Cleaning up of indirect tax regime a must

Oct 04 2013, 04:56 IST
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SummaryDelays in the simplification of the Cenvat credit norms and removal of ambiguities in the negative-list-based service tax hurting industry

To counter the impact of economic slowdown and dwindling investor confidence, the government has recently taken a slew of measures aimed at reforming the overall legal and regulatory framework in India.

A committee was constituted under the chairmanship of former Sebi chairman M Damodaran to suggest regulatory reforms for doing business in India. This was in response to the ‘Doing Business Report, 2012’ of the World Bank, which placed India at low ranks in almost all parameters. Earlier this month, the committee presented its report to the government. The report strongly advocates review of the current laws and regulations, including tax laws.

While the report does not talk about it specifically, however, there is growing realisation that the plethora of complex indirect tax laws are clearly a major hindrance to India's industrial growth. They have resulted in supply chain inefficiencies, widespread litigation and increased cost of business.

The industry was hopeful that the introduction of GST would simplify things and doing business would be easier. However, with the general election early next year and opposition from several states on various contentious issues, the wait for GST could get longer.

Clearly, therefore, one does not expect a big bang tax reform till after the election. However, the question that begs an answer is that should the status quo be maintained till then? Can something still be done to provide some relief to the industry?

A closer look at the existing woes of industry suggests that many of the challenges being faced on tax-related matters can actually be addressed without any serious legislative interventions. These are several cases where the desired outcome can be accomplished by issuing appropriate notifications or clarifications, or by overhauling the administrative setup in some cases.

For instance, the rationalisation of the Cenvat credit regime has been a long-standing demand of the industry, cutting across sectors. The M K Gupta committee constituted by the government to look into the credit scheme has apparently recommended a very liberal Cenvat credit regime. The time has come to simplify this mechanism and allow credit of all legitimate business expenses, except a small negative list, if needed. This is particularly because after the negative list regime under service tax from last year, almost all services are now being subjected to tax. This change will reduce litigation and make industry more competitive.

The negative-list-based service tax regime has also posed several ambiguities

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