tax on various IT services.
In summary, the finance minister has chosen to provide continuity and stability on the indirect tax front rather than proposing any sweeping changes.
The author is partner and leader, indirect taxes, Ernst & Young.
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