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Updated: February 17, 2010 12:20 IST

Indirect tax reform imperatives

D. Murali
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Corporate India’s hope and expectation for indirect tax reform reached a new high after the announcement of the Government’s intention to introduce the Goods and Services Tax (GST) regime in India, observes Vivek Pachisia, Tax Partner, Ernst & Young. In light of the complexity, anomalies and ever-growing litigation that currently surround indirect taxes, the proposed implementation of GST on April 1, 2010 was unanimously acknowledged by the corporate world as a radical step forward by the Government in carrying out the biggest-ever indirect tax reform in the country, he adds, during a recent pre-Budget email interaction with Business Line.

“While the urgency for implementation of GST cannot be emphasised more, given the uncertainty around its introduction, current level of preparedness and the potential political challenges around such a significant country-wide tax reform, the Government may have to adapt Budget 2010 to address the need for more immediate tax reforms and rationalisation measures under the existing indirect tax regime,” Pachisia adds.

Excerpts from the interview.

On top priorities.

The Central Government should firstly address its unfinished agenda on elimination of Central Sales Tax (CST), which was committed for a phase-out since the introduction of Value Added Tax (VAT) regime. Elimination of CST is a crucial step towards achieving the objective of enabling free-trade between States and paving the way for implementation of GST.

While the rate of CST stands reduced from 4 to 2 per cent pursuant to the introduction of VAT, it is imperative that the upcoming Budget addresses the need for a complete elimination of CST – to eradicate its tax cascading impact.

On the need to reduce complexity.

The advent of service tax has led to manifold increase in the complexity of indirect taxes. The legislation governing the taxation of services (chapter V of the Finance Act, 1994) remains unclear and ambiguous with many loopholes.

The Indian industry, for some time, has been faced with several instances of multiple taxation, viz. the levy of VAT and service tax on intangible (such as the right to use software and IPR or intellectual property rights), works contract and so on, being the prime examples of such instances of multiple levies.

The definition of taxable service includes “in relation to or in connection with, in any manner, directly or indirectly,” which renders the scope of taxable services unclear and subject to differing interpretations by the various sections of the business/ Revenue authorities.

The service exporters are unable to prove that their services are exported and ‘used outside India’ to qualify for exemption from service tax on export of services. Litigation in such an environment is becoming a matter of routine.

It is now long overdue that the Government divorces the taxation of services from the Finance Act, 1994 and provides a separate, more comprehensive legislation for levy of service tax – with a focus on reducing litigation and a differentiated approach to make the legislation more assessee-friendly.

On refunds and rebates.

Another area of concern for urgent reforms is with regard to refund / rebate for exporter of service and Special Economic Zones (SEZ). While the Government has notified a time-bound refund mechanism and issued various circular from time-to-time advising its effective implementation, the authorities in various tax jurisdictions are following divergent practices in the absence of a streamlined and comprehensive procedure for granting refunds – leading to significant delays, denial and protracted litigation.

A redefined, transparent and non-discretionary process in the upcoming Budget would go a long way in making the scheme practically effective and beneficial for the exporters.

Given the initial signs of economic revival, there have been indications of partial roll back of incentives by the government which were intended to prop up the beleaguered economy. The Finance Minister would need to tread a fine line between continuing to provide a thrust to the tax reforms to support the revival without stretching the already strained finances of the Government.

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