In Sitharaman's first Union Budget, the focus is on Make in India

The priority to ease of doing business and measures against tax malpractices should widen the country's tax base, but implementation will be key to success

Indirect taxes

Expectations from this Budget were high, as the government had laid out its vision to make India a $5 trillion economy by 2025. So the common man and businesses wanted to know what it had in its store for them.

With overall tax collections not increasing at a pace desired by the government, Finance Minister Nirmala Sitharaman had the twin objectives of facilitating trade and boosting tax revenues.

Going by recent trends, the Direct Tax-GDP ratio and Indirect Tax-GDP ratio have been moving neck and neck. However, projections for the immediate future indicate a slightly different picture.

Furthermore, treading the fiscal consolidation path, as laid out in previous Budgets, would be a herculean task,in view of estimates of future tax collections. Therefore, the planned fiscal deficit has been tweaked in this year’s Budget to 3.3 per cent of the GDP (which was earlier expected to be realised in 2018-19).

Before the Budget, the common man was more concerned with expected relaxation in personal income tax, while indirect tax proposals were keenly awaited by the business community. The introduction of the Goods and Services Tax (GST) in July 2017 changed the landscape of indirect tax in the country. It now focuses primarily on amendments in Customs and Excise laws. The contribution of GST in unifying the nation and facilitating trade was highlighted in this year’s Budget speech.

Certain areas on which the Budget focused, such as incentivising purchase of electric vehicles and  curbing import of non-essential products, has set the government’s vision for various industry sectors. Furthermore, the introduction of certain dispute resolution measures send out signals to businesses about the government’s intent to move forward without the burden of unfruitful pre-GST era tax litigations.

This year’s indirect tax proposals focused on five key objectives — encouraging Make in India, securing India’s borders, boosting tax revenues, protecting small business enterprises and promoting renewable energy. The Make in India initiative has evidently held the ground for indirect taxes in this year’s Budget and has been given effect to through multiple proposals for changes in Basic Customs Duty (BCD) rates.

Focus on Make in India

To boost manufacturing activities within India, BCD rates for certain finished goods have been increased while certain input materials have seen a cut in duties to incentivise manufacture of final products in India. Industries and sectors that will be subject to changes in BCD rates include chemicals, textiles, base metals, food processing, consumer durables, defence and automobiles.

Furthermore, the customs duty waiver on import of defence equipment will go a long way in strengthening the capability of India’s armed forces.

Discouraging outdated technology

Apart from changes in the rate of taxes, certain exemptions granted earlier on imports have been withdrawn, to discourage use of old and outdated technology, such as capital goods used to manufacture cathode ray tubes (CRT), CRT monitors and plasma display panels.

In other cases, exemption from tax has been withdrawn to create a competitive environment for domestic manufacturers making electronic goods such as switches, sockets, plugs and connectors.

‘Green Budget’

This year’s Budget can be called a “green budget”, since the government has proposed exemption from income tax of an amount up to Rs 1.5 lakh on interest paid on loans to purchase electric vehicles. Furthermore, the government is also thinking of reducing GST rates on import of electric vehicles from 12% at present to 5%. And, as discussed above, import of certain parts of electric vehicles have also been exempted from customs duty.

Increase in excise duty and cess to fuel inflation

The proposal to increase special additional excise duty and road and infrastructure cess by Rs 1 each will result in daily commutes becoming more expensive. Furthermore, the cascading effect of an increase in fuel costs on prices of goods will result in a rise in inflationary pressure. This increase in excise duty and road and infrastructure cess will also adversely impact movement of goods by businesses.

Benefits of increase in excise duty 

on ‘sin’ goods

The rise in excise duty on cigarettes and tobacco products will discourage their use and at the same time increase tax revenues.

Dispute-resolution mechanism 

A dispute resolution-cum-amnesty scheme, the Sabka Vishwas Legacy Dispute Resolution Scheme, 2019, will be introduced for resolution and settlement of legacy cases of taxes and duties, which have been subsumed in GST, e.g. Central excise and service tax. The key features of these are:

(i) Applicable to matters pending on or before June 30, 2019

(ii) Exclusion of certain cases such as those pending before the Settlement Commission

(iii) Relief to vary from 40% to 70% of tax dues or arrears for cases “other than voluntary disclosure”, including waiver of interest and penalty

The scheme provides businesses the option of minimising their litigation burden by partly paying their tax dues or arrears (without interest and penalty). However, it is noteworthy that cases of voluntary disclosure by taxpayers before June 30, 2019 have not been covered under the scheme, and therefore, the normal procedure of law will be applicable in such cases.

Retrospective exemptions under service tax

In a new approach towards reduction of litigation, retrospective exemption from service tax has been proposed on provision of certain services, such as granting of liquor licences by state governments and provision of certain long-duration degree or diploma programmes offered by the Indian Institutes of Management for a specified period of time.

Furthermore, an enabling provision to seek tax refund, in cases where service tax had already been paid in respect of such services, has also been proposed. However, a refund application would need to be filed within six months from the date the Finance Bill receives Presidential assent.

Radical changes in GST 

Amendments to the GST proposed in the Budget will give legal force to the decisions of the GST Council. The key amendments proposed include:
 

1. A Composition Scheme has been proposed for suppliers of services or mixed suppliers with annual turnover of up to Rs 50 lakh in the preceding financial year. Earlier, the option of aare Composition Scheme was not available to suppliers of services (other than restaurants, which are considered to be service providers under GST) and they had to mandatorily register as regular taxpayers.

2. Specified suppliers are to mandatorily provide the option of identified modes of electronic payment to recipients. This measure is in line with the government’s aim to promote a cashless payment structure in India.

3. Ease of doing business in India has received an impetus by the proposal for introduction of the facility to transfer any amount of tax, interest, penalty and fee from one head to another head in electronic cash ledgers (subject to certain restrictions).

4. Providing relief to taxpayers, interest will only be charged on the net cash tax liability, i.e. on the amount of tax paid by a debiting Electronic Cash Ledger and not on tax paid through utilisation of input tax credit.

5. The government may also disburse the refund amount to taxpayers in respect of refund of state taxes. This will benefit taxpayers and put an end to their shuttling between the Central and state jurisdiction officers.

6. The National Anti-Profiteering Authority has been empowered to impose a penalty equivalent to 10% of the profiteered amount.

7. It is proposed that a National Appellate Authority of Advance Rulings should be created with the objective of enabling appeals being heard against conflicting GST advance rulings (pronounced on the same question by the GST Appellate Authorities of two or more states or Union Territories) in the case of distinct persons. This will ensure uniformity in adoption of tax positions across different states.

Apart from proposals relating to GST, the Budget also focused on upcoming changes in the GST compliance framework, i.e. implementation of ane-invoicing facility anda new return-filing framework. Furthermore, facilitation of trade and industry through a slew of measures, including single quarterly returns for small taxpayers, free accounting software for small businesses and a fully automated refund mechanism, were given prime importance.

Hits and misses

Budget 2019 has presented a comprehensive and futuristic approach, with initiatives including fuel-efficient vehicles and e-vehicles, while laying stress on reducing indirect tax-related litigations of the past. The government’s mantra of promoting ease of doing business and its strict measures against tax malpractices should pave the way for a substantial increase in the country’s tax base.

However, it is the manner of implementation of such trade facilitation proposals that will eventually determine their success. And while the Amnesty Scheme is targeted at reducing past litigations, more concentrated effort needs to be made to minimise litigation under GST by provision of timely clarifications on certain contentious issues. We look forward to the government continuing the pro-active approach it has adopted in relation to GST and hope that it will proactively address the pain points of various industries. This will go a long way in boosting the Indian economy.