Budget 2021: Striving for tax equilibrium

The Union Budget was anticipated to be extraordinary, especially in view of the economic slowdown caused by the global pandemic. The expectation rose further with the finance minister declaring it to be a Budget never witnessed in the past. The presentation of the Budget demonstrated a fine balancing act to manage industry expectations without compromising on the objectives of economic growth and reduction of fiscal deficit.

With this background, the changes announced in the Finance Bill, 2021 primarily focus on ensuring greater transparency in tax administration, resolving disputes, and the integration of India's position in the global supply chain, without compromising the interests of the domestic industry.

Noteworthy measures addressing the foundational inefficiencies and at the same time tightening the noose around tax dodgers are:

1) In furtherance of the faceless assessment scheme introduced under both direct and customs law, constitution of National Faceless Income Tax Appellate Tribunal Centre has been announced for faceless and/or electronic disposal of taxation disputes at the appellate stage. The introduction of faceless proceedings or e-proceedings at the Appellate Tribunal stage is a pilot project, which can be later replicated for other streams in case of successful implementation thereof.

2) With a long-standing objective to reduce the cost of recovery of taxes, the government has not only reduced the limitation period for re-opening assessments under the direct tax laws but also announced the constitution of a faceless Dispute Resolution Committee for settlement of tax disputes, with powers to waive penalty and grant immunity from prosecution in case of tax disputes. This is a welcome move that will help reduce the burden of our judiciary and improve tax collections.

3) Removal of the mandatory requirement of annual accounts audit and reconciliation under the Goods and Services Tax (GST) laws, subject to self-certification, is likely to reduce the cost and efforts for compliance. However, it will also make the taxpayer responsible for the declaration of information in its annual returns, including the repercussions of mis-declarations, if any.

4) For easy access to funds for infrastructure and agricultural development, the government has rejigged the taxation structure on import of identified products and introduced the levy of Agriculture Infrastructure and Development Cess (AIDC) as a duty of customs. However, to limit the impact on the general public, commensurate reduction in the Basic Customs and Central Excise Duty thereon, has been notified.

5) To empower its officers to deal with evaders, suitable edits have been proposed in the GST laws to call for any information from any person in connection with the Central Goods and Services Tax Act, 2017 (CGST Act). However, simultaneously, appropriate legislative measures are also proposed to maintain the confidentiality of such information received from the taxpayer.

6) The tendency of Pavlovian responses to legal issues by way of retrospective amendment of legal provisions has continued in the present Budget. While the levy of interest on net cash liability under GST by way of retrospective amendment is a welcome change, the government has extended the levy of GST to the supply of goods and services by any organisation (such as a club) to its members, without clarifying the scope of such transactions, with effect from the date of introduction of GST. This move is likely to open a pandora’s box for litigation.

7) Pursuing the objective of Atma Nirbhar Bharat, Make in India, and Vocal for Local, customs duty rates for various goods have been rationalised.

8) It is also noteworthy that the duty exemption or concession continue to be scrutinised through microscopic lens to remove disparity and ensure integration with the global supply chain.

Though the above measures are introspective, the government has unambiguously conveyed its intentions to clamp down on the evasion of GST with a two-pronged policy i.e., curbing the right to claim refunds of GST on export of goods and introduction of strict penal provisions (with penalty up to five times the amount of alleged tax evasion) on wrongful availment of tax credits on such exports.

We note that the Union Budget is indeed a ‘never before like’ Budget considering the absence of populist policies of reduction in tax rates or doling out subsidies. However, a few measures namely, restricting eligibility to claim input tax credit and increased compliances are not only against the spirit of GST laws but may also adversely impact bona fide exporters.

For now, the government seems to have struck a balance with the tax measures. We will, however, only find out the effects (or side-effects) of this ‘vaccine’ on the recovery of an ailing economy in the forthcoming months.

Views are personal. Mehrotra is a Partner and Agrawal an Associate at Khaitan & Co.