A run-up-to-GST Budget

Budget 2017-18 may turn out to be one of the most trend-setting Budgets to be presented by the National Democratic Alliance government. This is the first time that the Railway Budget has been merged with the Central Finance Budget and there is no distinction between Plan and nonPlan expenditure. This apart, the Budget would be presented on February 1, almost a month earlier than the usual date. Further, preceded by the historic move of demonetisation and expected to be followed by the path-breaking tax reform of goods and services tax (GST), this Budget carries high expectations for both consumers and business owners.

With the conclusion of the GST Council’s last meeting, the tax reform’s journey towards realisation has progressed substantially. Resolution between the Centre and the states on the much-debated issue of sharing administrative control over taxpayers should also set the pace to reach the remaining milestones and for the government to roll out GST. The decision that states will assess more than 90 per cent of small taxpayers with turnover below Rs.1.5 crore is welcome and in line with the existing scheme of indirect taxation in the country. At present, the Centre does not assess manufacturers with turnover of up to Rs.1.5 crore, as they are exempted from excise duty. The challenge for the state tax authorities would be to gear up to assess taxation of services where most of the small service providers fall in the lower bracket and who have been assessed only by the central tax authorities so far.

The next major steps for the GST Council would be to finalise the draft of the GST law, supporting legislations and tax rate schedules for various goods and services in accordance with an already decided multi-rate structure. The realistic timeline for the nationwide rollout of GST was pushed by a quarter to July 1. This short deferment was indeed required, as this would provide the much-needed time for analysis and preparedness for both the government and the businesses.

Budget 2017-18 might be the last one before the country moves to a GST regime. This means it is the last opportunity for the government to further realign the existing tax structure for a smooth transition. Any major amendments such as further introduction and/or increase in rates of cesses or restrictions on availability of credit, which lead to cascading of taxes and are against the spirit of GST, are uncalled for.

The central government has in the last couple of years taken several legislative and administrative measures to foster ease of doing business. However, recent amendments in service tax law around taxability of certain cross-border transactions came as a surprise for various service providers, who were given little time to prepare for critical changes in their tax positions and compliances. These included taxability of digital services provided by overseas service providers to Indian customers, tour operator services and inbound transportation of goods through sea routes in which no Indian person was involved as a contractual party to the service agreement. With the existing regime set to lapse in a few months, having these kinds of sudden tax changes may not only lead to higher tax uncertainty but could also distort the outlook of overseas investors towards India as an emerging market and investment destination. These kinds of amendments should be brought in at a stage so that industry does not panic. At this point, the government should try to improve the existing machinery for processing refund claims and introduce measures for timely conclusion of pending cases to minimise their spillover into GST.

Other expectations from this Budget include realignment of existing cesses such as Swachh Bharat Cess on services and infrastructure cess on automobiles to bring down the cascading of taxes. Creditable cesses such as Krishi Kalyan Cess and NCCD should be made more fungible to allow their credit against other taxes. This would help reduce possible rollover/lapse of credit for these cesses with the taxpayers on the GST cut-over date.

As services could possibly attract up to 18 per cent of tax rate under GST, a marginal increase in service tax rate may be announced to rationalise it further with GST. However, it could be a risky proposition as the tax rate would increase without a commensurate increase in efficiencies that GST would provide to service providers. This might increase the tax burden substantially for the end consumers, who may be hoping for some tax relief given that demonetisation caused them great inconvenience. Post demonetisation, India has witnessed multifold surge in the use of digital payments, including mobile wallets, debit and credit cards and NEFTs. While the government has already extended certain tax concessions to promote digital payments, further benefits on service tax, excise and Customs should be provided for the economy dealing with cash crunch.

The overall expectation of industry from this Budget is further realignment of the existing indirect tax structure with GST framework without radical changes, as it remains busy preparing for this tax reform.

The author is leader, Indirect Tax, BMR & Associates LLP. With inputs from Poonam Harjani, director, and Himanshu Gupta, associate, BMR & Associates LLP.

Business Standard New Delhi,25th January 2017