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Excise-service tax blend right start for GST
Posted on January 6, 2011 | Author: Pratik Jain | View 223
A unified regime would not only conserve time and money of the taxpayer, but it would also offer her the flexibility to streamline or automate the underlying business and IT processes for handling these taxes.
The Finance Minister recently indicated that the goods and services tax (GST) can possibly be implemented from April 2012. However, developments around implementation of GST have not been particularly encouraging over the last few months.
While industry has been keenly waiting for the new tax regime, the Centre and the states have not been able to resolve fundamental differences in terms of design and structure of the proposed regime. The delay has caused disappointment to many of us, and perhaps it is time the Centre took concrete steps for implementing GST.
The first step could be fully integrating the current excise laws (applicable on manufacture of goods) with service tax (applicable on notified services) in the forthcoming Union Budget. This proposition needs to be evaluated along the parameters of rationality and practicality.
To start with, integration of excise duty with service tax would provide a first-hand experience to the government and taxpayers to evaluate the merits and challenges associated with an integrated tax regime for goods and services.
The government had taken the first step in this direction in 2004 by integrating the tax credit regime for these two taxes (known as Cenvat credit). While a unified credit regime has certainly helped industry in terms of reduced input tax leakages, there are still inefficiencies and issues emanating from separate legislation for excise and service tax.
For instance, there is often a debate as to whether the concept of ‘inputs’ and ‘input services’ should be interpreted differently for a service provider vis-à-vis a manufacturer. The reason is that while the manufacturer can use these inputs or services ‘directly’ or ‘indirectly’ in or ‘in relation to’ manufacture of final products, there is no reference of ‘indirect’ usage for service providers.
There are many other instances where the credit rules are not aligned for manufacturers and service providers. To illustrate, while a manufacturer exporting exempt goods is entitled to claim credit or refund of input duties or taxes paid by him, a service provider exporting exempt services is deprived of this privilege.
If there is a common legislation for levying tax on manufacture of goods and supply of services, hopefully, the underlying input tax credit rules would also be common and simplified. This would also give the businesses flexibility to transfer their surplus credits from a particular manufacturing location to another manufacturing location and also to a service unit, or vice versa.
The other major advantage of this integration would be simplified compliances for taxpayers. Currently, excise duty is payable at the time of clearance of goods from the factory, while service tax is payable on receipt of payment. There are separate registration and other compliance requirements for these taxes.
A unified regime would not only conserve time and money of the taxpayer, but it would also offer her the flexibility to streamline or automate the underlying business and IT processes for handling these taxes.
The integration would also provide an opportunity for the government to align the administration of these legislations by having common personnel for processing the applications, audit and appeal proceedings and so on. It would also reduce the number of legislations by at least one, which would again be a welcome change.
If GST is to be implemented in near future, then this integration should preferably happen in the forthcoming Budget or from April 1, 2011, and no later. The government should also take this opportunity to reduce various exemptions and concessions under both these laws and try to broaden the tax net.
The integration would, of course, be a challenging task, specifically in view of the need for revamping the administrative setup within a short timeframe. However, as there are various touch points between these two laws and many government officials would have experienced both, this challenge does not seem to be huge.
Also, this aspect needs to be evaluated in light of the realistic timelines for GST implementation, and the progress already made towards aligning the taxes on goods and services (during the course of GST preparations).
This would also be a clear signal that the government is indeed serious about tax reforms and reinforce the belief among stakeholders that we are moving towards GST — may be slowly, but surely.
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