Budget 2021: Multiple amendments to change course of indirect taxes

Representative image (PC- MoneyControl.Com)

Representative image (PC- MoneyControl.Com)

The Finance Minister’s announcements on February 1, 2021 have been large and widespread. There are substantial changes in the text of tax laws which affect all classes of indirect taxes such a GST, Customs and even the no longer commonly applicable Central Excise laws. In this article, we seek to examine the major changes as they affect the industry and common man alike.

1. Another Cess makes a debut

The Finance Minister gave extensive account for the commitment of the Government to the cause of the farmers. She gave detailed figures as regards the expenses of the Government on MSP commitments and other reforms on the agricultural front. However, it is others who have to foot the tab for these commitments of the Government. It is in this context that this proposal to introduce a new cess named as “Agriculture Infrastructure and Development Cess” (AIDC) is to be viewed.

The text of the Finance Bill, 2021 reveals that this cess is dedicated for “purposes of financing the agriculture infrastructure and other development expenditure”.

Two changes have been made for the purpose of this cess. The first change relates to imported goods where the annexure to the speech of the FM lists out twelve different species of goods on which such cess will be imposed. A review of this list presents a curious picture in so far as there appears to be no underlying homogeneity in the constituents of this list.

For example, at one end of the spectrum are price inelastic goods such as gold, silver, alcoholic beverages, etc whereas at the other end of the spectrum, there are edible commodities such as gram, peas, lentil, apples, sunflower oil, etc with certain other commodities such as cotton, fertilizers, etc in the middle.

Furthermore, there is a huge variation in the rates of the commodities, with alcohol obviously being the highest at 100% with some commodities at 5%. Interestingly, a note has been appended to this list that “overall there would be no additional burden on the consumer on most of these items”.

The other change is in respect of another price-inelastic category of goods which are still outside the GST regime and are subject to central excise duty. Petrol and diesel continue to be the lifeline of transportation in India and have been saddled with this cess, that too at a high rate of Rs 2.5/litre and Rs 4/litre respectively.

The saving grace is that no higher tax incidence is proposed on the citizens on this account in so far as simultaneously the excise duty has been reduced on these fuels. Thus, the budget speech carries a note that “overall there would be no additional burden on the consumer”.

There is substance in this claim in so far as the net tax outgo for the consumer will remain the same despite the cess. Simultaneously, the amount which will be collected from the consumer under this head of cess will specifically be available to the Government for the purpose of meeting its’ agriculture related obligation without a requirement to share these proceeds with the states under the devolution formula. In other words, the Government is carving out this cess from the existing tax pool in so far as petrol and diesel are concerned.

2. Proposal to omit the GST annual audit obligation of the businesses

One key amendment in the GST laws is the acceptance of the GST Council proposal to do away with the requirement of annual audit applicable on large taxpayers.

At the time when GST was introduced, this particular provision was apparently pedestalled on the need for annual reconciliation of the taxpayer’s accounts besides providing a via-media to the tax officers to obtain confirmation of the taxpayer’s affairs by way of independent audit by practicing chartered accountants. This would ensure that the anomalies and inadvertent errors on the tax positions of the taxpayers and errors in GST compliances would be addressed at the taxpayer’s end itself, thereby reducing scope of litigation.

Even though the underlying objective of the mechanism was noble, the confusion which arose in the initial days of implementation of GST and the inability of taxpayers to timely migrate to the new system (GSTN) led to various representations being made against the annual audit obligations and the Government also factored these when it extended the due dates on multiple occasions.

The annual return for 2017-18 deadline being extended 7 times, negative feedback regarding their filing and working of GSTN, severe criticism of high cost of compliance, etc. were certain facets which were noted by the GST council in its 39th meeting held on 14th March, 2020. As a consequence, the Government has undone the existing provisions to make mandatory annual audit as optional and permit self-certification as well.

This implies that the requirement for a third-party validation by way of audit is no longer necessary. However, to allow the taxpayers who like to seek comfort in independent external audit, annual audit reports will still be accepted. In other words, the compliance has been rationalized for the benefit of taxpayer fraternity, and thus another large criticism has been done away with.

3. Restrictions on input tax credit

In an amendment which renders moot many constitutional and legal challenges currently being considered by multiple high courts, the Government has added another obligation for the taxpayers to take input tax credit.

It was being argued by the taxpayers that certain rules exist in the GST law which restrict the input tax credit in the event the supplier does not carry out the necessary compliances at its own end, and thus, input tax credit is being denied to the taxpayers for events which are beyond their control. It was argued by the taxpayers that such a restriction of input tax credit was not manifest from the GST law.

Pre-emptively overruling such challenges, the Government has carried out this amendment to provide a legislative backing to the Rules restricting the input tax credit. Given the sentimental aspects and legal issues associated with such requirement, one would expect challenges to the validity of this provision would soon come up for consideration before Indian courts.

4. Overriding the doctrine of mutuality

The scope of supply has been amended to include transactions between clubs, etc. and their members. There were judicial rulings which applied the doctrine of mutuality, peculiar to tax laws, to bold that club and their members are essentially same and thus, there is no taxable transaction between them. A retrospective amendment has been proposed to ensure that such transactions will be covered under ‘supply’, and GST is collected on the amounts paid by members towards the supplies of goods and services. In fact, a validation law has been enacted which overrules contrary rulings in favor of taxpayers.

5. Time limit for customs investigations.

A new section has been proposed which providess for a limitation of two years, further extendable by one more year, as sunset period for audit, search, seizure or summons for completion of the investigations. Thus, there shall be no more long drawn inquiry procedures, in a big relief to open ended inquiries by customs officers.

6. Time bound customs exemptions

All new conditional exemptions under the Customs Act, 1962 shall be valid now only for two years, instead of being open-ended in the past. Further, the new customs duty framework shall be in place after the Government would review about 400 exemption notifications. As a result, reviewing such exemptions on a periodical basis will become a norm and businesses will have to adjust to such dynamic Customs Duty regime.

The author was assisted by Divyasha Mathur.