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Budget 2014-15: Govt must rationalise indirect tax regime to revive manufacturing, says KPMG

Pratik Jain and Siddharth Mehta     June 24, 2014

Pratik Jain (R) and Siddharth Mehta
As expected, the new government is keen to get the economy back on the high-growth path at the earliest possible. A plethora of reforms are being considered to revive manufacturing in particular.  One of the measures that can come in handy is to rationalise the existing indirect tax regime , to make it more business-friendly.

As always, this year also the wish list of industry continues to be dominated by demands around extending the existing tax exemptions/ concessions, Cenvat credit rationalisation, addressing the inverted duty structure in some sectors, etc.

Earlier this year, the government had reduced the excise duty rates on capital goods, white goods, automobiles, etc. to revive demand in these sectors.

{blurb}The relief was supposed to be temporary, and is slated to expire on June 30. While the industry wants the duty cuts to be retained, it is not clear as to whether the Finance Minister [Arun Jaitley] will pay heed to this demand. The need for fiscal consolidation and the general perception that the duty cut had little impact on reviving growth could tempt the finance minister to roll back the concession.

A mid-way out could be to continue with the cut only for certain sectors that are bleeding more than others, such as automobile.

A lot has been discussed about the need for revamping the Cenvat credit regime, which deals with the set-off available to the manufacturers for the various central taxes paid by them on their sourcing of goods and services, against their output excise duty liability on the goods manufactured.  Currently, the scheme puts several restrictions on claiming credit (for instance, on civil work, employee related benefits, etc.).

Apart from these express denials, a large number of claims are contested by authorities on grounds of inadequate nexus between the expense incurred and the manufacturing undertaken.

To do away with all these disputes and to align our taxation framework with international best practices, the credit scheme needs to be liberalised significantly. All these restrictions ought to be withdrawn, and taxpayers should be allowed to claim credit for all expenses incurred in connection with business. The M.K. Gupta committee constituted earlier by the government had made similar recommendations. The report can be shared with all stakeholders for inputs and implementation.

A recent Supreme Court ruling in the case of Fiat India has also opened a Pandora's Box for the industry, which merits immediate remedy. Applying the ratio of the ruling, excise authorities have been seeking to recover duty on a 'notional' market value of the product manufactured, even though it would have been sold by the manufacturer to customers at a loss/ specially discounted price. The industry has extensively represented on this matter to authorities.

Hopefully, the government will carry out requisite amendments in excise laws this time to avoid any additional duty burden on manufacturers who are compelled to sell their products below cost due to slackening demand, stiff competition, or other commercial considerations.

Then there are issues around the inverted duty structure in some sectors (such as chemicals), which need to be addressed. Also, there is a need to revisit the benefits being extended on imports from countries covered under Free Trade Agreements. A fresh cost-benefit analysis needs to be undertaken to make them more productive for the economy.

From a long-term perspective, the industry expects the Goods and Services Tax (GST) to address many existing tax-related woes, which in turn would help in conducting business more effectively.  

Currently, even some basic commercial decisions (such as whether or not to engage a third party for manufacturing, where to source the goods and services from, choice of distribution model, etc.) are swayed to a large extent by tax considerations.

This often leads to inefficiencies from an operational standpoint, which can be avoided once the GST is implemented. Therefore, the industry is eagerly waiting for this mega-transformation in the tax space, which can significantly alter the outlook of domestic as well as global players towards the ease (or difficulty) of doing business in India.
In the interim, it would be worthwhile to explore a 'Central GST', by developing a unified code for excise and service tax. Currently, there exists a partial convergence, but there is clearly room for more.

For example, a facility to opt for a centralised excise and service tax registration, transfer of surplus unutilised credit from manufacturing to service tax registration and vice-versa, etc. are some of the relaxations that the industry is looking forward to.

Thus, there are several things that the finance minister can propose in the forthcoming budget to revive the manufacturing sector. Many of these reforms could, in fact, act as stepping stones for the GST.

With mounting criticism of India's convoluted tax regime from all stakeholders, the finance minister will have to take some radical measures to reinstate industry and investor confidence.

Pratik Jain is partner - Indirect Tax, KPMG in India 

With inputs from Siddharth Mehta, partner - Indirect Tax, KPMG in India

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