A categorical affirmation of implementation of GST including a time-frame for its introduction, though widely anticipated, was ubiquitously missing from the Budget speech. That said, the Budget proposals are a mixed bag of positive and not so positive changes being implemented under existing transaction tax laws.
On the positive side, the tax credit mechanism has been rationalised in the context of distribution of tax credits. A long-standing interpretative debate on the extent of service tax credit reversal required to be carried out by a business engaged in taxable and non-taxable activities has been addressed through clear provisions that enable full credit to be availed on services (exclusively) used in taxable activities. Another change is distribution of service tax credits by a brand owner to his outsourced manufacturer. This should plug loss of credit incurred by the brand owner in cases where excise duty is paid by outsourced manufacturer. Other changes include rationalising interest rates on all duties and taxes at 15% on delayed payments. This was long awaited by service providers who were faced with arduous interest costs up to 30%.
Amongst the not-so-welcome moves is the continuing trend of introduction of various types of cess towards specific initiatives. With its creditability in debate, the proposed Krishi Kalyan Cess could, apart from increasing the effective rate of service tax to 15%, enhance cascading effect of such tax for domestic service providers as well as exporters. Then there is infrastructure cess, to be levied within the range of 1-4% on all cars manufactured in India. The increase in time period for recovery of taxes and duties could result in uncertainties for businesses in estimating potential demands.
A key legislative change has been dispute resolution. The government has made an attempt to boost investor confidence and reduce indirect tax litigation by providing means to the assessee settle cases at the first appellate level by paying the tax/duty, interest and also 25% of the penalty. As this amendment has been made for the short term (with a settlement window being available only till December 2016), its efficacy would need to be practically tested. This may give an option to assessees to obtain closure of matters which may be technically challenging to win in appeal. The Budget has also sought to address backlog of cases with 11 new indirect tax tribunal benches proposed.
The trend of increasing tax rates for luxury goods and sin goods continues, with some respite for certain personal care products. Large-scale expectations of the electronics industry on being a key beneficiary of Make-in-India have, however, witnessed mixed results. While the government is keen to implement a manufacturing ecosystem commencing with manufacture of parts/accessories, withdrawal of certain exemptions notified the past two years on certain mobile phone parts and accessories has caused some concern with manufacturers who have embarked on expansion plans. All in all, it is a budget of consolidation with few peaking reforms.
(With inputs from Jayashree P, Shreya Tripathi and Chirag Bhatia)