Jayashree Parthasarathy – Partner, BMR & Associates, LLP
A hallmark of a value-added system of taxation is that businesses engaged in supplying taxable goods and services do not absorb any taxes. Despite being under a system of value-added taxation both at the Central as well as state level, Indian businesses typically absorb transaction tax costs on account of a restrictive tax credit regime.
Currently, central laws (that is, central excise and service tax) offer three distinct types of credits: ‘inputs’, ‘input services’ and ‘capital goods’, with a host of restrictions. By way of illustration, today, a realtor engaged in renting of commercial space upon payment of service tax is unable to avail any credit with respect to the construction of the commercial space under rent. Similarly, a BPO company is unable to take credit of service tax paid on vehicles engaged for transport of its employees for conduct of business operations. Such credit restrictions riddle Indian exports with tax costs and render them uncompetitive globally.
Categorisations like ‘input’, ‘input service’ and ‘capital goods’ should be done away with and all business-related input tax expenses should be allowed as credit without any artificial restrictions.
Currently, there is no robust mechanism to tackle a situation of inequitable accumulation of credits across offices or units of a tax payer. Businesses are forced to pay service tax in cash at the corporate office despite excise credits accumulating in the factory. Even large tax payers falling under ‘LTU’ have been deprived of their promised benefit of unhindered transfer of credits from one office to another. The input service distribution scheme is a poor substitute in seeking to allow distribution of service tax credits subject to a nexus of use of the service by the relevant unit to which the transfer is made.
Eligible tax credits should be made easily transferable between units of the same assessee, with minimal restrictions and without co-relation of use such across central tax laws.
Outsourced manufacturing as a concept has been prevalent in India for some-time now with job workers or toll manufacturers being engaged for manufacture of products on behalf of the brand owner. Despite the concept being popular and prevalent, as on date, there is no specific mechanism for integration of the credits of the brand owner and job worker to ensure all expenses incurred with respect to the product are offset against the income earned from the product. By way of illustration, service tax incurred by the brand owner for marketing the product is not eligible to be offset against excise duty paid by the job worker at the stage of manufacture or VAT paid by the brand owner at the stage of sale of the product.
There is need for an integrated tax system that enables tax credits to be fungible in situations of an outsourced manufacture.
There is also the need for all types of “cess” imposed as either a duty of excise or service tax being integrated into a pool of credits eligible to be used for payment of excise duty, service tax or any type of cess.
It is time Indian legislators take note of these anomalies such that they are cured before the introduction of the much awaited GST. Should these issues continue under GST it is likely to be the proverbial case of old wine in a new bottle.
The author is Partner, BMR & Associates, LLP. The views are personal