FEBRUARY 24, 2010

FM needs to sweat out more for indirect tax reforms

By Dr Sanjiv Agarwal

INDIAN economy is pegged to grow at close to 7 per cent in current fiscal, belying pessimism that the economy would grow at a lower pace due to global economic slowdown. There are also evidences that the industrial sector is reviving now, However, according to IMF, growth in the Indian economy is likely to pick up from 6.75% in 2009-10 to 8% in 2010-11. Also services sector, more particularly, banking, financial services, insurance and information technology are expected to grow in double digits.

In the recent Reserve Bank's credit policy review, the central bank has given a clear message for fiscal consolidation and signaling an end to the expansionary policy stance. This appears to be in sync with improved global outlook, optimistic growth prospects and fear of inflationary expectations. So far as fiscal deficit is concerned, it could be reduced to 5.5 percent of GDP in 2010-11 as spending on pay arrears and debt waiver scheme will be saved. Disinvestment plans will also get materialized.

Forthcoming Budget

The next Indian Union Budget 2010-11 will be presented in Parliament on 26 th February 2010, as against usual date of 28 th February.

The forthcoming Union Budget may be relatively easy for the Finance Minister as it would require lesser tinkering with the tax provisions –both direct and indirect in view of major tax reforms on the anvil, viz, direct tax code and goods and services tax laws which are being dealt with comprehensively. These are considered to be major steps towards economic growth. However, sustainability of economic growth in post economic recession and facing the rising inflation (more so in case of food items) is posing challenge to the government. Continuity of economic and fiscal incentives given to the industry and exporters last year is also a vital issue to be addressed in the forthcoming budget.

The tax stimulus announced in 2009 should not be withdrawn if industry and economy, both are on recovery path. Infact, this is the time to provide stability to the current revival which is necessary to incubate the sustainability of growth. As such, it could be desirable that cenvat rate is not altered for the time being. The Government had cut the cenvat rate (mean rate ) which was levied on most of the items from 14% to 10% in December, 2008 and service tax rate from 12% to 10% in February, 2009. It is suggested that the present rates may be continued for the time being at 10 percent and facilitate stabilization of industrial growth and economy, more so when India is soon going to witness the biggest ever tax reforms.

Although, general feeling is that in the wake of proposed GST by 2011, the government may not propose major changes in excise and service tax arena, a school of thought is of the view that. 2010 budget will be the last opportunity to align existing rates to the proposed GST rates and also levy service tax on more services so that preparatory exercise is done and date bank created. Thus, extending the service tax to all services and having a common threshold limit match with that proposed in GST may be attempted. A common rate may also be explored.

2010 also presents the opportune time for introducing a negative list of taxable services and taxing services comprehensively. What would be more desirable is to identify all such services and atleast remove the overlaps between existing services. However, with GST just a year away, will it serve any tangible objective will have to be deliberated . Taking opportunity of the Budget 2010, Finance Minister ought to make certain bold and straight forward statements on introduction of GST in India .

Goods and Services Tax (GST)

So far as goods and services tax (GST) is concerned, its aim is to simplify the indirect tax structure by replacing multiple taxes by a single tax, viz, GST with one or two rates, easy administration and low cost of compliance and collection .Despite what is being deliberated at the Empowered Committee and what is the ‘desire' of the state finance ministers, there is a need to assert the relevance and objective of GST to replace multiplicity of taxes. Keeping this in mind, GST ought to subsume all indirect taxes and ensure a simple GST across the value chain. There should be no indirect tax left outside the purview of GST. If this is done, investment in organized sector is bound to improve and get incentivised.

On GST, there also seem to be no consensus amongst the policy making agencies, what to talk of Empowered Committee where state finance ministers have different views on GST rates, exemptions etc. The first discussion paper released by the Empowered Committee and report of Thirteenth Finance Commission have divergent view points on crucial issues in GST like GST rate, threshold limit, exemptions, subsumation of state and local taxes etc. Then, the Prime Minister's Economic Advisory Council talks of a single rate and other differing points of view. We need to set the basic things right so that any subsequent discussion is built thereon. The Union Budget 2010-11 would be the right opportunity for this exercise so that we have broad framework in place which is acceptable to Government, policy makers, revenue authorities and all other stakeholders.

GST is aimed at increasing the revenue tax base and reducing cascading effect of taxes. Under GST regime, tax base would go up as goods and services across the board will get taxed with minimal of exemptions. The payment and compliance becomes flawless through input tax credit mechanism thus, making goods and services competitive resulting in economic value added. There however, exists a set of differences between the centre and the states and states inter se on various issues concerning GST.

Our country needs to adopt a balanced approach and a concerted effort to maximize taxes under GST across almost all goods and services so that industry is benefited in terms of lower cost of compliance. Not only this, GST will benefit the industry in terms of increased output and productivity and even improve the GDP by over one percent. GST should also spur higher tax compliance leading to lower tax rates.

So far as GST exemptions are concerned, they should be decided judiciously rather than on arbitrary basis or on political compulsions. GST to be economically successful should also be backed by efficient tax administration and machinery. For this grass root level is most crucial which must be suitably addressed.

While it should atleast lay down a clear cut road map to GST, both in terms of time line and scope, it should also spell in clear terms about its nature, subsuming of all other indirect taxes, national GST or otherwise, probable rates of GST, exemptions or negative list etc. Apart from the issue of threshold limit, the issue of single rate or dual rate is of prime concern. The budget should clear the air on this with clear cut announcement. Tax payers and business community would also expect some assurance that basic framework of GST ought not to be tinkered with by any State Government. The budget must particularly clear the doubts on date of introduction of GST in India , nature of GST (single, dual), rate structure, threshold limit, uniformity of GST law across the country and administration of GST

It is strongly urged that still, India should try for a single GST as it is the most ideal model. But to implement this, a strong political will and economic consensus is required . If under political compulsion, it is not possible for now, efforts should be made to have constitutional amendments leading to a single GST in future.

Even with both the GST levels, the central and state GST should be administered by a common authority leading to common registration, payment, returns, adjudication and appellate remedies. As indicated earlier, all and all taxes must be subsumed within the GST framework. It is also suggested that the new GST law must be made applicable throughout the country from a common date . Appropriate amendments in the Constitution should be carried out without any further delay. The Government should also ensure that the definitions provided under the Centre as well as the State enactments should be uniform, unambiguous, simple and in harmony with other existing laws. As far as possible, artificial deeming fiction in the definitions should be avoided. It is also necessary that classification of goods and services is based on international norms to avoid all classification disputes.

Service Tax

On service tax front, following suggestions can be attempted keeping in mind that GST is still away, atleast for a year –

Wherever assessees or trade associations or chambers seek clarification from the board, a time limit of say, 30 to 60 days be set so that board is bound to clarify the issues raised within such time fame. There have been instances where clarifications have come after a gap of as long as 2 to 3 years and in some cases, clarification is due.

Like small service providers exemption scheme (Rs 10 lakh threshold limit) for service providers, registration is also required for service receivers wherein some similar threshold limit should be prescribed. The issue here is that if small service provider gets a benefit of exemption, why should not a small service receiver also get a similar benefit. He should not be deprived simply because he has been made liable to pay tax under section 68(2) of Finance Act, 1994.

Presently the provisions of seeking advance ruling is not available to Indian resident assessees. As such , they are deprived from the benefit of seeking advance ruling in genuine cases. This leads to increased non compliance and litigation. Depriving the resident assessees from seeking advance ruling does not serve any purpose, is retrogatory and counter productive. It is desirable that Indian assessees are also allowed to benefit from advance ruling which is an effective tool for enhancing compliance, tax efficiency and revenue collection .

The concept of deemed service should be done away with as it leads to interpretational issues and unnecessary litigation (eg, renting of property). This has also been struck down by Delhi High Court in Home Solutions case.

Service tax is paid for different services under different accounting codes. If an assessee renders, say five services, it has to pay tax by different challans under different codes. In some cases, taxable services provided are more than ten or even more (eg, hotels). It is suggested that like Income Tax, Service Tax should be paid under one code, ie, assessee's code and not the service code. This will simplify the procedure without any loss of revenue.

On valuation of services, all reimbursements of expenses should be kept out of tax net and the definition of pure agent should be amended accordingly.

Export and import of service needs to be redefined in a much simpler manner so that assessees comply with the law and litigation is reduced.

Refund of service tax on input services to exporters is still a tedious process and despite of CBEC's clarifications, the field is not forthcoming with the hassle free refund process. The exporters are made to run from pillar to post for claiming refund at field level or at first appeal stage. The budget should seriously address this issue and help exporters and others to avail the benefit which is in line with the legislative intention as well as rules. Also, the simplified refund procedure should cover all service tax assessees.

There is a dire need to simplify two procedures - one availing of cenvat credit and two, refund to exporters. Both these issues continue to be the problematic areas from assessee's point of view. At the same time, Department is not at all proactive in dealing with these cases, despite there being circulars from the Board. It is suggested that suitable legislative changes be brought in the rules and procedures so that the assessee are not harassed and the legitimate refunds or credits due to them are settled within a reasonable time frame.

There have been large number of litigations on cenvat credit, more particularly on scope of input services. Various high courts and even Supreme Court have in recent past. Have decided this issue and almost all the decisions are in favour of assesses. In light of these, it is desirable that the necessary clarity is provided in the definition of input service itself by amending and simplifying the same. The budget should also address the issue of interest on reversal of cenvat credit in light of the contrary views of department and judiciary. Necessary amendments are required in Cenvat Credit Rules.

Yet another major issue is applicability of both taxes- VAT and service tax on certain transactions treating the service as both- goods and services at the same time. For this, there is a need to define explicitly what is meant by service so as to exclude those transactions on which VAT or sales tax is levied.

In 2009, service tax was extended to certain legal services which excluded services provided by individuals or services provided to individuals. A similar approach is desirable for other professional services such as chartered accountants, company secretaries, cost accountants, architects, management or business consultants etc.

Central Excise & Other Issues

In Central Excise, the exemption limits for SSI were revised in 2005 and 2007 which needs to be revised in present economic condition, given the contribution of SSI sector to economy and the problems being faced by them. Also, capital goods used by companies for research and development work are not considered for the purpose of availing cenvat credit. It would be desirable to consider such goods as eligible capital goods or such goods be exempted form the levy of central excise duty.

The budget should also address other crucial issues in indirect tax, viz, complete phase out of central sales tax (presently, CST is @ 2 percent). It may be noted that phasing out of CST is also necessary for smooth introduction of GST as CST credit is not allowed under VAT and VAT will get subsumed into GST, once the GST is introduced.

Presently, various levies in the form of cess increases the cost and compliance requirement for taxpayers. Some examples are electricity cess, mining cess, research and development cess etc. A step towards removal of these cesses would also help achieve consistency and efficiency under GST regime which aims at subsuming various indirect taxes.