The indirect tax proposals are aligned with key strategic priorities of the government. Largely, the focus has been on the Make in India theme, export promotion, ease of doing business, green energy and mobility.
There are aspects relating to input tax credit (ITC), the e-commerce sector, and foreign digital service providers, which also merit special mention.
Denial of ITC on CSR spends a regressive step
A key feature of the goods and services tax (GST) is that all expenses which are in furtherance of business should be allowed as ITC. This essentially translates into the fact that GST applies only on value addition at each point in the supply chain.
However, the proposal to deny credit on CSR expenses is opposed to the basic fabric of the GST credit scheme. In fact, there are various expenses incurred by taxpayers which have statutory backing, such as expenses on food and beverages, travel, and health-related expenses, where there is no restriction on ITC. By disallowing ITC on CSR spends, the actual quantum for such expenses would reduce, as the tax in the range of 12-18 per cent on procurement for such expenses would become a part of the CSR fund allocation.
This change can be seen as treating CSR-related expenses on a par with non-business expenses that are not aligned with the provisions under the income tax laws, where such expenditure is an allowable business expense.
An interesting point which arises is that since a specific restriction has now been placed on CSR spends, meaning that this amendment is prospective, organisations could argue that the past ITC on such expense was available to them. We are also aware that there have been multiple advance rulings both for and against the availability of credit on CSR expenses. Considering that there was no restriction on ITC in the past, what happens to the advance rulings which actually disallowed the credits?
Typically, ITC is proportionately restricted where goods or services are used by a registered person for effecting taxable supplies and exempt supplies. There is a proposal that supply of warehoused goods before clearance for home consumption would be treated as exempt supplies.
This will amount to further restricting the ITC for a person making supplies of warehoused goods. There have been High Court judgements (Bombay and Kerala) which had held that reversal of credits was not required. Clearly, the proposed amendment attempts to overturn these High Court decisions.
Both the above proposals lead to reduction of ITC for corporates.
Simplification for foreign digital service providers
Use of technology and digital services has increased significantly worldwide (including India) over the past few years. To capture such services under the tax radar, the tax liability of foreign service providers who provide services known as Online Information Database Access and Retrieval (OIDAR) has been included in the indirect tax regime.
It was first made taxable in December 2016 under the erstwhile service tax regime, which was further continued under GST as well. Such foreign service providers are required to pay GST on their revenue when OIDAR services are provided to specified categories of recipients such as government, local authorities, governmental authorities, etc.
The list of specified categories of recipients is currently leading to complexity in the hands of service providers in correctly determining their liability to pay taxes. This is coupled with the fact that since OIDAR service providers are not physically present in India, it is a big challenge for them to determine who actually falls in the definition of, say, a governmental authority, which has again been specified as an authority set up by an Act of Parliament, or a state legislature, and so on.
To avoid such complexity, it has now been proposed that if the recipient is an unregistered person, then the foreign service provider is liable to pay the tax. Further, it has been explained that in case the receiver is registered only for deducting TDS, then such a recipient would be considered an unregistered person for the purpose of the foreign service provider to pay tax. This is a welcome change.
An amendment has also been introduced to further widen the scope of OIDAR services by omitting the condition of such services being “essentially automated” and “involving minimal human intervention”. These expressions led to a lot of subjectivity, as one had to figure out the meaning of “minimal”. Will it be 5 per cent or 10 per cent? Also, what exactly does “human intervention” mean? Although this proposal makes it simple to interpret, it is a major deviation from the definition of electronically supplied services in the UK VAT laws, which include “automation” and “minimal or no human intervention” as conditions for e-services.
Changes in the e-commerce sector
In order to promote micro enterprises to do business through e-commerce platforms, the government has extended the composition scheme under GST to suppliers willing to supply goods through e-commerce platforms. This will promote micro enterprises to register under the composition scheme with reduced compliance benefits.
Further, penal provisions for e-commerce operators have been prescribed in cases of contravention of the following:
Allowing supply of goods or services through themselves by an unregistered person other than a person specifically exempted from registration; or
Allowing inter-state supply by a person who is not eligible to make such inter-state supply; or
Failing to furnish the correct details in the TCS return (GSTR 8) of any outward supply of goods effected through themselves by a person exempted from obtaining registration.
The penalty is Rs 10,000 or an amount equivalent to the amount of tax involved had such supply been made by a registered person other than a person paying tax under section 10 (composition dealer), whichever is higher.
The change aims at improving GST compliances in the e-commerce industry, with greater onus on e-commerce operators.
Consent-based sharing of information with other systems
A significant step has been taken by the government to enable consent-based sharing of taxpayer’s data through the GST common portal to such systems as may be notified by the government.
The information would relate to returns, registration application, statement of outward supplies, details uploaded for generation of electronic invoice or e-way bill, or any other details, as may be prescribed.
One of the reasons for this consent-based sharing of GST data could be that the Goods and Service Tax Network (GSTN) has been included as a financial information provider under the account aggregator framework. With a view to facilitating cash flow-based lending to MSMEs, GST information is considered a taxpayer’s financial information. The consent will be taken both from the supplier and the recipient.
Prosecution and decriminalisation under GST
In line with the recommendations of 48th GST Council Meeting, the following proposals have been made:
The minimum threshold for prosecution under GST has been raised from Rs 1 crore to Rs 2 crore, except for the offense of issuance of invoices without supply of goods, or services, or both.
The compounding amount range has been reduced:
The minimum from 50 per cent to 25 per cent
The maximum from 150 per cent to 100 per cent
The following offences are to be decriminalised:
Obstruction or preventing any officer from discharging his duties
Tampering with or destruction of material evidence or documents
Failure to supply information required under law or supplying false information.
Continued focus on Make in India
In order to further push the Make in India initiative, many proposals have been announced in customs duty that aim to boost domestic manufacturing. The government has given a fresh impetus to Indian manufacturers in the electronics sector (mobile phones and television parts) in the Budget, by lowering customs duties on specified parts, while increasing it on the finished product (like for electrical kitchen chimneys).
To further deepen domestic value addition in manufacturing of electric vehicles (EVs), chemical and steel products, the government has proposed relief in customs duties on import of machinery and raw material like denatured ethyl alcohol, crude glycerin and has continued the concessional duty on lithium-ion cells for batteries for another year. On phased manufacturing programme (PMP), the Budget has also proposed to extend the exemption from levy of basic customs duty on multiple components until March 2024. These include components and accessories for manufacturing of CCTV cameras and IP cameras, lithium-ion batteries, e-readers, video games, and medical instruments.
Budget 2023-24 adopted seven priorities or Saptarishi, one of which is building focus on green growth. The finance minister mentioned that “Hon’ble Prime Minister has given a vision for ‘LiFE’, or Lifestyle for Environment, to spur a movement of environmentally conscious lifestyle”.
Keeping this in mind, certain indirect tax proposals are also aimed at promoting and encouraging green energy. To promote green fuel and also to avoid double taxation (under excise and GST), central excise duty has been exempted on blended compressed natural gas (CNG). This exemption on blended CNG will be equal to the GST paid on bio-gas/compressed bio-gas contained in it.
Further, customs duty has been abolished on the import of specified capital goods and machinery required to manufacture lithium-ion cells for batteries that are used in EVs. This will boost the production of battery cells domestically for EVs.
Focus on the gems and jewellery sector
The gems and jewellery sector plays a significant role in the Indian economy. The government has viewed this sector as a focus area for export promotion and Budget 2023-24 has given a boost to the sector by abolishing the import duty on seeds used in the manufacture of rough lab-grown diamonds (the existing rate was 5 per cent). This will lead to increased domestic manufacture of diamonds and, in turn, enhance export turnover as well.
There are further changes pertaining to this sector to disincentivise imports — customs duty rates on articles of precious metals, imitation jewellery and silver have been increased.
Other important changes
Regularisation of defaults under GST, such as non-filing of monthly and annual returns, and short payment of tax, is now proposed to be undertaken within three years of the respective due dates. The relevant provisions in this regard have been introduced in order to promote timely compliances.
The prices of specified cigarette categories may be increased on account of the increase in National Calamity Contingent Duty. Additionally, the Budget has taken a significant step for early disposal of settlement applications pending before the Settlement Commission under the Custom Act 1962, by fixing the upper time limit for disposal to nine months.
This will ensure time-bound resolution. The government has also proposed to remove the two-year sunset on exemptions/concessions for cases such as FTA and FTP commitments.
However, there was no mention of the much-anticipated voluntary compliance scheme under Customs to reduce pending disputes. Further, there was an expectation that some tangible announcements on the functioning of GST Tribunals would be made.
The industry was also hoping for an announcement of a clear roadmap of the DESH scheme, and the introduction of an automated standardised Customs SVB procedure. To sum up, this Budget neither provided much relief nor added to the existing burden. It would fall within the category of a balanced scorecard.