The Budget should lay the ground
While the Goods and Services Tax (‘GST’) introduction remains at the top of the heap, the delay in implementing GST provides an opportunity to correct the flaws in current indirect tax system.
For instance merger of several laws into GST can be preceded with merger of excise and service tax into a single law that would provide a precursor to the oncoming CGST. The Central Sales Tax (‘CST’) has long been accused of distorting the supply chain. The CST was to be gradually brought down to zero by 2010.
Having failed to meet that timeline, even now a reduction of rate of CST to 1 per cent would be in line with current GST amendment Bill proposal which envisages a levy of additional tax at that rate.
The non-recoverable levy of Swachh Bharat Cess on services leads to a cascading effect of tax. While it was introduced at 0.5 per cent on value of taxable services from November 2015, the Finance Act 2015, gives power to government to levy a cess up to 2 per cent.
Up it goes
With continuing pressure to keep fiscal deficit in check it is widely perceived that the government may be tempted to increase the rate of cess. It is not surprising therefore that in a survey conducted by Deloitte, the survey respondents have largely voted for subsuming the cess in the higher rate of service tax, which is a recoverable tax for a business.
Another issue that needs to be dealt with is the double taxation that certain sectors witness on account of levy of both Central and State taxes. The lack of clarity on the taxable base of levy needs to be addressed.
The sectors that need attention in this regard are software, telecom, hospitality and within financial services activities such as leasing without transferring the right to use goods. It’s not too late to progress with the Tax Administration Reforms suggested by Shome Panel (TARC).
A common Tax Policy Research Unit as suggested in TARC recommendation was recently formed. But a pick and choose method to implement recommendations may not work. The finance minister should give a roadmap for implementation of TARC’s main recommendations in his Budget.
Apart from general policy and administration measures, there are certain initiative specific measures that could be taken. This could involve necessary sops to promote manufacturing or disincentivise imports that discourage manufacture in India, of those products that are the focus of the Make in India initiative.
Another initiative like Startup India could benefit from innovative schemes which instead of giving tax exemption could grant cash subsidies linked to tax payments.
There is a general expectation that indirect tax rates may head northwards. But a balancing act would be necessary to see that it does not lead to inflationary pressures or further dampen the manufacturing sector.