The increase in the rate of service tax and CED by 2% would translate into 2% to 2.5% higher price for goods and services across the board, for the common man.

This can potentially fuel inflation and we have to wait for the Reserve Bank of India to reverse the repo rate downward.

In addition to the above, the merit rate of CED is increased from 5% to 6% and the 1% merit rate of CED imposed on 130 items has been increased to 2% barring a few exceptions such as coal, fertilisers, jewellery and mobile/ cellular phones.

Nevertheless, a status quo has been maintained on the basic customs duty (BCD) rate.

The finance minister has proffered relief proposals for certain sectors such as agriculture, infrastructure i.e. power, civil aviation, manufacturing (such as steel and textile) and health & nutrition as these sectors merit special consideration.

The burden on producers of thermal power is attempted to be reduced by proposing full exemption from BCD and a concessional countervailing duty of 1% on thermal coal. So also, exemption from BCD has been proposed on natural gas, LNG, uranium used for power generation.

There are proposals for complete exemption from BCD on parts of aircraft and testing equipment imported by MRO for maintenance & repair of aircraft and on coal mining projects.

The incidence of duty on branded readymade garments has been reduced from 4.635% to 3.708%.

The majority of the indirect tax reforms proposed by the finance minister are predominantly with the objective of reducing the fiscal deficit and taking a step closer to the desired Goods and Service Tax (GST) regime.

The finance minister indicated that GST IT Network would be operational by August 2012 and has picked up the pace towards GST by proposing to tax all services except the 17 services included in the negative list of services.

Apart from the negative list the finance minister has proposed an exempted services list which includes services provided by charities, religious persons, sportspersons, performing artists in folk and classical arts, individual advocates providing services to non-business entities, independent journalists and services by way of animal care or car parkings are proposed to be exempted.

Recognising the contribution of the film industry to the Indian society, in its centenary year, finance minister Pranab Mukherjee has proposed to exempt the film industry from the levy of service tax on temporary transfer permitting the use or enjoyment of a copyright in cinematographic films.

The indirect tax reforms such as changes in abatement rates for increasing the portion of taxable value, synchronisation of Service Tax and Central Excise compliance procedures, expanding the eligibility of Cenvat credit for various sectors in order to reduce the cascading effect of taxes and changes to rationalise the Point of Taxation Rules indicate a steady movement towards GST.

All in all, the finance minister has proposed Indirect Tax reforms which may appear difficult now but are inching the economy towards GST which will be a welcome and desired change for the various industries functioning in the Indian economy.

A gradual implementation of the GST regime in due course of time will definitely prove that Pranab Mukherjee had aptly quoted Shakespeare’s Hamlet before announcing the
tax proposals.

Source: Daily News & Analysis, India,  dated 17/03/2012