Published Editorial

Budget 2014: Indirect Tax Reforms Agenda

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CNBC - The Firm website

By

Divyesh Lapsiwala

Tax Partner, EY

Italian poet and revolutionary thinker Giovanni Niccolini once said “by asking for the impossible we obtain the best possible”.  Probably, this is the best way to describe the run up to this Budget.  Truly, there is a long list on the agenda; here we have attempted to capture some of the key indirect taxes expectations.  

To begin with, the stated agenda of tax policy of reducing exemptions may be suspended this year.  Budget may bring-in a string of benefits to key sectors such as power and infrastructure.  Exemptions to mega and non-mega power projects may be restored; further exemptions on domestic procurements may also be granted.  Natural gas may be listed as a ‘declared good’ attracting a maximum of 4% VAT/ CST, at par with coal and crude oil.  Special benefits may be announced for capacity expansions in the manufacturing sector.  Sector specific packages may also be introduced for pharmaceuticals, electronics, and gem and jewellery.  It is also hoped that direct and collateral impact of Fiat judgement be nullified by clarifying that merely selling at a loss cannot result a valuation challenge. 

The SEZ policy has been largely attracting IT/ITES sector, and the growth in manufacturing or trading has been limited.  It is expected that several pending issues such as FTWZ policy, procedures for grant of indirect tax exemptions, etc.  may be addressed. 

SAD of 4% has been a cause of several issues – manufacturers with high import content are facing the challenge of accumulated tax credits due to inverted duty structure triggered by SAD requiring an over 40% margin to utilize input credits, traders face a delays in grant of refund, and it is a non-creditable tax for service providers.  First up, SAD should not be applied to manufacturers as their final products would anyway be liable to VAT.  Traders should also be provided an exemption instead of refunds.  SAD application should be limited only to imports for final consumption or by service providers.  Even in such cases, given that CST rate is now down to 2%, SAD should also be reduced to 2%.  

Another key issue impacting across sectors is the double taxation of license transactions in intellectual property rights.  While the debate on which of the two taxes – VAT or service tax – cannot be resolved unilaterally by the Centre, until GST is introduced, the Government should consider providing for ad-hoc abatements from tax base to minimize the impact of double tax.

For service providers, several issues have been represented post introduction of negative list based taxation two years ago.  A majority are yet to be clarified.  It is hoped that the Budget addresses some of these contentious issues such as liquidated damages, scope of declared services, taxation of consortia and revenue share arrangements, intermediary services, export of services to branches outside India, applicability on CTC structures between employer and employee, etc.  As a benefit to the SME sector, the threshold for taxability could be increased to 50 lacs, or a simplified lower rate scheme without input credits could be introduced to reduce compliance costs. 

The long drawn and cumbersome process of claiming refunds and their arbitrary rejections needs course correction. As a solution, provisions can be amended to eliminate pre-scrutiny of refunds claims.  CA certification of computation of refund should suffice.  Verification of claim related documents can be done on a selective basis.  Also, a list of input services for which refunds would be allowed should be published, esp for the IT/ ITES sector.  Interest should be granted (like income tax) if refunds are delayed beyond 90 days.  Measures to enforce accountability to tax officers causing frivolous denials should be implemented.  As an alternate, a mechanism to claim drawback (like in case of goods) should be considered for select sectors.  This will provide an alternate to the detailed process of claiming refunds (including resultant litigation).  This will specifically benefit SME service exporters.

Process of investigation by the tax office needs two key changes – one, number of investigating authorities needs to be reduced to only one; second, clear guidelines should be issued as to when personal penalties can be levied or prosecution initiated, especially for corporate entities.  This will ease out the possible abuse of such provisions in the regulations to coerce taxpayers.

One of the most important and urgent needs is an overhaul of litigation process.  As a new concept, Advance Ruling provisions can be made applicable to all; this could result in many taxpayers getting upfront clarity on contentions issues such as classification, rate, applicability of exemption, export status, etc.  Clearly, a sure shot way of curbing post facto litigation.  In the existing framework, we need a manifold increase in appellate authorities.  Secondly, taxpayers should have the option to exit litigation on a selective issue by paying tax, interest and 25% penalty at any stage of the process.  This will provide the much needed compounding option.  Provisions relating to statutory vacation of stay after 180 days should be done away with as it only increases number of miscellaneous applications, wasting precious time of the judiciary. Threshold for Revenue initiated appeals should be raised to 25 to 50 lacs to provide finality to small disputes.  Time limit of 3 years should be introduced for adjudication of show cause notices.

It is hoped that the Budget is a first and major step to catch up on the slack in indirect tax policy rationalization; a move towards less of government and more of governance – the mantra of the present NDA. 

(Views expressed are personal)