Union Budget 2017: considerations for indirect tax proposals

B Sriram, Tax Partner, EY India

This Budget will be presented against the backdrop of two key events: demonetization and the implementation of the Goods and Services Tax Act.

First and foremost, the most eagerly watched expectation would be the roadmap for GST implementation. Pursuant to the recently concluded GST Council meeting, the FM has made an announcement in the press that the roll of out GST is likely to be deferred to 01 July instead of 01 April.  In this background, this Budget may not see any significant tax proposals, barring proposals that will align some of the existing indirect taxes to the proposed GST.  For example, the service tax rate may be taken to 18% and all the cesses eliminated.  Along the same lines, excise duty rates can be reduced to equate with the proposed Central GST rate to further drive Make in India, and the Central Sales Tax can be reduced to, say, 1%.  Further, as a step for quick closure of CST assessments before GST, an amnesty scheme can be considered to close assessments that could not be completed only because of non-submission of statutory declaration forms such as “C” forms.  With the above, the 1 July 2017 implementation will be aligned.

On the other hand, if a consensus could not be achieved in the GST Council before the Budget, then while the September deadline still looms large for implementation, there could be proposals independent of GST-related ones.  There are several asks of various industries/sectors and also per se from the indirect tax law and procedural perspective.

There could be a set of favorable proposals for sectors/products and services that could hasten digitization as a sequel to demonetization.

“Make in India” can be another working agenda of the Government, eliciting some indirect tax proposals.  For example, an inverted duty structure from an excise point of view can be a focus for correction to help the manufacturing sector (pharma for one). Exemptions could be pruned.

The exporting community can also expect a few remediating measures, including procedural easing of refunds. There are demands from intermediaries and other service providers such as testing agencies providing services to cross-border clients to amend the place of provision of service rules to make these services earning foreign exchange qualify as export of services. Currently, these are treated as provided in India even though the customers are located outside India, and the earnings are in convertible foreign exchange.  Besides, inbound ocean freight, on which Indian players have been charged service tax since the last budget, has recently been extended to foreign players as well. As this service tax is charged to the foreign exporters of goods to India, the credit pertaining to it is getting defeated.  Further, ocean freight is also subject to Customs Duty on import of goods.  This aspect requires a careful resolution.

One indirect tax that is not getting subsumed into GST is Customs Duty.  There could be more proposals as far as Customs Tariff is concerned to address the specific request of a particular sector or industry to reduce/increase the Customs Duty rate for rationalization or correcting the inverted duty structure.  As regards procedural relaxation, recently, customs valuations procedures were eased (the SVB process was rehashed in February 2016). As a continuation to the procedural easing and to make the process more definitive, acceptance of transfer pricing norms for demonstrating the arm’s length nature of transactions should also be considered. Discretionary procedures could be eliminated. The procedure to reduce dwell time in ports, which is still in the higher range, should be considered.

One sector that could get back into focus is the renewable energy sector. Wind energy projects could be given additional concessions, on par with the concessions provided to solar energy projects. Solar energy projects have complete excise exemption on all types of equipment, which is not the case in wind energy project as excise exemption is not available for certain plant equipment.

Other indirect tax budget expectations include liberalization in CENVAT Credit Rules, allowing for seamless credit without any restriction, and, in adjudication, roll back of the time limit for issuing show cause notice to 12 or 18 months as against the recent timelines of 30 months.

 (Views expressed are personal)

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