Budget 2010 fine print: Assessing FM's tax agenda

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The Finance Minister, in today's Budget speech announced a roadmap for the much-talked about Direct Tax Code and Goods and Service Tax (GST). "The process of building a simple tax system is near completion," Pranab Mukherjee said on the Direct Tax Code in Parliament today, adding, "We aim to implement the Direct Tax Code and GST by April 1, 2011."

In a special Budget discussion on CNBC-TV18, V Sridhar, Chairman, CBEC; Rajiv Memani, CEO & Managing Partner, E&Y; Pratik Jain, ED, KPMG; Mukesh Butani, Partner, BMR Advisors expressed their views on the tax proposals made by the FM.

Here is a verbatim transcript of the discussion. Also watch the accompanying video.

Q: As far as service tax is concerned because the anticipation was that the service tax rate would be hiked by atleast 2%. The finance minister has left it at where it currently is, so is this a signal of the GST rate because that's what the finance minister on our interview has indicated?

Sridhar: It was clarified in the speech by the finance minister himself that he had two options whether he could increase the rate from 10% to 12%. But he didn't do it because the CENVAT rate was increased to 10% and he wanted the convergence of service tax rate with the CENVAT rate.

So in one sense you could say that it's a precursor to the preparation for GST, a unified rate for goods and services that is 10%.

Q: So could we say that that is going to be the convergence rate?

Sridhar: No, we have not yet reached the stage as to what will be the revenue neutral rate. The discussions are still not over at the state governments.

Q: Eight new services have been brought under the net. The Finance minister talked about them but just about everything from air tickets to mediclaim policies are now going to be more expensive. I want to specifically ask you about real estate. We saw the real estate stocks selling off in the markets this afternoon because there was no clarity on construction of new buildings and whether they will attract service tax, I understand that this was a notification of 2005, there has been some additional clarifications this afternoon in the budget. Can you take us through what he situation is?

Sridhar: What we have said is, unless the entire consideration of the property is paid, after the completion of construction that is after the receipt of completion certificate from the competent authority, the activity of construction would be deemed to be a taxable service provided by the builder or promoter or developer to the prospective buyer and the service tax would be charged accordingly.

Q: So you are saying that I am going to pay more for the house that is under construction?

Sridhar: In a sense, yes, because it comes under that heading of construction of service.

Q: What is the rationale for this, you are just making it some expensive for people to go out and buy houses, when the government is trying to promote consumption. This seems to not fit in with what you are attempting to do?

Sridhar: This is not a new service. This is a service which is already existing and we have provided abatement also. It is not as if the entire value or consideration will be taken. So just to give some clarity to the issue. That is what we have done.