GST to Cenvat, FM has his hands full

With Budget 2012 just round the corner, both the industry as well as the common man are expecting the finance minister to announce proposals that would help ease some of the ever-increasing inflationary burden and give a fillip to consumption and growth in these difficult times. At the same time, the government has the mammoth task of managing its deficit through fiscal consolidation.

After the 2011 Budget, one of the key expectations was introduction of goods and service tax (GST) with effect from April 1, 2012 — there was also near unanimity that GST would, in general, lead to a reduction in prices of goods and services by eliminating the cascading effect of indirect taxes.

With GST implementation getting delayed due to a political gridlock, it’s likely that the finance minister will announce some significant changes in indirect taxes to align at least the central levies, as a roadmap towards GST.

While there are recommendations from various committees to roll back the stimulus given to the industry in 2010 and increase the excise duty as well as service tax rates from 10% to at least 12%, it remains to be seen whether such an increase would happen, considering that these rates are already aligned with the proposed central GST rates.

The finance minister may further prune the current excise duty exemptions and bring more products within the tax net at the concessional rate of 1%, as done for more than 130 items last year.

Another key change expected from Budget 2012 is the introduction of ‘negative list’ concept in service tax, which is likely to widen the service tax revenue base and eventually pave the way for a simpler GST design.

The previous year’s Budget significantly restricted the Cenvat credit availability to both manufacturing as well as services sectors, especially in relation to taxes paid on construction activity. This has adversely affected capital-intensive sectors such as automotive, power and real estate, including hotels.

The move was, in fact, perceived as being totally contrary to the principles of GST. With rising input costs, the industry expects restoration of earlier definitions of inputs and input services and allowance of credit on all business-related expenses, thus providing a seamless Cenvat credit flow throughout the supply chain for goods and services and avoiding cascading of taxes.

One key sector that would be looking for tax sops in this year’s Budget is power, which has been in doldrums in the past few months, with recent cancellation of equipment orders being reportedly in the range of above Rs5,000 crore.

News reports also suggest a possible withdrawal of tax benefits to mega power projects in the near future. However, keeping in view the serious power shortage in the country, the finance minister should consider giving a boost to the sector by according it the ‘infrastructure’ status, in line with roads, airport, railways and the like, which would entitle it to various indirect tax benefits, including a service tax exemption on input services, and further to rationalise the tax structure for power equipment in order to bring both imports and domestic industry at par.

A major change looming for the auto sector is an additional excise duty levy of up to Rs80,000 per unit on diesel vehicles as recommended by the Parikh Committee.

With the industry expressing strong reservations against this increase, another panel of experts has recommended an increase in diesel price by 75 paise per litre instead of levying such an additional duty. It remains to be seen whether the finance minister would maintain status quo or adopt either of these proposals.

Increasing fuel prices, interest rates and input costs, coupled with tax leakages, have definitely created a challenging growth environment for India Inc. To address the urgent need of maintaining growth rates, enhance competitiveness of Indian companies and retain attractiveness of Indian market, it will be crucial for the finance minister to deliver a Budget which can keep the India story going strong.

With indirect taxes generally being passed on to consumers, any tax reforms for the industry would benefit the aam aadmi also. It is expected that the finance minister will take a very balanced approach to keep the growth momentum and at the same time, take steps to control inflation.

Heetesh Veera is tax partner Ernst & Young. Sarika Goel, senior tax professional with a member firm of Ernst & Young Global, also  contributed to the article. Views are personal.