There is also a need to revisit the provision governing distribution of CenVAT credit by an input service distributor which restricts the allotment of common credit by the corporate office to its taxpaying units.
The expectations from the Budget FY16 are high, given the government’s pro-industry and pro-growth attitude. On February 28, we will see how and to what extent the government can ‘walk the talk’.
On the indirect tax front, changes in median tax rates under service tax and central excise seem unlikely. An upward revision would probably cause massive unrest and a lowering of the rate seems unaffordable. There would be some specific alterations in product-specific duty rates under central excise and customs to address trade challenges and inverted duty structures.
However, there are some provisions that need to be reviewed as they are causing considerable hardship to industry. For example, the CenVAT credit rules were amended to introduce a time limit of six months from the date of the invoice to avail of the credit on inputs and input services. This, ironically, was done by the BJP government at the time of their first Budget. There is no legitimate reason for the government to require that input tax credits be used within a given time-frame. If a taxpayer claims credit for an invoice that is more than six months old, the delay in claiming credit only costs the taxpayer, not the government. On the other hand, there are a number of legitimate reasons why a customer is unable to use the credits within six months. An invoice may be disputed for over a year. If a person is building a new factory, he might have input credits that he cannot use for 2-3 years until the factory is completed and commences production. Therefore, this provision should be deleted.
Similarly, there is a need to revisit the provision governing distribution of CenVAT credit by an input service distributor which restricts the allotment of common credit by the corporate office to its taxpaying units. Since the distribution of CenVAT credit is revenue neutral, the eligible credit after adjusting for exempt/non-taxable turnover should be allowed to be distributed without any restriction.
In service tax, interest rates on delayed payment of tax have been changed to a variable rate scheme ranging from 18% to a high of 30% in case the tax remains due for more than a year. This is not a subtle way of discouraging any service provider from disputing any tax liability or tax demand raised by the department. This is not at all in keeping with the business-friendly image that the government is keen to portray, in order to jump-start the economy. If there is a law in which effectively there is no appeal mechanism against an unjust tax demand, this is hardly in keeping with the pro-business and pro-development image that the government is keen to portray.
Then, there are provisions that are in practice subject to conflicting interpretations. In customs, the valuation rules provide that all payments made by the buyer as a ‘condition of sale’ of the imported goods should be added to the transaction value for purposes of customs valuation. In a typical MNC scenario, an importer might be sourcing multiple goods related to its manufacturing process from its parent company. Quite frequently, the parent provides the subsidiary company with proprietary technical know-how to enable it to manufacture the product. The department invariably assumes all royalty and technical services fees have been paid by the buyer as a condition for sale of goods that are supplied. This is irrespective of the fact that product ‘X’ was imported and royalty payment was towards technical know-how supplied in relation to the manufacturing process of the end product ‘A’. The recent history of case laws involving evaluation of ‘condition for sale’ scenario suggest that in majority of the cases the tribunal or the court, as the case may be, held the approach followed by the importer as correct. This, however, has not slowed the spate of tax demands.
Therefore, it seems desirable that a clarification be issued explaining that the technology fee should be added to the import value of goods only where it relates to the goods that are imported.
As far as indirect tax reforms are concerned, a lot is expected from this Budget with respect to implementation of GST. Now that the Constitutional Amendment Bill has been tabled in Parliament and is due for discussion in the coming Budget session, a clear roadmap for the implementation of GST should be shared with the country. This would include setting timelines for the Constitutional Amendment, the release of draft GST legislation up to the final enactment of GST and the expected ‘go-live’ date.
(Supported by Tajinder Singh)
The author is partner and leader, Indirect Tax, PwC India.