Cleaning up of indirect tax regime a must

Written by Pratik Jain | Updated: Oct 4 2013, 10:26am hrs
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 for the taxpayers. Many of these issues require mere clarification of the governments stand, rather than any amendment in law. These include several generic issues, such as taxability of cross-border transactions between head office and branch/PO, treatment of transactions involving consortia, activities done by employers for employees, taxability of amounts in the nature of liquidated damages/penalty, grants, etc.

Then there are various industry-specific issues which should also be clarified at the earliest. While the issues cut across sectors, ambiguities largely prevail in infrastructure, oil & gas and real estate.

A large number of representations have already been made by various industry associations on these issues, but most of these remain unresolved. It is important to appreciate that the industry is not necessarily looking for favourable clarifications in all cases, which would reduce the tax liability or increase credits. What is really required is certainty of tax treatment so that companies can devote their time and resources towards more productive activities rather than engaging in legal battles with tax authorities. In this context, setting up of the Parthasarathi Shome committee to address these issues is indeed a welcome step. The committee has had extensive deliberations with industry over the last couple of months and hopes are high that the outcome would be encouraging.

Similarly, immediate measures are warranted to relieve the industry of various operational and administrative challenges being faced. Delay in grant of service tax and customs refunds has been a perennial grievance of the industry. The impact has, in fact, aggravated over last year, in the wake of economic slowdown. Clearly, this is an area that needs urgent attention, and it has no correlation whatsoever with the impending elections or budget.

While GST is still a distant reality, this should not be a deterrent for the stakeholders to continue with the groundwork on priority basis. Towards this objective, the attempts should be to look at structural issues such as correction of inverted duty structure, strengthening of the advance ruling mechanism and tightening of tax administration.

Considering that we have already lost a good amount of time for implementing tax reforms over last few years, the industry now expects to see some quick action, to get back on the high growth track. After prolonged gloom, some of the economic parameters have recently started giving positive indications. This is a good opportunity for the government to build on the momentum and bring back the industry confidence.

The author is partnerindirect tax, KPMG in India. Views are personal