Budget 2011: Gradual shift to GST track

By Bipin Sapra

The Budget aims at maintaining a sustainable economic growth , while the indirect tax proposals primarily focused on driving the current legislation towards the proposed Goods and Service Tax (GST) regime.

The Budget allays the fears of the industry by retaining the rate of excise duty and service tax at 10%. However, the duty rate on some goods liable to concessional rate of 4% has been increased to 5%. A large number of exemptions have also been withdrawn and excise duty levy of 1% has been introduced on certain goods. However, manufacturers have been given an option to either pay 1% duty without availing input credit or pay 5% duty and avail of credit of input taxes on goods and services. This levy could lead to potential ambiguity on the applicable rate of Countervailing Duty (equal to excise duty) when such notified goods are imported for the purpose of sale in India.

The inclusion of new services, including diagnostic testing and legal consultancy, and expansion in the scope of current taxable services (life insurance services, commercial coaching, business support etc.) in the service tax net has further been done to capture additional revenue lying untapped in the industry. This is aimed at cushioning any post-budget loss of revenue in the current economic fabric.

The introduction of point of taxation (POT) rules is another landmark development. The POT rules are a definitive step towards the GST regime as it envisages a paradigm shift of taxation from a 'payment basis' to 'accrual basis'. However, the proposed shift could entail more working capital requirements for service providers as they will not be allowed to wait for the actual realization of money from their clients to discharge service tax liability. It is important to note that the credit of tax would still be admissible on payment basis only.

Amendments have also been made in the export and import rules of service tax by changing the requirement for certain services from a recipient basis to a performance basis and vice versa.

One of the highlights of this year's Budget is the introduction of self-assessment in the Customs Act, for import and export goods. The proposed amendments provide for a more trust-based compliance management and allow the importer/exporter to self-assess his goods and pay appropriate duty. However, the Customs authorities have been given power to verify such assessment and in case of lapse, issue a speaking order levying appropriate duty.

The Cenvat Credit Rules-2004 has been amended with a view to remove long lasting ambiguities in the system. Some salient changes include amendments in the definition of 'inputs' to provide specific inclusions for goods used for manufacture and providing output services and exclude goods used in construction. Amendments in the definition of 'input service' have been made to exclude services used for personal consumption. Significant changes have also been introduced in the credit rules relating to reversal of credit on the provision of non-taxable and exempted goods and services.

In summary, the new Budget proposals are clearly major stepping stones towards the approaching GST regime. However, the synthesis of these changes with the current legislation will be the litmus test for the final rollout and hence will be keenly watched by the industry.

(Author is Tax Partner, Ernst & Young. Views expressed are personal.)