Budget 2015: Government’s intention to implement GST in April 2016 is welcome, says Harishankar Subramanian

By Harishankar Subramanian, Partner & National Leader, Indirect Tax, EY India

This budget has delivered what was largely expected from an indirect tax perspective — incentivise manufacturing to promote the policy thrust of ‘Make in India’ and broaden the services base as a precursor to GST.

The finance minister's affirmation of the government’s intention to implement GST in April 2016 is indeed welcome and will go a long way in creating a common market and ease cascading, though the distortionary 1% additional non-creditable origin tax proposal still needs to be debated. The budget has addressed the sector specific issues of inverted duty structure by reduction of basic customs duty on inputs/intermediates to ensure more competitive manufacturing.

Reduction of SAD from 4% to nil on inputs/components required for end use manufacturing of ITA products and LEDs, and from 4% to 2% in case of metal and chemical industries was another welcome step. This would help in removing accumulation of input credits due to value addition constraints in these sectors.

We have also seen a significant increase in customs duty of 6.5% on import of goods like mobile phones due to increase in excise duties. Now, a local manufacturer in the domestic tariff area will incur 2% excise duty including NCCD without availment of credits versus imports, potentially promoting more domestic manufacturing. Excise duty has been increased to 12.5% with consolidation of all cesses/surcharges.

However, the increase in service tax rate to 14% creating a variance with excise duty rate will create complexities for certain sectors, which could have been avoided. The increase in service tax rate to 14% with an enabling provision to further incrementally increase by 2% to 16% by a Swachh Bharat Cess clearly indicates a two rate GST structure with the standard rates likely to be in the range of 18 to 20%.

There has also been a conscious effort to broaden the base of service tax by pruning the negative list as a precursor to GST. Going forward, services provided by the government to business entities, intermediate job work for manufacture of potable liquor, activities of lottery like promotion, marketing, organisation, selling of lottery, facilitation etc will all be covered, besides amusement and entertainment events (exemption is now restricted only to specified activities).

The fine print in the budget has also brought several changes across customs, excise and service tax by rationalising penal provisions with a view to provide a choice to taxpayers to opt for such routes to avoid protracted tax litigations. Another welcome step has been an increase in the period of Cenvat credit from six months to a year.