Tax reforms, 2010 and beyond     

Beginning of the 2000s carried huge expectations around indirect tax reforms in India, reminisces Pratik Jain, Executive Director, Indirect Tax & Regulatory Services, KPMG India, Gurgaon. “It was expected that the reform process, which began in early 1990s, would get a definite direction and translate into tangible changes.”

These expectations were further augmented with the Kelkar Committee report on indirect tax reforms in October 2002, which recommended sweeping changes in the structure, ambit and administration of the tax system, adds Pratik, during the course of a recent year-end email interaction with Business Line.

Excerpts from the interview:

What were the policy expectations to be fulfilled by the end of the first decade?

These included the simplification of tax regime by reducing various exemptions, concessions and rate slabs, expansion of service tax on all services, integration of excise and service tax legislation, removal of inverted duty structure, and more importantly implementation of State level VAT by April 1, 2003.

At the close of 2009, where are we?

Looking back at the time since the beginning of the current decade, it's really a mixed bag.

To a large extent, multiple rate slabs under customs and excise laws have been streamlined. The three-tier rate structure under excise has now been largely converted into a single rate. Customs duties have progressively gone down and the inverted duty structure on many products has been removed.

However, under both these laws, there are still various exemptions and concessions, clearly an area where much more could have been done.

Integration of excise and service tax credits in 2004 was another major step towards reforms. It provided an opportunity to industry to reduce cost of production by setting off their input service tax against excise duty on output.

Implementation of State-level VAT in most States from April 1, 2005, was perhaps the most radical reform till date, which required closer coordination and cooperation between the Centre and the States. It is somewhat disappointing to see varying legislative provisions and rates across States, removal of which was clearly one of the prime objectives of VAT. Nonetheless, there is a general consensus that VAT has largely been successful, both for States as well as businesses.

For some reason, we have not been able to comprehensively levy tax on services under a separate legislation. With issues such as multiple exemptions, seeming overlapping taxable categories and absence of a robust mechanism for refund to service exporters, it is not surprising that taxation of services has resulted in substantial disputes and litigation.

For 2010, what should be the agenda?

As we embark upon the year 2010, the country is expectantly looking at the largest and most radical reform — the implementation of a nationwide Goods and Services Tax (GST) regime.

Though it would be a dual GST regime, with both the Centre and the States having rights to levy and administer their respective tax, there is a general consensus that it would be a significant improvement from the present system.

In many ways, GST will change the manner in which business is done in India. The industry expects that it would be a much simpler regime, where hopefully taxes will not impact the business decisions.

There are indications that the deadline of April 1, 2010, may be missed, which is not necessarily a bad news. After all, history will not judge us by the speed of tax reforms, it needs to be well thought out and find acceptance from all stakeholders.