Budget 2016: Indirect tax proposals give impetus to ease of doing business

Bipin SapraFinance Minister Arun Jaitley tabled his third successive Union Budget 2016-17 today. The main thrust of the indirect tax proposals seems to be around ‘Make in India’ and ‘Ease of doing business’ including reduction in litigation, simplification in tax administration and tax compliances. While in the last Budget there was significant emphasis given to the GST reform, there was no discussion on the status and progress of GST in the current Budget.The single biggest change is the levy of Krishi Kalyan Cess at the rate of 0.5% with effect from 1 June 2016. This will effectively increase the service tax rate to 15% from 14.5%. This measure was widely expected towards movement to a higher GST rate of 18%. Unlike the Swacch Bharat Cess introduced in November 2015, the Krishi Kalyan Cess would be a creditable tax and hence will not be a cost at the intermediate stage of the supply chain.The Government has continued its initiative on Make in India by rationalizing the customs and excise duty rates on certain inputs pertaining to various sectors like Information Technology, hardware, capital goods, defence production, textiles, chemicals and petrochemicals. This is likely to reduce costs and improve competitiveness in these sectors. Further, there are various products on which BCD has increased, in order to incentivize domestic manufacture of these products, for instance metals like aluminium products and zinc alloys, imitation jewellery etc.Impetus has also been provided to the ‘ease of doing business’ initiative of the current Government. Some of the reforms are abolition of 13 cesses levied by Ministries / Departments where the revenue is less than INR 50 crores. Interest rate on delayed payment for customs, excise and service tax has also been rationalized to 15%, as compared to the current standard rate of 18% (18%, 24% and 30% for service tax). However, in case of service tax collected but not deposited, the interest rate would be 24%. This is an extremely positive and radical reform, especially given the fact that the same Government had increased the interest rate in the Budget 2014.Reduction in litigation and providing certainty in taxes has also been a key focus point in this year’s Budget. A Dispute Resolution mechanism is proposed to be introduced for customs, excise and service tax in respect of cases pending before Commissioner (Appeals), where the assessee can file a declaration for closure of proceedings after payment of duty, interest and penalty equal to 25% of penalty imposed. The implementation of the aforesaid mechanism on the ground would need to be seen. Further, the monetary limit for launching prosecution has been increased to INR 2 crore of service tax evasion and power to arrest being restricted only to situations where the tax payer has collected the tax but not deposited the same above INR 2 crore. Also, with a view to reduce the pendency of cases, the Government has proposed to open 11 new benches of the CESTAT. At the same time, the limitation period to serve a show cause notice under Service Tax has been increased from 18 months to 30 months. This will increase the period of uncertainty regarding acceptance of the assessee’s tax positions by the Revenue Department and is unlikely to be welcomed by the industry. Further, the time for filing refund claim continues to be one year. There have been certain amendments proposed in the tax compliances. While the number of returns for service tax is proposed to be increased from 2 to 3 with the introduction of annual return, for central excise assessees above a certain threshold, the returns have been reduced from 27 to 13 i.e. one annual and 12 monthly. Further, like service tax, the revision of return facility has been extended to Central excise as well. The Cenvat Credit Rules, 2004 are proposed to be revamped with a view to improve credit flow, reduce compliance cost and litigation. The focus of these amendments is to provide clear guidelines on apportionment of credit between exempted and taxable final products / services. Moreover, the provisions for distribution of credit are also being amended to provide the facility of distribution of input services credit to outsourced manufacturers. Manufacturers will also be able to maintain a common warehouse for inputs, and distribute the credit to the respective manufacturing units. The aforesaid amendments are a welcome measure for manufacturers and will promote the Make in India initiative of the Government. There have been significant reforms introduced in Customs as well. Recently, the Government had issued circulars simplifying the proceedings initiated by Special Valuation Branch on related party imports by taxpayers. As a follow up to this measure, a scheme for deferred payment of customs duties has been introduced for certain class of importers and exporters. Further, the Indian Customs Single Window Project is also proposed to be implemented at major ports and airports.While the Union Budget has introduced a number of favourable reforms for the tax payer and economy in general, the status and progress of the proposed GST was conspicuously absent from the Finance Minister’s speech. This will add fuel to the doubts in the industry on the future of this much anticipated tax reform.Author is Tax Partner, EY