Expect GST roadmap in Budget and some indirect tax changes to align with tax reform
The present Government, halfway through its term has shown courage in taking bold decisions. As a result, there are a lot of expectations that the upcoming Budget will have similar bold reforms.
Over the last few decades, a much larger proportion of tax revenue, collected in India has been from indirect taxes. Comparatively, the share of direct taxes is significantly lesser. A tax structure heavily dependent on indirect taxes for revenue mobilisation, is considered regressive as it casts a higher tax burden on the poor in proportion to their income. It is to be seen as to what extent the next budget can correct this structure. The present Government headed by Prime Minister Narendra Modi has always talked about making the less privileged the focus of the Government’s policy making efforts. Whether the next budget will move in this direction with respect to indirect taxes is to be seen.
The implementation of the Goods and Services Tax (GST) before 16 September 2017 is imminent as this is the outer limit for replacement of existing taxes by GST under Section 19 of the 101st Constitution Amendment Act, 2016. It seems difficult that GST could be implemented by 1 April 2017 as some differences between the various states and centre are yet to be resolved in the GST Council. In these circumstances, it is expected that the budget for FY 2017-18 could align tax rates under existing tax laws such as excise duty and service tax with the 4 rate structure proposed under GST, as a precursor to the implementation of GST. The budget speech may also contain the road map for implementation of GST.
In order to reduce the pain of the common man during the 50 days’ period of demonetisation, the excise duty rates of items of mass consumption could be reduced to make them affordable. The next budget may also contain significant changes in the duty structure to stimulate economic growth which has been adversely affected by demonetisation.
The threshold limit for service tax payment at present is Rs 10 lakhs as compared to Rs 20 lakhs proposed under GST, except for few special category states such as those in the North East of India. There is a possibility that the Government may make an upward revision in the threshold limit for service tax. There is also a possibility to move towards two rate tax structure for services with lower rate of basic essential services, particularly those services consumed by the economically weaker strata of the population.
Currently, about 300 products are exempted from duty under central taxes viz. excise and customs duties as opposed to less than 100 under state tax laws. . The Government is therefore well advised to rationalize duty exemptions by bringing more products under the tax net and align the same with GST.
On the customs duty front, the forthcoming budget is expected to correct the inverted duty structure for certain products where the effective rate of duty on raw material is higher than the duty rate on finished goods which adversely affects indigenous manufacturers of such products.
One of the key election promises which has remained unfulfilled is to create large scale employment. In fact, the recent demonetisation has rendered several self-employed and contract labourers jobless. The Government needs to create more job opportunities by significantly increasing investment on infrastructure projects such as roads, ports, airports, housing, bridges etc. and provide fiscal benefits for such projects by way of tax exemption/ reduced taxes.
During the last one and half years the Government has shown courage to take 3 bold steps promising to have a long term impact on the economy viz.Constitution amendment to implement GST
Demonetisation of high denomination currency notes; and
Large scale financial inclusion of rural population by opening bank accounts with zero balance.
The present government having completed half of its term, could still take bold decisions in the forthcoming budget to leave its imprint on the economic landscape of the country before the next general election.
It is expected that the thrust of the upcoming budget would be to accelerate economic growth, encourage capital investment by extending fiscal incentives, especially investments which have large potential for additional job creation. On the expenditure side, the government may increase outlay on infrastructure development, construction of houses for low income groups, promote digitisation of processes and direct transfer of subsidies to the target groups.
(The author is Executive Director, Khaitan & Company)
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