The new government has come to power at a time when India faces a host of economic challenges such as inflation, manufacturing slump and a depreciating rupee. The new regime has pledged to revive the economy by kick-starting capital investment, employment and economic growth.
Expectations are high that a concrete plan for implementation of Goods and Services Tax (GST) would be introduced in the upcoming budget. So far, due to resistance from the states, introduction of the GST has been an unmanageable, if not impossible, task. The states are still awaiting compensation for reduction in CST rates in preparation for its subsequent abolition. There are several to-dos for introduction of GST—the finalisation of the GST legislation, tabling of the revised Constitutional Amendment Bill, enabling of IT infrastructure prior to implementation, to name a few. Since GST is the key indirect tax reform in India, with a potential to substantially add to the economic growth of the country, the expectation is that the new regime would overcome the several hurdles it faces.
The CENVAT credit scheme, over the years, has been narrowed down in scope. The credit restriction results in a higher tax cost for businesses. The business community looks forward to a liberalised credit scheme wherein all goods and services used for the business purpose are entitled for credit. Expansion of the credit base to miscellaneous duties and cesses that contribute towards significant tax costs for businesses would also be welcome. Rationalisation of the CENVAT credit scheme is one of the most anticipated changes in the excise and service tax laws.
The infrastructure sector faces substantial service tax costs during the setting-up phase as this service tax does not enter the CENVAT credit pool. While there are service tax exemptions provided for setting up certain infrastructure facilities, there is a need to broad-base this exemption to key sectors such as power, oil and gas, etc. It is also necessary to provide a mechanism for exempting service tax through the value-chain of contractors and sub-contractors, engineering services and the likes.
The excise authorities have also been targeting manufacturing companies that are incurring losses and selling their goods below the cost of production, on the basis of the Supreme Court ruling in the case of Fiat India. The concept of notional tax is regressive. Although a circular limiting the application of the Fiat judgment was subsequently issued by the CBEC, an amendment in the law is expected to provide the required protection to the industry.
Protracted and delayed litigation is a factor adversely impacting the sentiments of the business community in the country. The authorities issue tax demands on superficial grounds without considering judicial precedents, and such demands are routinely confirmed by lower level authorities. Eventually, however, most of these demands do not sustain and are quashed by tribunals and the higher courts. The smallest of disagreements between the tax officer and the taxpayer ends up as a long-drawn litigation, imposing huge costs on the taxpayer. The new government is expected to introduce newer means of dispute resolution to address the huge backlog of legal cases. Tax disputes can be significantly minimised by expanding the scope and strength of the Authority for Advance Rulings (AAR) and the Settlement Commission.
Then, there are issues regarding administration of indirect taxes that need addressing. The multiplicity of audits and investigations by the taxman is a point of pain for the taxpayer. Multiple agencies audit or investigate the same set of transactions of a taxpayer due to which the taxpayer ends up explaining same set of transactions and tax positions to multiple authorities. There are stringent prosecution provisions in place for defaults and omissions by taxpayers. It is to be appreciated these powers, for instance, arrests, etc, should be allowed only in exceptional cases and not as a tool for arm-twisting taxpayers where disputes are of a technical nature, involving interpretative issues. Other administrative issues, like inordinate delay in refund by the tax authorities to exporters of goods and services—especially SEZs and STPIs also needs urgent attention. There is a pressing need to develop a robust system for timely disposal of refunds.
Recently, the Tax Administration Reform Commission (TARC) issued a report focussing on the problems facing tax administration much like those discussed above and has given recommendations for aligning the prevalent tax policies and laws with the global practices. The new government is expected to implement the recommendations of TARC and needs to address these issues by reposing greater faith in the taxpayers, minimising the number of audit/investigating agencies and restricting the scope of prosecution powers.
Budget proposals are keenly awaited in the above backdrop.
Rajeev Dimri | The Financial Express
With inputs from Saurabh Kanchan
The author is partner, BMR & Associates LLP. Views are personal