FEBRUARY 03, 2020

By Puneet Bansal, Managing Partner, NITYA Tax Associates

"The cold harsh reality is that we have to balance the budget"
- Michael Bloomberg

IN the backdrop of the current economic slowdown being faced by the country, the industry had huge expectations from the Modi government in this budget.

The Finance Minister introduced this budget with three themes viz. Aspirational India, Economic Development and 'Caring Society' at the centre-stage. Quoting a verse from a Kashmiri poem, the Finance Minister emphasised that every act of the government aims to benefit the people of India. Certainly, the Budget has set the ball rolling for great transition in the field of Taxation with watershed benefits being introduced in the field of Direct Taxation.

Nevertheless, this budget still leaves a lot to be desired from an Indirect Tax standpoint. This is evident from the formal adoption of Taxpayer's Charter, which would statutorily recognise the rights of the taxpayers only in Direct Tax regime.

Even after the tremendous success of the Sabka Vishwas Scheme for resolving Excise Duty and Service Tax litigations, the Government has come up with a similar amnesty scheme for pending Direct Tax litigations. A similar amnesty scheme for Customs laws, would have gone a long way in resolving Customs litigations while generating extra revenue for the Government.

On the Customs front, the Government has introduced an array of reforms, namely, introduction of levy of 'Health Cess' on imported medical equipment coupled with increase in rate of BCD/SWS for various sectors such as footwear, electronics etc. The Government has also announced a comprehensive review of existing customs duty exemptions on many products in coming months.

While such a stance is understandable given the Government's commitment to its 'Make in India' initiative, this move will lead to an inflationary trend. Such constant shuffling in rates of customs duty (which becomes cost for an importer) creates an atmosphere of uncertainty and erodes investor confidence.

The introduction of 'Health Cess' distances the country from a Cess-free regime. As evident from the past, every Cess brings its own sets of legal disputes.

Another landmark change proposed in this budget is a greater regulation around the 'Country of Origin' provisions under Free Trade Agreements. While the Government intends to be pro-active in catching hold of the FTA violations, there are serious question marks on the legality of the proposed provisions. The questions range from these provisions being in direct conflict with the Free Trade Agreements entered by India with other countries, manner of exercise of 'reasonable care' by an importer etc.

On the incentives front, the Government plans to introduce an incentive scheme to encourage electronics and medical equipment manufacturing in India. The Government also intends to grant refund of taxes like VAT on fuel, Electricity Duty etc. to exporters in the future.

Another important feature of this Budget is the introduction of the Electronic Duty Credit Ledger ('EDCL') for grant of export incentives. Instead of grant of export incentives in cash or scrips, the Government is likely to bring a fresh set of export incentives in the upcoming Foreign Trade Policy 2020 - 2025 and these incentives will be credited in EDCL.

On GST front, the Government has proposed to ease time limit for availment of ITC on debit notes and impose penalty on beneficiaries of fake/fraudulent credits. The Government has retained its commitment to introduce new returns and e-invoicing system from April 2020.

To sum up, the Union Budget 2020 leaves a lot to be desired from an Indirect Tax perspective with the only silver lining being the incentives sought to boost exports and encourage indigenous manufacturing.

(The article is co-authored with Shivam Bansal, Associate, NITYA Tax Associates.  The views expressed are strictly personal.)