The Hindu Business Line : A `taxing' exercise

The increase in the rate of service tax from 10 per cent to 12 per cent and the indications that this is but a step towards the convergence of the CENVAT (16per cent) and service tax rate is certain to cause considerable consternation to the manufacturing and service sectors.

Rather than address squarely issues that constitute transaction cost of the Indian industry that is hampering global competitiveness, the Budget seeks to inflict additional indirect tax measure in the guise of rationalisation.

In the Indian context, indirect taxes that exist in multiple forms, often, non-transparently, add to the cost of production/service and with archaic and discretionary rebate/refund system, resulting in significant export of taxes.

In fact, the economic survey at para 7.57 fairly states that low factor productivity is a major factor impeding global competitiveness of the Indian industry.

If the Finance Minister had meant well, the CENVAT rates should have been brought down to 12per cent simultaneously. With state VAT at 12.5 per cent, the Indian consumer groans under a commodity tax burden of more than 30 per cent with added cess and local levies.

The corresponding rate in other developing countries is less than 16per cent. Even the welfare states of the Nordic region keep below 22 per cent or so.

The Kelkar committee on FRBM, which first toyed with the idea of GST, indicated a mean rate of 20 per cent at most!

While the road map to GST, with a four-year horizon of 2010 can at best be a sincere thought at the Union Finance Ministry level, since the multitude of States, with allegiance to differing political ideologies, need to concur for any such reforms of surrendering their sovereign taxation rights, the route is bound to be most onerous for India Inc and the transition would be at a heavy cost if the Finance Minister pursues his thought of taking the service tax rate to 16 per cent to converge with CENVAT.

On the contrary, the law could have been codified in a separate enactment and enforcement strengthened to have revenue buoyancy.

(The author is Partner, Global Tax Advisory Services, Ernst & Young.)