Union Budget 2017 and Indirect Tax: The fine print reflects GST theme

Budget 2017 proposals pivot around elimination of black money, promotion of a digital economy and easing norms for attracting foreign investment in India.

Budget 2017 proposals pivot around elimination of black money, promotion of a digital economy and easing norms for attracting foreign investment in India. In line with industry expectation, there were no major indirect-tax-rate related announcements, the effective service tax rate remaining unchanged at 15%.

From an indirect tax standpoint, the highlight of the Budget speech was the emphasis placed on the progress made by the government with respect to achieving various GST-related milestones. Efforts by the government such as passage of the GST Constitutional Amendment Bill and setting-up of the GST Council were lauded by the finance minister, showcasing how the government is moving with full gusto towards adopting GST. Thrust was put on key decisions already taken by the GST Council with respect to GST implementation ‘in consensus with stakeholders’, such as deciding threshold exemptions, compensation to states, administrative mechanism, IT infrastructure preparedness and drafting of GST laws, among others. Reiterating the commitment to GST and just short of giving the exact date for implementing GST, was the assurance of the finance minister of carrying out a nation-wide outreach/ training programme for businesses from April 1, 2017. Some of the other indirect tax announcements that may have a positive impact on businesses have been elucidated here.

An important announcement was with respect to withdrawal of the R&D cess, with effect from April 1, 2017. Consequent to the same, the service tax abatement/exemption of R&D cess enjoyed by taxpayers so far is also proposed to be done away with. This would be welcomed by the industry as R&D cess was a sunk cost to taxpayers, being non-creditable in nature. Only a set-off of R&D cess already paid was available against service tax; however, so far, taxpayers preferred to pay service tax on the entire value ‘accrued’ in their books of accounts, and thereafter availing credit of the same (under the reverse charge mechanism). Withdrawal of R&D cess would certainly encourage technology imports and incentivise domestic value addition. Although removal of R&D cess seems to be in alignment with the GST design, there is no talk on elimination/ subsumation of other cesses such auto cess, infrastructure cess, NCCD, etc.

The proposals also create a service tax refund opportunity in long-term land lease of industrial plots by State Government Industrial Development Corporations (SIDCs). With effect from September 2016, a service tax exemption was introduced on the salami/premium amount paid upfront on long-term lease of industrial plots. This exemption has now been made retrospectively applicable with effect from June 1, 2007, i.e., the date when the services of renting of immovable property in effect became taxable. In effect, SIDCs would be required to file a refund claim of the service tax on such salami amounts. While the retrospective extension of exemption is a business-friendly move, this could add to the already heavily-burdened adjudication authorities, grappling with pending refund claims before GST.

Further, services in relation to undertaking the process of manufacturing/production of goods, have been omitted from the negative list and moved to list of exempted services. Similar amendments have been made in the past where an entry has been moved from the negative list to the general exemption list. While the amendment doesn’t seem to entail any immediate implications, this gives the power to the government to impose tax on select or all the services falling in this category in future by introduction of a mere notification, instead of adopting a circuitous path of amending the Finance Act provisions.

Keeping in mind the Make in India initiative, the Budget proposals also seek to correct duty inversions that have been plaguing certain manufacturing sectors in India. Customs and excise duties on certain inputs and raw materials used for manufacturing final products in the automobile, renewable energy sector and petro-chemical sector (among others) have been reduced which shall help in correcting the issue of accumulation of credits, which affects cash flow of various taxpayers. This rationalisation of duty rates would certainly boost domestic manufacturing.

Curiously, some of the amendments correcting the inverted duty structure are effective only up to June 30, 2017. For duty benefits to be introduced only for a window of three months is quite intriguing. While the obvious reason of the sunset clause seems to be the expected advent of GST, duty exemptions would have anyway become infructuous as GST kicks in and a specific sunset was not really needed for this reason alone. Instead, if the duty exemptions are to be made co-terminus with date of GST implementation, a further deferment in GST implementation date (if any) would require amendment in the sunset clause in these amendment notifications.

With respect to ‘ease of doing business’, an amendment has been introduced with respect to the scheme of Advance Rulings, which proposes to appoint a retired high court judge as the chairperson of the Authority of Advance Ruling (AAR) in addition to the retired Supreme Court judge. This is expected to fast-track disposal of cases pending before AAR. The AAR for Customs, Central Excise and Service Tax has also been formally merged with the AAR for Income Tax.

A new concept of ‘beneficial owner’ has been introduced under the custom laws, defined as any person on whose behalf the goods are being imported or exported or who exercises effective control over the goods being imported or exported. This may give rise to ambiguity regarding rights and liabilities of an ‘importer on record’, ‘beneficial owner’ or the actual owner of goods. In fact with respect to customs, the proposals also give wide reaching powers to customs authorities for demanding any information/ document with respect to imported or exported goods, and the importer/ relevant person is bound to produce the same. Thus, while the proposals on one hand seek to ease doing business in India by easing procedures around import of goods and reducing the time involved in clearance of goods from customs, at the same time it may contribute to significant delays caused in clearance of goods due to excessive information demands from importers.

As India is on the cusp of a new era for indirect taxes, lack of any major indirect-tax-related amendments is actually welcome as it would have only served to be disruptive in view of the preparatory work for GST. Here is hoping that the progress on GST is maintained and its implementation is treated with utmost priority by the government.

With inputs from Poonam Harjani and Shreya Tripathi, BMR & Associates LLP

The author is leader (indirect tax), BMR & Associates LLP.

Source: http://www.financialexpress.com/opinion/union-budget-2017-and-indirect-tax-the-fine-print-reflects-gst-theme/540296/

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