Satish Bhanushali

The month of February is always a speculation filled month in India as at the end of the month India receives a Budget for the coming fiscal year. Bearing in mind the proposed overhaul in the tax arena in India, Budget 2011-12 will surely play a crucial role in bridging the gap between present and proposed direct as well as indirect tax models in India.

As we all are aware, India is heading towards the biggest tax reform in its history. However as with every reform, challenges are inherent to the process. Thus the key to successful implementation would be quick and clear resolution of the challenges posed along the way.

The tax reforms stated above consist of:

  • Direct Tax Code („DTC?) which will replace existing Income Tax Act, 1961; and
  • Goods and Services Tax („GST?) which will replace the existing complex indirect tax structure in India.

DTC is expected to come into effect from 1 April 2012. Central Government has already issued two draft models of the same. This was because anomalies existed in the first draft model, which were removed by the second draft DTC after taking into consideration the comments received from the industry bodies and other stakeholders.

Thus, Budget 2011-12, is expected to do very little to streamline the provisions proposed in DTC.

There are no “Big Ticket” announcements expected in the Budget. However, as far as GST is concerned, Mr. Pranab Mukerjee, Hon?ble Union Finance Minister, will show his earnest endeavour in Budget 2011- 12 to bridge the gap between present multi structure Indirect tax system and proposed GST.

In this connection, the Central Government has already issued First Discussion Draft Paper about proposed GST model to be followed in India. Further, a step has been taken in presenting the possible rate structure for CGST which would be aligned in the phase manner at destined rate of 8%.

Successful introduction of GST in India would entail several amendments in the Constitution of India including powers to the State Government to levy GST on the services, etc. This needs to be further supported by Draft GST legislation and developing the infrastructure i.e information technology system across India as desired in successful rollout of GST.

However, in the absence of a political consensus, changes expected from Budget 2011 to align the aforesaid hurdles are outlined below:

  • Phasing out the Central Sales Tax or possibly reduction in the rate from the current 2% to 1% with effect from 1 April 2011.
  • Introduction of Point of Taxation Rules which defines the taxable event for levy of service tax.
  • Reduction in duty rates of excise and service tax considering the fact that destined rate of Central GST proposed under the GST law is 8%.
  • Reduction in the number of exemptions presently available in India which may not sustain under the GST regime.
  • Reduction in list of goods eligible for concessional duty rates under excise as well as in customs.
  • Reduction on minimum threshold limit available to Small Scale Industries in excise.
  • It is also expected that the Finance Minister will continue with his spree of widening the service tax net which has off-late been the bane of many controversies/litigations. This inter alia include:

-Introduction of new taxable service categories; and

– Introduction Expansion in scope of existing taxable service  categories.

Apart from aforesaid tax reforms, the Budget 2011 is also expected to make Finance Minister walk the tight-rope as he would focus on narrowing down the fiscal deficit by widening the tax base of the Country but at the same time controlling inflation. However, one will really have to wait and watch to know what comes out from the bag of Hon?ble Union Finance Minister on the budget day and what he would do for the common man of India.

(The author is associated with one of the big four)

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