On the framework front, I do not expect that a Central GST regulation will be created as a common framework between excise and service tax as it is too close to GST and the two regulations are not entirely aligned.
As the GST dream continues to be elusive, the Budget is expected to be a good example of “showing action” in existing central laws. This is likely to be aligned to the introduction of GST, probably advancing the introduction of changes which otherwise could have waited.
And the action has already begun. Recently, several pharma products were moved out of the exemption list, by introducing excise duty on them. I think more exemptions will be pruned. This is one of the “expected” changes for GST alignment.
On the framework front, I do not expect that a Central GST regulation will be created as a common framework between excise and service tax as it is too close to GST and the two regulations are not entirely aligned. One thing that can certainly be expected is that the list of levies of the central government on goods is reduced. For example, one can expect changes in NCCD, additional excise duty, and various cesses to make them more fungible with the mainstream taxes.
Also, some of the “undesired” restrictions on credit eligibility need to be removed; credits should flow freely as long as there is a connection with the business. The central sales tax rate may be further moderated to 1% (from 2%) again, with the objective of reducing non-creditable taxes.
Customs, per se, does not require any major overhaul as it will survive GST. However, the government may establish formal processes for sharing data between customs and state VAT authorities – a pre-cursor to what will happen in GST. This will usher more incisive analysis of default or evasion for state governments and bring more taxpayers into the net.
Service tax may see quite a few changes. Negative list introduced in 2012 is already creating controversies, and the government would be proactive in clarifying some open issues. Whether it is taxability of non-compete fees or liquidated damages or RFOR, or the scope and applicability of intermediary services or aggregator provisions (introduced last year).
Most importantly, the penal interest rates of service tax need to be moderated. There are penalties that anyway apply to defaulters, therefore the need to have steep interest rates of 30% needs a relook.
The government may use indirect taxes as the surfboard for reforms – both in terms of improving the ease of doing business in India, as well as giving a hard push to the various programmes like ‘Make in India’, ‘Start up India’, and ‘Skill India’. Some of these programmes are also interlinked, like the success of Make in India in a way depends on the success of Skill India. The benefits could either be tax breaks or ease of compliances.
An important item on the agenda could be taking active steps to reduce litigation or pendency thereof. It could start with changing the culture of appealing every order in favour of the tax payer and disputing only merit cases.
The government is also likely to focus hard on operationalising some of the recent proposals such as increasing the benches of courts and other appellate authorities, automation and non-intrusive risk based assessments.
Overall, 2016 Budget has the potential of being the point of inflexion for indirect taxes. Even if the start date for GST is not within calendar 2016, the year would see significant traction on the subject starting with the Budget.
Moreover, an impetus is likely to be provided to the key programmes run by the government to bolster investments, deepen the human capital, and improve the ease of doing business.
The writer is tax partner, EY India