Saturday, April 9, 2011


Budget Rollbacks and Promise
The smooth passage of the Finance Bill by Parliament was facilitated by the slew
of concessions extended by Finance Minister Pranab Mukherjee. As many as 47
amendments to the original bill were passed. The concessions aggregate Rs.1,500
crore, a large portion of this attributable to procedural changes in the method of
levying and collecting taxes. For instance, the deferment by three months of a
new procedure to collect service tax on an accrual basis instead of on actual
receipts will mean less revenue than what was envisaged in the budget.
Manufacturers of readymade garments, especially those in the small-scale
segment, have got relief by way of higher excise duty abatement. By far, the
most anticipated announcement was the rollback of the 5 per cent service tax on
certain grades of hospitals and diagnostic services in the private sector. This
budget proposal drew a good deal of flak. Had it been implemented, it would have
increased the already high health care costs. However, while the government will
now forgo around Rs.300 crore, it was not just revenue considerations that were
behind the proposal. The idea of bringing the various entities in the booming
health care segment under the tax net has been around for quite a while.
Besides, as the Finance Minister said, the move was meant to prepare the ground
for the Goods and Services Tax (GST). It is unlikely that this sector will be
exempted when the GST is finally in place. The principal idea behind the GST and
the Direct Taxes Code (DTC) — the two key reforms measures — is to have a tax
structure with moderate taxes, minimum exemptions, and wide coverage.
Mr. Mukherjee has kept the promise which he made in the budget speech by
introducing a Constitution Amendment Bill to pave the way for the GST.
Essentially, the Bill seeks to give powers to the States to tax services and to the
Centre to levy duties beyond the factory gate. The Bill incorporates features that
seek to resolve the sharp differences between the Centre and the States over the
implementation of the far-going structural change. A GST Council, headed by the
Union Finance Minister and a GST Dispute Settlement Authority are proposed. In
bringing the Bill before Parliament, Mr. Mukherjee may have kept his word. But it
will be over-optimistic to expect the GST to become a reality on April 1, 2012.
The legislation, which will now go to a standing committee, requires two-thirds
support in both houses of Parliament and to be ratified by at least half the
number of State legislatures.

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