The Government has a long way ahead as it walks a tightrope, balancing the needs of the economy on one hand with limited fiscal head room on the other. At the time of presentation of Union Budget 2020-21, the government had to perform a tough balancing act in terms of managing stakeholder expectations, keeping a close check on fiscal deficit, announcing measures to battle current economic slowdown both at home and globally.
While the proposals announced on the direct tax front were pragmatic aimed at providing relief to the taxpayers, on the indirect tax front, the announcements were more forward looking. In addition to continuing with the ongoing effort on making product specific customs duty tweaks, Special emphasis was given to protect Indian manufacturing industry by implementing certain additional procedural safeguards.
Under the GST regime, decision making happens at the GST Council meetings. Accordingly, GST does not form part of the indirect tax proposals of the Budget announcements anymore. Nevertheless, the Government has reiterated its commitment to introduce new returns and e-invoicing system from April 2020 in continuation of its efforts to simplify and ease the GST compliance framework.
Several sectors, including Auto, Petroleum and Healthcare, had demanded revisiting the GST regime applicable to them both in terms of rate as well as input credit blockage. There was a hope that atleast some intent or roadmap would be announced towards how Government is looking at expanding the overall base to make it more inclusive on one side and keep the rate structure uniform on the other.
Auto industry, for example, was hoping for a rate cut on supply of vehicles to provide impetus amidst slowdown. It had also been pitching for customs duty waivers to boost the manufacturing of electric vehicles in India. Another key demand was inclusion of Petroleum products under the GST regime which would have provided seamless flow of credits and helped reduce overall costs. Healthcare sector, which has been exempted from GST had been seeking a regime where it could mitigate the input tax costs by way of zero rating or by imposing a concessional rate of GST. Similar asks were made for CSR activities.
Unfortunately, none of this happened and the primary reason of the same could be revenue shortfalls and sensitivities around imposing any taxes on essential services.
There were also expectations that certain important clarifications or notifications would be announced in order to provide more clarity to the GST provisions. Few examples are issues such as meaning and place of supply in case of "intermediary services", clarity on input credit eligibility in terms of what activities qualify the "use in business" criteria over the credit restrictions prescribed, etc. However, the budget did not address these issues, thus giving room to the revenue authorities to adopt alternative interpretations which result in unwanted litigation.
The Government has indeed widened the ambit of penal provisions by making fraudulent availment of Input Tax Credit (ITC) a cognizable and non-bailable offence. Further, the penal provisions have been extended to beneficiary of passing on or availing fraudulent ITC similar to a person who commits such specified offences. This is a welcome move as it would curb tax evasion and assist in boosting government revenue. However, one would hope that use of such stringent provisions would be limited to cases of frauds and deliberate tax evasion and not on account of bona fide availment or at cost of honest taxpayers.
Further, with an intent to create an appropriate balance to benefit both industry and government, the Government has delinked the date of invoice from the date of debit note which means that the date of debit note shall be considered stand alone for claiming ITC which was a common ask of taxpayers.
On the Customs front, the Government has introduced an array of reforms, namely, introduction of levy of 5% 'Health Cess' on specific imported medical equipment coupled with increase in rate of BCD/SWS for various sectors such as footwear, electronics etc. While introduction of 'Health Cess' has been done in order to encourage medical equipment manufacturing in India, the same further distances the Country overall tax regime from a cess-free regime and adds to the overall landed cost and valuation challenges.
Stringent checks have been introduced on rising imports under free trade agreements which include adherence to rules of origin requirements. This would ensure that no undue claims are made by the importers.
The Government has also announced a comprehensive review of existing customs duty exemptions on many products in coming months. Though such amendments are in line with the 'Make-in-India' initiative of the Government, the flipside of the same could be its inflationary impact as the same could adversely impact the spending capacity of households. Moreover, such changes also impacts investors' confidence leading to an overall negative impact.
In order to encourage taxpayers to settle their historical disputes and cases in the field of Direct Taxation, the Government has introduced the 'Vivad se Vishwas' Scheme for pending direct tax litigations on similar lines of last year's 'Sabka Vishwas' Scheme for Central Excise and Service tax. A similar amnesty scheme for Customs laws, was also the need of the hour to resolve Customs litigations and generating extra revenue for the Government. Also, looking at the success the scheme attained at fag end, another window to extend the same for Central Excise and Service tax could have encouraged more players to participate which could helped improve the overall market sentiment as also aid the Government in closing/reducing legacy cases.
Budget 2020 evidences an apparent focus of the Government to encourage local manufacturing and consumption thereof. There also appears to be a consistent focus on efforts of Government to take the "Make in India" theme forward. However, the government could have also considered introducing certain clarificatory amendments in the GST laws as well as announced some long term thought on widening the GST base making it more and more inclusive. These could have certainly helped revive more confidence and trust in the minds of taxpayers. To sum up, some positives did come out of the budget which was forward looking, however, there is always room for more!!
(Krishan Arora is Partner and Praveen Kashyap is Director with Grant Thornton India LLP. Views expressed are strictly personal)