Tax caFE: Budget must fix indirect tax administration

Written by Vivek Mishra | Updated: Jun 27 2014, 07:06am hrs
Budget 2014 will be announced against the backdrop of a major change in the political scenario in India. With the BJP and its allies having an absolute majority in the Lok Sabha, the expectation is for a bold, business-friendly Budget.

On the indirect tax front, industry does not expect or see the need for big-ticket tax reforms or policy changes in this Budget (leaving aside the demand for a speedy implementation of GST). However, Narendra Modi has a reputation of providing efficient administration and business-friendly policies. It is in this aspect that industry would have high expectations of things changing for the better. The present scenario on the indirect administration front is quite bleak. Industry has been subjected to a relatively harsh and confrontational indirect tax regime. This means that taxpayers have had to contend with a large number of queries/notices, audits and summons. These eventually convert into tax demands, which, in turn, are disputed by industry. Taxpayers typically file appeals, which drag on for years, going up to the tribunals and high courts. A disturbing fact was pointed out by the CAG, that approximately 80% of cases at the tribunals are won by the taxpayer. This indicates that a majority of the tax demands raised by the authorities are not raised on a sound legal basis.

Against this backdrop, we have the Union Budget 2014. The signal which this Budget should provide is that the administration would be balanced and not confrontational. Indirect tax laws have been simplified and streamlined over the years, resulting in fewer ambiguities in the law. When the law is largely not capable of differing interpretations, there is less scope for the authorities to raise large tax demands. It would be difficult to see how the current confrontational attitude can be changed, but a change is what is required by industry.

Other than the change in attitude, broadly there are a limited number of issues that require amendment to the law. For example, the dispute that was the subject matter of landmark judgment by the Supreme Court in Fiat India (P) Ltd, wherein a well settled and generally followed principle of valuation based on transaction value under central excise has been rejected to include notional value to levy tax.

The Fiat decision has created uncertainty on the amount of tax that should be paid as excise duty by the manufacturer. It is not that the excise duty burden has increased by a definite amount such as 5% or 10%. The problem is that no one can be certain as to how much additional tax they need to pay in view of the Fiat decision. The government would do well to end this uncertainty by making suitable amendments in the law to restore the concept of transaction value as the basis of paying excise duty.

There are other provisions that are not equitable, which should be amended. For example, the cross-border transactions between head office (HO) and its branch office/liaison office (BO/LO) are treated differently for the purpose of levy of service tax on import vis-a-vis while extending benefits of exports. For an import of services, the HO and BO are deemed to be two separate entities and the BO has to pay service tax as a recipient of services. For a service provided by the BO to the HO, the transaction is not treated as an export of services.

Similarly, there is a need to revisit the provision governing distribution of CENVAT credit by input service distributor which restricts the preferential allotment of common credit by corporate office to its taxpaying units. Keeping in with the revenue neutrality of the transaction the eligible credit after adjusting for exempt/non-taxable turnover should be allowed to be distributed without any restriction.

The exporters of services are a major source of positive economic activity and should be given priority treatment while extending tax benefits. Delay and frequent rejections of export refund of service tax is not a novel issue. Irrespective of the measures that have been introduced to deal with the situation, the ground realty has remain much the same. It needs a professional and dedicated approach on the part of policy-making coupled with administrative discipline to clear backlog of refund claims and to reduce the hassles for future claims. Schemes like duty drawback should be frequently revisited to make those more comprehensive/feasible and the same should be wholeheartedly extended to service exporters.

This Budget should be the stepping stone for an efficient implementation of progressive tax policy and to develop the framework for a sound tax administration. The government has to take concrete steps to correct the interpretational as well as policy gaps to come closer to fulfilling the expectations of industry.

(Tajinder Singh, PwC India, contributed to this article)

The author is leader, Indirect Tax, PwC India