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What's in store for indirect taxes in Union Budget 2017

Payal Tuli     January 20, 2017

Payal Tuli
Union Budget 2017 would be a unique budget for various reasons - first this time the budget will be presented on February 1, instead of accustomed date of February 28, second the rail budget would not be presented separately, instead would be merged with the Union budget, thirdly this could be populist budget so as to soothe the pain caused to masses due to demonetization drive; and last but not least this could be last budget for current indirect taxes, in case much awaited Goods & Services Tax (GST) is implemented during next financial year.

With recent statement made by Union Finance Minister on deferment of GST roll out date, the focus of the industry has slightly shifted from addressing GST issues to alignment of present indirect tax structure. 

The expectation of industry is that the government will take necessary steps in this budget to bridge the gap between the present indirect tax structure and the GST structure so as to avoid sudden surprises to taxpayers.  This article seeks to discuss few areas in which amendment can be expected in this budget in light of long impending GST.


Augmentation of the credit base: Historically, the credit provisions under indirect taxes have been selective and restrictive.  On the contrary, the credit provisions under GST are broad based and liberal to allow free flow of credits throughout the value chain.  For the purpose of realigning the current credit structure with GST, the government may consider trimming down the exclusions from the definition of 'inputs' and 'input services' under CENVAT Credit Rules, 2004 to avoid disallowance of credit of regular business expenditures.  Also, Swachh Bharat Cess and Krishi Kalyan Cesss hould be made creditable and cross fungible to avoid the current cascading of these cesses in the businesses. Alternatively, applicability of such Cesses could be restricted to business to consumer transactions to avoid multiplier cost impact through the value chain.

Trimming down present exemptions: While exemptions are good news for the taxpayer who is entitled for such exemption, it disrupts the supply chain by breaking the credit flow and leads to additional compliance requirements. With this as premise coupled with liberal credit provisions, the GST envisages minimum exemptions. Keeping in mind this, the government may do away with lot ofpresent exemptions.  This could also serve the motive of preparing taxpayers for minimum exemptions under GST regime and set the tone for GST implementation.

Increase in service tax rate: In the last two years, the government has increased the service tax rate from 12.36 per cent to 15 per cent so as to prepare India Inc for GST under which certain services are expected to be taxed at higher rate. The intent of taxing services at higher rate has been corroborated by the GST Council meeting in which the council has proposed three tier rate 28 per cent, 18 per cent and 12 per cent for taxing services keeping in mind the higher credit base.


Despite the negative impact of increasing the tax burden on taxpayers, the centre may still consider to increase the service tax rate in this Budgetand introduce a three tier structure for taxing services.  The purpose of this move could be two fold - one to bring the rate of tax on services closer to the proposed GST rate and second to improve revenue collection,although this objective may be short lived as center would be entitled for only a portion of total GST charged on services. While a marginal increase may be fine, it needs to be kept in perspective that the tax rate on services does not merit matching with the expected rates under GST since currently the service industry does not enjoy the broad credit base as will be there under the GST regime.

Rationalization of inverted duty structure: Inverted duty structure refers to a situation where tax on components of a commodity is higher than tax on that commodity as a result of which taxpayer has excess credits. Under GST, it is expected that problems of credit accumulation on account of inverted duty structure would not arise in first place and in case it does, the taxpayer would be entitled for refund of such accumulated credits. However, there is no such mechanism in present indirect taxes. While, in last budget the government did attempt to correct instances of inverted duty structure, however still there are some industries which grapple with this issue. In the upcoming budget, as run up to GST, government should further rationalize duty structures to help address the inverted duty structures especially for high import intensive industries.


Promoting 'Make in India' scheme: Make in India has always been a flagship policy of NDA government. It is only prudent to expect that government would announce few schemes and tax concessions towards Make in India scheme. This would also provide impetus to domestic manufacturing sector which seemed to have slowed down due to recent demonetization and coincide with GST implementation, which seeks to remove indirect tax related distortions across the country.

Fast tracking of refunds and disposing pending litigation: In preparation of migration to GST, the government may consider to clean up the past to the extent possible. This would ensure that unnecessary past litigation is not carried forward in the new GST regime. While the government seemed to have picked up some pace already on this issue, however the Union Budget 2017 could bring in new measures (such as amnesty schemes, liberal penal provisions) in this regard.

Realigning the current indirect tax structure can set a good platform for smooth transition into GST which has always been visualized as a positive and progressive reform by the industry. It would need to be seen which of the above issues would be picked by Finance Minister during presentation of one of its kind 'Union Budget 2017'.

(The author is Partner, Indirect Tax, BMR & Associates LLP. With inputs from Poonam Harjani, Director and Divya Mahajan, Assistant Manager.)


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