Tax World reacts to Union Budget 2020!

Central GST collection target for this financial year (FY 19-20) has been revised downwards from INR 526,000 crores to INR 514,000 crores. The target for FY 20-21 has been pegged at INR 580,000 crores, a growth of about 13% from the revised collection target, which seems to be a positive step towards setting up more realistic targets.

On GST, directionally, thrust towards simplification and technology led administration is expected to continue. The proposal of implementing a system of cash reward to incentivise customers seeking invoice should help create a more compliant GST ecosystem. Proposal to make fraudulent claim of input tax credit without any invoice or bill a cognizable and non-bailable offence is important and should help the Government enforce a check on tax evasion, though it needs to be ensured that the same is implemented well on the ground.

Changes incorporated in the Customs Act to provide for stringent checks on preferential duty claims on goods imported under a free trade agreement (FTA) based on rules of origin requirements would necessitate a complete review of current imports by the businesses. 

There has been a decision to review all Customs duty exemptions by September 2020, which is a directional shift to provide additional incentive to domestic manufacturing. However, it will have to be seen if increasing Customs duty alone would help the Government meet this objective.

With Mr. Aditya Nadkarni, Manager.

Continuing the new practice of carrying the Union Budget documents in a red bag, reminiscence of the ‘bahi-khata’, the Hon’ble Finance Minister Ms. Nirmala Sitharaman unveiled this year’s budget in the backdrop of two cross-cutting developments:

a)      Proliferation of technologies specially analytics, machine learning, robotics, bio-informatics and Artificial Intelligence; and

b)      The number of people in the productive age group i.e. 15-65 years in India, being at its highest. 

Woven around three prominent themes, viz. ‘Aspirational India’, ‘Economic Development’ and ‘Caring Society’, the Union Budget has given plenty to ponder upon on the Income tax front such as incentives on the personal tax front, modification of concessional tax schemes for domestic companies u/s 115BAA and 115BAB, rationalization of provisions for start-ups, as well as rationalization of provisions relating to tax audit in certain cases, dispute resolution scheme etc. 

However, the measures announced around indirect taxes albeit few are no less worthy of taking note of. The Government has, like last year, proposed amendments to GST law through the Finance Bill. These include inter alia –

(a)     Harmonization of the conditions or eligibility to opt for composition scheme for supply of goods vis-à-vis supply of services;

(b)     Delinking of the date of issuance of debit note from the date of issuance of underlying invoice for purposes of claiming ITC. Accordingly, credit in respect of a debit note issued in say FY 2018-19 for an invoice pertaining to FY 2017-18, can now be claimed by the earlier due date of September 2019 return or Annual Return of FY 2018-19;

(c)     retrospectively empowering the Central Government to prescribe time limit and the manner for availing transitional credit against certain unavailed credit under existing law;

(d)     making the offence of fraudulent availment of ITC without invoice or bill cognizable and non-bailable; and

(e)    making the person who retains the benefit of a fraudulent supply or ITC availment / utilization / distribution or at whose instance such transactions are conducted, liable to penalty. 

On the Customs front, some significant amendments have been proposed to the Customs Act 1962 with a view to curb injury to the domestic economy on account of uncontrolled import or export of goods. These are –

(i)          introduction of stringent checks on rising imports under Free Trade Agreements which include adherence to Rules of Origin requirements;

(ii)     strengthening of the provisions regulating surges in dumping of goods and imports of subsidized goods and empowering the Central Government to apply safeguard measures such as imposition of safeguard duty, application of tariff-rate quota or such other measures to check increased import of an article;

(iii)     withdrawal of Customs duty exemptions which have outlived their utility, with a further review in September 2020; and

(iv)    introduction of an additional “Health Cess” of 5% on import of medical devices which shall be used for financing the health infrastructure and services; 

The Government has also sought to introduce a “ledger for duty credit” under the Customs law where the Government shall issue duty credit – (a) in lieu of remission of any duty or tax or levy, chargeable on any material used in the manufacture or processing of goods or for carrying out any operation on such goods in India that are exported; or (b) in lieu of such other financial benefit subject to such conditions and restrictions as may be specified therein. Such duty credit shall be maintained in the Customs Automated System in the form of Electronic Duty Credit Ledger of the recipient and same can be used towards payment of customs duties. 

As a revenue measure, the Hon’ble FM has also proposed to raise excise duty by way of NCCD on cigarettes and other tobacco products. 

With a view to boost exports, the Government has proposed a Scheme for Reversion of duties and taxes on exported products that will be launched in this year. Under this scheme, it is proposed to digitally refund to exporters, duties and taxes levied at the Central, State and local levels, such as electricity duties and VAT on fuel used for transportation, which are not getting exempted or refunded under any other existing mechanism. 

The aforesaid sops would certainly help put a stop to the worst economic slowdown the country has witnessed in a decade and it will spur consumer demand and investment. After all, the Government has estimated a nominal growth of GDP, on the basis of trends available, at 10% for this fiscal!! However, it seems the Government has missed the bus by not introducing certain clarificatory amendments in the GST law, which are the need of the hour. For eg. tweaking of definition of “intermediary” which has been plaguing majority of companies engaged in backend support services.

Making a person who may unknowingly retain the benefit of input tax credit on an incorrect or false invoice issued by supplier, liable to penalty should be reconsidered. Taxpayers are known to take credit of input taxes on invoices appearing in GSTR 2A and then following up with the supplier for the missing invoice. 

 

Tax authorities making them liable to punishment alleging fraudulent retention of such input tax credit taken without any invoice is possible; requiring review of practices of taking input tax credit. 

 

Delinking of underlying invoices while determining the financial year to which a debit note pertains is a necessary and welcome amendment. But it should be given retrospective effect since most tax payers would have generally read the law in the amended form without realizing the nuances.”

While abolition of dividend distribution tax and reduced tax burden for individuals are few good proposals no major stimulus has been provided which could significantly help boost the economy.

Some good steps include, attracting foreign investment, make in India initiatives and a definitive timeline for implementation of new incentive scheme for exporters. The direct tax amnesty scheme has been announced to reduce the pendency in the direct tax litigation against the backdrop of success of indirect tax amnesty scheme - however the benefits under the scheme are significantly low when compared with the indirect tax scheme and therefore the scheme may not be as successful. No major steps have also been taken for sectors which were in dire need of sops (infrastructure, real estate and auto sector) – to kickstart growth in the economy. Even the new direct tax regime which does not permit any deductions/exemptions for individuals may also not provide the expected increase in disposable income in the hands of individuals to boost consumption.

Overall the budget still appears to be not meeting the expectations.

Overall the budget did not meet the expectations of the industry. However to cite a few positives on the indirect tax front would be – inclusion of tax payer’s charter in the statute is a confidence building measure; there is a clear indication of RoDTEP proposal being considered seriously to replace some of the export incentives; review of ADD and SG provisions under customs and creation of electronic customs duty ledger. On the contrary, the points of worry for the industry would be steep increase in the customs duties for several products which significantly impact the auto sector including the EV segment, mobiles and refrigerating industry. Instead of increasing the import duties on medical devices, introduction of health cess is not expected by the industry, when these cesses are not being put to intended use in the past.

On the direct tax front, the positives would be introduction of new tax slabs for those prepared to forego the exemptions and Vivad se Vishwas scheme. But the expectations of the individual regarding the tweaking of exemptions particularly in relation to medical insurance, housing loan repayment did not meet the expectations.

On the corporate tax front, the abolition of DDT in the hands of the companies and impetus given to startups would be welcome move.

The reforms announced in education sector particularly introduction of INDSAT, introduction of new courses which have industry acceptance are good measures.

Some of the key takeaways from the Union Budget 2020-21 are -

* Indirect tax revenue for 2019-20 -  shortfall of INR 1.33 lakh crores from budgeted estimates to revised estimates; a modest growth of 5.3% as compared to 2018-19 (Actuals).

* Indirect tax revenue for 2020-21 – reduction of 2% as compared to 2019-20 (budget estimates); revenue increase estimated at 11.1% as compared to 2019-20 (revised estimates).

* GST revenue – shortfall of INR 0.51 lakh crores from budgeted estimates to revised estimates for 2019-20; revenue increase estimated at 12.8% as compared to 2019-20 (revised estimates).

* GST – 20% reduction in turnaround time for trucks, saving of 4% in monthly average household spending, 60 lakhs new tax payers added in last 2 years

* Availment of input tax credit without an invoice to be a cognizable and non-bailable offence.

* Scheme for Reversion of duties and taxes on exported products - electricity duties and VAT on fuel used for transportation to be refunded (details of the Scheme not announced)

* An importer claiming preferential rate of duty in terms of any trade agreement will be required to possess sufficient information regards the manner in which country of origin criteria specified in the rules of origin in the trade agreement are satisfied.  The importer is required to exercise reasonable care as to the accuracy and thruthfulness of the information furnished, including that of certificate of origin.

* Health Cess to be levied, with immediate effect, at 5% on import of specified medical devices.  Customs duty exemptions pruned.  Social Welfare Surcharge exempted on certain items.

* National Calamity Contingency Duty, with immediate effect, increased on tobacco and tobacco products.

The announcements around tax are simple but interesting. It appears very clearly that the government has learnt the benefits of Amnesty scheme introduced for the indirect tax regime and has now proposed it even for the direct tax regime. It is expected that the scheme will resolve lot of pending litigation, resulting in benefits to the taxpayers and the government exchequer. The interesting and innovative announcements related to inclusion of the tax charter and cash rewards needs to be closely monitored. The finance minister did not shy away from making announcements to show that the focus will remain on a better tax compliance and hence appropriately commented with respect to returns, refund, electronic invoices, Aadhaar-based verification, credit mismatch and deep data analytics. The other important issues announced were the rate rationalisation and removal of the problem of inverted duty structure. The government is keen to pragmatically address these issues apart from addressing the problem of foreign trade agreements. It is a fact that various imports under the foreign trade agreements are made based on the rules of Origin. The government is clear that various checks would be put to examine these rules including those provisions where the tax leakages may happen in Customs and GST.

“The Government’s focus on ‘Make in India’ campaign was significantly evident through proposed increase in rates of customs duty on import of several products including electric motor vehicles, refrigerating equipment, furniture, parts of cellular mobile phones, headphones and earphones and an exemption for parts used for manufacture of some of these products.  The said proposals should incentivise domestic industries and boost indigenization of various goods including local value addition. To further incentivize domestic industry, proposals have been made for ensuring adequate controls on any undue benefits being claimed by businesses including larger administration of benefits being claimed under the preferential tariff treatment regime, liability on importers claiming such benefits for ensuring the eligibility of such benefits, etc.

Proposals for strengthening safeguard measures including additional duties, tariff quotas, etc to protect dumping of goods and jeopardization of domestic industries as well foster the ‘Make in India’ leitmotif of this Government.  On similar lines, proposal of levying health cess on import of certain medical devices should also help boost the healthcare sector in India and the proposition of limited use of this Cess for generating resources for health services should help the larger Indian population as well.  Confirmation on implementation of RoDTEP Scheme for exporters in this fiscal year helps boost morale for our foreign exchange earners on continuation of fiscal incentives and the provisions on electronic duty credit ledger with allowing of transfer of funds credited in the said ledger provides a blueprint of the proposed framework and related comfort for the exporters.

From a GST perspective, relaxation in restriction of 30th September/ annual return deadline for input tax credit on debit notes with it now being linked to the debit note date instead of the original invoice date should financially benefit various sectors especially sectors where finalization of price adjustments is a long drawn battle or are into continuous supply and price monitoring by customers.  Similarly, higher penalty and prosecution provisions for nurturing fake input tax credits through self- availment or inducing fake invoicing should also help effectively deter/ check tax evasion. Also, reinforcement by the Finance Minister on implementation of New Returns from 1 April, e invoicing system in a phase wise manner, cash reward system for incentivising customers who seek tax invoices, etc further reflect the Government’s focus on implementing measures for checking tax evasion”

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While the budget is a non-event from a GST perspective, the Finance Minister reiterated and confirmed the steps being taken by the Government towards ease of compliance and curbing tax evasion. The Finance Minister has re-stated that the new simplified return filing mechanism will be implemented April 2020 and the various steps that are being taken to improve compliances such as the E-invoicing, dynamic QR Code, Automated refunds etc. On the Customs front, the key amendment includes legislative changes that have been made to introduce stringent measures to avoid abuse of Free Trade Agreements, an outcome of the multiple disputes that are ongoing with respect to payment of Customs duty on imports at preferential rates under FTA. It was also mentioned that the Certificate of Origin Rules will be re-discussed and tightened to curb improper use of the FTAs.

The notable feature of this Union Budget 2020 are that:

1) we are referring to and glorifying the golden heritage of our amazing country,

2) we are learning from it,

3) we are ready to address the most important concerns,

4) we have the capability to identify the potentials which can provide the maximum comparative advantage, and

5) new India has decided to apply the latest technological tools and investment in infrastructure to harness the fullest potential

To me these features are unparalleled. For a hitherto thought constrained policy makers who represented India as a "backward under developed country", Budget 2020 marks a quantum jump towards an aspiring Bharat. The Bharat which had golden heritage and which is ready and willing to regain it once more.

The FM gave the trinity of mantras i.e.

- Aspiring India i.e. never give up approach so as to continue moving towards the better, the Lord Shiv who continuously meditates within to learn and achieve more

- Economic Development which is the basis for third dimensional existence. Through prosperity i.e. goddess Laxmi the human beings can achieve the goal of wholistic well being, and

- Caring society - Economic Development without a society which is humane and compassionate leads to materialism. The Finance Minister has done well by channelizing the economic development towards the positive goal of an egalitarian society 

I would briefly discuss each of the above to further what I perceive of this budget. 

GLORIFYING THE GOLDEN HERITAGE OF OUR AMAZING COUNTRY

1) references have been made toSaraswati Sindhu civilization, and to the Harappan Seals tracing the history of our ancient wisdom

2) establishing Indian Institute of Heritage and Conservation as a deemed university is also a positive step to scientifically bring to fore, our history and heritage

3) Development of 5 archeological sites as iconic sites with iconic museums is yet another step towards glorifying the rich part of our country, which will also bring opportunities in international tourism.

4) likewise development and re-curation of other museums is a step towards re-affirming our history and portraying the same to the outside world. 

READY TO LEARN FROM PAST

Our children are eating poison in form of food, and we can do nothing about it.

Notable feature of the budget to address this problem is the Government's initiative to reduce the use of chemical fertilizers.

Our country had huge share in global GDP and the lion's share came from agriculture and allied products. That time chemicals were not used for growing crops. Modern agriculture is largely dependent on increased use of chemicals, and the Government of the day has to spend huge amount by subsidizing the said chemical fertilizers. The government has shown renewed rigour and commitment and has made a bold statement by laying down the policy towards changing the incentive (read subsidy) regime. Towards this end, the FM has stated the following in her budget speech:

Our government shall encourage balanced use of all kinds of fertilizers including the traditional organic and other innovative fertilizers. This is a necessary step to change the prevailing incentive regime, which encourages excessive use of chemical fertilisers. 

Reaffirming the use of organic farming methods and reference to zero budget farming are very important road maps laid by the present government. Zero budget farming is the farming by ancient methods where nature and natural products easily available to farmers are used for doing the farming in substitution of the chemical based farming.

The dedication of the budget towards making available easy finance to the farmers, and helping the rural women to setup Village storage scheme, through self help groups (SLG), are also quite important. This is seen as a step towards helping women regain their position as "Dhaanya Lakshmi", whereby the women of the village were the repositories of seeds of all type of crops. Wonderful thought for women empowerment!!

With proper implementation of these goals, the vision towards healthy India, doubling the income of the farmers, gender equality, etc. can become a reality. 

WE ARE READY TO ADDRESS THE MOST IMPORTANT CONCERNS, and WE HAVE THE CAPABILITY TO IDENTIFY THE POTENTIALS WHICH CAN PROVIDE THE MAXIMUM COMPARATIVE ADVANTAGE

Education

"Garibi hatao" has been a political war cry. But no one was ready to address the concerns. This budget has shown the willingness to address the problem in our education system which produce graduates who are far from the requirement of the employers.

Towards this end, the following are important:

1) New education Policy is slated to be issued

2) About 150 higher educational institutions will start apprenticeship embedded degree/diploma courses by March 2021

3) urban local bodies across the country would provide internship opportunities to fresh engineers for a period up to one year

4) degree level full-fledged online education programmes for students of deprived section of the society by institutions who are ranked within top 100 in the National Institutional Ranking framework. 

Health and piped water supply for all through "Jal Jeevan Mission" are also being provided a prominent space in the budget exercise. To provide for adequate number of doctors, medical colleges are proposed with each Distt hospital.

The resolve to provide minimum basic facilities to all with renewed vigour, forms the basis for the Aspirational India. 

NEW INDIA HAS DECIDED TO APPLY THE LATEST TECHNOLOGICAL TOOLS AND INVESTMENT IN INFRASTRUCTURE TO HARNESS THE FULLEST POTENTIAL

The budget make references to extensive use of Artificial intelligence, Internet-of-Things (IoT), 3D printing, drones, DNA data storage, quantum computing, etc.,

Huge investment is proposed to be made in infrastructure including railways, roadways, airways and inland waterways. 

Investment in quality education and backing it up with robust infrastructure will be the quotient of growth for new India. 

This is completing the full circle. Starting from the history, and aligning the values and the learnings with the modern day technology in the practical perspective to achieve maximum good for maximum number of people. This is the FM's recipe for glorious future and THE NEW INDIA.
Dear FM, we are very optimistic.

The Hon’ble FM in her speech touted GST as the most historic tax reform on account of the new regime integrating the country commercially by promoting cooperative federalism. Reduction in turnaround time of trucks by 20%, abolishment of inspector raj, reduction in effective tax incidence and 4% gain in monthly expenditure on account of reduced GST rates, were cited as some of the key accomplishments.

Some of the upcoming significant GST policy level changes which were re-iterated by the Hon’ble FM included simplified new return system, fully automated refunds, introduction of electronic invoicing, use of dynamic QR code for consumer invoices, aadhar based verification of taxpayers, system of cash reward to incentivize customers to seek invoices, deliberation on GST rate structure etc.

Announcement of new scheme to be introduced later this year for providing digital refund to exporters for electricity duty and VAT on fuels used in transportation, is a big plus as the same would not only reduce the embedded tax cost in exports, but also help in making Indian exports competitive globally.

As regards Customs, on expected lines, changes in duty structure were made to promote domestic manufacturing by reducing rates on inputs, and increasing rates of finished products. Duty rates on finished goods such as footwear and furniture, household items such as tableware, kitchenware, glassware, appliances such as fans, food grinders, hair dryers, coffee and tea makers, water cooler, vending machines etc., have been increased.

Further, to protect domestic manufacturing,  changes have been proposed in administration of rules of origin under trade agreements and new section has been substituted for imposition of safeguard duties.

This Union Budget has certainly set the ball in motion for great transition in the overall scheme of Taxation. However, with Direct Taxes receiving watershed benefits in this budget, Indirect Taxes ranked low in the Government’s list of priorities. This is clearly evident from the formal adoption of Taxpayer’s Charter, statutorily recognizing the rights of taxpayers and duties of tax administrators, only in the Direct Tax laws.

In the customs duty arena, the Government continues to strengthen Indian domestic market. The duty rates have been rationalised to lower the duty liability on inputs and increased duties on finished goods. The strengthening of FTA compliances and enhancement of safeguard duties will also positively serve the interests of domestic industry. The Government has also announced its plans for comprehensive review of customs duty exemptions, introduction of product-specific Country of Origin Rules and incentive scheme for electronics manufacturers in the coming months.

To give impetus to ‘Make in India’ scheme and ‘Ayushman Bharat’ initiative, the Government has levied ‘Health Cess’ on imported medical equipment. With the ‘Health Cess’ being levied while levy of Social Welfare Surcharge on imported goods continues, expectations of Cess-free regime seem fanciful.

On export incentives front, the Government plans on introducing enabling provisions for Electronic Duty Credit Ledger (‘EDCL’) to incentivize exporters. This seems to be in line with the export incentives likely to be introduced in the upcoming Foreign Trade Policy 2020-25. The Government has also announced its plans to grant refund of other taxes (like VAT on fuel, Electricity Duty etc.) to exporters in the future.

Interestingly, Government chose not to introduce a Dispute Resolution Scheme for customs litigations like the Sabka Vishwas Scheme introduced in the last budget. This Scheme, if introduced, would have gone a long way in closing customs litigations and concurrently harnessed extra revenue for the Government.

On GST front, the Government reiterated its commitment on two major changes effective from April 1, 2020 viz. New Returns and E-Invoicing.

“Given the environment of slow growth, declining consumption and weak investment, Budget 2020 comes at a very crucial time of the Economy. Undoubtedly, the Finance Minister Nirmala Sitharaman has announced pro-middle class and development oriented Budget. To the limelight of aam aadmi, Income Tax rates for earning up to Rs. 15 lakh per annum have been slashed and no tax will be applied on earnings up to Rs. 5 lakh, if a taxpayer opts for foregoing exemptions and deductions. The FM termed GST as a historic structural reform, while listing out the benefits of the GST regime in reducing the time taken by trucks to transport goods, substantially bringing down the effective tax incidence so that average household saves monthly 4% on account of reduced GST. Around 60 lakh new taxpayers added to tax net and a simplified new return system is being introduced from April 1, 2020. Also, the FM hailed e-invoicing as another innovation wherein critical information shall be captured electronically in a centralized system. 

Response of GST is indeed heartening but it remains to be seen as to how smooth these new systems will be put in place. Needless to mention that robust IT network is going to be the heart of new return system and e-invoicing. Unless the system supports these functions without glitches, their utility and efficiency may not be established in desired sense, which we are witnessing in the era of GSTR-1 and GSTR-3B which took its own time to settle and taxpayers still continue to face last day portal glitches leading to staggered extension of due dates – region based. Such ideas may not go well the concept of one nation one tax. Moreover, the nation was also looking for a roadmap towards rate-rationalisation in GST, which does not seem to be on agenda of this budget. Earlier, former Finance Minister Arun Jaitley had said that the policymakers could merge the 12% and 18% slabs under GST going forward as revenue increases, thereby effectively making it a two-tier tax. Also, it is time that we strive to maintain stability of provisions and systems under GST, as frequent changes causes disruptions in business operations as well as increasing confusions in trade. Though, Centre and States are quite receptive to resolve GST issues but certain level of steadiness is also required. 

In nutshell, though this budget may be considered as good providing tax benefits to the middle men, corporates and support to farmers, but the present situation of the economy and taxation system was requiring little more.”

With a focus to give wings to India’s aspirations, the budget focuses on economic and social growth. On the tax front, the Finance Minister has promised further simplification of GST. For further boosting the domestic manufacturing sector, customs duties on import certain commodities electric vehicles and parts of mobile phones is proposed to be increased. A new health cess is also proposed to be imposed to incentivise domestic manufacturers in the health sector. It is also proposed to review existing customs duty exemptions, FTA’s, safeguard duty measures, dumping of goods so as to prevent injury to the domestic market.

To continue to give impetus to exports, the FM announced that a scheme is proposed that would allow exporters digital refunds with no human interface. Further, it is also proposed that exporters would be digitally refunded the duties and taxes levied at the Central, State and local levels, such as electricity duties and VAT on fuel used for transportation,  which are not getting exempted or refunded under any other existing mechanism – a welcome move.

Aadhaar based verification of taxpayers is being introduced with a view to call out the non-existent units. Dynamic QR-code is proposed for consumer invoices. GST details would be captured when payment for purchases is made through the QR-code. Further, in order to encourage a customer to seek an invoice from supplier, a system of cash reward is proposed. 

The FM’s speech displayed reliance on technology, AI and PPP models in all identified sectors- steering the path to a digital economy. The Union Budget 2020-21, lays down what look like tax friendly measures, however how much of it would actually translate into a reality, is something that time would tell.