Given that implementation of the Goods and Services Tax (GST) has been deferred till 1 July, instead of the 1 April 2017, it will be interesting to see how the finance ministry drafts the indirect taxes proposal in the upcoming Budget.
Even as most experts believe that the indirect taxes proposals in the budget would be aligned to GST, here are the few major indirect tax changes that we may see in the Budget this year.
Increase in service taxes: In GST, the services would most likely be taxed at 18 per cent. Therefore, the government may increase the service tax rate from the existing 15 per cent. Some experts believe that the budget may not increase the service tax rate by 3 percentage point but instead increase it by 1.5 percentage point to 16.5 per cent.
Excise rates changed as per the GST tax bands: Under GST, products would be categorised in five tax bands -- 5, 12, 18 and 28 per cent. Which products would be kept in which tax band is being decided by the GST Council. As per experts, it is likely that the council may have made up its mind on certain products and their tax band. The budget may see excise duties on some products categories changed to bring them closer to the GST tax band.
For example if a product which is taxed at 6 per cent under the current laws, may be put in the 12 per cent basket in the GST. In such cases, the Budget may increase the excise duty on such a product to either 10 or 12 per cent.
Correct the inverted duty structure: There are many products in which the input duty is more than the output duty. In pharma industry for example, using active pharmaceutical ingredients (APIs) a formulation is made. Quite often the duty on APIs is more than the duty on the formulation. This leads to manufacture of the formulation getting more (tax) credits than he can utilise. This leads to accumulation of credits in the hand of manufacturer and the manufacturer can't do anything with it.
"Under GST, there is a provision that if there is credit accumulation in the hand of manufacturer, the government would refund the manufacturer. Therefore, it is likely that the government may correct the inverted duty structure by either increasing the output duty or decreasing the input duty," says M S Mani, Senior Director - Indirect Tax, Deloitte.
Change in MRP based excise levy: There are around 140 products, on which the excise duty is charged on the maximum retail price (MRP) of the product. So, in the factory itself when the excise is levied on the product, it is levied on the maximum retail price.
However, the government has fixed abetment on these products, that is, the tax is levied not on the entire MRP but after deducting the abetment rate (or rebate). For example if the rebate is 40 per cent for a product with MRP of Rs 100, the excise would be levied on Rs 60 (100- 40 per cent of 100).
The rate of abetment for differs for different products and usually range between 25 and 45 per cent.
Under GST, there is no system of MRP-based duty and therefore, the government may either completely remove the MRP based system in the budget or go for a single abetment rate.