Sukumar Mukhopadhyay: No move towards GST - no reform

BUDGET ANALYSIS/INDIRECT TAX

This is a budget just for this year. Even a populist budget could have incorporated some reform measures or indicated a road map towards Goods & Services Tax (GST) which is being talked about for the last few years. This being the last serious budget before April 2010, which has been announced as the cut-out date for GST, there could have been a positive movement towards the new system by introducing a comprehensive service tax, comprehensive goods tax (Central Excise and Cenvat), a convergence of rates towards 14 per cent, removal of exemptions and so on.

Even general reforms have not found much attention. Reforms would have meant simplification of rates by converging towards 14 per cent for service tax and central excise and 10 per cent, 7.5 per cent and 5 per cent in customs. There should have been a systematic removal of exemptions.

In Central Excise, one good move that has been made is that the rate of tax has been reduced from 16 per cent to 14 per cent, avowedly to reduce the tax burden on the manufacturing sector. This sector does need special help as it is an engine of growth. This sector was suffering due to a looming recession in the outer world. Particularly the automobile sector has been provided a good amount of tax relief. The rate of duty has been reduced for small cars, two wheelers and passenger three wheelers from 16 per cent to 12 per cent, for hybrid cars from 24 per cent to 14 per cent, for electric cars from 8 per cent to nil and specified parts of electric cars from 16 per cent to nil. Excise duty has also been fully exempted on selected refrigeration equipment for cold storage. The pharma sector has been given a tax break from 16 per cent to 8 per cent. Benefit has also been given to some paper and paper products.

But one doesn't know why so much of tax benefit had to be given to pan masala. It could have been reduced, in any case, from 16 to 14 per cent. But to reduce it to 8 per cent and even to do away with the National Calamity Contingent Duty shows the very kind heart of the Finance Minister for the consumer of pan masala. This may turn out to be a case of killing by kindness.

No attempt has been made to remove the distinction between raw materials and capital goods for the purpose of giving input tax credit in the Cenvat Rules. The rates of duty of Central Excise now are as varied as 4, 8, 12, 14, 16 and several fixed rates. The interchangeability of input tax credit between goods and services, which is still restrictive, could have been improved upon by making it more comprehensive. That has also not been done.

In customs, the situation is mostly unchanged. The so-called peak duty for non-agricultural goods remains at 10 per cent. This 10 per cent is not really the peak duty because there is a very large number of rates for industrial goods which are much higher than 10 per cent. This has been pointed out by many analysts repeatedly, but there is none to heed to this suggestion.

The rates of duty have been reduced from 7.5 per cent to 5 per cent in the case of project imports, 5 per cent to 2 per cent in the case of crude and unrefined sulfur, from 7.5 per cent to 5 per cent in the case of specified machinery for manufacture of sports goods, 10 per cent to 5 per cent for some products of the information technology and electronic industry, from 5 per cent to nil for steel melting and aluminum scrap and so on. These are not very major concessions.

What strikes one as a major step is that the customs duty on cigars and cheroots has been increased from 30 per cent to 60 per cent. The message is clear "" give up cigar and chew pan masala.

In regard to service tax what has been done is far from the comprehensive service tax which has been recommended by several economists. All that has been done is to impose tax on a few new services. They are services provided in relation to information technology software for use in business, service relating to management investment under Unit Linked Insurance Plan (ULIP) schemes, service provided by stock exchange, service provided in relation to supply of tangible goods without transferring the right of possession and three more services. They are unlikely to fetch much revenue. One important service which would have given more revenue is railway carriage service which the Finance Minister has not touched. And another such service is the one provided by lawyers. It seems to be a case of extending professional courtesy.

What is interesting is that a clarification has been given in the budget to say that banking and other financial service will include purchase or sale of foreign currency including money changing by authorised dealers. This is conceptually wrong. Buying and selling of foreign currency is just not service. It is trade. A tax on trade is only subject to Value Added Tax, not service tax. One just cannot impose service tax on something which is not a service.

Many people have gone to High Courts and the Supreme Court on the ground that certain imposts were not on service but the courts have held that they are service. If they are not service, then the courts would have set aside such imposts. It is most likely that the courts will set aside this impost of service tax on money changers because it is not a service, if somebody goes to the court.

The author is former member, Central Board of Excise and Customs