Reduction Of Custom Duties, GST: Experts Explain What To Expect From Union Budget 2024

Excerpts:

Anita, let me begin with you. Let’s first look at the overall landscape of indirect taxes in India. So, my first question to you is to lay out what this landscape looks like — in terms of goods and services tax. How complex or simple is it compared to where it was before this regime of taxes and where are we today? And then we will come to what the budget could do or cannot do.


Rastogi: Sure. Thank you so much. So, goods and services tax–when it was introduced in 2017, was a brilliant, envisaged law which had to come in and replaced the legacy indirect taxes law, where we had multiple taxes. This meant that if there was a service, there was a service tax. If it was a sale of goods, we had the value added tax, so on and so forth. And there were many, many taxes which were there. We also had an issue of tax on tax because of the different tax regimes which we had. And it was observed that GST, which is a goods and services tax, which means one tax, both on goods and services, will now apply across India. So one nation, one tax, was the dream.

I would say that the wish list was very good, but I don't think that the implementation happened so well in the initial years because the way the law was drafted, it was so complex, difficult for even the administration to administer it, along with the assessees, to understand it. But I must give kudos to the government that multiple plethora of clarifications and notifications were issued immediately; also, the moment they realised that these are the loopholes, because, you see, it was the first time for everybody, whether it was for the government or the taxpayer or the consultants. And we also were so pragmatic to say that, well, we want to make everything digital. So all the returns were filed online. And there were, of course, a lot of teething problems at that point of time as well. And I remember one of the very senior officers said to me that the portal issues which were faced in the initial times were like building a ship and before the ship was fully built in, you were asked to sail and hence we were trying to solve things.


Having said that, now so many years have passed by, I think people have understood what the GST law is all about. But still, is it a simple tax law? Today I will say, no, it is still not a simple tax law. I'll say it's more of a fractured law because wherever there were problems and loopholes, the government came in, they issued notifications and clarified things. But yes, much better than where we started. Independent of that because of the interpretation issue, there have been just too many notices, too much litigation happening across India. And the Director General of the Investigation Wing has also been quite proactive in doing investigations across the sectors with huge amounts of demands being raised on the corporates. And hence the load has gone to the High Court, because still today we still do not have the Tribunal for GST. And hence the high courts have been burdened by multiple writs with regard to the investigations which have happened. So today we are not in a great situation, but I do believe that the government is working towards it. There are measures which they are taking, especially the GST council meetings, which happen. They try to bring in the concept of ease of doing business, issue more clarifications and also try to help the DGI that, you know, you can't just issue notices and demands. In fact, there is this proposal, which we understand, which will soon get notified that you have to take an approval from the policy making wing of the government of GST before you issue demands on some interpretation issues. So I think we are moving towards a better regime. We are taking baby steps but miles to go before we sleep, I think.

Okay, so two questions very quickly, and before I come to Sameer. I mean, so one is, you talked about the fractured nature of the law and the fact that there are too many notices. Can you give me an instance of what or where most of these notices lie or what kind of notices would, let's say, constitute most of those which are being sent?

Rastogi: I think the latest and what people must be reading also is regarding online gaming. That sector has really been targeted, I would say, because it was felt that the valuation on which the tax was paid was absolutely wrong, as per the department and as per the investigating agencies. In fact, today the matter is in the Supreme Court and the Supreme Court is just waiting. I think the next hearing is going to happen on 31 July. The other is on a lot of classification issues. The moment you have multiple rates, people will try to interpret as to in which rate bracket my product or services fall. And because of that, you have classification disputes going around whether honey, this is a pure honey, or it could be a car, it could be a vehicle, it could be, things like aam, papad, those type of things. Also have actually seen litigations whether it's a roti or a paratha types of things. So I think because we have multiple rates, that is why the department thinks differently, assessees might interpret differently, and that's why there's a lot of litigation on that as well.

Other than that, of course, there are a lot of reconciliation issues. And there's a concept of input tax credit under the GST, which essentially means that if I, as a service provider, is procuring some goods or services and I pay tax on my procurements, I'm eligible to set off that tax with my output tax. Now, there is a mechanism where I can set it off. There is a portal which actually allows me to do an entire reconciliation, but it is not so seamless as it was initially envisaged. So a lot of litigation on input tax credit as well.

So classification, input tax credit interpretations. One of them is online gaming and almost many, many sectors as well.

Sameer, so let me start off with you. So, you know, when it comes to tax, the expectations are quite simple. And the biggest expectation, obviously, will be that tax rates will go down, whether it's for capital gains or personal income tax or corporate tax. Of course, my understanding, like many others, is that none of that will happen, and we'll see either nothing happen or even the prospect of something increasing, which, of course, people will not be happy with. So how are you seeing, in a broad sense, where we stand before we get into the nitty gritties?

Kanabar: So, at least I would be sort of agree with Anita to say that, yes, GST is in an arena where, you know, there is no certainty and people are in courts and everything is going crazy. But tax is an established system, so it's been there since maybe 1922. That was the original act. And then we have 1961, and the law has evolved. But more importantly, the income tax has become an international or a global subject matter, and it is not confined to every country. For example, now we have sort of an understanding, or a global understanding of almost 140 plus countries…To say that every country will levy a minimum 15% tax. You know, whether 15% is right or wrong is a separate debate. But at least there is a consensus and there is a dotted line, which at least everybody has signed to say that, yes, we should accept this 15%. And in light of that.


I'll come to the profit shifting and second pillar a little later. But could you talk more about the sort of classic tax, corporate tax and personal tax first?

Kanabar:
 I was just trying to lay the background. But yes, to come to corporate tax, what is important is that we have reduced our peak level of taxes almost from 35% to 25% for corporates. Right? So today the peak rate for corporate is 25. Unless you are claiming any tax holidays or you are claiming any benefits, then your tax rate could be still as high as 35%. But that may not be applicable because you are claiming tax holiday or tax exemptions. But otherwise your peak rate is 25.


And of course, if you were in a manufacturing sector and you had set up your manufacturing unit before 2023, then you had a special tax regime of 17% effective tax rate. So 15 plus percent surcharge, whatever. So that adds up to 17. So it cannot be lower than this from a corporate perspective.


From a personal tax, I think earlier the discussion was whether the base is wide enough, whether everybody is in the tax net. But if you look at our period of time, or at least in the last four odd years, we have moved from two crore taxpayers to almost six and a half crore taxpayers, which is a huge base and it's a multiplier. And all the efforts that the government has been taking is automation, bringing in a lot of technology. Government is far ahead of anybody, at least in the country, in terms of technology, in terms of tax, there will be hiccups, there will be challenges. I'm not saying no to it, but GST has ensured that many people come within the fold of tax.


And of course, linkage of Aadhaar and PAN is one more contributor to bring a lot of people. And we know that 97% of the people have Aadhaar today. And if PAN is linked, you can imagine. So we are not debating or discussing now or there is hardly any discussion about whether everybody is paying taxes or not. Right? So the discussion now is that, yes, if we have such a wider base, can there be a better tax regime? So if you look at a high tax regime, it is as high as 42% for the super rich or the people who are super wealthy. So it goes right up to that level. So are we taxing richer at the higher end? We are. Are we giving exemptions to people below five lakhs? Yes, we are. So in terms of statistics also, and of course, if you look at again, the government has put up these numbers, the people below five lakh who were filing returns were almost 50%. Now that has come down to 33%. So people who are reporting income below five lakhs have reduced from 50% to 33%.

So now the discussion is that can we sort of revisit the slab rates? Can we revisit what incentives we are giving on personal tax? Do we need to do away with the two regimes that we have which makes things so difficult? And can we live with one single regime? And I think we are converging and consolidating to a new single regime. We are giving, we are phasing out. And I am sure maybe if not this year, next year, we would eventually phase out to one single regime and make things so simple and straightforward for everybody.


Several questions, but let me start with one, Sameer. So why are personal tax collections running ahead of corporate tax collections? Is that normal? Has it happened before?

Kanabar:
No. And again, it's a surprise. And then I've answered the question to say that because the tax base has increased, it is a multi-fold and that is going to sort of only contribute to more taxes. And again, as I said, more people are beyond five lakh. So we know that five lakh is the hurdle rate below which you don't pay tax. And then of course even above five lakhs, up to seven odd lakhs, people still don't pay tax. There are still a lot of exemptions available. But the people have also moved into higher brackets and that is giving results to higher tax collection. And of course, as I said technology has improved, collection efforts have improved and compliance. So the new generation is sort of willing to pay the tax and sort of have a better life and not take any headache. So all of that is contributed.

And is this normal in other countries as well, where personal tax collections are higher than corporate tax collections?

Kanabar: Again, if I look at different countries, different countries will have different answers. If you look at the US again, where tax rates are quite high both for individuals but lower tax rates for corporates, there, again, we see that a lot of companies are paying higher taxes because they are making a lot of profits and there are not many incentives available as of now. But the collection of personal tax, again, is kind of 50-50 in that sense, between corporates and personal. Some other European countries will have different answers.

And the reason I'm asking this, and I'll come back to this in a moment, Sameer, is because that also, in a way, decides policy. I mean, you know, or decides the framing of policy or approach towards tax collection. And I'll come back to that.


Anita, you know, the indirect access today. Now I'd like you to give me the number. What is the percentage or proportion of total taxes collected in India at this point?


Rastogi: Sorry, I don't have the right number in front of me, but I do understand.


No one has it, which is why I'm asking.


Rastogi: That was a smart move. So I do believe indirect tax is a good proportion from the tax credit overall perspective, that is one. Now, what is the quantum? I don't know the answer because there is no data point from that perspective which is available. States have their different collection points. You know, the center has different, then we have IGST. So I don't know the answer today.

Sure. But the question that I'm leading to is really this. I mean, given that indirect taxes are likely to be a larger component of overall tax collections, where are we headed in terms of, where could we be headed in terms of, let's say, ensuring that either that balance is equalised, let's say direct tax collections equal indirect tax, or let's say, as the case is in many developed countries, direct tax collections are bigger or higher than indirect tax collections.


Rastogi: See, I can just respond to you on indirect taxes as to what I consider it and how they are going to move. I do believe that indirect tax collections will increase. And the reason is very, very simple. The reason is that, you know, when we are talking about the Indian economy, we are talking about people's standard of living going up, their consumption increases. So the domestic consumption of goods and services increases. And each and everything today is actually taxable under GST other than a few items, right? That is one.

And the second is that anyways, manufacturing in India is a focus area for the government. So if we do more manufacturing and we are able to export goods and services apart from the service sector, also the goods as well, then we are going to have much more taxes which will be collected. So from that perspective, I do believe that the taxes will only increase, the tax collection will only increase because the way the economy is going to grow, it's directly linked with that.

So let me ask you a slightly subjective question here in terms of, let's say an equilibrium of... And this applies, I guess, to direct taxes as well. And Sameer spoke about widening the tax base in terms of the addressable market of taxpayers. And I'm talking about indirect tax. Would you think we've reached an equilibrium in terms of targeting, touching, connecting everyone who should be connected in this economy?

Rastogi: 
No, no, not at all. There are still a lot of pockets which are untouched. And I'm not talking about the exempt sector because those sectors will always be exempt, whether it is the healthcare sector or the education sector. Till the time we become so developed that nobody will question that, you know, even if you're going to a school, you should pay taxes. But having said that, there are still pockets of people and there are still sectors where we see that people are not really 100% compliant. Now that is because of the typical nature of the way things are happening, right? Also, I don't think that there is a zero parallel economy today. It does exist, right? We can't be ignorant about that. And hence, I do believe that there's still a lot of scope for increase of the tax base under indirect taxes.

Now if you were to look at, let's say, the framing of tax policy, and now we'll come to the Union Budget next week, what should be the determining thinking before we come to the exact or the specific points when it comes to this time and this budget?


Rastogi: So I think we have to understand the fundamental principles of taxation and I have read it in many, many thesis as well. Lower the tax rate, more the compliance and more the collection. It is a very simple concept, because if the rates are low, people don't mind paying the tax, right? But if the rates are higher, then there's always chances of more revenue leakage to happen. Hence my suggestion here would be that let's have a rate rationalization, don't have very high rates.

Second point is that manufacturing in India has to be incentivised. So from a customs duty standpoint, it is important that the government should do a reduction of the customs duties on the raw material which is imported into India for doing the manufacturing activity. I think that is the next thing which they should be doing. Now, you might ask me that does the government have that kind of wherewithal to actually bear with that kind of a brunt from the customs duty, less being collected from the importers?


So my answer would be simple, that it is a chain reaction, right. The raw material will be imported at a lesser customs duty, but then once you're going to manufacture and then you're going to sell, you'll have a higher GST collection. So I don't think that the government is not in a good position to do that today. They can do that today very much to augment the economy per se in India.


Got it. So what would be a good example, Anita, of this, of, let's say product, where the input cost or the input material, I don't know, maybe it could be petrochemicals or steel where the input material is… If you reduce the customs duties, we could see potentially or even theoretically a jump in, let's say goods and service tax collections.


Rastogi: So this is a generic statement which I have made because every sector plays very differently. And there's also a concept of inverted structure under indirect tax regime where the procurement rate is much higher as compared to the output rate. So that needs to be normalised also. And I think sector wise, the government has to pinpoint which are the products which are largely not available in India, but we necessarily need to import them. There, I think the rate reduction should be the priority.

I'm going to come back to you for more specific, let's say, asks or recommendations from the budget. Sameer, again, what would you say should be first, the policy or the thinking when it comes to taxation and tax approach for this budget and then how should it be playing out?

Kanabar: Yeah, so I'll put it in different buckets. One is of course looking at how you can simplify and make tax easy for people because now we have a lot of people complying. Second is how you are able to resolve the huge bucket of litigation that you have, which is stuck up at different levels and unnecessarily people are just litigating. And then third is more importantly, the aspects relating to broader policy as to how one should now be forward looking, the income tax regime.


So in terms of simplification, again, two important things. One is, of course, if you look at it from a personal tax perspective, capital gains is too complex. There is one year long term, two years long term, three years long term, different rates, 10%, 20%. Again, for short term capital gain, different rates. You know, it's a jamboree. And this is the right time to sort of, you know, address this because a lot of people are complying. So that's from personal tax.


From a corporate tax perspective, you know, there are two or three major nuances and of course there are, I'm not saying that there are not major nuances, but two or three very basic ones. You know, if you look at Angel Tax right now, if you have accredited investors, right, whether they are AIFs, whether they are venture capital funds, they are registered with Sebi. You know, there are listed companies of all kinds, you know, approved, accredited, established investors, at least those should not be subjected to any Angel Tax.

And again, for your viewers, what is Angel Tax? Is that if you pay something for the capital or the shares that you are acquiring as a primary issue, and if you are paying a higher premium, then that higher premium, which is unfair or treated as an excessive premium, is being taxed as income. Now, capital can never be income. So that's angel tax. Second, If you look at, again, buyback tax. And again, this can touch both ways, personal and as well corporate sides. What happens is that essentially you are a listed company. Earlier for listed companies, there was no buyback tax. Then they brought in the buyback tax. There is no reason at least listed companies should be allowed to buy back their capital. There are various reasons why you may want to buy back, and you should be able to allow the investors to pay capital gains tax. You cannot ask a company to pay tax.

And the third one is more kind , if you look at restructuring for corporates. Now there are certain mergers in a restructuring scenario which are tax neutral, but in those tax neutral, you can offset the losses of the company which is merging. But if it is a service company or it is a financial service sector company and if it has losses and if it merges, then it is not allowed to offset. Now, we had set up this law when India was a manufacturing agricultural economy, but now India is a pure more service. Of course, we are aspiring to be more manufacturing, not that we are not sort of discounting that, but we are more of a service sort of country.

So, we should allow this kind of restructuring as well. So, these are some of the nuances which need to be fixed from a corporate tax perspective. And then if you come to the second bucket, which is litigation. Now, today, if you have a challenge against an order which is being passed, the first level of your litigation is Commissioner Appeals.

Now, virtually this Commissioner Appeals, they had made it faceless and since then, it is kind of part-time functioning, it's not fully functional and a lot of litigations are stuck there. Last budget, they made an attempt to sort of add an additional commissioner who can take up the matters, but that is also taking its own time and a lot of funds are getting blocked or a lot of taxes are getting blocked either from government or from the taxpayer. Now, there has to be some settlement or arbitration kind of mechanism. For example, if you look at the US, you look at Europe, they have these kind of measures where you can go, you sort of admit what you have done wrong, you also say that this is not wrong and finally, you settle and you close the matter. You can't fight a battle for 10 years, 12 years, 15 years. So, that is something that needs to be addressed and then of course… Yeah, okay.

Anita, I am just coming back to you in a second for your wish list. But Sameer, before we do that, two more quick points and I interrupted you earlier when you were talking about the second pillar which is the whole idea of equalizing or creating a more equal environment for companies who are multinationals, more than 650 million euros and have to pay a certain tax so that they don't keep moving their jurisdictions around. So, that is expected in this budget or what is your sense?

Rastogi: 
Yes. So, India is late, normally India is fast, but for this type of legislation, India is one of the late movers. Most countries have sort of not only brought in the law, they have implemented and they are effective. So, it is expected, yes, that if India doesn't want to lose out on the taxes, it is time to bring this law.

Sameer, so, you mentioned personal tax and you said that, you know, for example, in capital gains, there were multiple levels, you know, for one year, for two years, different asset classes. What's the ideal situation there, which is friendly to all?


Kanabar: Yeah. So, the proposition would be that you standardise the definition of long term and short term across the assets unless there is really some need to distinguish, but otherwise standardise that you say one year or two years, whatever, and then just leave it so that people know it's very clear.

Second, the rates that are applicable for long term and short term should also be standardised so that there is again no confusion. If you look at equity funds, you look at debt funds, you look at arbitrage funds, you look at immovable property, again, different rates. So, please standardise those rates and sort of even for short term capital, you know, rather than having a higher tax rate for listed securities, say you have 15%.

So, why not have a preferential short term capital gains rate, even for various classes of assets. So, if this can be simplified, we will make things simple and easy for everyone.

Thank you for that, Sameer. Anita, your wish list as we conclude.


Rastogi: So, essentially, let me focus on customs because customs is one most important area which will come out in the budget. Here also there are two aspects. One is certainty. I think everybody wants certainty in today's world when we're doing business as far as imports are concerned.

And for that, there is a concept which the government should definitely use. They're using it for transfer pricing perspective, which is the advanced pricing agreement, wherein actually the assessees can go and discuss it with the tax authorities as to what should be my arm's length if I'm doing a transaction with my parent and an Indian subsidiary. A similar concept should come for customs also. It is very prevalent in Korea. And we can actually just follow that same model, which essentially says that it's an advanced customs valuation agreement, which means when I import goods, most of the time the customs authorities disagree with the value on which I buy from my parent company because the objective of customs authorities is that it seems you've undervalued your product and hence paid a lesser customs duty. So, it is important that if we have that mechanism wherein in advance itself, we go to the authorities and agree on a particular rate which has to be agreed between the parent and the Indian subsidiary so that for the next five years, you know, I don't have to be troubled about it.

I'm certain that this is the valuation which is going to be followed. I think that is something which the government should definitely do because they've done it for the transfer pricing. And we have precedents across the world also to do that. That's one.

The second is that, you know, there's another way of getting some certainty, which is the Advanced Ruling Authority, which actually when I can go to the advanced tooling authority and ask them on a particular transaction, how it has to be taxed, what is the value, what is the additions, deductions, etc.

So, we'd have today in India only two benches, which are in Delhi and Mumbai. Definitely with the kind of imports which we do, we should have one bench in the south and one bench in the east part of India as well. So, we need to increase those benches. And the last one is that the government today wants to reduce litigation. And hence, we have seen that a couple of years ago, there was an amnesty scheme which was brought in for the legacy law, which is service tax. Now, they have announced a minor type of an amnesty scheme under GST also for the first two, three years that they will not be asking for interest and penalty if somebody makes a payment of tax by March of next year. I think that even for customs, there should be an amnesty scheme which should come in so that, you know, all these old litigations which people don't want to run around can be closed faster and we reduce the burden on both the government and the taxpayer and move forward and focus only on the business. So, this I think is the need of the hour.