INDIRECT TAXES NEED URGENT REFORMS

Vivek Mishra
The Economic Times

The industry is looking forward to broad policy reforms in indirect taxation, including clarity on implementation of GST, abolition of special additional duty, reform in indirect taxes on SEZs and clarity on taxation of software.

Introduction and implementation of GST would probably be one of the most significant indirect tax reforms ever in the country. While its actual implementation could take some years, the industry would like to have some insight into the government’s broad plans on its design and implementation. All budget speeches for the past few years have consistently talked about the implementation of GST, which is set to transform the indirect tax regime of the country by April 1, 2010. However, not even a basic structure of GST has been given to the industry to analyse the possible impact on their businesses.

The service tax laws recognise cash system of accounting while the Companies Act provides for maintenance of accounts on accrual basis. This is also an administrative issue for the corporates, where the operating systems are not geared up to account on a cash as well as accrual basis and this necessitates manual reconciliation. For the administrative convenience of the industry at large, the service tax regime should be aligned with the current accrual system of accounting and with the accounting principles and standards.

The IT industry has its own issues. It hopes for clarity on taxation of software. The software industry was hit by multiple taxation since the introduction of service tax on IT software service (ITSS) by the Budget 2008, making the services in relation to software development taxable. This was seen as a positive move by the government for the software export industry, as it entitled them to get a refund of input taxes (both for input services and for equipment), which was not available under the earlier exemption regime.

However, this has also created considerable confusion and litigation on the scope and coverage of ITSS. Currently, there are numerous overlaps between the levy of VAT and service tax on software under ITSS. For instance, ITSS includes within its ambit the electronic supply of software, as a taxable service. Supply of software, however, is also subject to VAT. This double taxation is definitely not the spirit of the law but has not been addressed till date. A similar overlap also exists between excise duty and service tax on software. Moreover, the classification of software as either packaged or customised is itself a subject matter of debate. The government ought to clarify on these issues.

Evidently, indirect taxes need many reforms, which require immediate attention. However setting up a clear and achievable road map and structure of GST should be the priority.

The author is leader, Indirect Tax, Ernst & Young, India