Budget 2016 and Indirect Taxes- compliance and exceptions

Amidst the continued uncertainty around GST there were expectations that this Union Budget may usher in changes in central excise and service tax to align toward a Central GST. The expectations were around rate increases especially in service tax, base expansion both under excise and service tax with changes in thresholds and a more efficient credit rule. Although some of these did find a place in the budget proposals, but not in a holistic manner as one would have liked.

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While the budget seeks to remove 13 cesses, which was a welcome move, two new cesses have been introduced.

The budget, however, seeks to impose new cesses, e.g., the Krishi Kalyan Cess effective 1 June 2016 on all taxable services at 0.5% taking the effective service tax including Swach Bharat Cess to 15%. Unlike the Swachh Bharat Cess the Krishi Kalyan cess is creditable, though the enabling provisions in law are awaited. The creditable Krishi Kalyan Cess with a one-on-one nexus may be a pass through for service providers but could be a cost for manufacturers.

The other is the Infrastructure Cess as excise duty effective 1 March 2016 ranging from 1% to 4% on automobiles depending on their engine capacity and overall size, with certain exempt category such as hybrid vehicles, taxis, ambulance, etc. This cess will have to be discharged by cash and not through any credit pool and will result in increase in prices of a vehicle.

The broad themes of the budget proposals are:

  • Incentivizing domestic manufacture to expand the policy thrust of “Make in India”
  • Reduce litigation and bring about certainty of tax
  • Simplify and rationalize taxes and duties

A series of changes were introduced in customs and excise duties across several sectors such as IT, telecom, defence to incentivize domestic manufacture. This include withdrawal of customs and excise exemptions on finished products including on government procurement (such as in case of defence) and exempting parts, components from duties of customs and excise for local manufacture.

Even the procedures to enjoy such exemption on parts and components for manufacture have been simplified for ease of business, which is a welcome move. The intent is to incentivize value add domestic manufacture and encourage manufacture of critical components in India.

Volume of indirect tax litigation and time to attain closure was another area of serious concern for both the government and the industry. To address this issue the budget proposes a Dispute Resolution Scheme, 2016 for cases that are pending for adjudication at the level of first appellate authority namely the Commissioner Appeals across customs, excise and service tax. There is a significant volume of cases pending at this level and the idea behind the scheme is to provide a window for early closure. The proposed scheme entails payment of tax or duty with interest and 25% penalty. This scheme will currently cover cases up to a value of INR5 million.

One may argue to make this scheme attractive; the penalty quantum could have been lowered. Nonetheless this scheme provides an opportunity for the industry to evaluate each case on merits and weigh the time and costs of litigation versus interest and penalty and seek this window for early closure accordingly.

Another key proposal has been around changes in Cenvat credit rules that govern recovery of tax across the central levies of customs, excise and service tax. These include changes in definition of capital goods and inputs, amendments in the rule dealing with taxable and exempt supplies for expanded credits.

These proposals are by and large salutary in nature and will benefit the industry in improved recoveries and reduced cascading. The changes also seek to clarify ambiguities in law that lead to interpretation and protracted litigation, which is a welcome move. The Government, in this mood, could have also allowed construction-related credits under the rules, to further incentivize the “Make in India” theme.

Another proposal looks at the assignment of telecom spectrum for a consideration as “declared service” for levy of service tax with pro-rata credits over the period of assignment.

Pro rata credits are something the industry will not be too happy about, since there will be a significant outgo of service tax at the outset while the credit will be gradual.

Industry has always voiced the concern that interest for delayed and non-payments of taxes and duties are very high at 18% (for service tax the maximum could be 30%) while delay in refunds, which are chronic, entails an interest of merely 6%. In deference to this concern the budget seeks to reduce interest to 15% across excise, customs and service tax. Only in case where service tax is collected by a tax payer and not deposited, interest will be at 24%.

Overall the budget proposals have sought to make incremental changes and missed an opportunity to make important structural changes in central levies signalling a move to GST.

Although the Finance Minister reiterated the Government’s intent to pass the Constitution Amendment Bill in this Budget Session, conversations with revenue officials suggests that even in case of such a possibility GST implementation looks more realistic only in April 2017.

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