Budget 2022: Key sectoral expectations from Indirect Tax perspective

Ahead of Union Budget 2022, which is to be tabled on February 01, 2022, huge expectations, from individual as well as corporate taxpayers, await Finance Minister. Nirmala Sitharaman. Businesses are waiting with bated breath to see what reforms and reliefs are introduced for the financial year ahead. It is expected that Union Budget would be an agent of change in ushering India towards the long-enumerated feat of realizing $5-trillion economy by the government. Along with the booming economy, Budget 2022-23 also has the huge responsibility for revival of economy in view of new looming Omicron threat.

Expectations continue to circle economic recovery, ease of compliance and kick-start investment cycle to transit domestic economy into a higher growth orbit while remaining inclusive and sustainable. The forthcoming Union Budget will also be important from the perspective of sustaining the growth turnaround after induced stress of Covid-19 pandemic. There have been spate of reformist announcements lately including Gati Shakti, sale of Air India as part of the aggressive asset monetization plan, scrapping of retrospective taxation, sector specific Production Linked Incentive (PLI) schemes all of which have set the premise that the Budget will continue to impart momentum to this infrastructural thrust.

In order to harness benefits of private sector investments and unleash the virtuous cycle of economic growth, it is expected that Budget would look into the impending demand for simplified tax structure with fewer tax slabs, zero multiplicity in taxes and easier flow of input tax credit in the system. While the number of items in 28 per cent tax slab has been brought down during past years, rate rationalization has been achieved only partially and much of this is yet to see the light of the day.

It is expected that the Union Budget may announce steps to reduce tax litigation, boost compliance by greater oversight of transactions. There are many measures that the government may undertake to address this, including accelerating the digitalization of tax administration so that compliance to existing tax rules may be made almost automatic. The use of technology has the potential to address various areas and identify players within the shadow economy, therefore creating the opportunity to recover lost revenue, improve taxpayer morale, and restore trust in the system. At full capacity, technology solutions can significantly reduce the level of informal activity and revolutionize the operation and organization of tax authorities and their interaction and relationships with taxpayers.

Further, enterprises seek clarity on admissibility of ITC for expenses incurred towards CSR activities as well as expenses incurred in wake of Covid-19. Since such supplies are being procured in course of business and mandated by law, industry opines that availment of ITC of GST charged on such supplies should not be in dispute. Much contested issue of double taxation of ocean freight may also be clarified by the Government and the same may be put to rest by taxing said transaction once as a good (as part of Customs duty) or service under reverse charge.

Additionally, industry is hoping for allowance of refund of ITC relating to input services under inverted duty structure which is currently being disallowed which results in higher costs for the business. Further, there are delays in processing GST refunds (whereas there is a statutory timeline of 60 days within which refund amount must be disbursed) under various categories leading to working capital crunch to businesses. In view of same, the Government may consider introducing granting provisional refund to the extent of ninety percent of the total claim within seven days of filing such refund claims.

Covid-19 has proved that we are living in times where health insurance is a necessity for every household to be adequately protected against all medical uncertainties. Higher GST rate of 18% results in higher insurance premium thereby becoming a deterrent in purchasing decision for customers. Reduced GST rate of 5% would not only encourage people to opt for better health coverage and provide access to better quality healthcare but also provide boost to insurance industry which is also under tremendous burden with manifold increase in medical claims.

Real-estate sector is looking at any possible means to liquidate projects that have been stuck for a while. The sector has a general expectation that this budget will incentivize both- rental housing market and the affordable housing sector. Any sort of GST reduction on under-construction projects and raw materials like cement, etc. may provide much needed boost to the sector.

While the government has deferred increase in GST rates, the textile industry is facing several challenges especially rising price of cotton in the international commodity market. The key players in this sector have urged the government to remove 5% import duty on raw cotton. This move will help stabilize the costs and impart much needed support to both big and small businesses. Similarly, there are specific sectoral expectations on overall rationalization of Customs duty rates specifically on raw materials in key sectors like Steel, Aluminum etc. to check input cost and inflation. On the other side, certain sectors like Pulp and paper are seeking imposition of import duties on specific sourcing material to create level playing field and protect domestic industry and further make them globally competitive. 

Although GST rates are decided by the GST council, an indication towards rationalization of GST on automobiles in the budget will be a positive step for reviving sales. With implementation of BS VI, all passenger vehicles and commercial vehicles sold in India are expected to get expensive, GST rate cut will offset the price rise to some extent. Sequentially, increased sales and higher prices will compensate GST revenues loss. More measures must be rolled out to encourage the adoption of electric vehicles. These measures can be in terms of rationalisation of import duties on components and parts, providing tax exemptions on loans taken for electric vehicles etc.

In addition to above, much required relief measures are expected by the industry’s worst hit by COVID in past couple of years – hospitality and aviation. This includes measures beyond GST, such as offering interest-free loans, subsidies, reduction in tax structure, relief in interest payment, tax exemptions and higher incentives. Government could also take a cue from other global jurisdictions which had introduced various interim benefits to incentivize consumption in many ways which would help these industries sustain the negative and direct impact of the pandemic.

It has been 15 years since implementation of SEZ law and with technological development as well as change in Indirect tax regime, a need has been felt for overhauling of SEZ law especially keeping in mind the emerging global scenarios and to bring it in synergy with GST law. Commerce Secretary has recently announced that some major changes in SEZ policies are being considered and would be introduced through Union Budget with an object of simplifying SEZ law in terms of procedural and compliance aspect.

Having to address critical issues of demand generation, job creation and putting the economy on a sustained 8-9% plus growth path, it is expected that the Finance Minister is likely to announce some tangible tax reliefs under both Direct and Indirect Taxes. This coupled with some radical changes to help revival of economy, investment in infrastructure, subsidized tax rates, rationalization of tax laws, extending sector specific incentives and continued thrust on automation may make the upcoming budget a populist and inclusive budget that India Inc is wishing for.

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Contributed by: Krishan Arora, Partner, Grant Thornton Bharat LLP, with inputs from Devika Dixit (Associate Director), Aditya Jain (Manager) and Vasu Aggarwal (Assistant Manager) at Grant Thornton Bharat LLP