In line with the expectations of the industry and following the recent trend in the past two years of phasing out of exemption for end products to boost domestic manufacturing, the Budget identifies 350 exemption entries which are being gradually phased out. These entries primarily relate to certain agricultural produce, chemicals, fabrics, medical devices, and drugs and medicines. These sectors have been identified after an assessment of domestic capacity and also based on sectors where the government is encouraging its 'Make in India' initiative.
In addition to duty arbitrage, to encourage component-level manufacturing (that is, backward integration), this Budget has a focused thrust for indigenous manufacture of the capital goods itself. The government's assessment has been that project import duty concessions have deprived local capital goods producers of a level-playing field in areas such as coal mining projects, power generation, transmission or distribution projects, and railway and metro projects. Accordingly, the Budget has announced phasing out of the concessional rates in capital goods and project imports gradually and apply a rate of 7.5%. This advanced and planned manner of phase out should help businesses plan on their capital expenditure ahead of time.
The Budget has also announced a scheme for design-led manufacturing which will be launched to build a strong ecosystem for 5G as part of the production-linked incentive scheme. Lastly, the Phased Manufacturing Plan (PMP), which was rolled out earlier for mobile phones, solar equipment and electric vehicles, is now expanded to include wearable devices, hearable devices and electronic smart meters. The key advantage of a PMP is a transparent plan of taxation of the key components over a four-year period that enables businesses to plan efficient procurement and subsequent manufacture.
With the changes recommended it is hoped that there will be not only an increasing manufacturing footprint in India but also higher value addition and a rise in R&D investment.
New SEZ legislation
One of the key announcements in the Budget that is expected to have a significant indirect tax impact is the new legislation that is set to replace the existing Special Economic Zones (SEZ) laws and "cover all large existing and new industrial enclaves to optimally utilize available infrastructure and enhance competitiveness of exports".
This new law is likely to consider the Baba Kalyani panel report that recommended transformation of SEZs into Employment and Economic Enclaves (3 Es) and is expected to enable the states to become partners in the 'Development of Enterprise and Service Hubs'.<
While the fine print is awaited to understand the finer nuances, it is hoped that the new legislation addresses the new normal of work from home (WFH), need for easing denotification of SEZ spaces and providing flexibility to make domestic supplies (ie, services or manufactured goods) easily and without treating the same to be an import for Customs purposes. Industry hopes that a consultation process is followed, by inputs being sought on the draft SEZ law.
Additionally, the Budget contains an announcement regarding the change in Customs administration of SEZs that shall be fully IT driven and function on the Customs National Portal with a focus on higher facilitation, targeted by the end of September 2022. This is a move in the right direction as it will allow for risk-based assessments as against all transactions and will ease doing of business by SEZ units considerably.
With this proposal, it is expected that SEZ will be far more effective in encouraging and enabling exports.
Streamlining of GST provisions
From a Goods and Services Tax (GST) perspective, revenues have been buoyant despite the COVID-19 pandemic with the gross GST collection for January 2022 crossing the Rs 1.4 lakh crore mark. Continuing the hopes and aspiration of a fully IT driven and progressive GST regime, this Budget focuses on tweaking the GST laws to tighten evasion and fraudulent availment of input tax credit (ITC) using technology.
Changes have been proposed to the GST Act to reflect the discussions during the recent GST council meeting to allow assessees to only avail ITC to the extent the supplier has reported in GST return and paid taxes
To ease the burden on the assessee, relief has been provided by extending the time limit for availment of ITC, rectification of returns for the previous year from existing due date of September return to 30 November. Interest has also been made applicable only in case ITC is availed and utilised.
While the implementation of technology-based tools for identification of tax-revenue leakages has eased the job of authorities, there has also been a growing pile of litigation for assesses.
Although recent GST changes have been announced post the GST council meetings, the industry has been asking for a timeline for set up of GST Tribunal for resolution of disputes or a pre-settlement of tax position (through set up of Central AAR), something that has not been addressed in this Budget.
On an overall basis, from an indirect tax perspective, messaging has been consistent in the Budget with the major push towards 'Make in India', rationalisation of long-standing Customs exemptions and facilitation of exports.
Mahesh Jaising is Partner in Deloitte Touche Tohmatsu India LLP. Sangita Prakash, Senior Manager, and Ashish Dhariwal, Manager, Deloitte Touche Tohmatsu India LLP, also contributed to the article.
The views expressed in this article by the authors are personal.