This article seeks to examine the budget and its indirect tax provision and expectations. The most important aspect of the budget is the introduction of the GST bill, its objectives and all that it entails for the taxpayers of the country. The paper also looks at the objective of the government in the passing of the Krishi Kalyan Cess, the purpose of the CENVAT provisions and the ‘make in India’ and ‘non-adversarial taxation regime’ vision of the 2016 Budget and the government that has presented it. It therefore, seeks to understand and sum up all the various indirect taxation aspects of the 2016 Budget and all that it means and implies for the taxpayers of the country.
The important aspects are:-
- Introduction of a uniform GST scheme for taxation.
The government in the fiscal year 2016 has decided to endeavor to pass the Constitution Amendment Bill for introduction of Goods and Service Tax i.e. GST.
The present indirect tax regime is such that there are complicated, overlapping taxes levied by the Centre as well as the State. The GST aims to transform India into a uniform market by facilitating a standardized tax system levied on goods and services homogeneously, throughout the country.
The proposed system is that of a twofold configuration where there will be a Central GST and a State GST for the supply of a good or service. Each empowered to separately and individually make and administer their own taxation rules.
GST will replace multiplicity of taxes on goods, like excise duty on indigenous manufacture and on imports, VAT, CST, purchase tax, entry tax, and various cesses and surcharges. It will also replace entertainment tax (other than by local bodies), luxury tax, taxes on advertisements and taxes on lottery, racing and gambling.
One of the most important features of GST is meant to be the input tax relief in inter-state transactions. Input tax credit is the credit for tax paid on inputs i.e. material used for the creation of the finished product or service such as raw material like seeds, manure and water for the cultivation of crops in the agriculture industry. Every dealer is liable for output tax on the taxable sale effected by him. Hence, a person is liable towards tax only for the value addition in a commodity brought about by his intention and action. Input tax credit is the instrument by which the dealer is able to set-off against his input tax against his output tax. At present, there is a pan-India input tax relief mechanism for only the central taxes on goods and services, in the form of Cenvat (Central Value Added Tax) credit. Cenvat is a credit in respect of central excise on inputs purchased for goods manufactured or duty paid in relation to the manufacture of the final product. As for state taxes, each state charges VAT on sale of goods within the state and provides input VAT credits for taxes paid within the state. Inter-state sales are subject to CST, levied by the centre but collected by the states. No credits are available for such inter-state transactions. The reason for the absence of tax credits in inter-state sales is loss of revenue that would ensue by allowing tax paid to another state to be reduced from tax payable.
The GST model will help to mediate inter-state input credit, with central compensation built into the system. It will be like a clearing house where all inter-state levy of taxes and the input credit that should be allowed with respect to such inter-state sales may be settled. CST will be replaced by integrated GST (IGST), which the originating state will charge on the sale. IGST can be taken as a credit in the destination state. Its use will be to pay IGST, CGST or SGST, in that order of preference. The transaction is planned to be electronically routed through the central clearing house, which will also track the use of IGST to pay SGST and will compensate the state to that extent. Although the states have feared loss of fiscal powers, the Constitutional amendment bill has promised to solve this by giving compensation packages for three years for any kind of revenue loss. In other words, the loss caused to the destination state by tax paid in another state being adjusted against tax payable to the destination state will be made up by the centre. The rationale for this is to encourage growth of the market, which in turn is expected to spur production and increase revenue.
The bill proposes to have a GST council wherein all union and state ministers in charge of finance will be on an equal footing. It will also have a Dispute Settlement authority to mitigate the tensions between the Centre and the states. The Council will be formed to make recommendations to the Centre and the States on exemptions including threshold exemption, rates of tax, date of tax to be levied on petroleum products, special provisions for specified states and so on.
Thus, the GST will replace all the different indirect taxes collected at different levels and all taxes such as excise duty, service tax, central sales tax, value added tax, octroy etc. will all be covered by the GST.
- Krishi Kalyan Cess, A Social Aspect of the Proposed Regime
The Budget of 2016 saw the announcement of two new cesses by the Finance Minister, the Krishi Kalyan Cess and the Infrastructure Cess.
The Krishi Kalyan Cess to be leviable as a service tax from June 1, 2016 is for the purpose of financing and promoting initiatives of agriculture. This is to be levied at 0.5% of the value of all taxable services, over and above the Service Tax and Swacch Bharat Cess.
Chapter VI, Clause 158 of the Finance Bill has inserted this cess in the scheme of taxation through the budget. An estimated aggregate of Rs. 5000 Crore is to be collected in the financial year 2016-17 from this tax. The Finance Bill states that “the proceeds of the Krishi Kalyan Cess levied shall first be credited to the Consolidated Fund of India and the Central Government may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money of the Krishi Kalyan Cess for such purposes specified.” the purpose being promotion and financing of agricultural initiatives. It also says that “The provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder, including those relating to refunds and exemptions from tax, interest and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Krishi Kalyan Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under the said Chapter or the rules made thereunder, as the case may be.” Thus, the KrishiKalyan Cess is to receive tax treatment like other similar taxes that may be levied simultaneously as stated in the Finance Bill.
The government has announced the levy of infrastructure cess as well at the rate of 1 per cent on small petrol, LPG, CNG cars, 2.5 per cent on diesel cars not exceeding 4m in length and engine capacity of up to 1500cc. The cess on all other higher engine capacity vehicles (SUVs and bigger sedans) will be levied at the rate of 4 per cent. The government has projected an aggregate collection of Rs. 3,000 crore through infrastructure cess in the financial year 2016-17.
- Customs and Excise
Customs and Excise duties have received a structural modification to boost local manufacturing of certain products as a part of the ‘Make in India’ initiative. ‘Incentivizing domestic value addition’ was stated as key by the Finance Minister when presenting the Budget this year. He also stated that customs and excise duty structure plays an important role in this. Thus, the lawmakers envisage an India that believes in being a self-sufficient economy. The producers must find in themselves to be integrated into the economy such that they add to its value, that they participate in the domestic production without depending on foreign agents for support of any kind. The ministry hence looks to encourage by means of monetary or monetary-value incentives to resort to domestic production and not foreign purchases. Thus, the Finance Minister said that the budget was formulated in a manner to make ‘changes in customs and excise duty rates on certain inputs, raw materials, intermediaries, components and other goods and simplify procedures, so as to reduce cost and improve competitiveness of the domestic industry.’
The idea of ‘Make in India’ was thought of and launched by the Prime Minister, Narendra Modi to stimulate Indian manufacturing and draw FDI.
For example, excise duty on inputs, parts and components and subparts for manufacture of batteries and chargers, adapters, wired headsets, modems, speakers of mobile phones, set top boxes for TV and internet etc. which used to be levied have all been abolished. These are IT hardware and the doing away of these taxes means that these industries are being awarded an advantage. Importers with a good track record can make deferred payments of custom duty. Customs on imported outputs have been increased and imported inputs have been decreased across various sectors. Renewable energy is being promoted by complete cutting down of excise duty on solar lamps.
Thus, an overall shift of customs and excise duties are being seen such that domestic industries can be encouraged to flourish and the world market recognizes Indian manufacture as worthy of competing in the world arena.
- The Vision of a Non-Adversarial Tax Regime
The tax regime has been modified such that-
(1) Interest rate for delay in payment of duties or taxes has been reduced-Punitive interest rates were introduced in 2015 for delayed payment of duties. This sole measure immensely increased the risk and complexity of conducting business. The present budget has effectively revoked the retrograde amendments of last year on the interest rate regime and rationalised the interest rate regime. The interest rates on delayed payment of duty/tax across all indirect taxes is proposed to be reduced to 15%, regardless of the quantum of delay. The interest rate only in cases w here the service tax is collected but not deposited with the Central Government – would attract a higher interest rate of 24%.
(2) Procedural requirements have been simplified and compliances have been relaxed- 13 cesses with collection of less than Rs. 50 Crores a year have been abolished to prevent multiplicity of taxation. Many such provisions have been laid down to simplify the taxation laws of the country
(3) Tax litigation has tried to be reduced and the environment for taxpayers has been aimed to be improved.
The CENVAT Credit Rules, 2004, were amended so as to improve credit flow, reduce the compliance burden and associated litigation, particularly those relating to apportionment of credit between exempted and non-exempted final products/services. The amendments in these rules will enable manufacturers with multiple manufacturing units to maintain a common warehouse for inputs and distribute inputs with credits to the individual manufacturing units. Restrictive credit policy had fuelled large-scale litigation in indirect taxes. For example, telecom companies found it difficult to claim tax credit on towers that sat on their books as cost.
Moreover, Companies will now be able to claim CENVAT credit on goods purchased within one year. The CENVAT credit policy used to be restrictive as it allowed companies to claim credit only for tax paid on services used in the output or on capital goods used in the process of manufacturing.
All capital goods of less than Rs 10,000 are to be treated as inputs and hence, are eligible for full CENVAT Credit in the first year itself but are ineligible for CENVAT Credit if used for exempt goods or services for the first two years. The budget has also widened the scope of by explaining ‘exempt service’ as any activity which is not a service.
Thus, the input credit system has also been altered by liberalizing CENVAT rules and aiding manufacturers and helping avoid tax compliance related litigation in keeping with the policy of the budget of 2016 to alter the tax regime to be supportive of domestic manufacturers in pursuance of the ‘Make in India’ campaign.
Thus, it is evident that the Finance Ministry has carefully adhered to the policy of the Prime Minister and all of his campaigns of the past. Local industries have been given explicit priorities through many measures whereby they have benefitted manifold by means of the GST as well as through the excise and customs aid for promoting domestic manufacture and through the aid of liberalised input credit i.e. CENVAT.
There are many reforms by way of indirect taxation but these promotions of domestic industry and the ‘Krishi Kalyan Cess’ and Infrastructure Cess will see the largest reach and extraction from the biggest sources. The allocation towards rural development is this Annual Budget is seen to be a key highlight for the year. Rs 2.21 Lakh Crore has been allocated for road and railway infrastructure development itself.
Small as well as large taxpayers will be significantly affect by the taxation regime as set up by the budget of 2016 in many ways positively as the government seeks to bring foreign investment to Indian manufacturers and aid their ability to manufacture goods that can stand their ground and compete on an equal footing in the international spheres.
Even though the ‘Make in India’ campaign is a very original initiative with a very noble objective, it does appear to come with a few shortcomings. Make in India seeks to garner FDI for domestic industries and their promotion. FDI is a remarkable boost to the economy encouraging trade relations however, it fails to give due attention to the interference that FDI also entails. Any country choosing to invest in an Indian industry will expect some form of control over it. Therefore, though it will be ‘Make in India’ it will also be make under the control of a foreign agent leading to a kind of economic colonialism. The situation also cannot be mended very easily because the foreign investor cannot be expected to finance Indian manufacturers without being able to reap any rewards in the form of participation as well but this participation can just as easily turn into exploitation of domestic units. This defeats the objective of the campaign whereby foreign interference is allowed to seep into Indian manufacturing.
The scheme of GST also though means to wipe out multiplicity of taxes, is not doing much by way of it since both the centre and all states are empowered to levy it, thus, it is inescapable that there will be some overlapping. The rates are also not determined with surety and it seems unviable for a vast, heterogeneous country like India where different areas have different needs, abilities and different specializations towards taxation. Thus, a uniform GST in areas where a good is in excess demand as well as in excess supply will not be received similarly in both places, one of these will certainly be weary of it. However, the abolition of the 13 cesses that were previously levied has simplified the tax regime so much itself, that perhaps any minor complexity in the GST scheme can be compensated by it.
Some critics have even said that the Budget has not succeeded in making any big changes and the pros and cons of it compensate each other such that no special benefit nor any drastic harm arises from it in any sphere. Thus, the Budget of 2016 has been stated to be a ‘mixed bag’ budget such that no radical provisions have been introduced or adopted in it but it has at the same time been commended for being balanced in catering to the different strata of the society.
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