Indirect Tax Measures in Budget 2020

The Union Budget is stated to be centred around three significant themes – Aspirational India, Economic Development and Caring Society – all of which are directed towards ease of living and doing business in better India. In short, helping the Indian industry is the most important theme of this budget.

On Indirect Tax front, a tax measure directed towards the first theme, namely, Aspirational India is the levy of health cess @5% as a duty of customs on import of medical devices to be utilised for creating health infrastructure and services. Since the specified medical devices are now being manufactured in India, this cess would boost the domestic industry.

The indirect tax proposal directed towards the second theme, namely, Economic Development is the increase in customs duty on items, which are also produced domestically by MSMEs, and withdrawal of eighty customs duty exemptions. Also, introducing enabling provisions for investigation in cases of circumvention of countervailing duty and strengthening anti-circumvention measures for anti-dumping duty will promote Make in India and consequently, economic growth.

The third theme Caring Society include the National Calamity Contingent Duty to be levied on cigarettes and other tobacco products which will, in addition to garnering revenue, promote social welfare.

A. Certain Amendment in the Customs Act, 1962

Largely, the incentive hidden in this budget is to boost the Indian industry and hence certain changes in the Customs Act, 1962 have been made.

Benefit proposed for exporter:

The Hon’ble Finance Minister in her budget speech has 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. This scheme for reversion of duties and taxes on exported products will be launched this year. This would certainly reduce a huge amount of paperwork and interface with the authorities and would motivate the exporters.

Power to prohibit importation or exportation of goods

Clause (f) of sub-section (2) of Section 11 of the Customs Act, 1962 is proposed to be amended so as to include “any other goods” in addition to gold or silver, to enable the Central Government to prohibit either absolutely or conditionally the import or export of such goods to prevent injury to the economy on account of uncontrolled import or export of such goods.

Facility of Electronic Duty Credit Ledger in the Customs

A new Section 51B will be inserted to Custom Act, 1962 so as to provide for creation of an Electronic Duty Credit Ledger in the customs system. This will enable duty credit in place of remission to be given on exports. The provision for recovery of duties under section 28AAA of Customs Act, 1962 is also being expanded to include such electronic credit of duties.

It is also proposed to empower the Central Government to make regulations for the purpose of prescribing the manner, procedures, conditions and restrictions to carry out the purposes of this facility. Further, the Bill seeks to amend the heading of Chapter VIIA of Customs Act from ‘Payments through electronic cash ledger’ to ‘Payments through electronic cash ledger and electronic duty credit ledger’.

For Reducing litigation

With the objective of reducing litigation, an explanation is proposed to be inserted in Section 28 of the Custom Act, 1962 to explicitly clarify that any notice issued under the said section, prior to the enactment of the Finance Act, 2018, shall continue to be governed by the Section 28 as it existed before the said enactment, notwithstanding order of any Appellate Authority, Appellate Tribunal, Court or any other law to the contrary. This amendment shall come into effect retrospectively from the 29.03.2018, the date of commencement of the Finance Act, 2018.

Recovery of duties in certain cases

Section 28AAA of the Customs Act is proposed to be amended so as to provide for recovery of duty from a person against utilisation of instruments issued under any other law, or under any scheme of the Central Government, for the time being in force, in addition to the Foreign Trade (Development and Regulation) Act, 1992.

B. Amendment in Customs Tariff Act, 1975

Under Make in India initiative, rate of customs duty on mobile phones, footwear, electric vehicles, electronics, household articles etc. has been increased. Further, the exemption from levy of social welfare surcharge cess on various goods and removal of concessional duty benefit on several items has been withdrawn. Some major changes are:

Power to impose safeguard duty

Bill seeks to make amendments to safeguard provisions to check surge in imports and prevent serious injury to domestic industry. Section 8B of the Custom Tariff Act, 1975 is proposed to be substituted to empower the Central Government to apply safeguard measures. Safeguard measure shall include imposition of a Safeguard Duty or application of a Tariff Rate Quota or any other measure that the Central Government may consider appropriate as safeguard measure.

Health Cess

Health Cess is proposed to be imposed on the import of Medical devices falling under headings 9018 to 9022, at the rate of 5% ad valorem on the import value of such goods as determined under section 14 of the Customs Act, 1962. This Health Cess shall be a duty of Customs. Any Export Promotion scrips shall not be used for payment of said Cess. Health Cess shall not be imposed on medical devices which are exempt from BCD. Further, inputs/parts used in the manufacture of medical devices will also be exempt from Health Cess. The proceeds of Health Cess shall be used by the Union for funding of health infrastructure in the Country.

Social Welfare Surcharge [SWS]

SWS means duty of customs levied vide Section 110 of the Finance Act, 2018 on the goods specified in the First Schedule to the Customs Tariff Act, 1975 to fulfil the commitment of the Government to provide and finance education, health and social security. It is levied at the rate of 10% of the aggregate duties of customs, on imported goods. Notification No. 09/2020 – Customs dated 2-2-2020 has been issued to amend Notification No. 11/2018 – Customs dated 2-2-2018. Few items have been exempted from levy of SWS w.e.f. 2-2-2020. However, all commercial vehicles (including electric vehicles) if imported or completely built unit under tariff heading 8702 or 8704 will be exempt w.e.f. 1.4.2020. Further, exemption from levy of SWS has been withdrawn in respect of 51 entries of specified items.

Amendment in Countervailing Duty Rules and Anti-Dumping Duty Rules

(i) These Rules are proposed to be amended to strengthen the anti-circumvention measures by making them more comprehensive and wider in scope. This is to take care of all types of circumventions of antidumping duty in line with best international practices. Further, certain other changes are proposed to be made for bringing more clarity in the Rules.

(ii) The Countervailing Duty Rules provide for the manner and procedure for causing investigation into the cases of imports of subsidised goods that cause injury to domestic industry. Currently, the Countervailing Duty Rules do not have any mechanism for imposition of countervailing duty in case of circumvention of these measures. A provision is being incorporated in the countervailing Duty Rules to enable investigation into the case of circumvention of countervailing duty for enabling imposition of such duty. Certain other changes are being made for bringing more clarity in the Rules.

Administration of Rules of Origin under Trade Agreement

Upsurge in imports under Free Trade Agreements (FTAs) with undue claims benefits posing threat to domestic industry has led to review of Rules of Origin requirements. Hence, a new Chapter VAA (a new section 28DA) is proposed to be incorporated in the Customs Act, 1962 to provide enabling provision for administering the preferential tax treatment regime under Trade Agreements.

Consequential changes have also been proposed in Section 111 for confiscation of goods imported on claim of preferential rate in contravention of provision of Chapter VAA or of any rule made under this Act. Further, Section 156 (2) of the Custom Act is proposed to be amended to empower the Central Government to make rules for carrying out the purposes of newly inserted Chapter VAA.

C. Excise

National Calamity Contingent Duty (NCCD) is levied as a duty of excise on certain manufactured goods specified under the Seventh Schedule of Finance Act, 2001. NCCD on cigarettes has been increased ranging from 212% to 388% depending on cigarette stick size.

D. Goods and Services Tax (GST)

Change in rates or exemptions are provided through notifications issued time to time. However there are certain amendments made through Finance Act as recommended by GST council.

On the GST front, the government focused on procedural aspects to strengthen the enforcement of the law.

The significant changes proposed in Goods and Services Tax are as follows:

Registration

Section 29(1)(c) of CGST Act, 2017 is proposed to be amended to enable cancellation of registration which has been obtained voluntarily under sub-section (3) of Section 25. Further, a proviso to section 30(1) is proposed to be inserted to empower the jurisdictional tax authorities to extend the date for application of revocation of cancellation of registration in deserving cases.

Composition scheme

Initially the composition scheme under section 10(1) of CGST Act 2017 was available only to certain class of persons supplying goods and for supply of food covered under entry 6(b) of Schedule II. Subsequently, the scheme was extended to supply of services to the extent of 10% of turnover or ₹ 5 lakhs, whichever is higher. However, restriction like inter-state supply of services etc. was not imposed.

Now, with a view to harmonise the conditions for eligibility under Composition Scheme for the taxable persons engaged in suppliers of goods and to the extent of eligible services, Clauses (b), (c) and (d) of Section 10(2) are proposed to be amended to exclude following categories of taxable persons from composition scheme who are engaged in making:

• supply of services not leviable to tax,
• inter-State outward supplies of services,
• supply of services through an electronic commerce operator who is required to collect tax at source

Tax Invoice

Proviso to Section 31(2) of the CGST Act, 2017 is proposed to be amended to provide enabling provision to prescribe the manner of issuance of invoices in case of supply of taxable services or specified supplies.

Relief in timeline for claiming input tax credit on debit note

The budget proposes to omit the words “invoice relating to such” from Section 16(4) of the CGST Act, 2017, thereby delinking the date of issuance of debit note from the date of issuance of the underlying invoice for purposes of availing ITC. Now, the time limit of taking input tax credit on Debit note will be counted from date of Debit note irrespective of date of underlying invoices.

Penalty for beneficiary of fraudulent input tax credit

With a view to prevent fraudulent input tax credit, Section 122 of CGST Act, 2017 is proposed to be amended to penalise the beneficiary of the transactions of passing on or availing fraudulent Input Tax Credit. Further, scope of Section 132 of CGST Act, 2017 is proposed to widen to make the offence of fraudulent availment of input tax credit without an invoice or bill to make it a cognizable and non-bailable offence. Further, it proposes to make any person who commits, or causes the commission, or retains the benefit of transactions arising out of specified offences liable for punishment. Parallel amendments have been brought in the Income-tax Act also.

No requirement of TDS Certificate

Section 51 of CGST Act, 2017 so as to empower the Government to make rules to provide for the form and manner in which a certificate of TDS shall be issued. The reasoning for the said amendment has been provided in the memorandum to the bill which provides that proposed amendment has been made with a view to remove the requirement of issuance of TDS certificate by the deductor, and to omit the corresponding provision of late fees for delay in issuance of TDS certificate.

Power to issue instructions or directions

Section 168 of CGST Act, 2017 is to be amended to make provisions for enabling the jurisdictional commissioner to exercise powers under sub-section (5) of Section 66 and second proviso to sub-section (1) of Section 143.

Section 66(5) stipulates that in case of special audit the expenses of the examination and audit of records, shall be determined and paid by the Commissioner and such determination shall be final.

ITC on inputs / capital goods send to a job worker from principal can be claimed without payment of tax subject to such goods coming back either as such or finished within the stipulated period of 1 and 3 years respectively. Such period can be extended by the Commissioner for a further period not exceeding one year and two years respectively in terms of second proviso to Section 143(1).

Enabling issuance of removal of difficulty order by 2 years

Finance Bill seeks to amend Section 172 of CGST Act, 2017 so as to extend the time limit provided for issuance of removal of difficulties order from three years (30.06.2020) to five years (30.06.2022), with effect from the date of commencement of the said Act (i.e. 01.07.2017).

Similar amendment is also proposed in IGST Act, UTGST Act and Goods and Services Tax (Compensation to States) Act, 2017 by virtue of proposed amendment in proviso to Section 25(1), proviso to Section 26(1) and proviso to Section 14(1) respectively.

Definition of Union Territory

The definition of Union Territory in clause (114) of Section 2 is proposed to be amended so as to align with the Jammu and Kashmir Reorganisation Act, 2019 and the Dadra and Nagar Haveli and Daman and Diu (Merger of Union Territories), Act, 2019. Similar amendment is proposed in UTGST Act.

Constitution of Tribunal in Jammu and Kashmir and Ladakh

Section 109 (6) of the CGST Act, 2017 is proposed to be amended to bring the provision for Appellate Tribunal and its benches thereof under the CGST Act in the Union territory of Jammu and Kashmir and Union Territory of Ladakh.

Retrospective Changes Relating to GST

• Amendment in Transitional arrangements for ITC: Section 140 of the CGST Act, 2017 is proposed to be amended with effect from 01.07.17, to prescribe the manner and time limit for taking transitional credit. This amendment is to be made to nullify the effect of the various judgments of Courts.
• Amendment in Schedule II: With a view to provide clarity and resolve ambiguity, entries at 4(a) & 4(b) in Schedule II of the CGST Act is proposed to be amended w.e.f. 01.07.2017 to make provision for omission of supplies relating to transfer of business assets made without any consideration from Schedule II of the said Act.
• Retrospective exemption or levy and collection of GST:
  • CGST, UTGST and IGST are proposed to be exempted on supply of fishmeal under tariff heading 2301 for the period 01.07.2017 to 30.09.2019. However, if GST has already been paid, the same would not be eligible for refund.
  • Levy of 6% CGST/UTGST and 12% IGST for the period 01.07.2017 to 31.12.2018, is proposed on supply of pulley, wheels and other parts (falling under heading 8483) and used as parts of agricultural machinery of headings 8432, 8433 and 8436. However, no refund shall be made of the tax which has already been collected.
• Notification issued under section 54(3)(ii) of CGST Act: Notification No. 3/2019-Compensation Cess (Rate), dated 30.09.2019 disallows the refund of compensation cess in case of inverted duty structure for tobacco and manufactured tobacco w.e.f. 1.10.2019. This notification is proposed to be effective from 1.7.2017. Hence, no refund on account of inverted duty structure for tobacco would be admissible on any tobacco products once notified.

Conclusion

Government’s focus on implementing various tools such as in-depth data analysis and artificial intelligence to crack down on frauds coupled with strengthening its internal systems by introducing Aadhar based verification, linking of various government portals, e-invoicing clearly demonstrate the intention for plugging revenue leakage and hence improving the Indian economy. The Government has introduced high penalties and in extreme cases non-bailable offence on taxpayers where cases of tax evasion or fraudulent availment of credits are detected. To work towards the Government’s long-term objective of “Make in India”, the Budget seeks to increase the domestic production by introducing various incentives and also by increasing the customs duty on several products.

The gross GST revenue collected in the month of January, 2020 is ₹ 1,10,828 crore which is highest ever collection since implementation of GST till now. It can be considered as a good sign of recovery of economy from its temporary slowdown. The author hopes that the changes proposed in customs will help in boosting the domestic manufacturing industry and support ‘Make in India’ initiatives of the Government.