Budget 2011 from a GST perspective

Pratik Jain Siddharth Mehta | Updated on March 12, 2018

Transition can be made smoother for taxpayers by aligning the prevailing tax regime with the proposed GST system in terms of tax rates, exemptions and concessions, input tax credits, collection mechanism, and other procedural aspects.

By Despite the frantic efforts by the Union Finance Minister to bring all States on board for timely implementation of Goods and Services Tax (GST), delay now seems inevitable. While the Empowered Committee and the Central Government grapple with the impediments around GST, one wonders whether the Finance Minister would take this delay as an opportunity to make the GST transition seamless, by making some policy changes in indirect taxes, in the forthcoming Budget.

To begin with, one would expect the Finance Minister to lay down a clear roadmap for GST implementation. It needs to be appreciated that he may not be able to commit any specific timeline for the same, as GST is not just a Central subject, but would also require consensus of all the States represented through the Empowered Committee. However, this should not preclude him from talking about the concrete steps the Central Government has taken/ intends to take to expedite the transition.

Transition can be made smoother for taxpayers by aligning the prevailing tax regime with proposed GST system in terms of tax rates, exemptions and concessions, input tax credits, collection mechanism, and other procedural aspects.

The current excise duty rate of 10 per cent appears to be broadly in line with the likely Central GST (CGST) rate and hence, does not require any tweaking. As regards services, with States also getting the power to levy tax, the total tax incidence on services will go up under GST. To avoid an abrupt increase in service tax rate from current 10 per cent to say, 16 per cent under GST, the Finance Minister may consider increasing the current rate to around 12%.

The Finance Minister may also consider widening the ambit of taxes, wherever possible. One of the key pillars of GST is a broad tax base, with moderate tax rates. Thus, activities/ sectors which are currently outside the tax net, but are likely to be covered under GST, could be subject to service tax. This could include specific services in the healthcare and education sector.

Withdrawal of exemptions

Another step in this direction could be withdrawal of some of the existing Customs, Excise and Service tax exemptions/ concessions. The existing list of such incentives is fairly long, and some of the exemptions have perhaps outlived their utility. The Finance Minister may consider revoking some of these exemptions (especially in the not-so-priority sectors) to augment revenues, while moving a step closer towards GST.

There is also room for further simplification and rationalisation of the prevailing input tax credit (known as Cenvat credit) regime for manufacturers and service providers. For instance, some of the long standing controversial issues such as availability of credit for passive infrastructure to telecom sector, extent of nexus required between inputs/input services and the business activity, etc. can be addressed in the udget. In any case, one would expect the Government to address these issues under GST. Addressing these issues now itself would enable the Government to evaluate the ramifications on the exchequer/ taxpayers.


Convergence of service tax laws with excise laws is another area that the Finance Minister can look at. The GST laws are expected to be by and large uniform for manufacturers and service providers. However, under the current system of taxation, there are several disconnects under excise and service tax, both conceptually and procedurally. For instance, there is often a debate as to whether the concept of inputs/ input services is to be interpreted more liberally for service providers vis-à-vis manufacturers. Then there are other differences, such as the event triggering the tax liability (receipt of payment in case of service tax, as against removal of goods from the factory under excise). Also, unlike inputs, for input services, the credit can be claimed only after making payment to the service provider. While merging both the laws under one may not be feasible in such a limited timeframe, the Finance Minister may at least address some of these deviations. The budget proposals would take into account the other non-GST factors as well, such as inflation, fiscal deficit, and the economic recovery. While some of the measures discussed could have a bearing on these parameters, many of them can be implemented without having any adverse impact on them. Even if GST gets delayed further, rationalisation of the current tax regime would only make the taxpayers' lives simpler and hassle-free.

(The authors are Executive Director and Director respectively of Indirect Tax, KPMG.)

Published on February 12, 2011

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