Sukumar Mukhopadhyay: What Budget 2011 should do for advancement of GST

Budget 2011 should make all the preparations for the GST which may come next year or earlier. Maybe the rates and the Centre State equations are in doubt and are under active negotiations but surely the basic structure of how the Central Excise and Service tax will be merged at the central level are not in doubt. So the Budget should be done with an eye to the GST which is impending.

The situation prevailing before the next 2011 Budget is considerably different from the earlier one on two important respects. Last time the concern was about fighting the recession but now the concern is also about fighting the fiscal deficit without injuring the fledgling recovery. Moreover it has now been known officially that there will be a dual GST and even the character of it has also been indicated. Accordingly the suggestions for this Budget should be on these two counts mainly, not so much on the procedural part as everything will change soon enough, when the GST comes.

A. Fiscal deficit — The issue of the fiscal deficit will determine if the Finance Minister withdraws the boost that he has given in terms of reducing the rates of tax in excise, service tax and customs. Apart from the general rate, there were many exemptions given and the net impact has been a lower collection of indirect tax revenue. So the net impact has been much greater than what the tariff rates indicate. The result has been definitely a boost to manufacturing sector which has decidedly come out of the recession but the trend is still shaky. While deficit finance limit is important, there should not be a fiscal scare also. Short term budget deficits are not so problematic so long as there is growth which is substantially positive in the case of India. Contrary to what some economists think , the large deficit what the Indian Government is running now is not the result of runaway spending growth, Instead most of the deficit was caused by the ongoing economic crisis which has resulted in a plunge in tax receipts, which are temporary measures to stimulate growth and support employment. There is a strong and correct view of economists that running big deficits on the face of worst economic slump is actually the right thing to do. So in the next Budget the best policy will be to continue with the fiscal boost that was given last time and it may continue till the time the GST comes probably in April 2011 when all rates will change comprehensively.

B. Excise Tariff

(i) All entries in the Central excise tariff which are for unmanufactured goods must be removed from the Central excise tariff as they are not excisable.

(ii) In the excise tariff only ‘Nil’ should be there. All entries of ‘Blank’ should be abolished. ‘Nil’ and ‘Blank’ should not be written interchangeably. ‘Nil’ is the proper expression which means that the goods are basically excisable and the government at the present moment does not want to charge any duty on it. ‘Blank’ should not occur anywhere because it is redundant and, therefore, it creates confusion and litigation. One expression which is good enough should prevail rather than other redundant expressions. ‘Nil’ has an advantage over ‘Blank’ because in exemption notification the expression ‘Nil’ is there and not ‘Blank’ such as the general exemption No.6/2006-C.E. dated 1 March 2006, as amended, which contains all ‘Nil’ entries but no ‘Blank’. In the customs exemptions also the expressions are ‘Nil’.

(iii) In the customs tariff the expression ‘Free’ should be replaced by ‘Nil’. That will bring symmetry between the expressions in customs and Central excise tariff.

iii.         Thus in place of three expressions, ‘Nil’, ‘Blank’, and ‘Free’ there should be only one expression: ‘Nil’.

C. Service tax For making preparation for the coming GST, there needs to be a complete change in the tariff structure of service tax now. The government has been proceeding on the basis of selective approach , that is, introducing a few services every year. Over a period of nearly 16 years since 1994 when service tax was first introduced, more than hundred services have come under the tax net. There are not too many services left which will give substantial revenue. The only exception is transport services. Therefore, a time has come to consolidate whatever taxes have been imposed into a viable and more workable system where it is not necessary to issue circulars after circulars to clarify matters. Comprehensive service tax will put things into a more theoretical groove and pave the way for introducing GST next year. Not introducing a comprehensive service tax in this Budget will be a case of missed opportunity to prepare for the massive change that GST will usher in.

D. Comprehensive goods tax-- At the same time a comprehensive goods tax (excise with Cenvat) should be introduced in this Budget. Now there is distinction between raw materials and capital goods for the purpose of Cenvat and rigidity of input tax credit between goods and services. They should be all abolished so that for one year the preparation can continue for the ultimate transition to merger between goods and services. (a) Distinction between capital goods and inputs to be abolished;

(b) Reference to manufacture has to be reduced in favour of ‘use’.

(c) It should be laid down that all goods used should be allowed Cenvat Credit excepting those in the banned list.

(d) Interchangeability of input from service tax and central excise should be made complete without any restriction.

(e) Other suggestions are given in the article below.

(f) A task force should be constituted to work out the simplification with an economist to chair the task force.

E. Cenvat

The Cenvat Credit Rules made in 2004 as amended several times are as elaborate as they are complicated. I am quite sure that no taxpayer, big or small, will ever be able to avail himself of Cenvat credit on his own without having a lawyer to help him. If he does try, he is most likely to get slapped with a show-cause memo for following the wrong rule or procedure. Years ago when the Rules started, it was simple. Now while all senior functionaries talk of simplification, day in and day out, the Rules have become most complicated. The availing of credit is subject to as many as seven provisos which have got several subclauses and a daunting number of notifications which keep on changing all the time.

F. Unjust Enrichment

This Budget will be an excellent opportunity for doing away with the law of denying refunds on the ground of unjust enrichment. Since its introduction it has been one of the most litigated laws and has achieved nothing by refusal of refunds to assessees on flimsy grounds. This has also contributed to unfair means by assessees since they know that this law practically debars them from getting refund without protracted litigation. The simplification that GST will bring should not be marred by the complication of denying refund for so-called unjust enrichment. There is another reason why the law of unjust enrichment has to be done away with. When GST comes, the laws of the States and those of the Centre relating to the indirect taxes have to tally with each other. In the states, there is no law of unjust enrichment. So there cannot any law of unjust enrichment in the Center also relating to the central excise and service tax. And for the sake of parity the same cannot remain only for Customs alone. So it is better that in this Budget of 2011 itself the law of unjust enrichment is abolished to pave the way for the GST.

G. Area-specific exemptions

What should be done for such area-specific reconstruction on the fiscal front are the following:

1.         Develop the infrastructure to ensure availability of raw materials, adequate roads and other transport facilities, skilled labour supply, adequate consumer market, availability of credit and other banking facilities, and adequate supply of power, water, telecommunication, and other public utilities.

2.         Make the inputs duty-free and not the outputs. The way to do it is to give fiscal relief in terms of exemption from Central excise and sales tax to cement, steel, machinery, etc., used in making these industries. An end-use condition can be introduced so that the exemption cannot be easily misused. In the case of earthquake at Latur this sort of exemption was used with proper result.