Budget Expectations: Indirect Taxes

24 Jan 2022 , 09:56 AM

If there is one thing that stood out about the fiscal year 2021-22, it is the strong bounce in direct and indirect taxes. The indirect taxes today are not as diverse as they used to be in the old day. Today, most of the indirect taxes including excise duty, sales tax, state VAT, Octroi and service tax have all been subsumed into GST with effect from July 2017.

Currently, customs duty on imported goods are still outside the purview of GST and that is charged separately. Also certain products like petrol, diesel and liquor are outside the ambit of GST and continue in the old model of excise duties, state VAT etc. Before we get to the expectations on indirect taxes, let us first look at how the indirect tax scenario looks like.

How is the indirect tax collection scene in India?

Budget 2022 will be announced in the midst of the Omicron scare. Scientists are unanimous that this virus strain is not pernicious, but India has seen the perils of being complacent. Hence the budget will make the indirect tax policy assuming a possible third wave along with financial challenges emerging from unplanned expenditure and stunted economic activity. This is more so in contact intensive sectors like tourism, hospitality, travel, etc.

The focus would be primarily on keeping the wheels of growth churning by undertaking large projects in public infrastructure, healthcare and public welfare with focus on rural India. This move is likely to create jobs and improve the disposable incomes of people, especially those in the lower-and middle-income groups. These vulnerable groups will gain the most from a boost to demand and consumption.

GST collections are now above Rs1 trillion a month for 8 months in succession. Broadly, the government is likely to focus the budget on 3 aspects of indirect taxes. Firstly, it will focus on widening the tax base by bringing more small businesses and into the GST hub to boost overall indirect revenues. Secondly, the government will also look to plug leakage of taxes. This is being done by better use of technology to track audit trails and with warnings and collateral action. Lastly, the government may also look at an amnesty scheme for resolving old cases of tax disputes.

Customs duties likely to focus on Atma Nirbhar Bharat

What will be the budget approach to customs duties. It will have a dual policy on import of inputs and import of finished products. Here is how the budget could be doing its job. Firstly, it is very likely that the rate of customs duty on most primary inputs and intermediaries may be rationalised. This will help to bring in inputs at lower cost and promote domestic production at more competitive prices.

Secondly, the budget is likely to hike the rate of customs duties on finished products to provide tariff protection and promote domestic manufacturing. This may result in price rise in the import intensive sectors such as consumer durables, auto, electronics etc. However, this is in sync with Atma Nirbhar Bharat plan to improve self-sufficiency in domestic output. This will apply to products identified as thrust areas under the Atma Nirbhar program.

In the previous budgets, schemes to provide amnesty for excise and service taxes not only improved collections but also reduced the overhang of pending cases and reduced the burden of litigation. This year we could see a similar announcement for customs so that the overhang of old litigations can be reduced, if not fully done away with.

Giving a boost to PLI (Production linked Investment) scheme

The production linked incentive (PLI) scheme was announced for a host of sectors to encourage domestic production. Here  companies are incentivized for producing goods locally. PLI schemes for auto ancillaries, industrial components, textiles, electronics, consumer goods etc are already announced. This year, the government has also launched a dedicated PLI Scheme for drones and drone components.

The budget is likely to announce big incentives for semi-conductors, microchips, equipment for digital enablement etc. It is estimated that the PLI scheme alone would help India announce GDP accretion of nearly $500 billion over the next five years. This is giving confidence to the government that Indian economy can easily move from $3.6 trillion GDP to $5 trillion GDP over next 8 years. In this budget, the government is also expected to expand the PLI scheme to more sectors and product franchises.

What will the Budget announce on Goods and Services Tax (GST)?

In the previous year, the government took several steps on the procedural front. These included the withdrawal of requirement for GST audit, allowing transfer of unutilised balance in CGST and IGST cash ledgers, extending compliance periodicity, rationalisation of late fees etc. The government also decided to limit input tax credit based on Form GSTR-2B, thus compelling the suppliers to file Form GSTR-1 on time.

What about inclusion of petroleum products in GST ambit? While it is essential in the long run, it may be impractical at this point due to budgetary constraints. The best this budget could do is to outline a road map for bringing petrol and diesel under the ambit of GST.
The broad theme on the indirect tax front is likely to be demand generation and job creation. We need to now await the fine print!