Indirect Tax: FM has delivered!

Heetesh Veera, Tax Partner, EY

The new govt's much-awaited budget comes in the backdrop of a slowing economy and high inflation. Given the current economic scenario, the manufacturing sector required serious attention to spur growth and employment–a fact that the FM also reiterated in his budget speech.

There have been no changes in the peak customs duty (10%) and excise duty (12%) rates. The budget has proposed several measures to benefit the industry, including rationalisation of customs and excise duties for steel, solar and wind power, food processing, electronics, chemical and petrochemical sectors.

To boost domestic manufacturing and also to address the issue of inverted duties, customs duty rates have been reduced for specific inputs used in manufacture of soaps, steel-grade limestone and coal tar pitch. Further, to encourage new investment and capacity addition in chemical and petrochemical sectors, customs duty rates have been reduced on various products including ethane and propane.

Similarly, customs duty has been rationalised for various varieties of coal–a measure which is likely to benefit the infrastructure sector.

To encourage domestic production of electronics, custom duty rates have been hiked on specified telecommunication products and education cess imposed on all imported electronic products, and at the same time, import duty rates have been reduced for specified inputs required for local manufacture of electronic products.

Basic customs duty rate has been increased on import of stainless steel flat products, which could marginally have an adverse impact on the auto sector.

To increase use of renewal energy sources, duty concessions have been extended to equipment required for setting up solar and wind power projects.

Other changes in excise duties include extension of reduced excise duty rates and concessions for capital goods, consumer durables and automobile sectors. Additionally, excise duty rates have been reduced on specified food processing and packaging machinery.

Consumers should benefit from the reduction of excise duty on low cost footwear, but would have to shell out more for demerit goods with the excise duty being hiked on cigarettes, pan masala and aerated water.

To further mobilise resources for environmental projects, the clean energy cess levy on specified products such as coal has been doubled.

A widely expected change was the neutralization of impact of SC ruling in the case of an automotive major on excise valuation. Excise valuation rules have now been suitably amended to clarify that at least prospectively, it would be payable on "transaction value" even where a manufacturer sells below cost plus profit, in so far as there is no flow back of any additional consideration.

Trade facilitation measures such as faster clearance of cargo and single window scheme for import and export are also welcome measures, which should reduce the cost of doing business.

Service Tax
As expected, there have been no changes in Service Tax rates of 12%. However, its base has been expanded by pruning the negative list and deleting some exemptions. One notable change is the levy of Service Tax on online, mobile, bill boards and other modes of advertising. Clinical drug trials being exempted from Service Tax, and works contracts abatement for repair and renovation of both moveable and immoveable proper rites have been rationalised at 70%.

Another important change relates to defining intermediary services under place of provision of services rules, which now seek to also cover services of Indian commission and consignment agents by deeming such services to be performed in India.

A serious dampener for the industry however is the substantial increase in interest rates, from 18 to 30% (for delays over one year) for delayed payment of service tax, especially given the large number of litigations involving issues of interpretation.

Other severe measures include restricting the period for claiming Cenvat credit to just 6 months, and the amendment of Cenvat rules to disallow transfer of credit by a large tax payer (LTU) from one unit to another, which are unlikely to be well received by the industry.

From a dispute resolution standpoint, the expansion of the scope of advance rulings to also permit resident private limited companies to apply for rulings, and the expansion of scope of Settlement Commission, are welcome measures.

However, the introduction of mandatory pre-deposit of 7.5 and 10% of tax/duty and penalty with a ceiling of INR 10 crore at the levels of Commissioner Appeals and CESTAT, respectively is retrograde.

Clarity on the road-map for introducing Goods and Services Tax (GST) was one of the key expectations of all stakeholders. While no clear guidelines have been announced, the finance minister's comments on firm resolution on key areas of disputes with states within the year are positive and demonstrate the govt's commitment to an early introduction of GST.

(Uma Iyer, Associate Director, Tax & Regulatory Services, EY contributed to the article).