MARCH 02, 2015

By Sumit Dutt Majumder

AROUND three weeks back, I had written in this column about my expectations from the 2015-16 Budget on indirect tax proposals. Let's do a reality check today.

The netizens may recall, I had highlighted four factors that will work heavily in the Finance Minister's mind while laying down his proposals on indirect taxes. After it was decided to launch Goods and Services Tax (GST) in April 2016, expectations were high that Arun Jaitley , the Finance Minister would give definite signal in the budget proposal that he was heading towards GST. He has not let us down. Quite a few proposals on Service Tax and Central Excise clearly indicate that he is serious about taking the tax payers and tax men towards that goal. A few illustrations are given below.

In his Budget Speech, Jaitley has termed GST a game changing reform. In the 11th Para he stated - "GST will put in place a state-of -the -art indirect tax system by 1st April, 2016”.In the GST regime, the exemptions with respect to both services and goods would be very few. Keeping that in mind Jaitley has pruned the Negative List of Services, meaning thereby that more and more services would come within the ambit of Service Tax. He has reduced the number of excise exemptions with respect to goods as well.

Secondly, in the GST regime, the element of Service Tax would be subsumed in both Central GST (CGST) and States GST (SGST). Therefore, the incidence of tax on services would get much higher. There would of course be the credit of GST with respect to supply of goods embedded in supply of services. Still, the final incidence of tax on account of supply of services will be higher. In order to prepare the taxpayers for the GST regime, Jaitley stated at Para 121 of his speech as follows. "Introduction of GST is eagerly awaited by Trade and Industry. To facilitate a smooth transition to levy of tax on services by both the Centre and the States, it is proposed to increase the present rate of service tax plus educations cesses from 12.36% to a consolidated rate of 14%”.

Further, with respect to Central Excise Duty, Jaitley stated at Para 118 of his speech - "As part of the movement towards GST, I propose to subsume the Education Cess and the Secondary and Higher Education Cess in Central Excise Duty. In effect, the general rate of Central Excise duty of 12.36% including the cesses is being rounded off to 12.5%. I also propose to revise the specific rates of Central Excise duty in certain other commodities, as detailed in the Annexure.”

It is however felt that the signal towards switch over to GST would have been so much stronger, had the Finance Minister revised the current thresholds as well for Service Tax and Central Excise duty, keeping in mind the common thresholds for goods and services of around Rs 25 lakhs of annual turnover in the GST regime. The threshold for Service Tax could have been revised upward at Rs. 25 Lakhs, and that for Central Excise could have been brought down to say RS 75 Lakhs, so as to prepare the taxpayers for the GST regime.

The Finance Minister made a definitive statement on introduction of GST again at Para 96 of his speech as follows - "I have already introduced the Bill to amend the Constitution of India for Goods and Services Tax (GST) in the last Session of this august House. GST is expected to play a transformative role in the way our economy functions. It will add buoyancy to our economy by developing a common Indian market and reducing the cascading effect on the cost of goods and services. We are moving in various fronts to implement GST from the next year”.

On the Prime Minister's call for 'Make in India', the Finance Minister has taken steps in reducing the Customs duty on import of raw materials and components and simultaneously increasing the duty on finished products. These have been listed under the heading " Job creation through revival of growth and investment and promotion of domestic manufacturing and 'Make in India' at Annexure to Part B of the Budget Speech (Emphasis supplied). Similar proposals have been made with respect to Central Excise duty as well so as to provide a congenial environment for boosting domestic manufacture. In this context the Finance Minister has observed - at Para 112 as follows "The role of indirect taxes is also very important in the context of promotion of domestic manufacturing and Make in India. In indirect taxes, therefore, I propose to reduce the rates of basic customs duty on certain inputs, raw materials, intermediates and components (in all 22 items) so as to minimise the impact of duty inversion and reduce the manufacturing cost in several sectors. Some other changes address the problem of CENVAT credit accumulation due to the levy of SAD. I propose to fully exempt all goods, except populated printed circuit boards for use in manufacture of ITA bound items from SAD and reduce the SAD on imports of certain other inputs and raw materials subject to actual user condition. These changes are detailed in the Annexure to the Budget Speech".

Now a few words about the expectations on the other two fronts. Taking advantage of the falling oil prices, the Finance Minister has increased the Customs and Excise duties in a calibrated manner for select items taking care that the Make in India programme does not get effected through such hikes of duty. At the same time, such hikes of duty would help the Finance Minister in garnering more revenue and thus reducing the budget deficit. Finally, there being no political compulsion of a populist budget, in the absence of General Election for the next four years, the Finance Minister has gone mainly by the economic and social considerations in framing his budget proposals.
My expectations on indirect taxes have thus not been belied.

[The author is former Chairman, Central Board of Excise and Customs. He is the author of the book titled "GST in India..." He is also the Consulting Editor of the TIOL]