By G. Gokul Kishore
Pre-budget consultations for Budget-2012 are underway. This year, budget news has to jostle for space in the media as it is pitted against heavy weights like Lokpal and black money issues. Yet, one can notice the annual financial exercise of the nation catching the attention of the discerning readers. Let us also contribute in a small measure to push the debate on top of the agenda.
Rate revision?
Rate revision is also being spoken about in the media and industry bodies are learnt to be batting for status quo. Excise duty and service tax rates are provided with omnibus exemptions to retain a median effective rate of 10%. This measure of tariff reduction being used as a tool to incentivise production and consumption has been a moderate success with the Indian economy not hit badly by global recessionary rough-weather. But, today, the manufacturing sector is showing signs of weakness and the last month’s IIP data show growth in the negative territory for the first time in two years. The timing is far from conducive as North Block has begun pre-budget consultations with the industry bodies and others. It appears that the case for a roll-back, even partial, is not very strong and the effective rates for excise duty and service tax may have to be retained in Budget 2012.
Cenvat credit changes
Cenvat credit on capital goods continues to be restricted for many years now. When sectors like auto and mining are showing weakening of demand and rising costs, credit on capital goods should be made available fully during the year of receipt without the mandatory cap of 50% credit during first year. Another area where amendment to Cenvat Credit Rules, 2004 has taken a step backwards pertains to credit on construction materials. Changing the definitions in the CCR, 2004 to place an embargo on credit in respect of all construction materials including those used in the factory in relation to capital goods or machinery is not in consonance with the principles of VAT. When the country is marching towards GST with a liberal credit regime, it will be prudent to tailor the present CCR, 2004 in such a manner as it would reflect the spirit of GST and inspire confidence among the trade on the sincerity of purpose on the part of the tax administration in implementing a progressive reform.
Clearing the backlog
Reports suggest that around 50,000 appeals are pending in CESTAT. The number can hardly be doubted as the CESTAT has just two benches each in the South and the West and the principal seat at New Delhi catering to the entire North and the one in Kolkata taking care of the East. While timing of introduction may be uncertain, the fact that GST will be implemented in 2012 or a year later, is a certainty. Embracing a major tax reform with the ghost of pre-reform disputes in such a large number is not a desirable scenario. It is not feasible to wipe the slate clean at the stroke of midnight, yet the legacy can be less ugly. In this direction, to clear the pending cases and to gear itself up for cases that will be brought during GST regime, CESTAT benches need to be created in several places like Hyderabad, Pune, Nagpur, Vadodara, Jaipur, Indore and Lucknow. If GST were to be in force from October, 2012, this Budget has to contain a commitment to commence the process of creation of new benches from June 2012 as establishment of benches and selection of Members consume good amount of time. The new benches will also need time to stabilise before they welcome the huge number of ‘suppliers of goods and services paying CGST’ under the GST regime.
Negative list – Positive gains for Revenue
A negative list of services which will be out of Service Tax levy with the corollary being all other ‘economic activities’ attracting Service Tax, is very much on the cards. Armed with two rounds of public consultations and opinion-seeking exercise, the indirect tax administration appears to have firmed up rolling out the new basis for Service Tax in Budget 2012. Though the concept papers have stated that opinion is divided over timing of introduction of negative list for taxing services – whether it should be pre-GST or along with GST – the intention to implement is all too evident. The revenue pressures are telling and no other major tax effort at this juncture except negative list, merits serious consideration. The government is also supported by the trade and industry which expects a relaxed credit environment to be introduced.
The move has guaranteed consequences like a significant widening of tax base, increase in disputes at least during the initial stages, procedural infractions due to lack of understanding and tax officials at the cutting edge level lacking sufficient skills and training in administering the new regime. The revised concept paper seeks to steer clear of issues in respect of services provided by government authorities like transport authority and other departments while performing regulatory functions. The proposed definition attempting to net ‘economic activities carried on own account’ and excluding all activities of government except the notified few, seeks to answer taxability or otherwise of statutory and sovereign functions. It remains to be seen how Budget 2012 provides final shape to the new regime to gauge its effectiveness to the issues haunting the present Service Tax administration and assessees.
An article on the labyrinthine tax provisions can hardly be different from such provisions at least as far as form is concerned. This article will, therefore, continue in the next piece to continue discussions on a few other important issues.
[The author is Senior Manager, Lakshmikumaran & Sridharan, New Delhi and holds Ph.D. degree for studies on Union Excise Duties]
Pre-budget consultations for Budget-2012 are underway. This year, budget news has to jostle for space in the media as it is pitted against heavy weights like Lokpal and black money issues. Yet, one can notice the annual financial exercise of the nation catching the attention of the discerning readers. Let us also contribute in a small measure to push the debate on top of the agenda.
Rate revision?
Rate revision is also being spoken about in the media and industry bodies are learnt to be batting for status quo. Excise duty and service tax rates are provided with omnibus exemptions to retain a median effective rate of 10%. This measure of tariff reduction being used as a tool to incentivise production and consumption has been a moderate success with the Indian economy not hit badly by global recessionary rough-weather. But, today, the manufacturing sector is showing signs of weakness and the last month’s IIP data show growth in the negative territory for the first time in two years. The timing is far from conducive as North Block has begun pre-budget consultations with the industry bodies and others. It appears that the case for a roll-back, even partial, is not very strong and the effective rates for excise duty and service tax may have to be retained in Budget 2012.
Cenvat credit changes
Cenvat credit on capital goods continues to be restricted for many years now. When sectors like auto and mining are showing weakening of demand and rising costs, credit on capital goods should be made available fully during the year of receipt without the mandatory cap of 50% credit during first year. Another area where amendment to Cenvat Credit Rules, 2004 has taken a step backwards pertains to credit on construction materials. Changing the definitions in the CCR, 2004 to place an embargo on credit in respect of all construction materials including those used in the factory in relation to capital goods or machinery is not in consonance with the principles of VAT. When the country is marching towards GST with a liberal credit regime, it will be prudent to tailor the present CCR, 2004 in such a manner as it would reflect the spirit of GST and inspire confidence among the trade on the sincerity of purpose on the part of the tax administration in implementing a progressive reform.
Clearing the backlog
Reports suggest that around 50,000 appeals are pending in CESTAT. The number can hardly be doubted as the CESTAT has just two benches each in the South and the West and the principal seat at New Delhi catering to the entire North and the one in Kolkata taking care of the East. While timing of introduction may be uncertain, the fact that GST will be implemented in 2012 or a year later, is a certainty. Embracing a major tax reform with the ghost of pre-reform disputes in such a large number is not a desirable scenario. It is not feasible to wipe the slate clean at the stroke of midnight, yet the legacy can be less ugly. In this direction, to clear the pending cases and to gear itself up for cases that will be brought during GST regime, CESTAT benches need to be created in several places like Hyderabad, Pune, Nagpur, Vadodara, Jaipur, Indore and Lucknow. If GST were to be in force from October, 2012, this Budget has to contain a commitment to commence the process of creation of new benches from June 2012 as establishment of benches and selection of Members consume good amount of time. The new benches will also need time to stabilise before they welcome the huge number of ‘suppliers of goods and services paying CGST’ under the GST regime.
Negative list – Positive gains for Revenue
A negative list of services which will be out of Service Tax levy with the corollary being all other ‘economic activities’ attracting Service Tax, is very much on the cards. Armed with two rounds of public consultations and opinion-seeking exercise, the indirect tax administration appears to have firmed up rolling out the new basis for Service Tax in Budget 2012. Though the concept papers have stated that opinion is divided over timing of introduction of negative list for taxing services – whether it should be pre-GST or along with GST – the intention to implement is all too evident. The revenue pressures are telling and no other major tax effort at this juncture except negative list, merits serious consideration. The government is also supported by the trade and industry which expects a relaxed credit environment to be introduced.
The move has guaranteed consequences like a significant widening of tax base, increase in disputes at least during the initial stages, procedural infractions due to lack of understanding and tax officials at the cutting edge level lacking sufficient skills and training in administering the new regime. The revised concept paper seeks to steer clear of issues in respect of services provided by government authorities like transport authority and other departments while performing regulatory functions. The proposed definition attempting to net ‘economic activities carried on own account’ and excluding all activities of government except the notified few, seeks to answer taxability or otherwise of statutory and sovereign functions. It remains to be seen how Budget 2012 provides final shape to the new regime to gauge its effectiveness to the issues haunting the present Service Tax administration and assessees.
An article on the labyrinthine tax provisions can hardly be different from such provisions at least as far as form is concerned. This article will, therefore, continue in the next piece to continue discussions on a few other important issues.
[The author is Senior Manager, Lakshmikumaran & Sridharan, New Delhi and holds Ph.D. degree for studies on Union Excise Duties]