Sukumar Mukhopadhyay; BUDGET: 2010-11 Industry friendly, short on reforms

This analysis relates only to indirect taxes and not to the general aspects of expenditure on different projects and reducing subsidy etc.

In regard to indirect taxes the Budget begins by saying that the major objective that has guided the making of the Budget is the need to achieve some degree of fiscal consolidation without impairing the recovery process and moving forward on the road to GST. So far as the fiscal consultation is concerned there is no doubt that the Budget has achieved something by increasing the general rate of Central Excise from 8% to 10%. This will help in reducing the fiscal deficit to some extent and also will bring the rate of excise and the service tax rate to the same level. 

However, this is the only move towards moving forward to GST. It is too little and will not serve any purpose. For we do not know what the GST rate will be. It is most likely to be more than 10% which can only be the Revenue neutral rate since there will be so many exemptions withdrawn. States also will charge State GST on the same base as that of CGST. So the States will have a big say in fixing the rate. It has also to be a revenue neutral rate (RNR) which therefore will involve a lot of arithmetical exercise involving all the taxes which will be subsumed in the GST. It is most uncertain what it will be. Just making two rates equal is no important advancement towards the goal. It will, however, make Cenvat credit simpler and to that extent it is welcome.  

Again 8% is not the only rate in Central Excise, though the most predominant rate. There are several rates like 2, 4, 8, 12, 24, 37.5, 42 and many specific rates which should have been made to converge towards 8% to a substantial extent in this Budget. The specific rates should have been advaloremised.

The tariff should have been simplified now for smooth subsumation into GST. There are nearly 283 exemptions, with 9 lists and 54 conditions in the main notification. There are many more others. While removing all exemptions would be difficult at this stage,  standardization could certainly be done by sticking to two rates like 10 and 5 (apart from nil). On the other hand so many exemptions have been added in this Budget. 

This Budget has missed an opportunity for introducing comprehensive service tax which would have given the            Continued from page 1

tax payers and the tax collectors an advance opportunity to get settled with the new concept of having all services as taxable except those in the banned list. This was the most appropriate stage to bring in the comprehensive service tax. The reason is that the GST is one year away. When all taxes are subsumed together and suddenly all the taxable events change, exemptions vanish and the concept of manufacture also evaporates, a whole lot of new concepts will bring in a tremendous splurge of unknown circumstances. If the comprehensive service tax was introduced now, all the stake holders would have got used to it in the next one year. This would have been a great preparation time for GST.

In regard to exemptions this Budget has followed the very old pattern of exempting goods even if not necessary, sometimes for imaginary and populist reasons without paying any heed to the lot of the importers and manufacturers who will be burdened with interpretation problems even more than before.   Many exemptions have been given on several types of machinery, industrial, agricultural, transport, electronic etc. These are all exemptions mostly to the extent of 2 ½ per cent and are not well deserved. Micro-oven parts do not deserve any exemption as they are not used by the Aam Admi to whom the Budget is dedicated. Several such minor exemptions have been given which are end-use based such as special grade stainless steel for the manufacture of orthopaedic  implants, parts of the battery chargers for hands free headphones etc.  These are costly items and the duty foregone element will be extremely negligible.  These exemptions will crowd the columns of tariff and burden the arrears of end- use bonds. Such exemptions are breeding ground for unfair practices. Exemptions with fine distinctions are being introduced.  Goggles will attract 10 per cent duty but goggles which correct vision will attract nil duty.  Balloons will pay 10 per cent duty but not toy balloons.  Making these fine distinctions will keep the officers busy, the manufacturers hassled and readers of newspapers entertained when Supreme Court judgements come out on them. These exemptions remind us of earlier exemptions on bindi, vanity bag and writing ink. 

Industry-wise analysis

Now we all examine what the different impacts are on industries as separate sector.  In regard to air conditioning and refrigeration, cold storage/cold room (including for farm level pre-cooling) or industrial projects for preservation, storage or processing of agricultural, dairy, poultry, aquatic and marine produce and meat has been notified under project import and will attract customs duty of 5%.  Excise duty has been increased from 8% to 10%.  This measure has been beneficial to the industry.  For automobiles, the changes are the following:

• Excise duty has been increased

on all vehicles by 2%.

• Excise duty on all electrically operated vehicles and their specified parts has been increased from

nil to 4%.

• Excise duty has been fully exempted on self-loading or self-unloading trailers, and semi-trailers for agricultural purposes.

• Chassis fitted with engines have also been brought under excise valuation based on retail price with abatement of 30%.

For capital goods industry, the changes are the following:

• Excise duty has been exempted on goods supplied to mega power projects from which supply of power has been tied up through tariff based competitive bidding or a mega power project awarded to a developer on the basis of such bidding.

• Excise duty has been exempted on initial setting up of solar power generation project or facility.

• Monorail projects will attract customs duty of 5%.

When I have attended seminars on the Budget organised by the Associations of industries I found that they are generally satisfied with the changes brought in regard to the industrial sector. 

One retrospective amendment has been made in regard to service tax.  It is in respect of  the service of renting of property for commercial purposes. Amendment has been made in the definition of “Renting of immovable property service” to provide explicitly that the activity of renting itself is a renting service. The change has given retrospective effect from 1.6.2007. This treatise seeks to explain the rationale and the background for the retrospective amendment for a proper appreciation of this action in the Budget.             

This amendment has been made to settle an issue which became quite controversial when  in a very recent judgement of the Delhi High Court in the case of Home Solution Retail India vs UOI 2009 (237) ELT 209 (Del) held that renting of immovable property is not service . Section 65(105)(zzzz) of Finance Act 1994 reads “to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce”.  The High Court had held that service tax is value added tax and since there is no value added in renting of property  it is not service. And it is not service independently also  the terms of  Section 65(105)(zzzz)”. Detailed justification for amendment is the following:

(i) Renting of immovable property is a service. And service tax is a tax on rent. It is not a property tax. It is a tax on the service given by the property for the time being when it remains in the possession of the person who has taken it on rent. It is just like the service of pandal, or shamiana or modem or telephone in telecommunication service or similar material objects whose services are taken on payment for the time being. The distinction that has been made with the judgment in the Kalyan Mandapam case is really not valid.

(ii) Service tax is not a value added tax by itself. Only if there is the system of input credit of the tax already paid that it becomes a value added tax. That is how it has been designed in India but basically it is not a value added tax. It can be also a turnover tax as it was when it was introduced in 1994 in India.  Since it is not a value added tax, the question of value addition does not does not determine the issue whether the tax is legally valid or not . There is no need of value addition at all since all that is necessary is that there is a turnover from the service. Now after  the amendment, the question of value addition has become irrelevant. The amendment has been a much better step than approaching the Supreme Court and waiting for its decision which in any case will take time during which period uncertainty would continue. It had been contended  by the Delhi High Court   that the expression ‘service in relation to renting of property’ does not in terms  include ‘service in renting of property’. Now by making an explicit provision for providing that renting of property is a service, the probable lacunae has been made good. The general power of retrospective amendment has also been upheld by the Supreme Court in many cases, one of them being in the case of  Easland Combines vs CCE Mumbai reported in 2003 (152) ELT 39 SC .  However, the power is not unlimited. Here, in any case, no challenge can come on that count since the retrospectivity is limited to three years and not extended over an unreasonably long period. And during these years the tax has been paid already. So there is no hardship also.

Conclusion is that the Budget has been generally good in the sense that the industry has accepted it as friendly. This was necessary when Indian economy is coming out of recession. However, from the point of view of reforms, it has done practically nothing. On the other hand by giving too many unmerited and populist exemption, the actual working of the tariff have been made more difficult than before.