Revamping the indirect tax regime

Doing away with multiple tax rates, phasing out of various exemptions, and changing credit rules and regulations can set a foundation for the proposed GST regime

The current fiscal has been a year of significant changes for the Indian economy. A number of initiatives—new as well as modified versions of old ones—have been rolled out in an attempt to refuel the growth engine. India topped the list in attracting FDI, according to the Financial Times, and jumped many ranks in various other indices, most importantly 12 ranks in the “ease of doing business”. Make-in-India, Digital India, Start-up India are some of the flagship programmes of the government, in addition to a host of initiatives to eliminate bottlenecks in economy and augment growth.

Although far from being perfect, much work has been done in restoring faith of international investors in the Indian tax regime, which had been dubbed unpredictable or even draconian due to a complex structure, high impact retroactive amendments and high litigations, which are sometimes even frivolous. Speaking at the CNN Asia Business Forum 2016, Cisco’s executive chairman John Chambers said, “India will become a country that will leapfrog your counterpart in global basis and India will be a country that no longer follows what others have done but leads in terms of innovation and leadership.”

The government has made much headway in implementing what is arguably the single largest tax reform post-Independence—the goods and services tax (GST). Some Indian indirect tax laws and practices are archaic, and do not sync with current global practices. GST is being seen as a giant leap from ancient to modern so far as the tax regime is concerned. Industry, both domestic and international, has high expectations from the Union Budget FY17 in this regard. While rolling out GST necessitates crossing a number of constitutional processes and will be a separate event, a few amendments are expected in the existing laws.

Start-up India: A platform for young ignited minds

While realigning the tax structure, a robust policy with specific benefits for start-ups can boost their growth on a global scale. The Action Plan launched by Prime Minister Narendra Modi in January contained a host of direct tax benefits for start-ups. Similar to these, certain indirect tax benefits can provide a platform for their growth.
* Easier registrations norms and procedures under indirect tax laws;
* Beneficial tax/duty rates;
* Exemptions on procurement of inputs and capital goods;
* Higher threshold exemptions for recognised start-ups;
* Specific export incentives for certain recognised start-ups;
* Smoother exit mechanisms.

Disputes resolution: The biggest win for industries

Tax litigations and disputes hinder growth. The disputes legacy takes away the taxpayer’s ability to litigate even in case of genuine difference of opinion on interpretation of law. Some changes can provide the industry a required push for their easy operation.

* Stricter enforcement of timelines for adjudication of show-cause notices;
* Elimination of mandatory pre-deposit provisions on filing appeals at first stage;
* Revision of inflated interest rates of up to 30% (in case of service tax);
* Fast-track redressal of similar nature cases and in those cases where decision on similar matters had already been rendered by the Supreme Court or high courts. Digitisation of court records to map similar cases and granting public access of the same are initiatives towards this effect, and an effective tool when GST is implemented.

To augment India as a business-friendly destination, the government must issue directives to its field formations to avoid frivolous claims by the department. Businesses should not be made victims of administrative necessities. If a business needs to be transacted in a certain way for reasons of administrative necessity, mandate of other law or common business prudence, then such transactions should not (always) be seen as colourable devices to evade tax. A few steps may go a long way in curbing such litigations.
* Timely clarifications on potentially disputable positions/practices;
* Periodic training of officers on global practices, new businesses/business arrangements and following the essence of court pronouncements in subsequent assessments.

Administrative and legal reforms: Need of industries

In 2015, the Supreme Court ruled in over 150 cases pertaining to indirect taxes. Some of these judgments could put an end to certain historic tax controversies—for example, the TVS Motor case, where the Court laid down that PDI/ASS charges should not form part of transaction value for levy of excise duty. Incorporating the amendments in provisions under various indirect tax laws based on such landmark judgments can help reduce continued litigations on identical issues for other taxpayers. Some other reforms can also make indirect tax laws more effective.
* Acceleration of pending refund claim approval process;
* Reviewing definitions of terms like ‘input service’ etc to remove unnecessary debate and litigation.

Expanding business with broadened credit base & rules

Revamping the input credit base and credit structure has to be addressed for the benefit of domestic industries.
* Definition of input/input service should include all business expenses;
* Amendment in Cenvat Credit Rules to facilitate credit of Swachh Bharat Cess on services;
* Utilisation of accumulated credit of Education Cess and Secondary & Higher Education Cess prior to March 1 and June 1, 2015, respectively, for manufacturers and service providers;
* Facility for cashless discharge of reverse charge liability by allowing credit in the same tax period in which the liability arises (similar to the concept under European VAT);
* Providing a clarification on the availability of upfront exemption, to SEZs, from recently levied Swachh Bharat Cess on taxable services;
* The time limit of one year for claiming of Cenvat credit should be done away with; it is regressive and not in line with the upcoming GST framework.

Doing away with multiple tax rates, phasing out of various exemptions, changing credit rules and regulations, and backing up the Digital India initiative can set a good base for transition of rigid Indian economy from the current indirect tax system to the proposed GST regime. Realigning the transition towards GST with Digital India and transforming the economy towards a paperless tax regime can eliminate the cumbersome documentation requirements for companies. Digital literacy and expansion of internet penetration across tier-2, tier-3 cities and other backward regions can help achieve this target. This entails a tectonic change in the mindset of the officers on ground—success can be had only if ground officers adapt to changes and evolve from being controllers to being consultants.

The global economy is slowing down and its growth seems far from recovery any time soon. At this juncture, a fast-paced growth can potentially make India a global economic powerhouse and centre to the policy of global giants across all industries. To achieve this, the government has to come up with some path-breaking business-friendly announcements in the Budget, which can prove to be India’s step towards a robust tax regime that nourishes growth and development.



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