Union Budget – Elements of good governance in indirect tax proposals

Senior Advisor Jogendra Singh of J. Sagar & Associates analyses the Budget and discusses its impact on good governance, the introduction of the GST and the upcoming DTC. He further discusses the implication of service tax on legal services..Union Budget 2011-12 has come at a paradoxical juncture. It is paradoxical in the sense that there is much to rejoice at the performance of Indian economy over the last one year, but no body seems to be rejoicing. GDP growth at 8.6 percent in real terms, expectation that GDP will grow at 9 percent during the next year, impressive growth in manufacturing sector, a turnaround in agriculture sector, 29.4 percent growth in exports are performances that would have gladdened anybody’s heart. But food inflation that adversely touches everyone’s life and in fact directly threatens physical survival of poor coupled with impression of drift in governance and a gap of accountability seem to have eclipsed performance of the remarkable financial year that had had a “swift and broad-based growth”. Therefore, while making an assessment of changes that budget proposes in the area of indirect taxes, one should first of all examine if there are any changes that would impact good governance and should thereafter move on to other changes. This approach also becomes relevant because taxation is an area where good governance and principle of accountability is as important as in any other field of public administration..Coming to the drift in governance, it is good that the Finance Minister has now fixed April 1, 2012 as the date for implementation of Direct Tax Code (DTC). However, it has not been possible for the Central Government to indicate a similar date for Goods and Services Tax (GST). Possibly, given the political complexities of the kind of federal set up we have, such a decision has not been possible so far in the absence of a consensus at political level. But it is reassuring to hear that the Finance Minister intends to move the Constitutional Amendment Bill during the current session of the Parliament, the work on formulation of a model GST legislation is on and IT infrastructure which is a prerequisite for the implementation of GST is being developed in the meanwhile..Coming to good governance, it can manifest itself in several ways in the field of taxation. But ultimate test of good governance lies in painless voluntary compliance by tax payers and accrual of revenue neither more nor less than what is legally due to exchequer. It will require a healthy balance between interests of revenue and legitimate interests of business and trade. Viewed in this light, it is heartening to note that the Central Board of Excise and Customs (CBEC) have tried to revamp provisions of Section 11A of the Central Excise Act, Section 28 of the Customs Act and Sections 73 and 78 of Chapter V of the Finance Act (service tax law). The reframed provisions are couched in simple language and should encourage taxpayers to rectify un-intentional transgressions of law without unjustified cost and consequences. These provisions while facilitating rectification of un-intentional mistakes also do not seem to accord undue or unjustified advantage to intentional evaders of tax. However, the CBEC has to ensure that disputes are not kept alive even after those who can legally do so comply with these provisions..Budget proposals introduce some other changes that are important from the point of view of trade. One such change is provision of self assessment on customs side. It is a welcome move and given a positive try by the field customs staff, it should accelerate clearances and reduce transaction cost. Again the CBEC has to see that self-assessments are not unjustifiably hijacked by the investigative staff..On service tax side, the Point of Taxation Rules, 2011 are being brought into effect. These rules make a major departure from the current position in the sense that service tax becomes payable on accrual basis whereas payment of service tax was so far linked with receipt of payments by service provider. Now payment of tax would be shifted solely from receipt of payment to raising of invoice, date of receipt of payment and providing of taxable service, whichever is earlier. It would have some adverse repercussions for the service industry as a whole. Service provider would have to pay service tax before he receives payment. Even majority of professional services firms follow cash system of accounting wherein revenue is recognized only on receipt of payment from the clients. Shifting of payment of tax solely from receipt to raising of invoice, date of receipt of payment and providing of taxable service whichever is earlier, may lead to maintenance of dual accounting by the such firms (i.e. both on accrual and cash basis)..Further scope of Legal Service has also been widened. Only an individual rendering legal service to another individual can escape service tax. An advocate representing a business entity shall also come within the purview of service tax. It needs to be seen how the bar associations take this change..Every budget makes changes motivated by revenue considerations. This budget is no exception. However, provisions of self-assessment in customs and changes made to encourage voluntary compliance should be welcome. But it is one thing to change the provisions and another to change the mindset of the officials in the field. Real test of these changes would lie in their implementation by tax officials..Jogendra Singh is a Senior Advisor with J. Sagar & Associates and his practice covers diverse areas of Indirect Tax and Regulatory Laws.