Service tax under scalpel, fisc to the fore

Budget 2012 is a mixed bag with across-the-board increase in peak central excise and service tax rates to 12% from 10%, widening of the tax base through the negative list-based taxation and at the same time, trying to address the rising inflation and boost industrial output by incentivising the primary sector and infrastructure projects.

A key disappointment was the absence of any announcement relating to timelines for introduction of GST even though the FM stated that drafting of model GST bill is under way and the IT infrastructure (GST network) is expected to be ready by August 2012.

The service tax legislation is slated to undergo a major revamp to bring it closer to the central excise law for an eventual transition to the GST.  From a date yet to be notified, all services except the 17 categories to be included in the ‘negative list’ and  ten exempted categories would be taxable. The place of supply rules would be shortly tabled for public comments, and the criteria for taxation of export and import of services as well as for valuation of services will undergo a change in light of the same.

The provisions of Cenvat Credit Rules, 2004, would also be amended in light of the negative list of services.

An amnesty from 100% penalty has been provided for services of renting of immovable property if the tax and interest amount payable up to March 6, 2012 is paid within six months of enactment of Finance Bill, 2012.

Other key changes on service tax include amendment in valuation rules pertaining to work contracts, reduction in abatement percentages on certain services with allowance of Cenvat credit on input services, simplification of refund procedures and better dispute resolution mechanism by way of introduction of Revision Application Authority and Settlement Commission.

The generic central excise duty rates of 1%/5%/10% have been increased to 2%/6%/12%, respectively, with few exceptions.  While the peak basic Customs duty rate has been maintained at 10%, the infrastructure sector has been given substantial concessions and exemptions from the Customs duty.

Full exemption from basic customs duty has been provided for fertiliser and coal mining projects, as well as on equipment imported for road construction projects awarded by metropolitan development authorities.  The generic peak customs duty rate would change from 26.85% to 28.85%, with an exemption provided on the education cess leviable as part of additional customs duty (CVD). 

On ready-made garments and other textile articles sold under a brand name, while the standard excise duty rate stands raised from 10% to 12%, the abatement has been increased from 55% to 70%, resulting in lowering of effective duty by almost 1%. The excise duty on mobile handsets has been maintained at 1% without Cenvat facility.  Further, a concessional rate of 2% has been allowed for spare parts of mobile phones, provided no Cenvat credit is claimed on the same.  The price of vehicles is set to increase with the increased excise duty rates. Vehicles of engine capacity > 1500cc would now attract a duty of 27% instead of 22%+`15,000. Other vehicles currently attracting 22% excise duty would now be taxed at 24%. 

The ambiguity relating to customs duty exemption on import of aircraft parts for maintenance and repair purposes has been removed by specifically allowing such exemption to third party maintenance, repair, and operations  units. Customs duty concessions have also been provided on specified equipment relating to rail projects, for survey and prospecting of mines, and for iron ore pellet/ beneficiation plants.

Other key duty rate changes include increase in cess on crude petroleum from Rs2,500 to Rs4,500 per tonne, excise as well as customs duty exemption to pneumatic tyres, new or retreaded, used in aircraft, uniform excise duty rates for packaged cement, excise and customs duty exemptions for parts of certain medical equipment and consumables and an effective levy of 0.30% excise duty on unbranded precious metal jewellery — except silver.

The Budget proposals are clearly aimed at reducing the fiscal deficit with the indirect tax proposals expected to generate additional revenue of almost Rs46,000 crore  — almost a 12% rise over the current year budgeted collections. However, the increased tax rates will almost surely result in an overall increase in prices of goods and services and thus, the government will face a challenge of achieving a fine balance between maintaining growth momentum and managing the common man’s expectations.

The writer is partner, Ernst & Young.
(Sarika Goel, associate director, Ernst & Young, contributed to the article.)