Indirect tax - More of the same

“The information technology sector may be the sector that is most impacted by the Budget. The government appears to be slowly abandoning the shelter that it had previously provided this sector” — Vivek Mishra

Budget 2008 does not have any radical or bold moves on the indirect tax front. This is probably just as well, given that in an election year, the best that one can expect is no overly populist measures. Amongst the indirect taxes, reduction in the peak rates of excise duty from 16 per cent to 14 per cent is the most significant change. This is in accordance with the intention to align the duty levied on goods and services. This reduction also has the impact of decreasing the effective customs duty on import of goods. The Finance Minister, in continuation of his focus on the infrastructure sector, reduced the basic customs duty rate on project imports from 7.5 per cent to 5 per cent.

However, contrarily he has also withdrawn the exemption from special additional customs duty of 4 per cent to specified power generation projects.

Experts speak Motilal Oswal Rajiv Kumar Rajiv Memani Gaurav Taneja Amitabh Singh Srinivasa Rao

The information technology sector may be the sector that is most impacted by the indirect tax proposals in this Budget. The government appears to be slowly abandoning the shelter that it had previously provided this sector. There is increase in excise duty on packaged software from 8 per cent to 12 per cent. Additionally, a new taxable service category is being introduced for taxing services provided in relation to information technology software. Finally, the category of consulting engineering services will no longer exclude services in relation to computer software. Ironically, making software development taxable will be a huge positive development to the software export industry, as they will now get a refund of input taxes (both for input services and for equipment).

In the banking sector, commission earned on foreign exchange broking has been subject to service tax for many years. There was a dispute on whether service tax would apply on purchase and sale of foreign currency by the bank on its own account. This will now be taxable.

The composition rate of 2 per cent of the total value of a works contract has been doubled to 4 per cent. This increase would bring in line the composition rate with general composition rate applicable under various state VAT laws and may be another step forward to align the duty levied on goods and services. This will certainly increase the effective cost of construction in the hands of the customer.

A very promising change is the continuation of the Central Sales Tax (CST) phase-out. The FM mentioned that the CST rate would be reduced from 3 per cent to 2 per cent. This is very welcome as CST is one tax that conspicuously harks back to an earlier era where taxes were non-creditable.

The Finance Bill 2008 has also dealt with certain CENVAT credit provisions. Taxpayers using common goods, services for rendering taxable as well as exempted services, now have an option to either reverse the proportionate credit attributable to the exempt portion or pay an amount of 8 per cent of the value of exempted services.

Therefore, this is a Budget that pushes along the overall agenda of tax reform and rationalisation on the indirect tax side, albeit a bit gingerly.

Vivek Mishra is Partner & Leader— Indirect Taxes, Ernst & Young