Indirect tax: Few but well-justified changes in Budget 2020

Customs duties and exemptions need to be streamlined

A lion’s share of the tax proposals in this Budget has been taken by the direct taxes. Much less has been done on the indirect tax side. This is justified in a way, because indirect tax consists of customs duty and goods and services tax (GST). The GST is not within the purview of the Budget so far as the rates of duty are concerned, though the policy can certainly be discussed, which has been done. In regard to customs, not many changes have been made. This shows the intention of the finance minister to show stability in the customs duty rates. 

Coming to the GST, the finance minister had made some general observations, which are of importance from the policy point of view. She has said that GST is the most historic tax reform that has ever been made. It, however, needs continuous readjustment. A simplified return shall be implemented from April 1, 2020. This is under pilot run. It will make return filing simple with features like SMS-based filing for nil return, return pre-filing, improved input tax credit flow and over all simplification. Refund process has been simplified and has been made fully automated with no human interface. Electronic invoice is another innovation wherein critical information shall be captured electronically in a centralised system that can be used for verification with returns which are submitted, and for verification of input credit system. An important measure that is going to be implemented is Aadhaar-based verification of taxpayers. This will help in weeding out dummy or non-existent units. In my view, this is an important anti-evasion measure that should have been implemented earlier rather than waiting for more than two years.

Another proposed measure which the finance minister has indicated in the Budget is that deep data analytics and tools based on Artificial Intelligence will be used to crack down on GST input tax credit and refund and other frauds, and identify those who are trying to game the system. This is an exceptionally good idea and is much better than matching 100 per cent invoices. The finance minister has also done the right thing in clearly mentioning in the Budget that invoice and input credit tax matching is being done wherein returns have been found to have mismatched by more than 10 per cent or above a threshold. This measure cannot be fully justified because even a mismatch of 10 per cent should not be allowed. In order to be effective a discrepancy of even 1 per cent of invoices should result in 100 per cent of the invoices of companies having a mismatch to be fully checked. But the finance minister has done the right thing in putting the facts straight so far as the allegation of excessive evasion is concerned. This statement of the finance minister in the Budget clearly establishes that there is no need to go for a 100 per cent matching of invoices. This can be taken as a reply given by the finance minister to critics who think that there is a structural problem in the GST. The statement of the finance minister clearly proves that there is no structural problem but the GST needs adjustment as the situation evolves. I fully agree with this view.

So far as customs duties are concerned, the changes in the rates of duty that have been made are justified. It has been found that imports under the Free Trade Agreement (FTA) are on the rise, which are posing a threat to domestic industry. Action has been taken to correct this situation. Measures have also been proposed to strengthen the provision in regard to safeguard duties, which are applied when surge in imports causes serious injury to domestic industry. Anti-dumping provisions are also being strengthened for some commodities. The Anti-dumping duty on PTA has been abolished. Several exemptions have been withdrawn and others will be reviewed comprehensively by September 2020. This should have been done in the Budget, which has been the practice in the past. There is a proposal here to crowd source suggestions from people for withdrawing this exemption. This is also not quite understandable. Exemption usually affects a few manufacturers, importers and exporters. They are always consulted during the Budget-making. Thus, what could have been done during the Budget has not been done but postponed. 

The finance minister has given a special consideration to the sector manufacturing medical equipment. It has been observed that we are now not only manufacturing medical equipment but also exporting them in large quantities. To provide a fillip to the sector, the Budget has proposed a nominal health cess by way of customs duty on the import of medical equipment. The proceeds of the cess shall be used for creating infrastructure for health services in the aspirational districts. This is the most cumbrous way of collecting duty. The duty itself could have been increased. Once a cess is brought in, it will ultimately become a cesspool.
 

While exemptions can be withdrawn at any time of the year, the rates of duty cannot be changed except during the Budget. Let us have a look at the rates of duty of customs. They are 5, 7.5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 60, 70, 75, 100, 105, 150 and a large number of fixed rates of duty. The finance minister may also like to consolidate these rates of duty into a few rates. There is also a plethora of lists and conditions attached to the exemptions. In the same chapters, there are several rates of duty. If the finance minister has a look at the customs tariff she will be convinced that a major reform in the form of simplifications is necessary. Maybe the National Institute of Public Finance and Policy can be requested to work out the reform, working along with the Budget Section of the finance ministry. The institute has given many good suggestions in the past.

The writer is retired member of the Central Board of Excise and Customs; smukher2000@yahoo.com