Tax & Accounting Blog

2016 India Budget Speech Raises Taxes

Blog, Indirect Tax, ONESOURCE, ONESOURCE, VAT Tax Rates, VAT-GST Management March 7, 2016

Budget Speech

29 February 2016 was the presentation of the 2016 Budget Speech in India’s Parliament. India’s Budget Speech lays out the spending programs for the government for the year and proposes changes to different legislation to be made during the Budget Session. This years’s budget session will run last from 23 February to 13 May 2016 with a recess from 17 March to 24 April.

India’s Finance Minister raised the tax rate for Services another 0.5% effective 1 June 2016 through the Krishi Kalyan Cess. The new cess will be used to fund agriculture and agriculture infrastructure across India. The latest change to the Service Tax will most likely require tax payers to break out and calculate three different taxes for Services.

First, the Service Tax will apply to all taxable services as 14%. Second, the Swachh Bharat Cess will apply at 0.5% to all taxable services. Third the new Krishi Kalyan Cess will apply at 0.5% to all taxable services for a total tax on services of 15%. In addition to the rates, services are subject to basis reductions or abatements and restrictions or input tax recovery.

Along with the new cess there is an increase in the number of services which are eligible for an input tax credit under the CENVAT credit rules. More transport services will have the Service Tax recoverable than before.

GST

The one question which was not addressed, was what will happen to the Goods and Services Tax (GST) which has been stalled in the Upper House of Parliament since last summer. In the 11th section of the Budget Speech, Arun Jaitley, only stated this:

The Annual Budget is also an opportunity for the Government to outline its priorities for the year to come. The priority of our Government is clearly to provide additional resources for vulnerable sections, rural areas and social and physical infrastructure creation. The Government shall also endeavour to continue with the ongoing reform programme and ensure the passage of the Constitutional amendments to enable the implementation of the Goods and Service Tax, the passage of Insolvency and Bankruptcy law and other important reform measures which are pending before the Parliament.

The change in the Service Tax rate brings the Service Tax rate closer to the general GST rate for services proposed in December 2015 paper the government prepared. This is another signal the GST will be implemented but there are key issues which still have to be resolved between the Government and the opposition parties. One of the toughest issues to be resolved is if there should be a cap placed on the GST in the Constitutional Amendment bill or if it should be left in the purview of the GST Council. Unlike many tax changes seen globally, the GST is one that almost all businesses in India support and have been waiting for because it will provide clarity and simplicity for their operations compared to the disjointed, cascading and inefficient system.