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GST on the anvil: Budget can clear the air over input tax credit, unutilised education cess

It is finally the season for Union Budget 2017, the most awaited event of this year primarily on account of imminent arrival of Goods and Services Tax (‘GST’). With the winter session of Parliament being washed out completely due to political logjam over demonetisation, it is expected that GST introduction may be further delayed by few months. In view of introduction of new indirect tax regime in upcoming months, it seems that this year’s budget may not witness any substantial machinery changes in the current indirect tax legislations. However, government may look at extending some immediate sops to the assessees to further facilitate rationalisation and ease of doing business, in line with overall spirit of GST.

The Central Board of Excise and Customs (‘CBEC’) has already sought suggestions on facilitating the movement towards GST through amendments of service tax rules and procedures as well as procedural simplification. Further, recent amendments have been introduced in service tax rules/ notifications thereby withdrawing certain exemptions and rationalising abatements keeping in view the proposed GST structure.

Various restrictions, exceptions and limitations on availability of input tax credit has led to inequitable situation whereby taxation of services is universal while the credit over tax paid on input services continues to be restricted. In order to correct this inequity and provide much needed relief to industry, service providers would expect some positive amendments in service tax laws in general and, specifically, in the definition of input service to allow seamless flow of input tax credit – basic fundamental principle of GST. This would also, to some extent, negate the likely impact of an upward rate shift on service providers under GST regime.

The government could also look at making possible announcements for further pruning of existing exemptions provided in various legislations as a move towards GST. Such exemptions could be in force for years and may have outlasted their utility and purpose. Similarly, certain exemptions or concessions which are likely to become redundant under GST regime may also be targeted for re-alignment.

Further, currently there is no clarity on treatment of unutilised education cess and secondary and higher education cess on account of tax paid on input services as on 31 May, 2015 when such cesses were abolished. It is imperative that the government proposes a one-time utilisation mechanism or refund route in relation to the said unutilised balance which most industry players would have parked in their books as a recoverable but are not in a position to utilise due to lack of clarity.

The government may also tinker with excise/customs rate of certain goods which continue to suffer from an inverted duty structure in order to correct the same. Additionally, it is also expected that in view of the impending GST implementation, the government may propose to refund the entire accumulated credit balance due to inverted duty structure instead of allowing the same to be carried forward indefinitely as this could further aggravate the working capital blockage under GST regime. In addition, usual changes in basic customs duty rates of certain goods, basis recommendations received from industry on account of providing impetus or level playing field, may also form part of indirect tax announcements.

On the administrative front, there is an immediate need for speedy completion/ closure of on-going/ pending audits/ assessments/ litigations keeping in line with the proposed timelines under GST for smooth transition to GST. Similarly, it is also expected that government may propose to amend rules related to refund of input credit in line with rules laid down under Model GST law making them rather time-bound and simple to ensure minimal blockage of working capital for exporters.

Whether the government would like to take up the aforesaid changes immediately as part of what could be the last budget before GST regime needs to be seen. As of now, the biggest focus of the government is to finalise all contentious issues between Central and States and placing GST model laws for final approval of both Houses of Parliament. This is absolutely imperative in order to bring GST well within the timelines committed under Constitutional framework. For this, GST Council would need to move very quickly in closing all open issues and agree on a clear way forward on implementation timelines for India Inc. to efficiently plan and organise themselves to ensure a smooth transition in the next couple of months.

To conclude, the government, eyeing the approaching state elections and the current sentiment, would be looking to play safe by keeping both industry and common man happy on one side and maintaining status quo at large on the other.

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