BUDGET EXPECTATIONS : INDIRECT TAXES

24 Jan 2023 , 09:29 AM

For the fiscal year FY23, the total indirect taxes were estimated at Rs13.30 trillion but India is likely to end the year with collections of over Rs14 trillion. Overall, for direct and indirect taxes put together, the government is likely to exceed the revenue target by Rs4 trillion. Typically indirect taxes have 3 categories. Most of the indirect taxes of the past like service tax, excise duty, octroi and sales tax were subsumed into the Goods & Services Tax (GST).

Hence, the overall gamut of indirect taxes has become quite limited. It includes GST, excise duty on petrol, diesel and alcohol and some items of customs duty on imports. The GST itself is broken up into Central GST (CGST), State GST (SGST), Integrated GST (IGST) and Cess. It needs to be noted here that the role of the Union Budget in setting indirect tax rates has sharply come down. In the past, the budget used to have a comprehensive discussion on rate changes and its implications. Now, all the GST changes are under the purview of the monthly GST Council Meet and do not come into the Budget purview Here are some of the major indirect tax changes expected in Union Budget 2023-24.

Major indirect tax expectations for Budget 2023-24

1. Budget 2023-24 will be the last full budget presentation by the current government. The next year will be an election year so the Budget would be an interim budget to seek a vote on account. The actual budget would only get presented after the new government is formed and the finance minister has been appointed.

 

1. With a slew of state elections coming up in 2023 and the general elections coming up in 2024, it would be a tightrope walk for the finance minister. Inflation is high and growth has to be ensured. However, the budget may also need a populist tinge, considering that there is just one year to go for elections.

 

1. Let us quickly look back at Budget 2022 and the difference it made to the economy on the indirect taxes front. In the last budget, the government had implemented Phased Manufacturing Plan (on selected products) by increasing duty on finished goods and reducing duties on raw materials and inputs. This type of structure prevents the cascading effect of indirect taxes at multiple levels.

 

1. The previous budget went a long way in simplifying the customs tariff structure by letting in unconditional exemptions. This budget is also likely to see a sharp focus on expediting the digital transformation of customs clearance with a strong focus on Compliance Information Portal. 

 

1. One of the major expectation of Budget 2023-24 is that the government would widen the Production Linked Incentive (PLI). It is expected that many new products would also be included under the ambit of the PLI scheme, which incentivizes the manufacturers of select products based on the quantum of manufacture. The government may also move to incremental production based incentives, which have the potential to diversify the Indian export basket. Some of the sectors to which the PLI scheme is being extended include leather, toys, chemicals, shipping containers etc.

 

1. India’s exports are slated to touch $1 trillion by 2025. For that to happen, two things would hold the key. The first is an expanded Production Linked Incentive (PLI) scheme. The second is the implementation of the PMP scheme for new products and consider the upcoming potential. These can be force multipliers for indirect tax collections in India in the coming years.

 

1. The next expectation is with respect to simplification of the indirect tax structure. This has been on the anvil for a long time. Even the WTO Trade Policy Review had underlined the need for Indian tariff structure to become more perspicuous to importers and exporters. While there has been adequate progress made in simplifying the tariff structure via removal of various exemptions, there is still a lot to do. A number of notifications need to be simplified a lot more. 

 

1. One of the downsides of too much complexity in legislation is that it leads to unnecessary and prolonged litigation. Such litigations arise from too many open interpretational issues. Greater clarity and simplicity of legislation can help to reduce such protracted litigation.

 

1. The other major expectation is of an elaborate amnesty scheme for customs duties. There are expectations that the Development of Enterprise and Service Hubs (DESH) Bill 2022 will give a boost to trade by ensuring proper utilisation of Special Economic Zones (SEZ). The focus is now on expediting the implementation of the DESH bill. 

 

1. There are hopes of a one-time amnesty scheme for customs disputes also. It may be recollected that in the Union Budgets of FY19 and FY20, the government had introduced an Amnesty scheme for central excise and service tax disputes (Sabka Vishwas) and income tax disputes (Vivad se Vishwas). This is an opportunity to resolve legacy disputes. This budget is expected to launch a one-time amnesty plan for customs legacy disputes.

 

1. In the last few months, India has signed free trade agreements (FTAs) with 13 countries including UAE and Australia. The UK FTA is expected to happen by the end of 2023. There is a call to ease compliance rules for Free Trade Agreement imports to avoid future litigations. FTAs have to be two way and the government needs to meet half way on the imports front too. 

 

1. The current requirements for imports under FTA under Section 28DA and CAROTAR 2020 fairly challenging for the importers, despite not being part of the FTA pact between the contracting nations. The budget is expected to trigger suitable changes to Section 28DA and CAROTAR 2020 to provide relief to the importer and avoid future litigations.

 

As stated earlier, the indirect tax regime is a lot more stabilized and outside the purview of the union budget. Hence the expectations are more on the procedural front than on the policy front.