For the first time, this Budget has announced that the basic structure of GST will be in keeping with the principles of fiscal federalism enshrined in the Constitution. The Budget has further clarified that the broad contour of the GST model is that it will be a dual GST comprising a Central GST and a State GST.
The Centre and the states will legislate, levy and administer the Central GST and the State GST, respectively. The central government will play a catalytic role to facilitate the introduction of GST by April 1, 2010. I may point out here that the central government's role is not only catalytic; it has to decide some very important issues.
For example, it has to decide on whether the states will also levy service tax. Since the Budget does not indicate any Constitutional change from the present state of 'fiscal federalism enshrined in the Constitution', it is pretty clear that it will remain with the Centre and not go to the states.
This is as it should be. But it needs to be stated by the finance minister very clearly. That will allow central government officers to work out the harmonisation of the Central Excise (Cenvat) and Service Tax. A lot has to be done within the next nine months to harmonise the procedures, redraft the rules and prepare for a combined rate of duty and many other things.
Similarly, the states should know what taxes they have to combine with State VAT. The FM has given a hint that the Central GST rate will be 8 per cent because of which he has merged the 4 per cent with 8 per cent, but has kept many rates at 4 per cent even now. It is high time such different rates and numerous exemptions were withdrawn.
As the present trend goes, we may land up with a Central GST rate of 8 per cent with hundreds of exemptions. And the same may be the fate of State GST.
The next best thing about the Budget is that it has left the rates of customs, excise and service tax unchanged. It is an economically sound decision not to increase the rates of duty, which the industry has found as workable for coming out of the recession.
Further, the rates could not be lowered because the fiscal deficit would be further aggravated. The changes in the rates of duty are marginal and need not be elaborated here, since they do not make much difference to any particular industry.
Another positive aspect is that the Budget has introduced two important service taxes. One is the service provided in relation to transportation of goods by rail and second is legal consultancy service. Individual lawyers are not covered but at least a beginning has been made of covering the legal consultancy service which had been a subject of criticism for long.
There are, however, some negative features. These could have been easily done to improve the tariff and the legal structure. But the opportunity has been missed.
The first is that a comprehensive service tax could have been introduced at this stage by declaring that all services are subject to tax except those which are in a negative list.
The second negative aspect is that there were many rigidities and complexities in the Cenvat rules which had been under discussion on various occasions. There were several suggestions: the distinction between capital goods and inputs could be abolished; reference to manufacture could be replaced in favour of use; interchangeability of input from service tax and central excise could be made completely unhindered; capital goods for repair and maintenance could also be allowed input tax credit; and so on. None has been corrected in this Budget.
The third negative aspect is that nothing has been done to remove all the existing exemptions many of which are generating litigations due to the lack of clarity and the inherent defects in them. One is to abolish the difference in duty between hand-made and machine-made goods.
The second is about exemptions on small items such as brooms which are in any case covered by small-scale exemptions. Area-specific exemptions could have been amended to introduce a sunset clause, particularly because with the decrease in rates of duty, the necessity for such exemptions has become largely irrelevant. Besides, they don't go well with the finance minister's general principles laid down in the Budget about a neutral tax.
There were legal inaccuracies in the present indirect tax laws which have also been pointed out to the finance ministry on various occasions. One was the Central Excise Act itself calling Central Excise as Cenvat by an amendment made in 2000. Central Excise is conceptually different from Cenvat.
When input tax credit is allowed on Central Excise Duty, what remains is Cenvat. They are not the same. This conceptual error in the Act has led to misunderstandings in various judicial decisions. This has not been corrected even now in this Budget. Moreover, the Central Excise Tariff itself contains unmanufactured goods which should not be there as Excise is only for manufactured goods.
In the Service Tax Law, there is no clarity about the effective date of applicability of the Service Tax and controversy persists about where it is the date of rendering the service or the date of payment of duty. All these controversies could have been resolved in this Budget but the bureaucracy seems to be totally unwilling to effect such reforms. Bureaucracy plays a very important role in making the Budget and all the complications in a tax structure cannot be attributed to higher echelons.
In totality, it is a positive Budget but could have been much more positive if only the existing distortions could be removed.
Sukumar Mukhopadhyay is former member of the Central Board of Excise and Customs.
