Tax Regime Gets Closer to GST

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Tax Regime Gets Closer to GST

Deepshikha Sikarwar





THE BUDGET lays the ground for the new levy that will replace multiple central and states taxes as Finance Minister Arun Jaitley reiterates his promise for rolling out GST from April 1, 2016

Finance Minister Arun Jaitley may have avoided giving definite milestone for imple mentation of various components of goods and services tax (GST), but his Budget for 2015-16 clearly laid the ground for the new levy that will replace multiple central and states taxes.

Jaitley also reiterated his promise for rolling out GST from April 1, 2016, ending any further doubts about the timelines for this ambitious tax reform.

Increase in service tax rate, subsuming education cess with excise duty and pruning items on the exempted list of items are among the important steps in the progression towards GST.

Though a significant increase in service tax to 14% --16% if 2% Swachh Bharat cess is imposed on all services -from 12% may pinch the aam aadmi in the immediate term, it prepares him for higher incidence of tax on services under the GST regime. Going by the increase in service tax rate, the case for government opting for a high 16% GST rate (8% for states and 8% for the centre) or even higher has strengthened.

Businesses would also face some pain in the intervening period until the GST is implemented due to divergence in excise duty and service tax rates as it could lead to a pile of input tax credit. But, this pain may short-lived, for a year, as the government has promised to launch GST by April next year.

GST seeks to subsume a plethora of state-level and central taxes into one and thereby reduce effective taxation of goods and also create a seamless national market in the country. It was to be rolled out starting April 1, 2010, but got delayed as some states were reluctant to give assent to the plan for fear of losing tax revenue. The Narendra Modi-led NDA government has tabled a constitutional amendment bill in Parliament to pave the way for GST.

While raising the tax rate, the government has also opted for a cleanup of exemptions, not just in service tax but also in excise duty. The negative or exempted list has been pruned and exemptions cut in line with the thinking that the base of services taxation needs to be widened.

A similar philosophy has been adopted in excise duty, where rationalisation has been focused on reducing exemptions as well as ad dressing the issue of inverted duty structure. Steps have been taken to incentivise manufacturing. Special additional duty has been exempted for most electronics goods, and halved to 2% for a number of chemical products in line with the Make in India phi losophy. In line with making India an easier place to do business, the Budget has unveiled a number of facilitation measures such as acceptance of digital invoices and quick registration.

Tax experts term the Budget as a mixed bag and seek more clarity on timelines for implementation of GST."On the indirect taxes front, the Budget proposals are a mixed bag. Proposals towards widening of the tax base by pruning exemptions, abolition of the education cess and rationalisation of the tax rates take the current tax regime a step closer to GST," said R Muralidharan, senior director at Deloitte in India .

Govt Services in Tax Net

New items could figure in the govern ment's service tax list such as the auc tion of spectrum and mining rights or the leasing of government land and buildings as the budget has substantially pruned the negative list, which details those areas that are exempt.

But the Centre could still notify them as exempted government services after the passage of the finance bill. The budget move is in line with the proposed goods and services tax regime that hinges on low rates but a wide base.

The finance bill seeks to incorporate definitions of "government" and "service" and make an enabling provision to exclude all services provided by the government or local authorities to a business entity from the negative list.

Spectrum sales and coal auctions have yielded a windfall for the Centre and the states, respectively. The government could generate more money from such exercises by imposing service tax on auctions going forward since the right to use mines and spectrum constitute part of services offered by government.

Tax experts sought clarity on the amendment as it could have broad impact. "Expansion of service tax to include to any government services provided to business entities as against only support services could have wide ramifications and amount collected through spectrum and coal block allocation could also be subjected to service tax," said Pratik Jain, partner, KPMG.