Tax reforms for economic growth

Amidst a gloomy economic scenario, that saw the growth rate slump to 6.9 per cent (estimated) in 2011-12, much lower than the growth rate for the previous years, the Finance Minister has tried to dish out a budget that would give economic growth a boost. While the agricultural and service sectors have continued to grow as expected, it is the manufacturing sector that has been a cause for worry and reason for the widening fiscal deficit. Add to this global turmoil and increasing inflation, and the Finance Minister had a difficult task while presenting the tax proposals for 2012.

The majority of the indirect tax reforms proposed by the Finance Minister are primarily with the goal of reducing the fiscal deficit and taking a step closer to the desired Goods and Service Tax (‘GST') regime.

One such major reform is the proposed introduction of a negative list of services, whereby the present list of 100-plus services would be done away with, with all services to be taxed, barring a small list of services which wouldn't be liable to service tax.

This negative list includes services provided by the government, except specified services where they compete with the private sector, pre-school and school education, entertainment and amusement services, large parts of public transportation including inland waterways, urban railways and metered cabs.

Further, healthcare, services of sportspersons, performing artists, independent journalists have also been included in the exempt list of services. This could have the effect of bringing within its ambit a plethora of services, which presently aren't liable to service tax. Recognising the contribution of the film industry to the Indian society in its centenary year, a specific exemption from Service tax has been proposed on copyrights relating to recording of cinematographic films.

FISCAL DEFICIT

As a means to reduce the fiscal deficit, the Finance Minister has proposed to increase the service tax rate and excise duty rate from the present 10 per cent to 12 per cent. Further, the excise duty rate of 1 per cent (without CENVAT credit) on 130 specified items introduced in last year's budget has been increased to 2 per cent, and from 5 per cent to 6 per cent for assesses' availing CENVAT credit.

As an industry requiring special focus, aviation has been granted special tax concessions, such as full customs duty exemption on parts and testing equipments imported by MRO operators for maintenance and repairs of aircrafts to help reduce its high operating costs.

Further, the incidence of excise duty on the branded readymade garments has been reduced to 3.708 per cent from 4.635 per cent.

On the other hand, the Finance Minister has held high imports of gold and some other precious metals as a primary driver for the current fiscal deficit, and has, therefore, doubled the basic customs duty and excise duty on gold and platinum.

INFRASTRUCTURE FOCUS

Continuing its focus on the development of infrastructure, the Finance Minister has provided full exemption from basic customs duty and a concessional CVD of 1 per cent to steam coal for a period of two years till March 31, 2014, and full exemption from basic duty to natural gas, LNG, uranium used for power generation.

Once again, the Finance Minister stopped short of commenting on the date when GST would be implemented.

NEGATIVE LIST

However, the reforms proposed in the Budget, like the negative list of services, alignment of service tax and excise provisions in terms of common simplified return and rate, continue to reflect the keenness of the Government to implement GST at the earliest. The fact that the GST network would be operational by August 2012, and significant progress made in drafting of the GST legislation should do good to resolve the deadlock in implementation of GST.

While the Finance Minister quoted Shakespeare's Hamlet in his speech, the Finance Minister has also made sure that the Budget was nothing short of a Shakespeare in drama.

The indirect tax proposals would significantly contribute to reducing the fiscal deficit by generating close to Rs 46,000 crore of additional revenue to the Government. However, the response of the industry to such proposals, and the impact on the common man in particular, is something that would be interesting to watch.

(The author is Head, Indirect Tax, KPMG India.)

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