India Budget 2015 - Indirect tax changes fail to strike a chord
Abhishek Shah, of Caterpillar in Asia, but writing here in a personal capacity, explains where he thinks the Indian Budget should have gone further on indirect tax.
The Asian economy is at an interesting juncture, with Singapore expecting flat GDP growth, Japan saddled with deflation and China battling with a slowdown. Amidst this, the economic survey of India projects the Indian economy to grow at an impressive 8% and advocates that double digit growth is within striking distance.
India has never witnessed a strong and stable government at the centre in the past three decades and therefore expectations were sky high about the first full-fledged Budget of this pro-business government.
The entire Budget revolves around the three pet projects of the prime minister, Narendra Modi (pictured left):
A 'Make in India' campaign to refocus back on manufacturing activities which had taken a back seat ever since the service sector took the driving seat during year 2002 to 2009;
A 'Clean India' mission to make a litter-free India a reality; and
The 'Ease of doing business in India' agenda, by improving its ranking several notches. The latest World Bank Group report puts India at 142nd of the 189 countries surveyed. It is not surprising either that India ranks 156th on the "paying taxes" parameter.
The absence of unified goods and service taxes to replace the multitude of levies has been identified as a key deterrent to growth and hence in the past the government has made several announcements to pave the way for the ambitious indirect tax reform agenda of bringing in a nationwide goods & service tax(GST).
Given this backdrop, it was expected that the finance minister would make big-bang announcements in the Budget. However, despite the media hype, he has resisted making any bold, radical changes. The overall theme of the Budget is to reiterate the government's objectives to make Indian tax regime more predictable, friendly and cohesive and its resolve to introduce GST by 2016.
Some of the key changes proposed on the indirect tax front were:
Changes in headline rates
The customs duty rates have been marginally increased and the education cesses will continue to be levied, making the effective median rate 29.44%. Though the rate of excise duty has been increased marginally, the education cesses have been abolished, leading to the median rate at 12.5%.
The base rate of service tax has been proposed to be increased to 14% from the present 12.36%, though with the abolition of education cesses. It has been proposed to levy a Swachh Bharat (Clean India) cess at 2% on the value of the services, which means, if implemented, the service tax would be almost 33.33% more than now. Such a mammoth increase will cost consumers dearly. One would hope that this 2% cess forms part of the pool of eligible CENVAT credit.
No changes were proposed, however, to the Central Sales Tax rate which continues to hover at 2% and is a sticking cost for inter-state sales transaction. A reduction in this rate, at least to 1%, could have brought a huge cheer and signalled a major step forward in the direction of GST - since in the proposed GST model as well, there exists a 1% additional GST on inter-state supply of goods.
Sector specific impact
To give an impetus to the Make In India campaign, the Basic Customs Duty (BCD) and Additional Duty of Customs (SAD) has been exempted on the import of specified components to manufacture certain finished products such as optical fibre cables, tablet computers and digital cameras. To attract investment in healthcare, a similar reduction/exemption has been granted in customs/excise duties for manufacture of pacemakers and flexible medical video endoscope and artificial hearts (left ventricular assist device).
Similarly, SAD has been exempted on all goods for use in the manufacture of notified Information Technology Agreement (within the WTO) bound items, except populated printed circuit boards.
The rate of BCD on commercial motor vehicles (other than those imported in CKD (completely knocked down) form or electrically operated motor vehicles) has been doubled and stands at 20% now.
Specific excise duty rate reductions have been made to give a fillip to industries such as renewable energy and leather footwear. The
While there has been a series of representations made to the Ministry of Finance for rationalisation of duty structures across industries, the government has, as in the past, cherry -picked the sectors they believe will benefit from this the most at the moment.
Service tax changes
Though services were first taxed barely 20 years ago, while excise and customs duties have began in 1944 and 1962, respectively, the services sector contributes about 60% of India's GDP and has therefore continued to hog the limelight in the Budget and has been used as an effective tool to garner more revenue. It is no surprise that the Budget estimates a 24% share in contribution from service tax to the exchequer.
Among others, the service tax levy has now been expanded (by pruning the mega exemption list and amending the negative list) to cover construction of original works at ports/ airports, all services by government to business entities, access to amusement facilities and where it costs more than Rs500 ($8) to gain entry to concerts/pageants.
A new levy has been introduced on 'aggregator' services to discharge service tax under the reverse charge mechanism. The term 'aggregator' is defined as a person who has a web-based model where he brings together service providers and customers under his brand. The attempt is to tap into the fast growing e-commerce market and bring into the tax net the service providers [such as online cab services like Uber). The chances of extending this provision to cover the supply of goods at a later date cannot be ruled out.
Some of the more favourable changes include an option to authenticate the invoices through digital signature and the maintenance of records in electronic format. The time limit to avail of the CENVAT credit on inputs and input services has also been increased from six months to one year from the date of issuance of invoices. And the inputs and capital goods can be sent directly to a job worker's premises at the direction of the manufacturer or service provider and capital goods can now remain with a job worker for two years rather than six months, without requiring the reversal of the CENVAT credit. The lack of these provisions has caused grave hardship in the past.
The penal provisions have been rationalised by reducing penalties for bona fide cases and making them more stringent for evasion. It has also been proposed to levy nil/reduced penalty if tax, interest & penalty is paid within 30 days of the issue of a notice/ order.
If one were to compare the Budget proposals with those of previous years, they do not seem to be any different than the plethora of selective changes around, such as the tweaking of rates, sector-specific benefits to industry segments and changes in procedures. However, given the backdrop against which the present Budget was delivered, the expectation was for sweeping structural changes rather than these mundane steps. It clearly fails to strike a chord on that count.
The extremist could ridicule the Budget as a mere vision statement, but one will have to be patient and put long-term bets on the government's systematic approach to untangle the present tax structure maze and then bring about a hassle-free nationwide GST, which has a long and bumpy road ahead.
(The author works for Caterpillar in Singapore, managing the VAT/GST function across Asia. His views are personal)