The current economic situation is characterised by uncertain economic conditions and increasing inflation. One of the biggest challenges facing the new government could be reforms in taxes, particularly indirect taxes such as excise duty and service tax.
In this context, the BJP had stated in its manifesto that it will bring on board all state governments in adopting the Goods and Services Tax (GST) and addressing all their concerns, provide a non-adversarial and conducive tax environment, rationalise and simplify the tax regime and overhaul the dispute resolution mechanisms. Given the above, it will be crucial for the new government to address the following key indirect tax issues:
Introducing GST
It may be pertinent to note that the one of the critical steps towards the introduction of GST was taken when the 115th Constitution Amendment Bill was introduced in Parliament in March 2011. Later, the Parliamentary Standing Committee on Finance examined this Amendment Bill and gave a detailed report in 2013. However, since then, the industry is eagerly awaiting the next positive step towards implementing GST.
With regard to GST implementation, the new government should give thorough clarity on the roadmap for introduction of GST along with the proposed date of its introduction. Further, legal provisions regarding GST should be introduced and laid open to public debate. This will give the industry enough time to upgrade its information technology systems and appreciate the impact of GST on their businesses.
Reduce cascading tax in the current indirect tax regime
In April 2011, the Cenvat credit provisions were amended and Cenvat credit eligibility was restricted as in the case of motor vehicle-related services and sectors like catering services and construction. This has lead to unnecessary denial of Cenvat credit on many services which are essential.
Therefore, the new government should revisit these Cenvat credit provisions and make the Cenvat credit provisions seamless. This will provide a non-adversarial tax environment for the industry.
Simplify Service Tax
Effective July 1, 2012, there was a paradigm shift in taxing services from the ‘positive list’ to a ‘negative list’ based approach. However, this change in legal provisions has increased the confusion of service providers. The confusion has been further compounded by various new provisions such as partial reverse charge mechanism, Place of Provision of Services Rules etc.
The new government should appropriately clarify the intent and address the inherent complexities of these rules. Such a step would simplify the tax regime to a certain extent.
Correct the inverted duty structure
Inverted duty structure is a scenario wherein the rate of customs duty on imported raw material is more than that of the imported final product. In such a situation, Indian importers would prefer importing the final product rather than the raw material (as the rate of duty on the final product is less).
The new government should take steps to correct the inverted duty structure as this will help the government stop the shifting of manufacturing activity outside India and consequently arrest job losses.
Support honest taxpayers
According to CAG’s report of 2013, approximately Rs 3,23,037 is currently locked up in pending litigation at various levels. Further, as per the Central Board of Excise and Customs, there were more than 1 lakh indirect tax cases pending as of March 2012.
Steps should also be taken to reduce the backlog of pending litigation (maybe, by giving the option of paying taxes along with interest and waiving off penalty), bringing in some clarity into tax provisions and smoothing off the compliance burden to restore the confidence of honest taxpayers.
Further, the retrospective amendments have made many assessees jittery. Even, the newly introduced arrest provisions are serious cause of concern for taxpayers. Apart from these, asking taxpayers to pre-deposit huge amounts just in case of frivolous tax demands is another legitimate area of concern.
There is a feeling amongst honest taxpayers that various recent schemes introduced by the government of India, such as Voluntary Compliance Encouragement Schemes (VCES), have only benefited the non-compliant taxpayer and not the honest ones.
The new government may also consider suitably amending the excise duty valuation provisions to clarify that excise duty is payable on transaction value as this established principle was unsettled by the apex court in the case of FIAT India Ltd.
Addressing these key issues going ahead will surely provide a conducive tax environment under the new government and give the taxpayer cause for cheer.
( The writer practices in the field of indirect taxes. He is currently assisting various state governments on the proposed GST )
