Budget 2020: The focus is on simplifying GST and preventing evasion

The direct tax proposals aim to accelerate economic momentum and ease of living for taxpayers, though the key will lie in smooth administration

Indirect Taxes

Budget 2020 was crucial in view of the juxtaposition of two contrasting situations in the current economic scenario, namely the government’s endeavour to make India a $5 trillion economy by the year 2025, and the economic slowdown. The length of the finance minister's Budget speech (by far, the longest in India's history) clearly indicated government’s economic concern.

The Budget was based on three prominent themes: Aspirational India (aimed at providing better standards of living to all sections of society), economic development (aimed at higher productivity by way of economic reforms) and a caring society (aimed at social welfare and environmental change).

With the Economic Survey highlighting that indirect taxes contributed 46 per cent of gross tax revenue (GTR) in 2019-20, all eyes were on the Budget, to see the measures taken to increase buoyancy of actual GST collections. The finance minister re-iterated that GST has been the most historic reform in India and is gradually maturing into a tax that has integrated the country economically.

GST remains the single largest source of tax revenue in this year’s Budget, with revenue collections estimated at Rs 6.91 trillion. However, the budgeted GST revenue is slightly less than estimates for the previous year (2018-19), where it stood at Rs 7.44 trillion. The decrease in estimated collections seems to have been made in the backdrop of actual tax collections during 2019-20.

The estimated contribution of each revenue source to the Budget is shown in the figure below.

In terms of indirect taxes, the perspective of Budget 2020 can be categorised broadly into three spheres, namely:

a) Simplifying GST and preventing GST evasion

b) Impetus to Make in India; and

c) Export incentivisation.
 

1.Simplifying GST and preventing evasion

It has been stated that the new simplified GST return framework would be implemented from April 1, 2020. It will make return filing simple, with features like SMS-based filing for nil return, return pre-filing and improved input tax credit flow. This would be a step to further the ease of doing business. The refund process has also been simplified and made fully automated, with no human interface -- a big relief for exporters. 

To deal with the menace of fake invoices, the government has reiterated introduction of electronic invoices. It will be implemented in a phased manner starting from this month, on an optional basis. This, in turn, implies that businesses should be ready to implement these reforms in a timely manner, specifically electronic invoicing, as it directly impacts raising of invoices by businesses and can lead to business disruption if not executed in a timely manner. 

The way to go is technology -- this is the message emanating from the government initiative of the new return format and electronic invoicing. Automation is the key. 

Owing to detection of massive tax evasion and fraud by the Tax Department, it was of paramount importance for the government to carry out measures to prevent fraudulent malpractices under GST. The amount involved in fraud cases detected so far is thousands of crores of rupees, and primarily relates to the malpractice of fraudulent input tax credit claims on the basis of fake invoices. A plethora of measures has been proposed, by way of stringent penalty and punishments, to curb the menace of availment of fraudulent input tax credit:

• Any person, being a beneficiary of passing or availing of fraudulent ITC, has been made liable for similar penalty leviable to the person who commits specified offences; and
• Provision amended to make the offence of fraudulent availment of ITC without an invoice or bill a cognisable and non-bailable offence, and to make any person who commits or causes the commission and retains the benefit or transactions arising out of specified offences liable for punishment.

Businesses need to adopt technology to ensure that their input tax credits are properly matched with vendor invoices and have a robust vendor screening process.

Along with these reforms, other crucial measures have also been proposed, such as Aadhar-based verification of taxpayers (in order to eliminate non-existent units), use of deep data analytics and artificial intelligence (AI) tools to detect cases of fraud in tax credit claims, and refund claims. Deliberations on the GST rate structure are also being considered in order to address peculiar issues, such as inverted duty structure. A system of cash rewards is envisaged to incentivise customers to seek invoices. These measures should go a long way in limiting tax frauds under GST.

2. Impetus to ‘Make in India’

Make in India is one of the flagship programmes of the government that is aimed at facilitating investment and to build the best-in-class manufacturing infrastructure in India. As anticipated, with a view to provide further impetus to Make in India, basic customs duty rates have been increased on import of certain goods, such as electrical appliances and household items, in order to de-incentivise imports of such goods and encourage their domestic production.

Prominent change in duty rates can be witnessed in the electric vehicles (EVs) and medical devices sectors. Combining its objective to promote adoption of EVs with its agenda to provide boost to domestic manufacturing, government has increased customs duty rate on import of completely built units of EVs and semi knocked down form of passenger EVs. This seems in line with the changes under the previous budget, wherein certain parts used in manufacture of EVs had been exempted from customs duty and income tax deduction was also provided on interest paid on loans to purchase EVs.

Government has also witnessed an impressive growth in domestic manufacturing of medical equipment. To provide a further fillip to domestic manufacturers, a health cess at the rate of 5 per cent has been imposed on the import of certain medical equipment, which will be over and above the Customs duty levy. Proceeds from this levy will be used for creating infrastructure for health services in aspirational districts, thus serving the twin objectives of promoting domestic manufacture and providing health services.

A sector-wise impact of such change has been provided in the table below.

Further, considering that undue claims under Free Trade Agreements have posed threat to domestic manufacturers of goods, certain measures such as review of Rules of Origin requirements would be taken, for certain sensitive items.

Government has also strengthened safeguard duty provisions in order to protect domestic industry against the serious injury from a surge in imports. Additionally, the provisions for checking dumping of goods and import of subsidised goods have also been strengthened for ensuring a level playing field for domestic manufacturers.

3. Export incentivisation

With the aim of facilitating exports and achieving higher export credit disbursement, a new scheme  — NIRVIK — is being launched, which will cover key aspects such as higher insurance coverage, reduction in premium for small exporters, and simplified procedures for claim settlements. Further, it has been proposed to launch the scheme for providing digital refunds to exporters for the amount of duties and taxes levied at the central, state and local levels (such as electricity duties and VAT on fuel used for transportation), which are not exempted or refunded under any other existing mechanism. These measures should help in revitalising India’s exports.

Other key measures

Apart from the focus on key spheres as mentioned above, certain revenue-augmenting measures have also been taken, such as increase in excise duty (by way of National Calamity Contingent Duty) on cigarettes and other tobacco products. It has also been decided to re-align the exemptions provided under customs law, in accordance with the needs of businesses. A comprehensive review of customs duty exemptions will be undertaken by the government by September 2020, for taking a view on their present relevance.

Anita Rastogi, Partner - Indirect Tax and GST, PwC India

Changes desired

Budget 2020 has rightly focused on simplification of tax processes and providing impetus to the domestic manufacturing industry. Its predecessor (Budget 2019) had also struck the right chord in introducing a dispute resolution scheme for pre-GST era indirect tax litigation (except customs), which has proven to be a success. Based on its success, similar amnesty schemes could have been proposed for past litigation under the customs law.

With the intent to foster trust between taxpayers and the administration, a Taxpayers' Charter has been proposed to be adopted by the Central Board of Direct Taxes (CBDT). A similar Charter should have been proposed by the governing body for indirect taxes.

Other key aspects that were desired to bring more certainty and stability to GST includes the need to simplify tax structure by reducing the tax rate slabs to three (by way of merging two rate slabs into one, either 5 per cent and 12 per cent, or 12 per cent and 18 per cent). An attempt to further consolidate indirect taxes is desirable, by way of bringing petroleum and petroleum products under the ambit of GST.

Assisted by: Prashant Gupta, Associate Director, and Rohit Gupta, Associate