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Whether GST is implemented in 2010 or gets delayed further, the momentum seems to be building irreversibly towards its introduction. This would be by far the biggest story on the indirect tax front.

Vivek Mishra | Print Edition: July 26, 2009

Budget 2009 has left the peak rates of indirect taxes unchanged, highlighting its objective of continuity. The peak rates of customs duty, excise duty and service tax will remain at 10, 8 and 10 per cent (against 10, 14 and 12 per cent, respectively, in the corresponding period last year). Since most of the reduction in the rates was done by the government as part of the stimulus packages, it was felt that the lowered rates were at best temporary and would ultimately go back to their earlier levels. At least for now it seems that the government is convinced that the lowered tax rates are the way to go.

Moving towards the concept of a single rate of duty, the government has increased the central excise duty on various items that were subject to duty at the rate of 4-8 per cent. Although exceptions have been made for certain specified food items, pharmaceuticals, paper, footwear etc., still daily use items such as toothbrush, contact lenses, MP3 players and certain industrial chemicals will become dearer due to this change.

Another significant proposal is the introduction of service tax on transportation of goods by railway, coastal cargo and through inland water. However, exemptions will be given to rail freight on account of essential commodities so that prices of these remain unaffected.

Lawyers and doctors have now been brought within the ambit of the service tax net. But legal services provided to individuals are exempt and only cosmetic/plastic surgery will be taxed.

The Budget has addressed some of the concerns of the Information Technology (IT) industry. Now, royalty paid on import of a Master CD for commercial exploitation would not be subject to both customs duty and service tax. This change has been implemented by exempting central excise duty/countervailing duty on supply of IT software in physical form for commercial exploitation. However, another anomaly created by the last Budget due to the introduction of service tax on supply of software electronically (i.e., through e-mail, etc.) still survives. The sale of packaged software, being treated as “goods”, was already subject to sales tax (VAT/CST) and the levy of service tax resulted in double taxation. The IT industry may need to wait for resolution of this controversy because it involves interplay of central and state laws, which can be resolved only by a major legislative action or Supreme Court verdict.

Finance Minister Pranab Mukherjee also granted relief to exporters of goods by proposing a simpler mechanism for grant of refund of input tax credits, but remained silent on the demand from exporters of services who have been suffering similar hardships.

Although the Budget declared the government’s intention of implementing Goods & Service Tax (GST) in 2010, it did not provide details of its design and implementation. The Finance Minister announced that the draft Direct Taxes Code will be released in 45 days for comments, but no such announcement was made for GST. Even the much-anticipated reduction in the rate of Central Sales Tax (CST) has not been implemented, and the same continues to be levied at the rate of 2 per cent. Phasing out CST was considered essential for the introduction of GST.

However, whether GST is implemented in 2010 or gets delayed further, the momentum seems to be building irreversibly towards its introduction. This would be by far the biggest story on the indirect tax front, and one on which industry is waiting impatiently for the next concrete step to be taken.

The author is Leader (Indirect Tax), Ernst & Young, India

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