Indirect Taxes: Union Budget 2022 is a transformative and progressive

The focus on India's startup ecosystem, the ease of doing business and green energy will shore up growth momentum and benefit multiple stakeholders.

The Economic Survey 2021-22 was a precursor to the Union Budget for 2022-23, as it signalled the green shoots in the post-vaccination phase of the economy. The Survey indicated the fiscal headroom that the government has in its hands to ramp up capital expenditure, which will boost growth. With tax buoyancy and fast-paced economic recovery on its side, the government was able to present a transformative and progressive Union Budget 2022-23.

The focus on India’s startup ecosystem, the ease of doing business and green energy indicates the government’s progressive outlook, which will benefit multiple stakeholders of the economy. This Budget seems to have done a fine job in balancing the domestic industry requirements, supporting growth momentum, and preventing tax leakages.

A game-changer move

In line with the experience gained over the past five years in dealing with and restricting the fraudulent GST practices, the government has proposed to completely revamp the input tax credit (ITC) availment and utilisation mechanism.

Going forward, it appears that a pre-generated statement will be provided to taxpayers, mentioning the total input tax credit. This will be bifurcated into the ITC that can be availed and the ITC that will be restricted for availment. It is notable that ITC will be restricted for availment in the following scenarios:

(a)  For the initial prescribed period after obtaining GST registration by the recipient’s supplier;

(b) Where the recipient’s supplier defaults in payment of tax for a prescribed period;

(c) Where the output tax payable in accordance with the details furnished by the recipient’s supplier in its Form GSTR-1 (outward supply return) exceeds the output tax actually paid by him;

(d) Where the recipient’s supplier avails ITC in excess of the amount eligible to him as per his pre-generated ITC statement;

(e) Where the recipient’s supplier does not adhere to the maximum permissible extent of input credit utilisation, while discharging his GST liability;

(f) Also, a certain class of persons may be prescribed on whose supplies input credit will not be eligible.

The industry is expecting to gain more clarity on the procedural aspects of these changes after they get notified and the GST rules get amended. As the pre-generated input credit statement remains the backbone of these changes, the effectiveness of the information technology (IT) infrastructure deployed by the department will play a key role in its successful execution. Hence, the government should ensure that its IT infrastructure is robust enough to capture all possible scenarios, in order to facilitate a smooth transition to new restrictions.

Relief for taxpayers under GST

Continuing with its endeavour to provide relief to genuine taxpayers, the Revenue department has proposed several key measures in the Budget, such as: 

(a) ITC amount reversed on account of non-payment of GST liability by the supplier can be re-availed once the supplier makes the payment of applicable GST to the government;

(b) Time limit to avail the ITC, issuance of GST credit notes, and error rectifications for a financial year has been extended to November 30 of the next financial year (whereas the existing timeline is only till the due date for filing GST returns for the month of September of the next financial year). While this will allow an additional month to taxpayers for making rectifications, it will also assist the GSTN portal in ensuring that no rectifications are possible for the previous financial year after this new cut-off date;

(c) The facility to transfer CGST cash balance from one GSTIN to CGST/IGST electronic cash ledger of different GSTIN of the same PAN will be introduced. This would ease the working capital requirement of the taxpayers who have GST registration in more than one state.

(d) GST exemption on the services of “grant of alcoholic liquor licence, against license fee or application fee” has been proposed retrospectively effective July 1, 2017.

Additional excise duty on fuel

In order to promote blending of ethanol/methanol with petrol and biodiesel with diesel, an additional basic excise duty of Rs 2 per liter of petrol and diesel without blending has been proposed to be levied.

New legislation for SEZ Act

As a big step towards plugging the issues being faced by the industry under the Special Economic Zones (SEZ) law, the government will be replacing the SEZ law with a new legislation. The new legislation should, expectedly, facilitate ease in moving in and out of the privileges available to these zones, and should also ease the criteria surrounding the mandatory export obligations. The government should also take this opportunity to address the issues concerning unutilised capacities of these zones, due to present restrictions on supply of goods/services to the domestic tariff area and to enable IT driven customs administration.

Push towards Make in India through customs

In order to provide a level playing field to the domestic industry, a lot of proposals have been announced in Customs that aim at the gradual phase-out of more than 350 duty exemptions customs duty exemptions that have supposedly outlived their intended purposes. These primarily include exemption on certain agricultural produce, chemicals, fabrics, etc. for which sufficient domestic production capacity exists. Project import duty concessions in areas like, coal mining projects, power generation, transmission or distribution projects, railway, and metro projects, etc. will also be discontinued and moderate duty tariffs will be applied.

A new phased manufacturing programme (PMP) will be introduced to boost the local production of wrist wearable devices, hearing devices, and electronic smart meters in India. Under PMP, the customs duty rates on such items will be standardised, while the customs duty rates for the inputs/parts/sub-parts required in manufacturing of such items will be increased in a phased manner. It is notable that a similar PMP scheme was introduced for mobile phones and laptops in the earlier Budgets.

Key reform to curb customs duty evasion

A significant step has been taken towards checking the duty evasion that occurs by way of undervaluation of imported goods. In this regard, a proposal has been made to require the importers to disclose certain additional details in respect of specified class of imported goods, in cases where the Central Board of Indirect Taxes (CBIC) has a “reason to believe” that the value of such goods may not be declared truthfully or accurately, having regard to any relevant criteria. This marks the shift from the concept of “reason to doubt”. Accordingly, a new set of rules will be prescribed to include such circumstances, where valuation can be doubted on the basis of “reason to believe”.

Retrospective customs amendment

It is notable that the Supreme Court, in its landmark decision, had ruled that the Directorate of Revenue Intelligence (DRI) officers are not “proper” officers of customs. This ruling was followed by many High Courts and Tribunals to quash show-cause notices and proceedings initiated by the DRI officers and resulted in putting a huge amount of government’s tax revenue at stake. In an interesting turn of events, the Budget has proposed a validation clause with retrospective effect to treat DRI officers as “proper officers” under customs and to validate any action taken/ functions performed by the DRI officers.

This amendment might result in the petitioners challenging the constitutional validity of the proposed validation clause due to its retrospective impact, a concept that has been intensely litigated in the past as well and is still pending.

The road ahead

The government has duly considered many industry representations and have provided relief on certain key aspects, including clarity on the non-applicability of social welfare surcharge in cases where the aggregate of customs duty is nil. There are certain aspects that the industry expects from the government going forward, such as:

(a) Reducing indirect tax litigation: In the Income Tax law, a proposal has been made to provide for the non-filing of appeals by the Department in cases where an identical question of law is pending before the High Courts or Supreme Court, either in case of assessee or any other assessee, in order to reduce litigations. The industry would expect a similar proposal in respect of the indirect tax litigations, since it will result in considerably reducing the associated time and costs involved in filing the appeal.

(b) Clarity on applicability of indirect taxes on virtual assets: As anticipated, the Budget has outlined the applicability of income tax on the income derived from sale of virtual digital assets. The industry would expect a similar clarity in respect to the applicability of GST.

(c) GST rate rationalisation: As the GST regime stabilises, the industry will expect further rationalisation of the GST rates into three categories.

(d) Customs amnesty scheme: Similar to the dispute resolution scheme introduced in Budget 2019 for pre-GST era, indirect tax litigations (except customs), the industry expects similar amnesty scheme for past litigations under the Customs law, so that it could focus on the future progress rather than being burdened with the tax litigations.

(e) Retrospective exemption to be granted on cross-charge: Provision of retrospective GST exemption for the services of grant of alcoholic liquor license is a welcome step from the government, aiming at reducing litigations. Similar retrospective exemption is expected by the industry with respect to the issue of GST applicability on deemed supplies between distinct persons (i.e. between head office and branch offices of the same entity), since the industry lacked clarity on this aspect in the initial years of GST implementation as to what should be applicable — cross-charge or input service distributor mechanism.

It is urged that the government grant retrospective exemption in case a taxpayer has not paid GST on such deemed supplies or had opted for the other mechanism in the first two years of the GST regime (i.e. year 2017-18 and 2018-19). Providing such exemption will surely go a long way in building the trust between the department and taxpayers.