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Budget 2012 – Indirect tax changes bring GST closer

By V. Sridhar

The Union Budget presented by the Finance Minister on 16th March, 2012 is a bold effort at fiscal consolidation. The fiscal position was not looking good. The revised estimate of fiscal deficit for the current year is 5.9 percent of the GDP. The current account deficit is estimated to be well above the comfort level and pegged at 3.6 percent of the GDP. Therefore, what the doctor ordered was some tough measures to reduce the fiscal deficit. In the Minister’s own words, he has not shied away from administering the bitter medicine. A massive revenue mobilisation effort, particularly on the indirect taxation side has been proposed. The additional resource mobilisation (ARM) is Rs. 18,660 Crores  from Service Tax where the general rate has been increased from 10 to 12 percent. The ARM from customs duties and excise duties is Rs. 27,280 Crores. It may be recalled that in the wake of the global financial crisis in 2008, a massive fiscal stimulus was provided with the slashing of the mean rate of excise rate from 14 to 10 percent and that of Service tax from 12 to 10 percent. So it was perhaps to be expected that the mantle for fiscal consolidation fell on indirect taxes. The direct tax proposals have resulted in an outgo of Rs 4500 Crores. The fiscal deficit for the coming year 2012-13 is estimated to be 5.1 percent of the GDP, quite a fall from the current year.      

This article will focus on the changes pertaining to indirect taxes. After factoring a GDP growth of 14 percent of GDP  in nominal terms and taking into account the ARM measures, the estimates for the next year  are pegged at  a revenue of Rs. 1,86,694 Cr from customs (22.02% growth rate), Rs. 1,94,350 Cr from excise (+28.97%) and Rs 1,24,000 Cr from Service Tax (+30.52%). The share of indirect tax in gross revenue has increased from 44.3 percent to 47 percent.
Taking excise first, the mean Cenvat rate has been increased from 10 to 12 percent .As a consequential measure ,the merit rate has gone up from 5 to 6 percent and the special rate has gone up from 1 to 2 percent (with some exceptions). This will affect a wide range of commodities from raw materials to intermediates to finished goods. This will impact imports too by way of corresponding increase in Additional duties and Special CVD. In fact much of the increase from customs duties will be on account of this factor. The other major revenue measure is the steep increase in cess on crude petroleum from Rs. 2500 to Rs. 4500 per tonne.

Cigarettes, biris and other tobacco products like chewing tobacco, gutka and cheroots have also faced rate hikes. For cigarettes which have carried pure specific rates based on length of cigarettes for the past 25 years, specific-cum ad-valorem rates have been introduced for costlier cigarettes of longer length. The ad-valorem component is a modest 10% (for cigarettes, it is indeed a modest rate!). Another interesting feature is that cigarettes have been brought under the MRP based assessment regime with an abatement rate of 50% from the MRP. If this measure succeeds, may be, we can expect the ad-valorem component to increase in the coming years.  A prelude to an eventual GST regime of only ad-valorem rate for cigarettes on the lines of State VAT?    

The duty structure on cement has been cleaned up doing away with the complicated structure that prevailed earlier. The government seems to have realised that a backdoor mechanism for price control through tariff disincentives does not work. The specific component on costlier cars has also been replaced by fixing a higher consolidated ad-valorem rate. Some sector specific concessions have also been announced.    

The increase in Cenvat rates to 12% also has the effect of bringing the rate on par with the general rate of 12.5% of State VAT. This would increase the bargaining power of the Centre in its negotiations with the State governments in arriving at the revenue neutral rate (RNR) for GST .This needs a little elaboration. Assuming that the ideal RNR for GST is 16% with an 8% central component and an 8% State component, if the Cenvat rate at the centre had remained at 10%, it would mean that the Centre takes a hit of only 2 percentage points with the introduction of GST, whereas the States would take a hit of 4.5 percentage points. Naturally in such a scenario the States would ask for a greater compensation from the Centre. Compensation issues are ticklish not capable of easy resolution to the satisfaction of all. The compensation issues relating to the reduction of CST to 2% still persist.    

Slowly but surely the Centre is making the Cenvat system more amenable to the introduction of GST so that as and when it comes, the transition is smooth. Apart from the tariff measures outlined above, the announcement of the Finance Minister about setting up of common portal for facilitating a computerised system that is interoperable between the Centre and the States is another step forward in this direction. To start with, this would facilitate the core activities of registration, filing of returns and payment of taxes. The announcement of the setting up of a committee for harmonising the Central Excise and Service Tax provisions and thinking in terms of a common return format for both excise and service tax are also steps in the same direction.    

Turning to customs, there are no major changes. The peak rate of basic duty remains at 10%. The import duty has been hiked on gold bars and coins from 2% to 4%. This could dampen demand slightly and also fetch considerable revenue to the government. However, it is a moot point as to whether this would result in increased smuggling. The duty increase should not result in killing the goose that lays the golden eggs! The baggage allowance for incoming passengers has been increased to Rs. 35000.This could also lead to increased imports of consumer goods through the baggage route and make it difficult to control what is called carrier traffic. The intelligence systems and risk profiling by the anti-smuggling agencies would need to be geared up to meet the fresh challenges. Several sector specific concessions have been announced.    

Both the Customs Act and the Central Excise Act have seen amendments to tweak the prosecution and penal  provisions, possibly to take care of adverse court judgements that made practically all offences non cognisable and bailable.    

The Service Tax rate has been raised from 10% to 12%. The present positive list is proposed to be replaced  by a comprehensive coverage of all services except those specified in a negative list covering 17 categories of services. This is a major step that would widen the tax base considerably. There is a proposal to introduce Place of Taxation Rules and make some changes in the Point of Taxation Rules. The legal provisions and the rules have seen extensive changes. They will come into force later, giving time to all the stake holders to carefully study the changes and articulate their views and concerns so that wherever necessary, the government could come out with suitable amendments to the Finance Bill before the Parliament. A welcome proposal is to extend the facility of settling of cases on Service Tax by the Settlement Commission. That should lead to faster resolution of disputes and quicker realisation of revenue.    

To sum up, the proposals relating to indirect taxes should lead to fiscal consolidation, widening of tax base and taking steps to facilitate the introduction of GST.

[The author is Director, Institute of Business Laws, Chennai]
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