From an indirect-tax perspective, India Inc is hopeful that this Budget would iron out anomalies of existing provisions. This would provide a breather to many industries, one such being the beleaguered automobile industry.
The auto sector has placed high hopes on the new government to revive the economy, by taking decisions to implement tax reforms such as the Goods and Services Tax (GST) and policies that boost investment inflows and infrastructure development, which in turn would speed up the stalled infrastructure projects.
The auto industry has a big wish list for the finance minister to consider in this Budget, the most prominent one being the maintenance of status quo on the excise duty rate on small cars, scooters, motorcycles, commercial vehicles, SUVs and mid- and large-sized cars. The rate was reduced by the earlier government in the interim budget and is effective till June 30. The industry desperately wants the duty reduction to prevail post June 30, in order to pull it out of the prolonged slump.
The industry is also suffering on account of an inverted customs duty structure. In certain cases, the customs duty imposed on raw materials and components is more than the same levied on the finished product. Hence, in order to encourage local manufacturing and promote value addition within the country by encouraging import of raw materials and components instead of finished goods, such anomaly should be removed.
Further, the definition of 'input service', which was once understood to be of the widest amplitude, post amendment (from April 2011), has cast a net of multiple limitations - words like 'services used in relation to setting up' and 'activities related to business' have been omitted. This has paved way for ambiguous interpretations. The result - litigation has been on the rise.
The story doesn't end here. Due to denial of CENVAT credit of duties paid on input services used for civil construction of factory buildings, this sector is not witnessing any major investments in new/additional facilities. Bottlenecked projects, coupled with drying up of investment inflows has been gradually paralyzing the auto industry with a with a huge cash crunch. Needless to say, this has hampered its growth. Given the fact that construction of factory building/civil infrastructure is necessary for installation and housing of machinery and for carrying out manufacturing activities, CENVAT credit of duties/taxes payable for such construction of factory buildings should be allowed.
To add to their woes, the market buzz is that confusion and lack of clarity in tax provisions is the moot cause of litigation. Even earlier, our finance minister had expressed concerns on substantial amounts of revenue remaining locked up in appeals and litigation at different levels, and had vowed to initiate several steps, with a view to mitigating litigation. However, contrary to what was said, radical changes were made in CENVAT Credit Rules which seem to have opened a Pandora's Box!
Prime Minister Narendra Modi has been preaching the mantras of 'minimum government, maximum governance' and 'accountability, efficiency and trust'. The country hopes the same is followed in true spirit by the finance minister during this Budget. As part of tax reform strategies, some level of accountability should be buckled on to tax authorities/departments, who on many occasions lead the assessee to unnecessary litigation on flimsy and irrelevant grounds. The Bombay High Court (in a case involving ONGC Ltd) has already directed the Central Board of Excise and Customs (CBEC) to issue administrative guidelines/circular to avoid prolonged litigation, in the interest of justice.
Unless accountability is placed on tax authorities/department, it's difficult to control the number of unwanted litigations and its cancerous effect on the business sector.
The auto industry is still skeptical of the Fiat Judgment issue having been fully put to rest by tax authorities, by issuing the necessary clarification. Though the clarification issued by the CBEC is a welcome relief to the industry's concerns on the ambit and extent of the Fiat judgment, it expects that as a long-term solution, they should look at amending the law - i.e. Section 4 of the Central Excise Act by incorporating the methodology as 'clarified' in the Circular.
Further, India Inc. feels that a robust unified GST will, no doubt, be pivotal in reducing the burden of indirect taxes, thereby resulting in a drop in prices of several products. However, it is expecting that whenever the GST becomes a reality, the transition from a regime of multiple indirect taxes to a common tax structure should be smooth, without any surprise hiccups, thus providing enough time and opportunity for making the necessary changes in their business structure and internal systems.
Implementation of the GST will create a single, unified Indian market realizing our prime minister's mantra of 'Ek Bharat Shrestha Bharat'.
As a billion hopes are pinned to this year's Budget, the finance minister must dole out a people-friendly and growth-oriented fiscal calendar, if it intends to retain a strong foothold on the Indian democracy. The much awaited Budget 2014 could serve as a useful tool for reviving the nation's confidence in its economy.
(Santosh Dalvi is Partner-Indirect Tax, KPMG in India, and Kishore Purohit is Senior Manager, KPMG in India)