2016 has been quite an eventful and action packed year with the government announcing a slew of measures to curtail cash economy. Whether it be the Income Disclosure Scheme or the discontinuation of high denomination notes, the focus of the government has been to bring back as much currency as possible to the banking system. Going by the figures available in public domain, it appears that the government has achieved formidable success in its endeavour.
The focus of the government should now shift to – a) increasing liquidity in the hands of the consumer by reducing lending rates and income tax rates, and, b) keep the reform agenda going by ensuring a smooth roll out of GST.
On the GST front, the government has done well to hammer out a consensus on the ticklish issue of division of administrative powers between Union and States, which had temporarily stalled the proceedings of the GST council. With the announcement of 1 July as the new date for implementation of GST, it is likely that the indirect tax proposals in the Union Budget 2017 will be a precursor of sorts to GST.
To start with, the rate of Service tax could be hiked from the current 15 percent by one or two percentage points, to bring it closer to the proposed GST rate of 18 percent on services. The abatement percentage on specific services may also be reduced in some cases. Any hike in Service tax rate is likely to impact the consumers directly who are yet to come out of the demonetization effects. To neutralize the effect, it is hoped that the government will also simultaneously look at liberalizing the Cenvat credit eligibility for industry, so that the cost of providing such services can be minimized. This will also be in line with the credit rules under the proposed GST regime.
On the Customs front, it will be interesting to see how Finance Minister Arun Jaitley deals with the exemptions which are currently available to various items. One of the basic tenets of GST is to provide minimum exemptions and expand the tax base. The Customs exemptions specifically need a relook, given that continuation of the same under GST may prove counterproductive for domestic manufacturers.
From an excise perspective, the rates are not likely to be changed. However, the government could revisit the various exemptions/ concessions available under excise law and align the same with what is proposed in GST regime.
Another area which the government should look at is disbursal of refunds. Obtaining refund from the government takes immense amount of time, severely affecting cash flow of companies. Further, refunds are rejected on irrational grounds due to which the assessee is left with no other option but to litigate the matter further. There is an urgent need to review the situation and clear the pending refund claims prior to the advent of GST.
While the government has tried to remove incidence of double taxation of goods and services, there are still various activities which end up being subjected to multiple taxes on the same base. A recent example of this is the levy of Service tax on ocean freight, which is being subject to both Service tax as well as included in assessable value for purposes of Customs duty. The government must look at such instances and suitable changes should be done in the laws to avoid double taxation.
The Government should also introduce provisions in the current indirect tax regime which will facilitate transition to the GST regime. For instance, under the draft Model GST law, traders shall be allowed to avail transitional credit of Excise duty paid under the current regime on the stock held as on GST go-live date, provided they have appropriate documents (from the supplier) to substantiate the amount of Excise duty paid on the said goods.
In the current regime, when a manufacturer sells goods lying in his non-bonded warehouse, to a trader, the manufacturer is not required to issue any excise invoice evidencing the amount of Excise duty paid on a product. Thus, in the GST regime, there may be a practical challenge on the part of a trader to produce any document which evidences the payment of Excise duty. Given the above, the government should introduce suitable provisions prescribing the documents which will act as evidence for a trader on the quantum of excise duty paid by such trader.
As we move towards GST, no doubt the government has its task cut-out. The focus should be on clearing legacy issues under the present regime and spelling out a clear road map for implementing GST. It is the industry’s expectation from the FM that the indirect tax proposals should carry a flavour of what to expect in GST. However, whether that happens in reality, we’ll get to know on the 1f February.
(The writer is Tax Partner, EY India)
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Updated Date: Feb 01, 2017 09:37 AM