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Indian budget accelerates the pace towards GST

Santosh Dalvi of KPMG analyses the indirect tax reforms from the latest Indian budget.

In an atmosphere of economic downturn and a financial year which witnessed the GDP rate stooping to as low as 6.9 %, Finance Minister Pranab Mukherjee tabled the Union Budget 2012-2013 on March 16. Mukherjee has looked to indirect taxes to boost economic growth of the country estimating an additional revenue gain of INR 45,940 Crores to be generated from his indirect tax proposals.

Major indirect tax reforms proposed by the finance minister are predominantly with an intention to reduce the fiscal deficit to less than 2% and to move closer to the desired GST regime.

The minister has indicated that the GST IT Network would be operational by August 2012 and has picked up the pace towards GST by proposing to tax all services except the 17 services included in the negative list of services.

This negative list includes services provided by government, except specified services where they compete with the private sector, pre-school and school education, entertainment and amusement services, large parts of public transportation including inland waterways, urban railways and metered cabs.

The finance minister has shown a kind gesture to the entertainment industry for playing a pivotal role in creating unity within India’s diverse culture by proposing to exempt the film industry from the levy of service tax on temporary transfer /permitting the use or enjoyment of a copyright in cinematographic films.

The other services proposed to be exempted are services provided by charities, religious persons, sportspersons, performing artists in folk and classical arts, individual advocates providing services to non-business entities, independent journalists and services by way of animal care or car parking.

Given the need for fiscal consolidation, the standard rate of Central Excise Duty (CED) on non-petroleum products and the service tax rate are increased from 10% to 12%. Consequently, the merit rate of CED is increased from 5% to 6% and the 1 % merit rate of CED imposed in the last budget for the first time on 130 items has also been increased to 2%. There are few exceptions such as coal, fertilisers, jewellery and mobile phones to the aforesaid increase in the CED.

A status quo has been maintained with respect to the peak rate of Basic Customs Duty (BCD). Nevertheless, BCD on completely built units of large cars/MUVs/SUVs permitted for import without type approval (value exceeding $40,000 and engine capacity exceeding 3000 CC for petrol and 2500 CC diesel) has been increased from 60 to 75%.

Though, the finance minister’s statement in Shakespeare’s immortal words, “I must be cruel only to be kind”, preceding the tax proposals indicated tough tax proposals, he has pronounced relief proposals for certain sectors such as agriculture, infrastructure such as power, civil aviation, manufacturing such as steel and textile and health and nutrition as these sectors merit special consideration.

Indirect tax concessions have been diverted largely to sectors such as agriculture, infrastructure like power, civil aviation, manufacturing (such as steel and textile) and health & nutrition sectors.

To reduce the burden on producers of thermal power full exemption from BCD and a concessional Countervailing Duty of Excise of 1% to thermal coal has been proposed up to March 31 2014. So also, exemption from BCD has been proposed on natural gas, LNG, uranium used for power generation. Further, there are proposals for complete exemption from BCD on parts of aircraft and testing equipment imported for maintenance and repair of aircraft and on coal mining projects. Also, the incidence of duty on the branded readymade garments has been reduced from 4.635% to 3.708%.

Converse to the aforementioned, the Finance Minister has proposed an increase in BCD rate applicable on standard gold bars; gold coins from 2% to 4% being the principal drivers in current account deficit and has also proposed an increase in the rate of CED on demerit goods such as cigarettes.

Indirect tax budget proposals such as harmonisation of service tax and excise compliance procedures, changes in abatement rates for increasing the portion of taxable value, expansion of the eligibility base of Cenvat credit for various sectors to reduce the cascading effect of taxes and changes to rationalise the Point of Taxation Rules are precursors to the much awaited implementation of GST.

The indirect tax reforms proposed by the finance minister may come across as complex now but are inching the country towards GST, which will be a welcome and preferred change for the Indian economy. At the end of the day, the Budget 2012-13 pronounced by the minister though without any concrete roadmap towards GST implementation, shows a dim ray of hope for witnessing the GST implementation soon which seemed a far-away reality so far.

Santosh Dalvi, partner, KPMG

Tel: + 91 22 3090 2685

Email: sdalvi@kpmg.com

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