The Hindu Business Line : Positives on the indirect tax front

Though this year’s Budget is the last of this Government’s in the run-up to general elections, the Finance Minister has presented a rational Budget that augurs well for the economy.

The biggest highlight of this year’s Budget is the reduction of the peak rate of excise duty from 16 per cent to 14 per cent on all non-agricultural goods. This impacts prices of both domestic as well as imported goods. Besides the reduction in the peak rate, the Finance Minister has also reduced the excise duty on two-wheelers, small cars and hybrid cars giving the automobile industry a boost.

Healthcare was another sector which has benefited this year, with the Budget cutting down Customs duty on specified lifesaving drugs and bulk drugs while slashing by half the excise duty to 8 per cent on drug formulations. Reduction in the basic Customs duty on project imports from 7.5 per cent to 5 per cent should benefit and promote additional investment in the infrastructure sector.

Another promising change is the continuation of the Central Sales Tax (CST) phase-out. The Finance Minister announced the reduction of the CST rate from 3 per cent to 2 per cent from April 1, 2008. This is welcome as CST is one tax that is inflationary, since it is non-creditable. Therefore, it is contrary to the trend in both State VAT and in excise and service tax, of indirect taxes being creditable through the supply chain.

Further, the requirement to reverse the input credit for capital goods if they are removed from the premises of the service provider for more than 180 days has been removed. This would hugely benefit the telecom sector where capital goods, such as towers and handsets, are installed at the premises other than the service provider’s for indefinite periods.

Software development

The introduction of a new taxable service category for taxing services provided in relation to information technology software, making software development taxable, comes as a blessing in disguise for software exporters.

Software exporters would now be eligible for refund of input taxes (on input services and inputs), which were a cost earlier. Further, the export rules have been amended and now services provided through a leased line or through the Internet and performed on software located outside India would now be considered as exports.

This is another positive for the industry as services to clients outside India such as software maintenance, which did not qualify as exports earlier would now qualify as exports.

Freight transport

Another change would benefit freight transportation companies. The service tax would apply to only 25 per cent of their charges for goods transportation, but no credit would be allowed for their input taxes. To bring a smile on the faces of small service providers, the threshold limit for levy of service tax has been increased from Rs 8 lakh to Rs 10 lakh.

Certain other measures such as revision of the amount for self-adjustment of excess service tax from Rs 50,000 to 1,00,000, increasing the time period for filing the revised return and payment of service tax in advance are all positive steps in the direction of a taxpayer-friendly environment.

(The author is Partner and Leader, Indirect Taxes, Ernst & Young.)