The last couple of months have been quite positive towards the most ambitious tax reform of the country: Goods & Services Tax (GST). There seems to be a broad consensus between the Centre and states on the issue of CST (central sales tax) compensation. However, it also means an additional provision of around Rs 12,000 crore in the upcoming budget, which would be a further strain on the mounting fiscal deficit.
Even on the contentious issues around constitutional amendments, there have been reports of convergence between the Centre and states.
With these developments in perspective, one would expect the upcoming budget to take us closer to GST, even though the exact date of implementation is still likely to be a moving target. This should mean stability in tax rates, expansion of the tax base and other measures to prepare the groundwork for GST.
The challenge of managing the fiscal deficit virtually rules out any possibility of reduction in tax rates. However, there is certainly a case to maintain the existing rate of excise duty at 12 per cent. Apart from the fact that the current excise duty rate is broadly in alignment with the likely Central GST rate of around 10 per cent, there is a visible slowdown in manufacturing. Any excise duty hike would have a spiral impact and may further aggravate the situation.
There may be a case for a slight increase in the service tax rate, since the rate of GST on services is likely to be 16 per cent or more. However, till the time GST comes in, perhaps it would be better to keep the rate same on goods and services, given the complexity of the current system, including restrictions on input credits, which increase the effective rate anyway.
In the last financial year, the government introduced a negative list regime under the service tax law, which completely revamped the earlier service tax regime. The move was considered by industry and various stakeholders as a positive step towards GST. Similarly, on the excise front many exemptions were pruned by levying excise duty at concessional rates of two/six per cent. One would expect that the attempt to broaden the tax base would continue and several existing excise exemptions and concessions would be rationalised. This would also augment the government's revenues to some extent and would take us to closer to GST, which is based on the fundamental principle of a large tax base, with fewer exceptions.
The new service tax regime has also posed certain challenges for the industry, which need to be addressed. This includes difficulties around implementation of the extended reverse charge mechanism, taxation of transactions between head office and branch/project office, ambiguity around application of place of provision of service rules (e.g. in case of intermediaries), etc.
The government should also look to harmonise excise duty and service tax law in the upcoming budget. At present, excise duty and service tax is administered through two different laws. In last year's budget, it was announced that the government would work towards a common code for excise and service tax. While a common code is not expected in the budget, these laws need to be reviewed and aligned to the extent possible. For example, the criteria to avail credit on capital goods and inputs for a manufacturer are different from the criteria to avail credit on input services. Similarly, if a refund is allowed on excise-exempt goods, the same should be allowed on export of exempted services as well. Immediate removal of cess, surcharges such as NCCD, clean energy cess etc would also be a good idea, since these are likely to be subsumed under GST.
Liberalisation of Cenvat credit provisions is a major expectation from the budget strongly advocated by most industry bodies. Currently, there are several restrictions on credit, as a result there is significant cascading of taxes. Globally, the concept is that tax incurred on any legitimate business expense is allowed as a set-off, with a very small list of ineligible expenses.
To sum it up, the momentum of indirect tax reform should not be lost, which will help ensure that we continue to move towards GST, slowly but surely.
Pratik Jain is a partner at KPMG India. Tthe views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.