At a first glance, the indirect tax proposals of Budget 2012 appear to be strongly driven by a motive of augmentation of revenue generation along with rationalisation of tax rates keeping in mind specific needs of various strategic sectors.
One of the most significant developments in the Budget is the introduction of a negative list-based approach to levy of service tax. This presents a fundamental shift in India?s approach to taxation in services (which currently taxes only certain specified services). This approach will lead to a scenario where service tax would effectively be leviable on every transaction for money other than certain specified categories like sale of goods or immovable property, specified services in connection with education, transport of passengers, etc. Hitherto untaxed transactions are likely to become liable to service tax.
It would be extremely important for businesses to go through all money inflows and outflows in their financials with utmost rigour to identify areas which would have fresh impact of service tax. In this regard, a detailed analysis of the changes in the CENVAT Credit provisions along with changes in the provisions vis-?-vis import and export of services would also be very critical.
Specifically pertaining to the thermal power sector, given the recent troubles plaguing the sector, there was an expectation that services provided in connection with setting up and operation and maintenance of a power project would be included in the negative list. That expectation remains unfulfilled.
The new approach is also a significant move towards the introduction of the goods and services tax (GST) in the medium term and would go a long way in fulfilling the present government?s short-term requirement of augmenting the present service tax base manifold and, increasing revenue generation significantly. The intent to move towards GST is further evidenced by announcement of operationalisation of a PAN-based GST IT network by August 2012 and the ongoing process of drafting of the model legislations for the Central and state GST in collaboration with the states.
Further, from a GST transition perspective, one more noteworthy development is the merger of compliances for excise and customs. This is the first time that administrative aspects of two different taxes pertaining to goods and services have been attempted to be merged. The lessons learnt from this endeavour would come in handy during transition to GST. From a revenue augmentation perspective, as expected, the median rates of service tax and excise have been hiked from 10% to 12%. This, coupled with negative list for services would lead to an all-round inflationary effect in prices of goods and services.
Taxpayers would now need to undertake extensive analysis to identify specific impact areas owing to the new approach. In this process, it would be crucial to put aside the common-sensical understanding of the phrase ?service? and rely upon the touchstone of negative list of services.