Partner and Head - Indirect Tax
Chief Operating Officer - Tax
KPMG in India
Typically, at the onset of every Budget, the industry, with euphoria and optimism, expects a 'dream budget' which addresses and helps improve the economic indicators, remove challenges/obstacles faced and injects a lease of life into stressed sectors.
These expectations have reached a higher level this year, owing to the several initiatives like ‘Ease of Doing Business,’ ‘Start-up India Stand-up India’ etc. announced by the government. They are also expected to provide a ‘stable and certain tax environment’. With such a promising backdrop, it is natural for the industry to go an extra mile to seek positive steps/actions which shall act as a catalyst for growth and in turn stimulate the economy.
While this is just one part of the story, the Finance Minister, who will be presenting his second full Budget, has his work cut out especially due to challenging macro-economic indicators. Declining exports, curtailed capacity utilisation, a stressed banking sector due to mounting non-performing assets, lacklustre private spending for infrastructure development, continuation of subsidies and on top of it all, the dichotomy of maintaining fiscal prudence and meeting the fiscal deficit targets, are likely to make the preparation of the Budget strenuous for the government.
The need of the hour is to recognise the stressed and needy sectors such as agriculture, banking, commodity manufacturing and infrastructure, etc. and develop a comprehensive plan to boost public spending to convert the adversities plaguing these sectors into opportunities.
As a fiscal prudence measure, it is critical to control the ever-increasing quantum of ‘revenue forgone’, by the rationalisation of exemptions and concessions in indirect taxes, which shall pave the path to the introduction of the Goods and Services Tax (GST) which promises to have a wider coverage and moderate tax rate.
This rationalisation measure along with the enhanced duty recovery on the import of crude oil could ease the pressure on finances and provide some elbow room to support other ailing sectors of the economy.
The move to curtail exemptions shall not be complete unless it is coupled with steps to expand the coverage of CENVAT credit by the removal of restrictions on credit by trade and industry. The credit regime should be liberalised to help ensure that the credit of all business expenditure is allowed when the entire revenue has suffered the output tax.
With respect to the indirect tax reforms, one of the positive outcomes of the Budget session is the passage of the GST Constitution amendment Bill, which is expected to provide an impetus to the growth of the gross domestic product (GDP) and overall economy. With the rising expectation of GST being introduced in 2016, the government could also reduce the Central Sales Tax rate to 1 per cent, which is the expected road map for GST.
The Budget is also likely to get a thumbs up if the various cesses (such as national calamity contingent duty, clean energy cess and the recently levied Swachh Bharat Cess, etc.) are abolished and subsumed within the existing applicable taxes.
With no avenues for adjustment, these cesses lead to tax cascading and consequently increase the price of the final product for consumer, besides placing an additional compliance burden on trade. The step of bringing these cesses into the mainstream (either by subsuming or by allowing credit) could go a long way in improving the ease of doing business in India.
‘Make in India’ is being promoted by the government on a large scale and hence it is critical to address the concern of the inverted duty structure especially in priority manufacturing sectors. If the rates cannot be tinkered with, then a refund of accumulated credits to such sectors can surely reaffirm confidence in the efforts of the government to contribute to this initiative.
While it is important to discourage the evasion of taxes by strict penal consequences, however, the collection of interest in the range of 18 to 30 per cent for delayed payments of service tax even for genuine assessees is not well received by the industry, especially when refunds are delayed and repaid with either no interest or the interest is paid by the government at a rate of just 6 percent.
It is time to bring parity and fiscal consolidation by staying on the path of reform. Any step that leads to achieving the fine balance of maintaining the fiscal deficit without curbing public spending, would be no less than a master stroke.
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