A special task force first recommended the move to simplify indirect taxation in India through the introduction of a comprehensive GST regime, but more than 10 years later taxpayers are still waiting for this to become reality.
Simplification in the area of indirect taxation would be a welcome development for taxpayers as a means of reducing their compliance burden, but should also benefit the government and tax authorities as a comprehensive GST should reduce leakages and widen the tax base.
“Indirect taxes play a major role in revenue collection for any government, and with India having a large consumer base, indirect taxes have frequently come to the rescue of finance ministers when announcing their Union Budget,” said Tirthesh Bagadiya, partner at Bagadiya & Jain.
From a direct tax perspective, multinational taxpayers want to see the repeal of retrospective amendments introduced under the previous government, but expectations are just as high for progress to be made on GST.
“We and our clients expect that the government will make a commitment in the Budget speech to progress the introduction of GST. As a first step the Budget should provide adequate compensation payable to states for loss of revenue on discontinuation of Central Sales Tax now being collected by states on inter-state sale of goods which has held up progress towards GST,” said Nihal Kothari, head of the indirect tax practice at Khaitan & Co.
Certainty on GST implementation will not only boost the domestic Indian market, but also send a strong signal to assure potential foreign investors that India is a stable environment in which to do business.
“We expect a realistic timeframe of two years will be set out for the introduction of GST to complete the legal process of amending the Constitution and passing of GST laws by states as well as related preparations,” said Kothari. “This is crucial to not only attract foreign investment but also for accelerating economic growth and domestic manufacturing.”
Amit Singhania, partner at Amarchand & Mangaldas, shares the view that GST is an important progressive step for the new government. But he does not expect GST to come in soon.
“I think the NDA [BJP-led National Democratic Alliance] government will take some time and then implement GST,” said Singhania, though he added that “if GST were to happen in India, this government is the best government to implement it”.
Bagadiya agrees that a realistic announcement on GST implementation will be critical to altering perceptions of India as an inhospitable place to conduct business.
“This will be vital in assuring foreign investors of the newly-elected government’s commitment to tax reforms that are in line with globally-followed practices,” he said.
CBDT/CBEC merger
Parthasarathi Shome, senior government adviser, Tax Administration Reform Commission (TARC) chairman and ITR Global Tax 50 member, also suggested in his recent TARC report that there should be one administrative tax collection body covering both direct and indirect taxation.
“It not only involves merging CBEC and CBDT but also integrating field officials,” said Kothari.
Singhania is less convinced about the merits of merging CBEC and CBDT.
“I think it’s going to be practically difficult to have one administrative tax collection body because of the way we operate in India. The purpose and objective of both direct and indirect tax levy are also different. However, if it is made possible then it would provide synergies to government,” said Singhania.
Bagadiya said the proposal is a refreshing one, but that the move will require a lot of groundwork and Kothari, too, acknowledges that moving to one tax collection body will be a difficult proposal to implement at this stage.
“It will require major restrictions on tax departments, changes in processes and training of officials. In the medium term it may be considered,” said Kothari. “The government’s priority at present is to improve the relationship between taxpayers and administration.”
The most likely course of action is for gradual convergence in limited areas initially, with full integration coming a couple of years down the line.
The Shome committee also recommended the abolition of the position of revenue secretary, but Kothari believes this could only be done if CBDT and CBEC are strengthened, “which is not presently the case”.
Excise duty
The Budget is also likely to include a reduction in excise duty from 12% to 10% to encourage growth in the Indian manufacturing sector.
“Today the Finance Minister already announced the continuation of the concessional duty rate on automobile sector for another six months up to the end of December,” said Kothari. “There is also expectation of some changes in the customs duty to remove inverted duty structures in some sectors.”
Further reading:
India Budget preview: Retrospective amendments still most contentious issue for taxpayers
