Indirect Tax: FM has delivered!
Heetesh Veera, Tax Partner, EY
Against the backdrop of a slowing economy and high inflation, the much awaited Budget by the new government was laid out today.
Given the current economic scenario, the manufacturing sector required serious attention as an impetus for growth and employment – a fact that the FM also reiterated in his budget speech. There have been no changes in the peak customs duty (10%) and excise duty (12%) rates. The budget has proposed several measures to benefit the industry, including customs and excise duties rationalisation for steel, solar and wind power, food processing, electronics, chemical and petrochemical sectors.
To boost the domestic manufacturing and also to address the issue of inverted duties, customs duty rates have been reduced for specific inputs used in manufacture of soaps, steel grade limestone andcoal tar pitch. Further, encourage new investment and capacity addition in the chemical and petrochemical sectors, customs duty rates have been reduced on various products including ethane and propane. Similarly, rationalisation of customs duty has been undertaken for various varieties of coal – a measure which is likely to benefit the infrastructure sector.
To encourage in-country production of electronics, custom duty rates have been increased on specified telecommunication products and education cess imposed on all imported electronic products, and at the same time, import duty rates have been reduced for specified inputs required for local manufacture of electronic products.
Basic customs duty rate has been increased on import of stainless steel flat products, which could marginally have an adverse impact on the auto sector.
To increase use of renewal energy sources, duty concessions have been extended to equipment required for setting up solar and wind power projects.
Other changes on excise duties include extension of reduced excise duty rates and concessions for capital goods, consumer durables and automobile sectors, 31 December 2014. Additionally, excise duty rates have been reduced on specified food processing and packaging machinery. Consumers should benefit from the reduction of excise duty on low cost footwear, but would have to shell out higher prices for demerit goods, with an increase in excise duty on cigarettes, pan masala and aerated waters.
In order to further mobilise resources for environmental projects, the clean energy cess levy on specified products such as coal has been doubled.
An important change which was widely expected was the neutralization of impact of the SC ruling in case of an automotive major on excise valuation. The excise valuation rules have now been suitably amended to clarify that atlteast prospectively, excise duty would be payable on “transaction value” even where a manufacturer sells below cost plus profit, in so far as there is no flowback of any additional consideration from the buyer.
Additionally, trade facilitation measures such as faster clearance of cargo and single window scheme for import and export are welcome measures, which should reduce the cost of doing business.
There have been no changes in rates of Service tax of 12% as expected; however, the base has been expanded by pruning of the negative list and deletion of some exemptions. One notable change is the levy of Service tax on online, mobile, bill boards and other modes of advertising except print media. The exemption from Service tax to clinical drug trials has been withdrawn, and works contracts abatement for repair and renovation of both moveable and immoveable proper rites has been rationalised at 70 percent. Another important change relates to the definition of intermediary services under Place of Provision of Services Rules, which now seeks to also cover the services of Indian commission and consignment agents, by deeming such services to be performed in India.
A serious dampener for the industry is the substantial increase in interest rates from 18 to 30 percent (for delays over one year) for delayed payment of Service tax, especially given the large number of litigations involving issues of interpretation. Other severe measures include restriction on the period for claiming cenvat credit to just 6 months, and the amendment of Cenvat rules to disallow transfer of credit by a large tax payer (LTU) from one unit to another, which are unlikely to be well received by the industry..
From a dispute resolution standpoint, the expansion of the scope of advance rulings to also permit resident private limited companies to apply for rulings, and the expansion of scope of Settlement Commission, are welcome measures.
However, the introduction of mandatory pre-deposit of 7.5 and 10 percent of tax/ duty and penalty with a ceiling of INR 10 crores at the levels of Commissioner Appeals and CESTAT respectively is retrograde.
Clarity on the roadmap for introduction of Goods and Services Tax (GST) was one of the key expectations of all stakeholders. While no clear guidelines have been announced in the Budget, the Finance Minister’s comments on firm resolution on key areas of disputes with States within the year are positive and demonstrate the Government’s commitment towards an early introduction of GST.
(Uma Iyer, Associate Director – Tax & Regulatory Services, EY contributed to the article)