Budget 2015: Reforms that Govt must initiate in Indirect Tax mechanisms

We came up with a wishlist for direct tax framework in the country. Now its time for the industry to come up with yet another wishlist but this time, it is for indirect taxes. The industry has seen the Modi government taking some bold steps as far as taxes are concerned. Beside this, a investor-friendly environment will pump up India’s rank on the list of ‘Ease of Doing Business’, which is also one of the key goals for the current government at the Centre. And keeping this in mind, the industry has suggested a few recommendations. Here is the list:

Goods & Services Tax (GST)

The central government has already taken a significant step forward for the implementation of the Goods and Services Tax (GST) in India. On December 19, 2014, the Constitution (122nd Amendment) Bill, 2014 has been tabled in the Indian Parliament, outlining and paving the way for introduction of a GST regime in India. With the state governments arriving at a consensus on various aspects of the GST regime, the Centre hopes to introduce GST in India at the earliest.

Extend Excise Duty Benefits

The Modi government had shown its intent for augmenting the growth of the manufacturing sector in India by extending the Excise duty benefits to the automobiles, consumer goods and capital goods industry till December 31, 2014. Now, in order to revive the manufacturing sector in India, it is the need of the hour to continue the duty sops beyond the said date.

Address Issue of double taxation

Double taxation of certain transactions like taxation of intellectual property rights, supply of software, works contracts, etc. ,also require immediate attention. Ambiguity as regards levy of VAT and service tax on such transactions has been continuing for long. Although these issues have been examined by the courtson various occasions, but the position is still not settled. And as a result of whichthe assessee is paying both service tax and VAT.

Rethink pre-deposit provision

The Union Budget 2014-15 introduced provisions for a mandatory fixed pre-deposit of 7.5% of duty/penalty demanded for filing appeal with Commissioner (Appeals) or the Appellate Tribunal at the first stage. Another 10% of duty demanded or penalty imposed for filing second stage appeal before the Appellate Tribunal. It is seen that in most cases the demands raised by the department are either on procedural aspects or not in line with settled judgments on similar issues. Such demands are invariably quashed by the Appellate Tribunal. Given the same, a rethinking on pre-deposit provisions for filing appeals may be a prudent step in the direction.

Reconsider service tax on educational institutions

The Union Budget 2014-15 imposed service tax on 'auxiliary educational services' as well as renting of immovable property services provided to educational institutions (the said services were exempt from service tax prior to July 11, 2014). Post July 11, 2014, only four services provided to specified educational institution enjoy exemption from service tax, namely: transportation of students/faculty, catering, security and housekeeping, and services pertaining to admission and conduct of examinations. This amendment would have an adverse impact on the education sector and substantially increase the cost of educational services being provided by the institutions. There is no output service tax on educational institutions in India. Effectively educational institutions cannot claim cenvat credit of the service tax paid on these services. This eventually leads to an increase in the cost of provision of educational services. Therefore, levy of service tax on educational institutions needs a re-look.

Revise penal rates of interest

The Union Budget 2014 (w.e.f October 1, 2014) has substantially increased the interest rates for delay in payment of service tax (for a delay for a period beyond 6 months and upto 1 year) rate of interest is 24%. On the other hand, the rate of interest has been increased to 30%. Such high rates of interest are unfair especially in cases where the delay in payment of service tax by an assessee is under a bonafide belief due to interpretational, valuation/ or classification issues. In such cases, it is recommended that the interest rates should be restored to 18% per annum so as to reduce the cost burden on an assessee. Penal rates of interest may be prescribed in cases where an assessee has wilfully defaulted in discharge of his service tax liability.

Finance Minister Arun Jaitley is expected to bring a slew of changes to kickstart India’s economic growth and move forward towards a non-adversarial tax system. The ball now lies in the court of the finance ministers as he will be delivering the wishes of people across the country.

(About the authors: This article has been written by Rakesh Nangia, managing partner and Nitish Sharma, executive director, Nangia & Co.)