» Business » Budget 2012: A good move towards GST, but reforms neglected

Budget 2012: A good move towards GST, but reforms neglected

By Sukumar Mukhopadhyaya
March 17, 2012 18:14 IST
Get Rediff News in your Inbox:
This Budget must be complimented for having taken two very positive steps towards the goods and services tax, or GST.

The first is the introduction of comprehensive service tax with a negative list. This is a big event. This has given a decent burial to the selective list of 120 services with corresponding definitions and innumerable circulars covering the whole gamut of the service tax structure.

Now, all services will be taxed except those in the negative list. The second is the introduction of a rate of 12 per cent for central excise duty and service tax, which is widely expected to be the GST rate.

However, we cannot celebrate this fundamental reform wholeheartedly mainly due to two inadequacies.

First, certain other basic reforms in customs and central excise have not been introduced; and secondly, the Budget has introduced new exemptions across the board, apart from the existing ones. The exemption raj will be further widened.

Exemptions in service tax have been introduced, even, in addition to the negative list. The negative list is a list of those services for which no duty will be charged. Why another list of exemptions has been introduced has not been explained in the Budget. It is most likely that the negative list will be the same as agreed to by the states. The exemption list will cover those that can be changed by the Centre.

The idea of comprehensive service tax was to do away with the specific list of 120 services. But now, to have a comprehensive service tax with a negative list and also an exempted list will preserve precisely the old system. This reminds me of the story of an officer who destroyed all the old files while keeping their photocopies.

The problem of having an additional exemption list is that the states, too, will ask for their own list of exemptions. Then the exemptions will proliferate in a competitive manner. Hidden subsidies have continued and have even proliferated.

The old exemption for the import of machinery for Metro railways has remained, and now an exemption has been given to the general railways for installation of safety equipment.

Every Budget has its share of populist exemptions and this one has not missed that privilege. The examples are the partial exemption for iodised salt and the absorbent material for geriatric diapers.

Regarding the increase in duty from 10 per cent to 12 per cent, both in respect of excise duties and service tax, some criticism has been voiced that it is possibly inflationary. I do not agree with this view for the following reasons.

Firstly, the input duty credit (Cenvat) is nearly 60 to 70 per cent. The net effect of two per cent higher duty is reduced to that extent. Secondly, the higher collection of duty will reduce the fiscal deficit, and this is anti-inflationary. Lastly, the rate of 12 per cent is being viewed as a stable rate. Stability is good for industry, trade or service.

Regarding service taxes, I must point out that some of the exemptions are quite startling. The best example is that of the exemption to the cinema industry from service tax on copyright relating to the recording of cinematographic films.

The reason stated is that, apparently, cinema has played a role in unifying the country. Such generosity towards cinema is not unknown. Dr B C Roy, former chief minister of West Bengal, gave a subsidy to Satyajit Ray's Pather Panchali, from the funds of the Public Works Department, on the grounds that path (road) was a matter within the PWD's jurisdiction.

The new law regarding service tax has been written in an unduly complicated manner. The definition of "service", all over the world, is only in one sentence. Here it has been made half-a-page long, and has included explanations that should not have been there.

The functions performed by MPs, MLAs and so on have been excluded. They should have be included in the negative list. Their services are conceptually "service".

If the government does not want to charge them tax, just like the government does not want to charge the services of government officials, they should have been included under section 66D, which is the negative list. What is the difference between the services of a government officer and the services of an MP? Conceptually, none.

The Act has created one more concept, of "declared service", under Section 66E, which is entirely unnecessary. This will just allow the government to arbitrarily put doubtful services under this heading. The charging section (66B) has also been defectively worded. The rate of 12 per cent has been included in the charging section whereas it should have been said "as in the schedule".

The government may have, in future, two or three rates. And then an amendment would be easy - but a Section cannot be so easily amended. In the charging section, the expression "taxable person" should have been introduced in the place of "person", and the definition of taxable person should have been given as "any person who independently carries out any economic activity whether or not for a pecuniary profit".

The concept of economic activity should have been introduced in the service tax law. Also, I wonder why "trading of goods" has come under Section 66D(e). Trading is not a service. So how could one put it in the negative list? This is a clear case of contradiction in terms.

In customs, the so-called peak rate of non-agricultural goods has remained unchanged at 10 per cent. But there are 13 higher rates - namely 15, 17.5, 25, 30, 35, 40, 50, 60, 65, 70, 85, 100 and 150.

These could have been combined into 30, 50, 100 and 150. Similarly, the lower rates are 10, 7.5, 5 and 2.5. They could have been combined into 10 and 5 - in which case, half the exemptions would have vanished.

In excise, the extra imposition of ad-valorem duty of 10 per cent on cigarettes is a very bad idea.

In seems the memory of litigation on the issue of valuation of cigarettes from 1980s until the recent past, the Supreme Court judgment, and the review petition to the Supreme Court has already died a premature death in the minds of the Budget drafters. <hr>

<B>Sukumar Mukhopadhyaya</B>, <I>Former Member, Central Board of Excise and Customs</I>

Union Budget 2012-13: Complete coverage
Get Rediff News in your Inbox:
Sukumar Mukhopadhyaya
Source: source

Moneywiz Live!