MARCH 07, 2016

By Sumit Dutt Majumder

NOW that the dust has settled down and the decibel levels have come down, let us have a dispassionate look at the Budget, 2016. Every Budget makes a statement - at times explicit, and quite often implicit. So, what is the statement that the Budget 2016 has made? Before looking for the answer, TIOL Netizens may recall what I had written in February, 2016 (Indirect Tax - What should one expect from Budget - 2016?).

I had stated, that the General Elections being three years away, the Union Finance Minister would get the unique opportunity to present a bold Budget, purely in accordance with the demands of the economy. The challenge before the Finance Minister was to maintain the fiscal deficit of 3.9 per cent for 2015-16 and 3.5 per cent for 2016-17; and these targets were to be achieved while simultaneously maintaining growth by increase in the public expenditure (investment) in select infrastructure sectors like Roads, Power etc. It was therefore expected that the Government would garner a sizeable amount of additional revenue, find some expenditure savings and minimize the additional demands. As a corollary, therefore, it was expected that the government would minimize and streamline the food and fertilizer subsidies as well.

Shift in Economic Strategy

The thing about this Budget that strikes first is that this budget reflects a perceptible shift in the government's economic strategy. In the first two budgets of Mr Arun Jaitley, the focus was on manufacturing through heavy public investments in roads, power generation and other infrastructure projects. The economic activities centered on promoting the idea of ‘Make in India'. The welfare measures were not a priority area. However, in the current budget, the focus has turned to the priority areas of Farm and Rural Sector including agricultural and farmer's welfare and social Sectors, including healthcare and education. This is a welcome course correction inasmuch as our cities and big towns cannot flourish if our villages and small towns languish. The demographic dividend of the rurban population must be nurtured and garnered in a planned way. But that is not to say that the progress made in development of infrastructure in power, roads etc should be slowed down.

Balancing Expenditure with Revenue

Here comes the question of the size of the government kitty. The Finance Minister has committed himself, and rightly so, to fiscal discipline by sticking to the previously mentioned fiscal deficit targets. Show of such fiscal prudence would instill the foreign investors' confidence in the Indian economy, and that would in turn result in flow of FDI. But the flip side is that Finance Minister's kitty is likely to show signs of strain because of such commitment on fiscal consolidation, particularly in light of the newly announced welfare measures in rural, agricultural and social sectors. The issue therefore boils down to how to make the Finance Minister's kitty bigger. The obvious answer is massive revenue mobilization - both tax and non-tax revenues and capital receipts.

Non-Tax Revenue

On the non-tax revenue front, Mr. Jaitley has betted on disinvestment, higher proceeds from ‘Spectrum' sales and strategic sales. The renaming of the Department of Disinvestment as the ‘Department of Investment and Public Asset Management (DIPAM)' notwithstanding, the actual garnering of revenue from disinvestment is a matter of speculation. The expectation of higher proceeds from ‘Spectrum' sales is another matter of speculation - it may not fetch that much of money. The strategic sales could range from the government selling a few units or facilities of a Public Sector Undertaking (PSU) to private investors to offloading a loss-making PSU. Even the earning from this one cannot be taken for granted. Thus, there are uncertainties about these three non-tax revenues as a reliable source of revenue. Therefore, attention was needed to be focused in some other expenditure savings and minimizing the additional expenditure demands. One could not find any bold measure in such expenditure management - not also in the field of food and fertilizers subsidies.

So, the next question is how to meet the additional expenditure in the aforesaid welfare measures in rural and social sectors. Going by the past records, the private investment in infrastructure sector that has long gestation period has not been inspiring - right since our Independence. Today, it might be fashionable to decry PSUs. But without them in the fifties and sixties, what would have happened to our infrastructure and heavy industries is anybody's guess.

Tax Revenue

Against this background, the only dependable source of revenue would be the tax revenue - to be more precise, the indirect tax revenue, since successive governments have shown reluctance to increase Income-tax which effects the citizenery directly. Same story is repeated this year also. Because of reduction in Direct Taxes, the treasury would lose Rs. 1060 Crores and therefore the government targets to garner an additional amount of Rs. 2060 Crores from Indirect Taxes. Huge target fixed for indirect taxes does put tremendous pressure on the officers of the CBEC, and more often than not this translates into stopping of refunds and drawback payments and forcing the taxpayers not to utilize CENVAT credit during the months of February and March. That makes the Trade and Industry jittery and unhappy.

Let us now turn to the Budget proposals in the three areas of Indirect Taxes - Central Excise, Customs and Service Tax.

Central Excise

Two Important changes in Central Excise duty rates pertain to Branded Ready Made Garments (RMGs) and Articles Jewellery. It is proposed to levy Excise duty on the branded RMGs with a retail price of Rs. 1000 or more at 2% without CENVAT Credit or 12.5% with the credit. Similarly, Articles of the Jewellery (other than silver) would attract 1% without CENVAT credit and 12.5% with the credit. None of these taxes would hurt the poor or the common man. But, it will hit the rich and middle class.

Other items where the excise duty has been raised will include the following - Pan Masala, Jarda & Gutkha, Aviation Turbine Fuel (ATF), Cigarettes, PSF and PFY, etc. In respect of these items, there are at least 11 rates of duty starting from 6% to 81%, with most of the items attracting levy at 12 to 12.5%.

Make in India

Keeping the theme ‘Make in India' in mind, changes have been made in Central Excise and Customs duty rates in respect of certain inputs, raw materials, intermediaries and components so has to reduce costs and improve competitiveness of domestic manufacture in certain sectors that include IT Hardware, Capital Goods, Defence Production, Textile, Mineral Oils & Fuels, Chemicals and Petrochemicals, Paper, Newsprints etc. To avoid wastage of our farm produce and marine products, the Budget has reduced Customs and Central Excise duties on Refrigerated Containers and thus promoted their use. In order to improve skill development, Service Tax has been exempted for services provided by the skill development organizations. All these and some more such measures will facilitate ‘Make in India' initiatives.

Cess

Even as 13 existing Cesses imposed by other Ministries and administered by CBEC were abolished, 2 new Cesses were brought in - Infrastructure Cess with no benefit of input tax credit is to be levied on manufacture of motor vehicles as follows:

(a) Petrol/CNG/LPG Vehicles not exceeding 1200cc-1%.

(b) Diesel driven motor vehicles not exceeding 1500cc - 2.5%

(c) SUVs, Sedans and others - 4%

The other new Cess is the Krishi Kalyan Cess. This is proposed to be levied on all taxable services at the rate of 0.5% of the value of services, with effect from 1.6.2016. The effective rate of Service Tax will thus increase to 15% from the current rate of 14.5%.

One existing Cess, the ‘Clean Energy Cess' levied on Coal, Lignite and Peat has been renamed as ‘Clean Environment Cess', and its rate has been increased from Rs.200/- per tonne to Rs.400 per tonne.

It may be noted that Cesses without input tax credit ultimately enhance the burden on the final consumers. Secondly, the Cess amount is not shared by Centre with the States, and thus in a way it goes against the principle be Cooperative Federalism.

Customs

As discussed before, there have been certain amendments in the rates of Customs mainly with a view to promoting the idea ‘Make in India'. Not much was expected on the Customs duty front since there was very little scope to increase the rates because of India's obligation to comply with the WTO bound rates on specific items and the Free Trade Agreements (FTAs) with a big number of trading partner countries. Having said that, it must also be pointed out that there was scope to clean up the Customs Tariff structure. There are around 20 rates of Customs duty varying from 2.5% to 150%, besides the exempted goods. There should have been a drastic reduction and rationalisation in the number of rates and the exemptions.

Service Tax

Contrary to expectations that Service Tax would be enhanced to take it to near the level of standard rate of GST at 18%, as suggested in the report of the Chief Economic Advisor on the Revenue Neutral Rates, it has not been touched, except for the addition of a Cess discussed before. However, the Service Tax exemptions in a few cases have been withdrawn. Legal services provided by Advocates and Consultants representing in Tribunal, the services related to construction, erection etc. and those related to transportation of passengers and goods under certain conditions.

Procedural Simplifications - Ease of doing business

On procedural simplification, the first thing that gets noticed is the Revision of Central Excise Returns which would be permitted by the end of the calendar month in which the original Return is filed. The number of Returns to be filed has been slashed to 13 from the existing 27 Returns. The second important reform that will promote ease of doing business is the amendments in the CENVAT Credit Rules, 2004. These amendments would improve credit flow, reduce the compliance burden and the associated litigations and expedite Refunds. The key reforms would be with respect to availment of credit for Capital Goods, and the changes in Rules & Provisions regarding reversal of credit. Other simplifications would include the following:

(a) Provisions for Deferred Payment of Customs duty in certain cases;

(b) Public and Private Bonded Warehouses will no longer be under physical control of the Officers, and their control will be record based;

(c) Manufacturers with multiple manufacturing units will be allowed to maintain a common warehouse for inputs;

(d) The Budget has announced the implementation of the Indian Customs Single Window Project at major ports and airports. This will immensely help the ease of doing business and Reduction in Litigation.

The Budget has proposed a new Dispute Resolution Scheme (DRS) to reduce the number of cases pending with first Appellate Authority. Under this scheme, a taxpayer can settle the appeal pending before the Appellate Commissioner by paying the disputed tax amount interest and penalty of 25% of the duty amount, based on which the case will be closed and the taxpayer would get immunity from prosecution. This would be helpful only in ‘open and shut' cases in favour of the Revenue. In other arguable cases, the assesse are not likely to avail of this scheme. Eleven new benches of the CESTAT (Appellate Tribunal) to be set up soon will remove the backlog of cases although the number, appears to be too large and rather unrealistic, Clarity has also been provided on applicability of Customs / Excise duty vis-à-vis Service Tax on IT software.

Goods and Services Tax

Given that the target date of 1st April, 2016 for introduction of GST was to missed, it was expected that the Finance Minister would take the Budget as an opportunity to prepare the taxpayer and taxman to be ready for GST by April 2017, by proposing alignment of the Central Excise and Service Tax structures with that of the proposed GST. It was also expected that the thresholds for Central Excise and Service Tax would be changed to bring them near to the proposed threshold of Rs.25 lakhs under GST. The threshold for Excise could have been reduced to around Rs.75 lakhs and that of Service Tax could have been raised to Rs. 20 lakhs. Further, the number of tax rates and the number of exemptions in Central Excise have not been substantially reduced so as to prepare the taxpayers for GST. As mentioned before, there are atleast 11 rates of duty starting from 6% to 81%, whereas the committee on Revenue Neutral Rates for GST headed by the CEA has recommended four rates of GST - Standard rate of 18%, Merit goods rate of 12%, Demerit goods rate of 40% and Precious Metal rate of 2 to 6%. The Central Excise has still over 250 exemptions, while the State VAT has around 100 exemptions, and in the GST regime, the number of exemptions for Central GST and State GST would be the same. Thus, the Budget 2016 does not show any signal to indicate that the Central Excise and Service Tax regimes are gradually moving towards the GST regime, which would have facilitated easy transition when the GST finally becomes a reality soon.

Conclusion

In conclusion, going back to the question raised in the first para, one would like to say that even as there have been some goods measure relating to the ‘ease of doing business', ‘Make in India' scheme, reduction in litigation, the Budget 2016-17 has not been a bold enough budget, and one is not sure whether at the end of the year the fiscal discipline targets would be maintained in the backdrop of additional expenditure in welfare services and lack of expenditure savings in other areas. After all, if the manufacture does not pick up, there would be a limit upto which the CBEC could be tasked to bridge the gapof Revenue and Expenditure through Indirect Taxes alone. I must also congratulate the officers and staff of the CBEC led by its dynamic chairman for doing a great ‘spring cleaning' in the areas of procedural simplifications which would definitely lead to further ‘ease of doing business'.

[The author is Former Chairman Central Board of Central Excise & Customs and Consulting Editor , TIOL. He is also author of the book "Customs Valuation - Law & Practice" and 'GST in India'.]