Steps to fiscal consolidation without affecting recovery

It was fairly an eventful budget in tough times and we should be thankful to the finance minister for not tinkering the existing rate of service tax of 10%.

The budget proposed to expand scope of service tax by incuding new categories of taxable services and enhanced the scope of existing taxable services.

The ‘aam admi’ would have major impact due to levy of service tax on purchase of under construction residential house / flats.

The instalments paid towards puchase of residential property during the consturction stage would attract service tax. However, purchase of property after completion will not have service tax impact.

Thus all the buyers of under construction property would have to shelve out more money in addition to ever increasing real estate rates. Further, any consideration charged for special services like preferntial location charges, internal/ external development, etc. would attract service tax.

The another impact would be to the airline sector where most of the airlines are operating under hevy losses. The government has expanded the scope of air travel services to include both domestic and international journey in econimc classes. This will reduce the competiveness of the airline sector.

The goverment has maintained its position of playing a spoilsport on a litigation matter pertaining to renting of immoveablle property. The Delhi High court had ruled that renting of immovable property per se will not attract service tax.

Though his matter is still pending before the Apex court, the budget has now explicitly provided that renting itself is a taxable service and would be subject to service tgax effective from June 1, 2007. Hence all the tenants would have to bear the burden of service tax on the lease rentals for the past period as well. This would largely impact retail and other sectors who are not in position to recoup the tax credits.

The Budget has imposed service tax on allowing right to use copyrights in sound recording / cinematographic films. This would have an impact on media and entertainmnet industry. However individual artists, composers and performers remain outside the preview of this service.

Further, various new services such as ‘brand’ promotion, medical record keeping, certain health services for which payment is made by corporates and insurance companies, services of electricity exchange, etc are brought under service tax net.

Service export

The pre-Budget Economic Survey on Thursday favoured providing further stimulus for the exports sector, arguing that the recovery prospects in global markets are still fragile.

In January this year the CBEC made a sincere effort to meet the long standing demand of the Service exporter community to rationalize the refund claim procedure. Now in the Budget the Finance Bill has proposed to amend the export of service rules, whereby the conditions that the “services has been used outside India” has been removed. This would save a lot of time and effort that usually drains down in the litigation process.

Excise

As anticipated, the rate of Cenvat has been increased back by 2% to 10%. This has been done for two principal reasons. First to calibrate integration with service tax ahead of the introduction of GST and second to increase government revenues, which have been hard hit by last years stimulus package.

Increase in the excise duty rate by 2% will definitely hit most industry sectors as more than 80% of industrial goods come under its purview.

Increase in rate of excise duty on petrol and diesel will obviously impact all the industries and consumers.

A Clean Energy cess on coal, lignite and peat produced in or imported into India is also proposed.

Customs Duty

Peak rate of customs duty (BCD) for most of the goods remains at 10% ad valorem. The rate of BCD has been increased for various goods like gold, silver, cigarette and petroleum products.

On the other hand, the FM has provided extended the exemption of BCD and CVD to parts, components for manufacture of battery charges and headphones. Reduction of BCD on all medical, surgical, dental and veterinary equipments from 7.5% to 5% is a welcome measure.

Another major step taken by FM for reducing administrative hassles in issuance of refund is outright exemption from special additional duty (SAD) of 4% on import of goods in pre-packaged form, which are intended for retail sale.

GST

The FM has reiterated government’s commitment to introduce GST. As expected the implementation of uniform GST has been pushed to April 1, 2011. Though it is important that the Biggest Tax Reform of the century should be implemented at the earliest however, besides implementation, it should be successfully implemented.

Deferment of GST is definitely negative for the industry per se, however, this will allow a breathing space to all the stake holders.

However, some half finished jobs like that of phasing out CST have not been completed. The CST rate has not been reduced, which is disappointment for industry.

Certainly, the budget proposals are aimed at making the development process more inclusive. Overall, Indian business should welcome the plan outlined by the FM. Though certain decisions were taken and had to be taken. The FM has inspired confidence in the future of our economy.