Multiplicity of rates and high levels don’t bode well for the overall simplicity of the GST design
The main thread running through the indirect tax proposals in the Budget is promotion of the Make-in-India initiative of the government. This objective is reflected in the reaffirmation of the Goods and Services Tax (GST) implementation in April 2016 and correction of the anomalies plaguing the manufacturing sector.
The government has responded to several of the industry demands, but only partially. The Budget reaffirms the GST implementation date of April 2016, but does not provide any details of its design or the roadmap for its implementation. Given that it is a joint initiative of the Centre and the states, the design can be decided only by the GST Council to be formed after the ratification of the Constitutional amendment.
GST implementation from April 2016, however, remains a challenge. A lot of preparation is needed to meet the deadline. First, the Constitution Amendment Bill will have to be ratified by both Parliament and the state assemblies. Following this, the GST Council will be formed and the GST law would need to be enacted by both levels of the government. The challenge of designing the IT infrastructure for its administration is equally daunting. These aspects will take several months for completion. The confidence of the business community in timely implementation of GST would have been significantly enhanced if the finance minister had clearly articulated how he planned to navigate these critical steps.
The Budget addresses the problem of inverted duty structure in the manufacturing sector in a meaningful manner. Currently, in many industries such as electronics and mobile phones, the effective tax burden on the domestically-manufactured products is much higher than on imports, as the tax on inputs for the domestic manufacturers is higher than that on their finished products. To address the problem, the government has lowered the excise duty from 12% to 6% on a range of parts and materials, such as those used in the manufacture of integrated circuit modules, LED drivers and fixtures and lamps. The Special Additional Duty (SAD) on import of these products has also been eliminated.
The service tax exemption list has been pruned in anticipation of those items becoming taxable under GST. The entertainment services will now become taxable with the exception of admission to entertainment events, namely, exhibition of cinematographic film, circus, recognised sporting events, dance, and theatrical performances. The exemption for admission to such events continues in recognition of the fact that, pending the Constitutional amendment, these services will fall in the purview of state taxation.
Specified services of construction, erection, commissioning, etc. provided to the governments or a local authority will now be taxable, with some exceptions like construction of a historical monument, canal, dam and pipeline or plant for water supply and water treatment or sewerage treatment or disposal.
The service tax base for taxing premium-class air travel has been increased from 40% to 60% of the ticket price. The excise duty for soft drinks, including mineral waters and aerated waters containing added sugar or other sweetening matter, has been increased from 12% to 18%. Excise duty of 2% without CENVAT credit or 6% with CENVAT credit is being levied on condensed milk and peanut butter. These changes suggest that processed foods would come under the ambit of GST at the lower rate of 12% (Centre and state taxes combined).
Tobacco duties have been further increased in this Budget. The last budget had proposed an excise duty increase of 72% for cigarettes not exceeding 65 mm and a smaller increase on larger sizes. This pattern has continued in this Budget, with an increase of 25% on smaller cigarettes and 15% on larger sizes. The large increase in smaller cigarettes resulted in revenue loss to the government because of diversion of sales to contraband production. These losses could now get compounded.
Can any inference be drawn from these about the tax base and rates under the GST regime? The increase in service tax rate to 14% suggests that the GST rate would not be moderate. It is likely that the GST will have multiple rates, a low rate for basic necessities of 12%, a standard rate of 18-20% applicable to all other goods and services and possibly a third higher rate for select products like soft drinks and tobacco. Such a rate structure, with multiplicity of rates and high levels, doesn’t bode well for the overall simplicity of the GST design, and could encounter substantial public resistance.
The author is tax partner (Policy Advisory Group), EY