Union Budget 2024: Needed, measures to reform indirect tax framework

The government has tasted success in implementing faceless assessment in corporate tax and automating compliance and appeals process under GST

By Gautam Khattar

The NDA government securing its third consecutive term in the recently concluded Lok Sabha elections is expected to focus on reforms that would be pivotal and crucial in positioning India as the fastest growing economy in the world.

The industry is awaiting to hear the Government’s vision for the next five years and to continue with the agenda of wide implementation of the ongoing reforms.

Expand PLI scheme to newer sectors

The Make in India initiative has been the cornerstone of the government's vision to turn the economy into a global manufacturing powerhouse. One of the key reforms in this area has been the Production Linked Incentive (PLI) scheme which aimed at incentivizing domestic production and saw widespread interest from several sections of the industry.

The industry now expects the Government to extend the scheme to other sectors, especially those with high import volume and greater export potential. Notably, the PLI scheme introduced for textile sector was limited to man-made fibres and the textile industry now expects the scheme to be extended to garments made of all fibres.

Clarity needed on SEZ policy

Another agenda on the government’s plate for quite some time is the overhaul of the SEZ Act. The Finance Minister had proposed framing the Development of Enterprise and Service Hub (DESH) Bill in her FY23 budget speech to make the SEZ policy more attractive for the investors. The DESH Bill is expected to boost the economic activity, integrate the supply and value chain and help in improving infrastructure facilities and promoting investments.

After two years of its introduction, the industry now look forward to the clarity on whether the DESH Bill will be enacted or whether amendments will be brought in the existing SEZ Act. Either ways, the government should now act swiftly to get the changes implemented for the industry to explore the contours of the changes and for the economy to get the necessary impetus.

Warehousing and capital goods valuation need attention

Another critical scheme, Manufacturing and Other Operations in Warehouse Regulations (MOOWR) scheme, which aimed at incentivizing domestic production, faces certain challenges, be it clarity on the amendment proposed in the Finance Act 2023 restricting Integrated Goods and Services Tax (IGST) and Goods and Services Tax (GST) compensation cess deferment or availability of the benefit under Remission of Duties and Taxes on Exported Products (RODTEP) scheme, unlike the benefit extended to advance authorization holders, Export Oriented Units (EOUs), and Special Economic Zone (SEZ) units. Addressing the divergence is crucial to ensure parity across all schemes to meet the desired objective of the MOOWR scheme.

Furthermore, another prominent issue is the valuation of capital goods cleared for home consumption after a certain period. Currently, customs duty is calculated on the original value of import. Accordingly, the depreciated value of the capital goods in the books of accounts will be lower, however customs duty is required to be paid at the original import value. This becomes extremely important for the Government to address to allow the depreciation based valuation method to make the MOOWR scheme more attractive and widely used.

Trade facilitation: Achieving resilient customs processes 

Trade facilitation initiatives, such as the Authorized Economic Operator (AEO) program, play a pivotal role in promoting seamless international trade by recognizing compliant businesses and providing them with expedited customs procedures. While the AEO program has seen wide acceptance across the industry, one of current legal restrictions is that a show cause notice relating to fraud or forgery should not be issued, which is deemed outdated and overly restrictive considering the current practice of the tax authorities. It is suggested that this criterion should be modified to consider the nature and outcome of the show cause notice, rather than their mere existence.

Another important aspect for eligibility to the AEO programme is the evaluation of financial solvency of a company, which primarily focuses on generation of net profit in the financial statement. The criterion, at present overlooks the company’s overall financial standing in the domestic market as well as its global stature in the international trade market. Implementing a more comprehensive program with evaluation based on the company’s past record on compliance and ability to discharge liabilities, rather than the presence of losses in the financial statements, will help in implementing a more nuanced and equitable basis for AEO eligibility.

Investigation by the Special Valuation Branch (SVB) for valuation of imported value of goods from related overseas entities is seen as a complex and a long drawn process. The delay in obtaining certainty on the valuation of imported value of goods lead to uncertainty and practical inconvenience for the industry. The government should work towards implementing a time bound adjudication process with transparent and consistent guidelines for evaluation.

As a further step towards trade facilitation and for having more redressal forums for customs, the government is expected to establish more Central Authority of Advance Rulings (CAAR) authorities across key states. Currently, the CAAR authorities are at Delhi and Mumbai, looking over the advance ruling applications for a cluster of regions. Establishment of more CAAR authorities would facilitate in minimizing disputes and to impart certainty on relevant matters.

Use technology to enhance efficiency

The government has tasted success in implementing faceless assessment in corporate tax and automating compliance and appeals process under GST. It is the opportune time that the government take forward its objective of ‘Digital Bharat’ by digitalizing the customs appeal and refund process. These advancements will help in improving efficiency and building a transparent system.

The writer is Principal, Price Waterhouse & Co LLP. 

Views are personal and do not represent the stand of this publication.