Budget 2011: Marking the inexorable advance to GST

Finance minister Pranab Mukherjee’s sixth budget focuses on moderation in tax rates and simplification of procedures for both the taxpayers and the tax-collectors.

With the service tax rate remaining unchanged at 10%, at first glance, the  proposals relating to indirect taxes seem to have little or no impact on the services sector.
But a closer reading of the fineprint reveals a different picture altogether.

The finance minister has proposed to expand the scope of certain existing service categories including services provided by life insurance companies in relation of investment management, services of legal professionals, services provided by hospitals etc. He has also sought to widen the taxpayer base by introducing two new services into the service tax net, thereby, taking the total number of taxable services to 119.

These new services include ‘services provided by air-conditioned restaurants with liquor licenses’ and ‘services of short term accommodation by hotels/inns etc’.

Service providers will also recollect the Draft Point of Taxation Rules released by the government for public comments in August last year. These rules post public comments have now been notified and would be effective from April 1, 2011. Through these rules the government has sought to determine the point in time when services will be deemed to be provided.

These rules also provide the methodology of determining the point of taxation in case of change in tax rate, introduction of new services and continuous service supply.

Several amendments have also been made in the Cenvat Credit Rules, 2004 and these would need to be examined by service providers to ascertain their impact.

The most important of these amendments is the scope truncation of the definition of ‘input service’.

Whether or not a service qualifies as an ‘input service’ in terms of these Rules has always been a matter of intense debate between the taxpayers  and the authorities.

The government has made amendments in these rules to swing the matter in its favour once and for all. The definition of ‘input service’ has been amended to specifically exclude services such as outdoor catering, rent-a-cab, life and health insurance  etc thus reducing the ambit of such definition.

These Rules have also been amended to make it mandatory for financial institutions including non-banking financial companies to reverse 50% of credit availed on a monthly basis irrespective of the actual ratio of exempted services to total services.

Further, while there have been no changes in the basic central excise duty and customs duty rates, the budget has tinkered with rates of various items and exemptions currently in force. Service providers should consider these amendments and ascertain the impact on their business operations.

On a positive note, the FM has once again communicated the government’s intention to move towards a goods and services tax (GST) regime and has highlighted the steps taken in that regard.

The Constitutional Amendment Bill, which has till date been the bone of contention between the Centre
and the states, is expected to
be tabled in the current Parliamentary session.

Mukherjee also announced National Securities Depository Ltd as the governments “technology partner” for establishment of an IT infrastructure, which would be the backbone of the GST system.

A pilot run of the GST portal is scheduled in June 2011 with 11 participating states. If everything goes as per plan, GST may see the light of day on 1 April 2012.

On the whole, this budget, though not without its share of controversies clearly amplifies the government’s intention to rationalise taxes and move towards GST.

Sachin Menon is executive director, KPMG