One has been hearing the negative aspects of the Budget
too often. Economists have been denouncing it for its
high percentage of fiscal deficit and not providing
enough for the different social programs. Others are
talking against it for not curtailing subsidies enough
or for not creating a more favorable climate for
investment. Those writing on indirect taxes are eloquent
about not reducing exemptions but giving more of them.
All of them may be partially correct, but not fully
since certain things have to be done only in the
circumstances beyond which the Budget cannot go. For
example, fiscal deficit should be reduced but how one
does it without increasing tax has not been pointed out
by the economists. So, one must also emphasize the
positive aspects, in order to make the assessment fair.
First, a big step towards the GST is the introduction of
the comprehensive service tax in place of the 17-year
old selective list, which has now swelled to 120
services with 120 definitions and 1,200 circulars , (on
an average of 10 circulars per service).
It was a circular raj and a
paradise for service tax practitioners. Now, for the first time all services
will be chargeable to tax. Only those in the Negative List will not be charged.
It is transparent and reasonable as is in the whole world wherever the GST is in
vogue. Though there is an exemption list, it is an aberration, which may be
corrected later, if better sense prevails, ever. The best part of the
comprehensive service tax is that it makes every service liable to tax and there
is no need for a definition for any service to be chargeable to tax. Only those
in the Negative List are not being taxed. They are basically chargeable to tax,
but the government in its wisdom is not charging them. This list has 17 heads,
which have reportedly been agreed to by the states also.
The reason why this comprehensive
service tax is greatly significant is that next year it will be easy to bring in
comprehensive goods tax (excise duty). That will mean, all goods will be
chargeable to excise duty except those in the Negative List. Once this is done,
possibly in the next Budget, then the two can be easily combined to make a
Comprehensive Goods and Services Tax at the central level. At that stage, at
least nearly half of the GST will have been done even though the full GST may
get delayed due to lack of agreement with the states.
The second positive point is the increase of the rate of duty of excise and
service tax from 10 to 12 per cent. Some economists have said that that it will
lead to cost push inflation. This is not fully correct since inflation depends
on a plethora of factors and on monetary policy also.
Also we have to take into account that the input duty credit (Cenvat) is nearly
60 to 70 per cent. The net effect of 2 per cent higher duty is reduced to a
large extent. Again, the higher collection of duty will reduce the fiscal
deficit which is anti inflationary. Lastly, the rate of 12 per cent is being
viewed as stable rate for the ultimate GST rate. Stability will do good to the
industry, trade and service.
The third move, which is very positive in nature is that with the retrospective
amendment to restate the legislative intent of the Section 9 and 195 of the
Income Tax Act, corporates cannot create any special purpose vehicle (SPV) in
any tax haven just by doing some paper work and shift Indian capital gains to
those havens. Contrary to intense criticism by some, this amendment will bring
clarity and stability in the approach, which will make coming of foreign capital
Last but not the least, other positive sides to the budget are the government's
decision to allow the corporate sector to raise funds at competitive rates
globally, allocate higher amounts for infrastructure development and for social
sectors, and an affirmation on pruning subsidies.