The upcoming budget is being heralded as the first real budget of the current government, with expectations running high in terms of what it should and could deliver.
With the Make-in-India initiative gaining momentum, expectations include sops to domestic manufacturers. Representations have poured in from manufacturers across sectors for a revamp of the existing duty structure. Currently, duty paid on inputs are often higher than duty payable on the manufactured finished goods requiring significantly high value-addition (30-50%, in most cases) to absorb the input tax credits. This ‘inverted’ duty structure has over the years rendered indigenous manufacturing unattractive. It is believed that the easiest way of addressing this issue across many sectors (such as electronic hardware, commercial vehicles, to name a few) is for countervailing duty in lieu of sales tax (popularly referred to as SAD or ACD) being exempted for manufacturers. On the other hand, sectors such as renewable energy—where the inverted duty structure is more pronounced on account of the finished goods being subjected to a zero rating or nil excise levy—are hopeful of additional sops to counter this issue. The fact that the government set up a specific committee under the auspices of the department of industrial policy and promotion to look into this inverted duty issue and make suitable recommendations for addressing the same has raised hopes that the same may finally be comprehensively addressed.
The aspect of the ease of doing business in India, including certain inherent as well as more recent challenges around the same, has been highlighted by various sectors, including industry associations. A common ask across sectors is for some of the rationalisation measures brought in by last budget to be rolled back. A case in point being the particularly high interest rate, of upto 30%, being levied for a one-year-and-above delay in payment of service tax. The apprehension is that this should not become a bench-mark for interest rates across indirect tax laws, including under GST. Exporters, particularly of services continue to reiterate their demand for a simple and smooth process to recoup taxes, particularly service tax built into exports. Such a scheme could set the theme and act as a precursor for a robust exemption/refund scheme for exporters under GST as well.
It would not be an exaggeration to state that Indian industry waits with bated breath on GST-related announcements. While a path to GST implementation with specific milestones being announced would help, it is also hoped that this budget will usher in certain changes in the existing laws that will enable a smooth transition into GST. A case in point being the CENVAT credit scheme which, despite regular efforts at streamlining, continues to be riddled with instances of goods and services used for legitimate business purposes being denied credit. With the country poised to embrace GST—a tax regime which promises free flow of credits for business purposes— next year, it is time for some of these restrictions to be re-evaluated and removed. A related ask is for the time-frame of 6 months for availing of credit being extended to at least 12-18 months to afford businesses sufficient time to recoup the input tax credits that they are entitled to.
The theme of a digital economy, including digitising India, was an important theme last budget. However, many of India’s fiscal laws border on the archaic in relation to acceptance of digitised documents for various purposes. It is hoped that this theme, coupled with the progress into a technology-enabled GST regime, will see necessary amendments being made across indirect tax laws for acceptance of digital records, including digitally-signed invoices for indirect tax purposes.
A key emerging sector is the e-commerce sector which delivers goods and services online as well as offline, based on orders placed online. Most market place players have sought for respite from a spate of state VAT department investigations deeming them ‘dealers’ that leaves them vulnerable to a potential dual-tax levy on offline supplies effected through their portals (in the state of despatch as well as delivery). However, being a state-level dispute, it is doubtful if the Centre will address some of these issues through a suitable provision or clarification under the auspices of the central sales tax law.
Valuation of composite supplies continues to be an issue both under VAT, particularly under service tax, with a significant overlap of the taxes vis-à-vis a common tax base. Further, the issue of dual taxation of the same item as ‘sale of goods’ from a VAT law perspective and as a ‘provision of service’ from the service tax law perspective continues to spread across sectors. Examples of this include software downloads, digital content such as e-books, intangibles such as trade-marks, even the right to use tangibles, in some cases. While it is hoped that GST would address these issues, subject to goods and services being taxed at the same rate, interim relief continues to be sought by these sectors to mitigate dual tax impact on their supplies.
It is also hoped that, in the wake of the transition into a new taxation regime under GST, a scheme for expediting the disposal of pending indirect tax litigations would be brought forth. This could include notification of additional tax courts/tribunals to hasten disposal as well as a scheme for settling really old and dated yet ongoing disputes. This would enable the government as well as businesses to start a new era under GST with a relatively clean slate from a dispute resolution perspective.
Revenue considerations have in the past led to introduction of provisions to overcome interpretations arising out of judicial pronouncements. A case in point being taxation of ‘intermediary’ services based on the location of the service-provider despite a series of rulings holding that the same should qualify for export status when provided to an overseas customer. This has led to the denial of export status to the marketing and sales support services provided by Indian commission agents to overseas suppliers of goods and services. It is hoped that the forthcoming budget would not only reverse this trend but also undo some of these actions of the past.
While expectations are manifold, for most businesses plagued by a host of these historical issues, even a firm statement on GST, including an affirmation that these issues shall stand resolved under GST, may meet their expectations.
By Rajeev Dimri
With inputs from Jayashree Parthasarathy, director, BMR & Associates, LLP
The author is partner, BMR & Associates, LLP. Views are personal