11

Reforms in Cenvat and Reforms in Cenvat and Service Tax in India: A Service Tax in India: A Roadmap towards a Roadmap towards a Comprehensive Comprehensive GSTGST________________________________________T.R.RustagiT.R.Rustagi

22

Scheme of my PresentationScheme of my Presentation

• Part-I: Excise– Some background– Reforms in Rate structure– Reforms in Valuation– Reforms in Credit Scheme– Reforms in Procedures

33

PartPart--II II

• Reforms in Service Tax– Rate

• Procedures

44

PartPart--IIIIII

• Comments– GST

55

Tax revenue as a per cent of GDP

1990-91

1995-96

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

A-Direct 1.9 2.8 3.2 3.0 3.4 3.8 4.2 5.0Personal IT 0.9 1.3 1.5 1.4 1.5 1.5 1.5 1.9

Corporation Tax

0.9 1.4 1.7 1.6 1.9 2.3 2.7 3.1

B-Indirect 7.9 6.5 5.6 5.1 5.4 5.3 5.5 5.4Customs 3.6 3.0 2.3 1.8 1.8 1.8 1.8 1.5

Excise 4.3 3.4 3.3 3.2 3.4 3.3 3.2 3.4

Service Tax 0.0 0.1 0.1 0.1 0.2 0.3 0.5 0.5

Total 10.1 9.4 8.9 8.2 8.8 9.2 9.8 10.5Source: Economic Survey

66

Year Rs. In Crore

1990-91 24514

1996-97 45008

2001-01 68526

2005-06 112000

2006-07 119000

77

Central Excise ReformsCentral Excise Reforms

88

Some background of Excise as Some background of Excise as a taxa tax

99

Central ExciseCentral Excise

• No word as such in Central Excise Law• Different names

– Duty of excise– Special duty of excise– Additional Duty of excise– Cess is also a duty of excise

1010

Origin in the ConstitutionOrigin in the Constitution

• Article 246 of the Constitution• Exclusive power of Parliament to make

laws– List I in the Seventh Schedule– Called the ‘Union List’

• Exclusive power of States to make laws– List II in the Seventh Schedule– Called ‘State List’

1111

Entry 84 of Union ListEntry 84 of Union List

Duties of excise on tobacco and other goods manufactured or produced in India except-

(a) Alcoholic liquors fro human consumption

(b) opium, Indian hemp and other narcotic drugs and narcotics,

but including medicinal and toilet preparations containing alcohol or any substance included in paragraph (b) of this entry

1212

A key fundamental:A key fundamental:

• It is a tax on ‘manufacture’• ‘Manufacture’ is essential to attract excise• Manufacture means ‘new and different article

must emerge having a distinctive name, character or use’

• Large number of disputes and litigation on interpretation of the term ‘manufacture’

1313

What were the compelling reasons What were the compelling reasons for reform:for reform:

• Too many disputes on classification, valuation, etc

• Discretionary powers of officers –A big concern• Discrimination vs Competitiveness• Avoidance or tax planning?• Evasion• Extremely difficult to administer• Collusion• Corruption vs Evasion and Revenue Loss

1414

Problems of classification: A havoc Problems of classification: A havoc

• Classification battles– Boroline: Drug or cosmetic?– Car battery: Part or accessory?– Cigarette case: Box or container?– Paper carton: Product of printing industry?– Urea: Fertiliser or chemical?– Paper vs paper board– Parts vs components– Forged/cast article vs part of machinery– Textile coated with plastic

• Textile article or plastic article

1515

Major features of reforms in Major features of reforms in exciseexcise

1616

Expansion of tax base:Expansion of tax base:

• Upto 1970– Selected items

• Raw materials, metals, some other products• New items added year after year

– 1975• 1% on All goods, not elsewhere specified in Tariff• Subsequently raised to 2%, 4%, 8%, 12%

– 1986: New Tariff based on HSN code: 4500 lines– Today: Almost universal– Exemptions: Still far too many many– Area based exemptions is a new feature

1717

Reforms in Rate StructureReforms in Rate Structure

• Till the 1990s– Too many rates, ranging from 5% to 100%– High rates on most items

• Cosmetics, air conditioners-100%• Paper-40-45%• Chemicals-30-40%

• 1993-2003– Historical rationalization– Gradual reduction—Revenue needs– 1997-98: Mr Chidambaram—8%, 13% and 18%– 1999-2000: Mr Yashwant Sinha—8%, 16% and 24%– Number of rates reduced: 22 to 3– 2000: 8%, 16%, 24% and 32%– Now : 16% is the main rate, some 8%, few 24%– Goal: 16% as one single rate?

1818

CENVAT: The Central Rate CENVAT: The Central Rate

• Name given in 2000-2001 Budget• Section 3 of the Central Excise Act

officially recognized it• Bulk of revenue from this rate

1919

Reforms in determination of Reforms in determination of ‘‘ValueValue’’

2020

Valuation has been a really serious Valuation has been a really serious problem in Central Exciseproblem in Central Excise• Normal price at which goods are ordinarily sold in the

course of wholesale trade– Normal price?– Ordinarily sold?– Wholesale?

• If not so sold, value defined by rules– Transfer to depots– Captive consumption– Made on job basis

2121

Problems faced in valuationProblems faced in valuation• Constitutional challenge

– Excise v sales tax issue– SC upheld the principle of valuation

• Difference between ‘nature of tax’ and ‘measure of tax’• So long as nature is ‘excise’, value can be any price-even retail

price• Even freight can be ‘value’ for assessment

– Yet problems• Disputes on individual cases• Discounts• Post removal expenses• Related person issue• Class of buyers

2222

Changes in Law (Section 4)Changes in Law (Section 4)

• 1996: Depot price also value• 2000: Transaction Value• MRP-based valuation introduced in 1997

2323

Reforms in Procedures: Manner of AssessmentReforms in Procedures: Manner of Assessment• Physical control abolished in 1969• Self Removal Procedure, but

– Approval of Classification List– Approval of Price List– Assessment returns examined by officers

• Classification list abolished in 1994• Gate pass system abolished; invoice system in 1994• Price list abolished in 1995• Self assessment introduced in 1996• Statutory records abolished• Manner of payment of duty

– Fortnightly basis in 2001– Monthly basis

2424

Reforms to remove cascading: Reforms to remove cascading: Modvat/Cenvat Credit SchemesModvat/Cenvat Credit Schemes

2525

Cascading effect of exciseCascading effect of excise

• For long excise was a multi-stage cascading tax– Raw materials– Intermediates– Finished goods

• Credit method is most suitable

2626

Modvat and CenvatModvat and Cenvat

• Modvat (1986-2000)– Declaration of input and finished goods– Restricted scope– Amended from time to time

• Cenvat-new name in 2000• Before Cenvat-

– Too many disputes; declarations, permissions, controls– Now all input, except motor spirit and diesel oil included– Capital goods-based on Chapter, heading and sub-heading– All finished goods included, except matches

• In 2000, simply 14 rules re-written in simple language• 2004: Integrated with ST Credit• Practically VAT up to manufacturing stage

2727

Problems with Problems with MODVAT/CENVATMODVAT/CENVAT

• Linked with ‘manufacture’– Is catalyst used in manufacture or not?

• Difficult to operate with exemptions– Common inputs– Either maintain separate records– Or else, pay an amount equal to 8/10% of the

price of exempted goods• Capital goods

– Specified, used for manufacture—now used in the factory

• Too many interpretational issues– SC: Explosives used in mines

2828

SERVICE TAXSERVICE TAX

2929

Why ST?Why ST?

• Goods and services both meet demands alike

• Too much burden on manufacturing sector• Service consumption grows with

development• Rich consume more of services• To reduce disputes • Revenue needs and buoyancy

3030

How did it come?How did it come?

• NIPFP Report• Fiscal experts input• 1994: Only 3 services—Rs. 407 crore• 2006: 99 services—Rs. 34, 500 crore

3131

SOME FEATURESSOME FEATURES

3232

Selective BaseSelective Base

• Each service defined• Service provider defined• Service receiver defined• Value: Gross value

– Cost of material sold not to be added– Explanation added in 2004: Cum-service tax

price concept

3333

Year Rs in Crore199495 4071999-00 20722001-02 32002002-03 41232003-04 77502004-05 142002005-06 230002006-07 (BE) 34500

3434

• Normally service provider• But service receiver in some cases:

Section 68 (2)• GTS, Insurance Agents-Typical examples

Who pays tax?Who pays tax?

3535

ADMINSTRATION OF STADMINSTRATION OF ST

• Central Excise model• Registration

– Commissioner, Chief Commissioner and DG (ST)– Special category of persons

• Input tax distributors• Turnover more than 3 lakhs in preceding financial year

• Now self assessment• Returns: Half yearly• Demands, adjudication-Excise pattern• Penalties

3636

CASCADING ASPECTCASCADING ASPECT

• 16.8.2002: Within same category of service

• Modified on 14.5.2003• Liberalized in 2004: Integration with Excise

3737

Some featuresSome features

• Input defined– all goods, except light diesel oil, high speed

diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service

3838

Input service is wide in scopeInput service is wide in scope• "input service" means any service,-• (i) used by a provider of taxable service for providing an output

service; or• (ii) used by the manufacturer, whether directly or indirectly, in or in

relation to the manufacture of final products and clearance of final products from the place of removal,and includes services used inrelation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal

3939

Input service distributorInput service distributor• The input service distributor may distribute the CENVAT

credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely:-

• (a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or

• (b) credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed

4040

TAX ON IMPORTTAX ON IMPORT

• Receiver to pay tax• Shipping service exempt• Service provided and consumed abroad

4141

Export of serviceExport of service

• Till March 2005• Afterwards

– Rules• Three categories• Rebate scheme• Controls and regulations

4242

Small service providersSmall service providers

• 1.4.2005• Optional• Not branded services• On 4 lakhs aggregate value• Like central excise-by or on behalf• No credit to be taken• Reversal of credit

4343

LITIGATIONLITIGATION

• Doubts on constitutionality– Confused with tax on profession

• Mandapkeepers• Chartered Accountants• Architects

• Ad agencies- Violates right of speech and expression

• Ad agencies-It is a tax on advertisement• Goods Transport Operators• Rules not adequate• Retrospective legislation• Adjudication powers: Only AC/DC, but

Commissioners also decided cases

4444

Interpretational disputesInterpretational disputes

• SIM card-Processing charges-part of value or not?

• Service tax and sales tax both valid• Consulting Engineers-Status of firms and

companies• Valuation of plant and machinery-consulting

engineering service?• Preparing sign board not an ad agency service• C&F: Two separate contracts for charges and

transport• Work contract on turnkey basis: Not taxable as

consulting engineers service

4545

Interpretational issues Interpretational issues (continued)(continued)

• Renting for trade fairs is not a mandapkeeper service

• Auditorium renting is taxable• Members Club is not taxable as

mandapkeeper• Space offered on hire by Metro-provided

to clients for ad-not taxable as ad agency service

4646

A comment on the approach A comment on the approach towards tax basetowards tax base

4747

Specified Service ApproachSpecified Service Approach

• Specified service approach– Acceptability– Administration– Cascading– Problems

• Definitions: Not easy to define• Coverage is confusing• Discrimination

– CAs-Only auditing– Lawyers

• Too slow to cover all services• Revenue growth suffers

4848

Comprehensive ApproachComprehensive Approach

• Most countries follow it• Non-discriminatory• Can work with moderate rate• Problems and concerns

– States are also interested• Confusing picture about sharing services• Constitution amended

– Tax administration– Requires comprehensive thinking on different issues, like

credit, procedures, etc– Winning confidence of taxpayers-image, attitude– Procedures—simple and easy to comply with

4949

FUTURE OF ST?FUTURE OF ST?

• Kelkar suggested comprehensive tax• Two layers of 12% (Centre) and 8% (States) on

same base• Article 268A of the Constitution

– Entry 92C– Centre to levy– Collection by Centre, States– Rate—Will it be 16%?– Will ad hoc expansion continue?

5050

CRITIQUECRITIQUE• Haphazard approach—Typical of Finance

Ministry!• Selective v. Comprehensive• Badly managed?

– Separate Service tax Commissionerates is debatable

• Optional E-filing optional • Legislation still hanging with Finance Act,

1994• Law should be self contained and

comprehensive• Why so many instructions still exist?• Learn from other country experiences:

5151

OVERALLOVERALL

5252

Slow pace of reforms• Tax-GDP ratio is appalling• Targets are not achieved

– Projections are wrong? Administration is bad?Compliance is poor?

• Inadequate thinking and preparation on policy aspects

• Lack of conceptual clarity in policy making• Ad hoc approach to problems• Credibility--Victim of sins of the past: Complexities,

controls, discretions, etc• Constitutional impediments• Tax administration—inefficient, slow, bureaucratic• Tax base: Political compulsions• Will all taxes merge into VAT one day?

5353

Gaps and InadequaciesGaps and Inadequacies

• Textiles: Out of Cenvat chain• Area-based exemptions• Other exemptions• Services not all covered• Cenvat Rules: Reform still needed• Tax administration: Not all that efficient• Still it has lessons for comprehensive VAT

5454

State Taxes: Switchover to State Taxes: Switchover to VATVAT

5555

Different taxesDifferent taxes

• Sales Tax• Additional Sales Tax• Turnover Tax• Purchase Tax• Other local taxes

5656

Different RatesDifferent Rates

• Each State:Own structure• First Point—Last point• Too many exemptions to attract clients• Distortions and rate wars—Higher tax on

medicines, lower tax on cars!• Common market—no way• Revenues: Victim of Politics

5757

Fiscal Experts contributionFiscal Experts contribution

• Falling Tax-GDP ratio• Harmful effects of cascading• CST is an issue• Need to expand the tax base• Moderate rates induce voluntary

compliance

5858

Center's InitiativeCenter's Initiative

5959

How did it come?How did it come?• 1995: FM calls meeting of CMs for talk on VAT• July 1996: Nov. 1999: CMs set 1.4.2001 as the VAT

date• June 2000: CMs reiterate 1.4.2001 as VAT date• Jul 2000: Committee of State FMs set up for

modalities• Jul 2001: 1.4.2002 set as the fresh deadline by CMs• Nov.2001: Only 12 States agree to meet the 1.4.2002

deadline• Jan 2002: VAT postponed for a year• Oct. 2002: CMs confirm 1.4.2003 as the deadline

6060

CONTINUEDCONTINUED

• Feb. 2003 FMs reiterates 1.4.2003 as the deadline

• April 2003: Haryana the only State to introduce VAT

• Jun 2004: Empowered Committee sets up 1.4.2005 as the deadline

• Jan 2005: Empowered Committee reiterates the deadline

• Feb 2005: UP says it is not ready• Mar 2005: BJP ruled States pull out• 1.4.2005: VAT finally comes

6161

What is VAT?What is VAT?

• Tax on value addition• Covers all stages of production, distribution and

sale• If extended to services, many problems solved• ‘Manufacture’ is not the issue• ‘Sale’ is not the issue• What is important is—Has value been added in

any activity?

6262

WHY VAT?WHY VAT?

• An efficient tax, equal competition and fairness in the system

• Turnover tax, surcharge, additional surcharge, etc abolished

• Self-policing: Evasion is rendered difficult• Wider base can afford moderate rates• Greater buoyancy• Better revenue estimation• Less political interference in the structure• Helps exports to relieve of local taxes• Can be combined with tax on services

6363

RATE STRUCTURERATE STRUCTURE

• Normal rate 12.5%• Other rates 4%--about 270 items:medicines,

agricultural and industrial inputs, CG and declared goods

• now a rate of 8% also• Gold and silver ornaments, etc—1%• Exemption to maximum of 10 categories chosen

from finalized list• VAT on exports to be refunded within 3 months

6464

CoverageCoverage

• All manufacturers and dealers• Registration of dealers –turnover above

Rs. 5 lakhs compulsory• Small dealers (Rs. 5 lakhs or lower limit

decided by a State) not to pay VAT• Dealers with turnover upto Rs. 50 lakhs—

Composition Scheme

6565

CONCERNSCONCERNS

• Invoicing is a must• Record keeping and documentation• Cost of compliance for the traders• Avoidance and evasion: charge from

public and not pay to government

6666

States are Happy: Revenue States are Happy: Revenue jumps in Delhi, Karnataka and jumps in Delhi, Karnataka and elsewhereelsewhere

6767

ISSUESISSUES

• Harmonized tariffs• Rate structure—4, 8, 12%• Harmonized rate structure

– Gold—Agreed at 1%– States are reducing it: Delhi 0.1%

• Efficient and responsive Tax Administration needed

6868

GSTGST

• Constitutional issues• Political consensus• Comprehensive preparation

– Structure, training, trade and industry– Who will administer? – Good for revenue, better compliance– Efficient tax, less disputes– Would help exports in a big way– Revenue forecasting more accurate– Stability of rate structure

• Minimal budgetary changes

6969

CentreCentre’’s Hopes Hope

• From 1.4.2010• But will they stick to the date?

7070

Thank you for your patience of Himalayan Thank you for your patience of Himalayan order!order!