Indirect Tax expectations from the Budget 2015

Small penThis Union Budget 2015 is expected to be a reality check on the Government’s ability to walk the talk and present transformational budget that will spur growth and foster investments into manufacturing and infrastructure. The budget is definitely expected to focus on incentivizing manufacturing to ensure “Make in India” is not a mere policy statement but a ground reality.

There is still a significant import bias in several sectors due to our inefficient indirect tax structure. Therefore, it is important that the budget addresses the following in the interim to provide Indian manufacturing a tax regime which is closer to being internationally competitive.

• Anomalies of inverted duty structure
• A liberal Cenvat credit regime with no restrictions as a precursor to GST

Inverted duty issues arise due to taxes/duties on inputs/intermediates being more than the taxes/duties on manufactured outputs and the value addition at the manufacturing level not being sufficient to offset accumulated credits in the Cenvat chain. There are various reasons for these, for example in sectors where manufacturing has significant imports Special Additional Duty of Customs (SAD) of 4% is applicable over and above the Excise duty of 12%. The accumulated credit of 17% plus (including cesses) requires a significant value addition to offset this credit, since the output Excise Duty is generally at 12%. SAD has been stagnant at 4% though the Central Sales tax has moved down to 2%. While SAD is available as a refund to traders, for manufacturers the assumption that it is available as a credit is a myth, since there isn’t sufficient value addition to offset this duty in several sectors.

The expectations are that SAD will be reduced to 2% in this budget and would help an inverted duty structure.
This issue gets further accentuated with restrictive Cenvat Credit rules around construction related activities, legitimate business related expenses on grounds of nexus, and legitimate employee-related expenses. The budget should liberalize Cenvat Credit rules and allow credits for all business-related expenses as a precursor to introduce GST.

The budget should also revisit the restriction of six months’ time limit for credit under Cenvat and the aspect of penal interest rates for delayed payment of service tax. Such penal rates should be for specific cases of tax avoidance only.

Introduction of GST in April 2016 is another important reform that will incentivize manufacturing and provide a real thrust for “Make in India”. Therefore, the passage of the Constitution Amendment Bill in the budget session becomes very crucial. A statement in this direction is expected from the Finance Minister.

However, the intent of levying 1% additional origin-based tax on inter-state supplies of goods is a considerable distortion and can potentially be more damaging than 2% CST, which was only on sale of goods. This needs an urgent revisit and we hope wiser counsel prevails when we debate and pass the Bill.

Some action around Tax Administration and Reform Commission (TARC) Report will be welcome with ease of doing business in India a high priority on the Government’s agenda. This will be especially true for customs valuation with cases languishing for years without any action. It will be better to move to customs audit process after import, like in most countries.

This budget is indeed an opportunity for the Government to showcase its reform agenda and I am sure the Finance Minister will give us some positive steps.

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