Administering a painful medicine

A painful medicine indeed! On broadly apprehended lines, the Finance Minister has finally conceded to fiscal pressures by increasing central indirect tax rates by 20 per cent (from the existing 10 per cent to 12 per cent) on excise duty and service tax. In addition to this, the other generally expected introduction of the “negative list approach” of taxing services is also proposed to be introduced from April 1, 2012. Certain sectoral concessions are also provided, but largely the Finance Minister has maintained an objective stand so far as indirect taxes are concerned. The single biggest change in the indirect tax structure is the introduction of the “negative list” approach for taxing services. Barring 17 specified activities, almost all activities carried out by a person for another for a consideration would be considered as a taxable service. Thus, activities such as ocean transport, non-compete arrangements and other similar activities that were historically outside the ambit of service tax are now proposed to be covered as taxable. Consequential and far reaching structural changes in service tax have also been proposed, including alignment of service tax compliance with central excise (namely, monthly return filing), introduction of “non-monetary consideration” as taxable and so on. A detailed study is essential to ensure that the impact areas are comprehensively analysed for businesses to align themselves to the new service tax structure, effective from April 1, 2012. Partial relief is granted to certain industry segments, particularly the entertainment industry, which is exempted from the levy of service tax. The proposed “negative list” includes activities such as those performed by the government or local authority, services relating to agriculture sector, trading of goods, transmission and distribution of electricity and primary and vocational education that are proposed to be kept outside the purview of the service tax net. While there has been a complete recast in the manner of taxing services, central excise duty on goods appears fairly simpler since only the rate of tax has been increased from the existing general rate of excise duty of 10 per cent to 12 per cent. Further, the excise duty of 1 per cent introduced on 130 specified items in the previous budget is also increased to 2 per cent without CENVAT credits. Items such as cement, petroleum products, liquor and tobacco are especially impacted. This increase is also likely to have a cascading effect in terms of levy of value added tax / sales tax on such increased component of excise duty. The rates of duty on manufacture of large cars (engine capacity of more than 1500cc) have been increased from the existing peak rate of around 22 per cent to around 27 per cent. The common man is provided only sporadic relief on items such as branded garments (where excise duty is reduced from 4.63 per cent to 3.70 per cent). On customs duty, without changing the general rates of basic customs duties, the Finance Minister has partially acceded to the demand of taxing diesel vehicles by raising the basic customs duties on specified SUVs from 60 per cent to 75 per cent. Certain sectoral concessions are granted to the power generation, shipping, textiles, mining and civil aviation sectors by providing duty concessions or exemptions on certain items. The economic impact of the above changes is likely to increase the general prices of manufactured goods and services. Coupled with the cascade impact of state taxes, it remains to be seen how the industry and common man absorb this painful medicine and hope that the “cruelty” meted out by the Finance Minister translates into the promised “kindness” in the future. The author is Senior Tax Professional in a member firm of Ernst & Young Global.