India

Two new services, hotel accommodation and services provided by airconditioned restaurants serving liquor, have been brought under service tax levy.

Indirect tax and GST reforms will affect most industries

The recently announced 2011-2012 Union Budget has outlined indirect tax reforms impacting almost all industries. At the same time it laid down the foundation for the long-awaited Goods and Services Tax (GST). While Budget 2011 awarded concessions to sectors like infrastructure, cement, food processing and textiles, certain other sectors like consumer goods, pharmaceuticals and computer hardware industries suffered additional excise duty burden. Excise duty of 1 percent has been levied on 130 items primarily in the consumer goods and pharma industries, which previously had concessions. With this move, the government is rationalizing tax concessions at central and state level. An important change has been introduced in the taxation of services, with the mechanism for payment of service tax shifted from receipt to accrual. With this, the government has attempted to align taxation of services with that of goods . This is a welcome move because it will resolve some of the issues under the current service tax regime and simultaneously act as the keystone for the proposed GST implementation. Two new services, hotel accommodation and services provided by air-conditioned restaurants serving liquor, have been brought under service tax levy. The rules governing credit of indirect taxes paid centrally have been simplified to reduce litigation and simplify the eligibility of input service credits. The availability of input credit for services

has been shifted from a payment basis to an invoice basis, in line with service taxes, which is now moved from receipt of payment to accrual. Furthermore, by limiting the scope of eligibility, credit has been denied for goods/services primarily used by businesses for personal consumption of the employees. Similarly, a complex set of rules has been framed to restrict eligibility of credits when both taxable and non-taxable activities are undertaken. Such restrictions on credits would lead to an increase in procurement costs for manufacturers/service providers. With these measures, the government is attempting to increase the revenue pool without increasing the tax rates. However, with the inbuilt complexities and conflicting judicial precedents, it is likely that these amended rules are likely to initiate fresh rounds of litigation. The indirect tax proposals are also intended to reduce the time lag in customs clearance by introducing self assessments in case of imports. Furthermore, to improve general compliance with indirect taxes, penalties have been increased for defaulters. The Budget would not have been complete without a mention of GST. While there has been no concrete timeline fixed, several preparatory steps have been taken, such as introducing the Constitutional Amendment Bill in Parliament, developing the IT framework and finalizing the draft legislations. This indicates the keenness of the government to implement GST by April 2012.

2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

If you would like to know more about this subject or any other Indian indirect tax matter, please contact: Sachin Menon KPMG in India Tel: +91 22 3090 2682 E-mail: sachinmenon@kpmg.com

2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.