Centre is expected to initiate steps to merge service tax and excise duty

While the Union Budget is a much-awaited event every year, this year’s budget seems to have an entirely different level of expectation and enthusiasm around it. With a majority government formed in India for the first time in three decades, the people are keenly awaiting the Budget to understand the approach of the new government towards India’s social and economic development.

In the arena of indirect taxes, the talks around GST (Goods and Services Tax) definitely seem to have gained momentum post the formation of the new government. While the actual implementation of GST still seems to be far off, the government is definitely expected to take some concrete steps for an early introduction. One of the most important requirements of GST is the requisite amendments to the Indian Constitution. It is expected that the government could introduce a bill in this budget session in order to amend the Constitution. Also, a target timeline for framing draft GST legislation is expected with a definite road map, which not only ensures an early introduction of GST but also gives sufficient time for industry to comment on it. Some other areas which could be addressed are an effective and reasonable revenue neutral rate (RNR), resolution of States’ concern on loss of CST and so on. The government is also expected to initiate steps to merge the two Central levies, namely, service tax and excise duty. This would definitely be a positive step towards implementation of GST.

Besides GST, there are other changes expected as well. One of the key concerns of the industry has been delays in adjudication of matters and the lengthy process of litigation. Accordingly, measures are expected to be taken towards revamping the dispute resolution mechanisms such as timely adjudication of matters, increasing the number of CESTAT benches, widening the ambit of advance ruling and so on.

Another problem area for taxpayers, especially exporter of goods and services, has been the delays in processing of service tax refund claims. Stringent instructions are expected for the Department which include strict timelines for grant of refunds, reliance on core documentation such as CA certificates, and stoppage of frivolous requirements such as nexus between input services and output services.Other items on taxpayers’ wish list include clarifications on Central Excise valuation post the Supreme Court judgment of Fiat India, revamping of the Cenvat Credit Rules, 2004, to make them simpler and more transparent, and clarifications on the concept of ‘intermediary’ in place of Provision of Service Rules, 2012, which has been one of the most debated topics under the negative list-based taxation.

On the direct tax front, rationalisation of the indirect transfer rules, which provide for taxation of gains accruing on transfer of shares of foreign entity if it derives its value “substantially” from assets located in India, by making the same applicable on a ‘prospective’ basis tops the budget wish list across all industries. Retrospective application of said provisions, besides increasing the tax burden, also promotes uncertainties regarding withholding tax obligations for already concluded transactions that cannot be complied with and unwarranted protracted litigation.

Such newly introduced indirect transfer rules also impact taxability of shares received by shareholders in amalgamation of overseas entities. In an overseas merger, while direct transfer of shares of Indian company held by the amalgamating overseas entity would be exempt, subject to satisfaction of the prescribed conditions, however, indirect transfer of shares held by the shareholders of the merging overseas entity may still be taxed. This anomaly defeats the intent behind extending tax neutrality to transfer of Indian shares in an overseas merger. It is thus expected that an amendment should be brought to address the above anomaly.

A key concern of the taxpayers has been the approach of the tax authorities adopted in making high-pitched assessments, largely on account of frivolous issues, and recovery of such demands (or substantial portion thereof) to meet their collection targets. It is thus expected that in cases where adjustments made by the tax authorities are more than or equal to 100 per cent of the returned income, the demand should be stayed till disposal of the matter by the appellate authorities.

Another issue being faced by the taxpayers is delay in adjudication of cases at appellate levels, which results in repetitive adjustments being made by the tax authorities on a year-to-year basis, thereby resulting in protracted litigation. It is thus expected that measures should be put in place for timely adjudication and disposal of the matters at the appellate levels.

Thus, this year’s budget is expected to usher in significant changes from a direct and indirect tax perspective.

The author is Tax Partner, EY

(Views expressed are personal)

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