Budget 2016: Indirect tax — a precursor

As the GST dream continues to be elusive, I expect this Budget to be a good example of “showing action” in existing central laws. I am sure this will be aligned to the introduction of GST, probably advancing the introduction of changes, which otherwise could have waited.

Exemptions removed

Last week, several pharma products were moved out of the exemption list, by introducing excise duty on them. I think more exemptions will be pruned. This is one of the “expected” changes for GST alignment where the Central Government is committed to reduce its list of exempt products; however, one can debate which products should be taxed and which continued to be exempted.

Framework changes

I do not expect that a Central GST regulation will be created as a common framework between excise and service tax. There are a few reasons for this. One, introducing a new law for a short period of 6 months to a year (ahead of GST) is not likely to be desirable. Two, technically, both the laws do not levy tax on similar taxable events — service tax is on supply of services for consideration, whereas excise is on manufacture (whether supplied or not, whether for consideration or not). Any attempt to bring in a common regulation could only be old-wine-in-new-bottle. Moreover, this will trigger change in law and totally avoidable interpretation debates.

One thing that can certainly be expected is that the list of levies that the Central Government levies on goods is reduced. For example, NCCD, which was introduced in 2003 on certain products only for a year, has since been continued. Moreover, its credit pool is different from the general excise duty pool. This needs to change. Either the duty needs to go (and get merged into excise) or credits are made fungible. Same will be additional excise duties. Additionally, on cesses, it can be expected that they are brought within the input credit chain to remove its cascading impact. The recently introduced Swachh Bharat Cess on services is a good example of how a 0.5% non-creditable cess, levied at all levels of the supply chain, can snowball into a much larger impact.

Furthermore, some of the “undesired” restrictions on credit eligibility need to be removed; credits should flow freely as long as there is a connection with the business.

Lastly, I expect that the Central Sales tax rate may be further moderated to 1% (from 2%) — again, with the objective of reducing non-creditable taxes.

Customs may share more data with states

Customs, per se, does not require any major overhaul, since it will survive GST. However, the Government may establish formal processes for sharing data between customs and State VAT authorities — a pre-cursor to what will happen in GST. This will usher in more incisive analysis of default or evasion for state governments and bring more taxpayers into the net. There could be other changes focussed on “ease of doing business”. For example, the 1% EDD, required to be paid in SVB cases, may be limited to a fixed period (say six months). Currently, there is no such cap and SVB process could take up to one to two years, if not more in certain cases.

Service tax needs a few tweaks

This regulation may see quite a few changes. Negative list introduced in 2012 is already creating controversies, and I expect the Government to be proactive in clarifying some open issues — whether it is taxability of non-compete fees or liquidated damages or right of first refusal or the scope and applicability of intermediary services or aggregator provisions (introduced last year).

Now that it is clear that electricity duty will not be a part of GST, it will not be unreasonable to expect that “electricity reimbursement” is allowed as a deduction from service tax on commercial rents. Moreover, the education sector may continue to be exempt in GST, and therefore, there is a need to zero rate services provided to this sector so that the cost of providing education does not inflate.

Most importantly, the penal interest rates of service tax need to be moderated. There are penalties that anyway apply to defaulters; therefore, the need to have steep interest rates of 30% needs a re-look.

Will compliances change to be GST ready

Key compliances such as the due date of payment of tax and periodicity of filing returns is currently different in service tax and excise as compared to what was suggested the Business Process Documents of GST released in October last year. It will be interesting to see whether these change will therefore, bring in the need to file monthly service tax returns. It will also provide the long expected shift of the due date of payment of excise and service tax from 6th of the following month to the 21st.

It remains to be seen whether any new services are added to domestic reverse charge or whether TDS such as provisions, or mandatory tax audit provisions are introduced. Moreover, the Government may create a pilot of GSTN by requiring a transaction level upload of data for excise and service tax.

Push to programs

The Government may use indirect taxes as the surf-board for reforms — both in terms of improving the ease of doing business in India, as well as giving a hard push to various programs such as “Make in India”, “Start up India”, and “Skill India” programs. Some of these programs are also interlinked, such as the success of Make in India is related to the success of Skill India. The benefits could either be tax breaks or ease of compliances. For example, there is a possibility of Government providing fiscal incentives to qualifying training institutes under the Skill India mission (that aims to impart skills to 500 million people by 2022).

Litigation reforms

An important item on the agenda could be taking active steps to reduce litigation or pendency thereof. It could start with changing the culture of appealing every order in favor of the tax payer and disputing only merit cases. This has been recently done in a couple of direct tax rulings and the same may be implemented for indirect taxes as well. Furthermore, the Government is also likely to make suitable (prospective) amendments on contentious tax provisions so that future litigation can be addressed. I also expect that the Government will focus hard on operationalizing some if the recent proposals such as increasing the benches of courts and other appellate authorities, automation and non-intrusive risk-based assessments.

Concluding comment

Overall, in my view, 2016 Budget has the potential to be the point of inflexion for indirect taxes. Even if the start date for GST is not within calendar 2016, the year is likely to see significant traction on the subject starting with the Budget. Moreover, an impetus is likely to be provided to key programs run by the Government to bolster investments, deepen the human capital, and improve the ease of doing business.

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