Introduction of GST
A considerable delay in GST implementation has been encountered on account of impasse between the central and state governments and there is a need to arrive at a consensus. So, a clear GST roadmap is needed.
A recurring challenge in indirect tax is that of double taxation on a single transaction. The challenge exists not only between the central and state levies of service tax and VAT, but also amongst the three levies operating at central levelscustoms, excise and service tax. For example, the transaction of licence to use software could attract service tax as well as VAT. Further, both service tax and customs duty could be applicable on payments related to intangible rights such as royalty. The government should issue a clarification to remove the tax dichotomy.
Inverted duty structure
There is an inverted duty structure, under which finished goods are taxed at lower rates than raw material, for items like desktops and smart cards as compared to parts required for their manufacture. The said structure not only results in a perennial excess credit situation, but also encourages direct import of finished goods, hampering the indigenous manufacturing sector. Steps are expected to ensure rationalisation of taxes on inputs/raw materials.
The SEZ policy
The objective of the SEZ policy is to provide tax incentives to the developer/SEZ units, thereby attracting foreign investment. However, certain challenges are faced by SEZ units. For example, ab initio exemption from service tax is available to SEZ units in respect of services that are exclusively used for authorised operations and are covered in the default list of services. But in cases where certain services are partially used for authorised operations, an SEZ unit may take recourse of claiming refund. It is suggested that all services that are exclusively used for authorised operations of SEZ unit may be ab initio exempted without the procedural requirement of obtaining default list of services from the specified officer of SEZ.
The Authority for Advance Rulings has been set up for reducing potential litigation. An application for advance ruling may be filed by a non-resident setting up a JV in India in collaboration with a non-resident or a resident; a resident setting up a JV in India in collaboration with a non-resident; a wholly-owned subsidiary Indian company for which the holding company is a foreign company; a JV in India; and a resident public limited company. An advance ruling can be sought by an applicant in respect of an activity of manufacture of goods and includes any new business of manufacture proposed to be undertaken by the existing manufacturer. The benefit of advance ruling can be extended to existing activities, provided there is no pending litigation.
The concept of intermediary services was introduced vide Finance Act, 2012, and the same did not exist prior to the introduction of the negative list regime. In terms of the Place of Provision of Services Rules, 2012, if services are provided to recipients outside India, the place of provision of service is construed to be outside India and no service tax is applicable. But in case of intermediary services, since the place of provision of service is based on the location of the intermediary service provider, even if the services are provided to a service recipient located outside India, service tax is applicable. The general rule of location of service recipient being the place of provision of service should be applicable.
The Supreme Court in the Fiat judgment held that where goods are sold at considerable losses for a long period of time for the purpose of market penetration, the transaction value cannot be accepted for the purpose of levy of excise duty. The judgment has posed an adverse impact on the industry since it is a common promotional practice for sellers to offer discounts on products for sale. Any non-monetary consideration such as discounts cannot be construed as the additional consideration paid by the buyer to the seller chargeable to excise duty. It is expected that section 4 of the Central Excise Act, 1944, is amended so that there is clarity on the determination of transaction value for the purpose of levy of excise duty.
A step towards tax administration reforms was initiated by P Chidambaram who set up TARC under Parthasarathi Shomes chairmanship. TARC aims at addressing various issues while providing recommendations for strengthening dispute resolution, improvement in grievance redressal, simplified and timely disbursal of duty drawback, export incentives and refunds. The first TARC report was made available to the public in June 2014. The suggestions from TARC could be considered by the new government.
Given the existing anomalies under the indirect tax regime, it is crucial that todays Budget addresses the concerns of the industry. We expect the government announces a roadmap for transition to the much-awaited GST.
Saloni Roy & Karuna Bhandari
Roy is senior director and Bhandari is deputy manager, Deloitte Touche Tohmatsu India Pvt Ltd