By the yard it’s hard; but inch by inch, anything’s a cinch ! Reviving itself from the pandemic, the Indian Economy is now set to primarily focus on ‘AatmaNirbhar Bharat Abhiyan’.

This budget is woven around six prominent themes “Health and Well being”, “Infrastructural development”, “Inclusive Development for Aspirational India”, “Reinvigorating Human Capital”, “Innovation and R&D” and “Minimum Government and Maximum Governance”. On the Indirect tax front, the Finance Bill 2021 proposes radical changes around various aspects like rationalization of duties and taxes, review of existing exemptions, stronger compliance and trade facilitation measures.

The present article highlights important changes proposed in the Finance Bill relating to GST and Customs:

Part I: Important changes proposed in Customs vide Finance Bill 2021

With the primary objective of “Make in India”, the budget proposes to thrust on easy access to raw materials and exports of Indian goods.

Also, with the intent of fulfilling “AatmaNirbhar Bharat” campaign, changes in rates of duties have been made to safeguard and boost the domestic market and provide a level playing field for the domestic industries.

– Sub-section 4A to Section 25 of The Customs Act, 1962 has been inserted to withdraw all the earlier issued conditional exemptions. Thereby all conditional exemptions will be granted only for a period of 2 years. Further, all such exemptions which are in force as on date will be valid only till 31st March 2023, if not specifically extended/ rescinded earlier on review. Hence, it becomes important for business to plan their activities in accordance with the timely conditional exemptions provided.

– Amendment to Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017 (IGCR Rules): The amendment proposed in the Finance Bill 2021 has been made effective from February 2, 2021. The amendment has brought in a relaxation by way of allowing 100% out-sourcing for manufacture of goods on job work. Further, imported capital goods used for the specified purpose can be cleared on payment of differential duty, along with interest, on depreciated value.

– Entry of goods on importation –Presentation of valid bill of entry:

It was a general practice that bill of entry is presented to the Customs within a day when the goods are arrived. However, the amended section 46(3) highlights the requirement to update the bill of entry one day prior (including holidays) to the day of arrival of the goods in vessel or aircraft. The amended section is definitely compelling the importers to be on toes for compliance failing which they may have to pay out late fee charges even for a days delay.

– A Common electronic portal proposed to set up to facilitate registration, filing bill of entries, shipping bill, amendment in the filed documents by the customs authorities, etc.

– New levy of Agriculture Infrastructure and Development Cess (AIDC) effective from 2 February 2021. The AIDC will be levied on specified goods imported into India with simultaneous reduction in basic customs duty rates on such products to ensure no additional duty burden on tax payers

Part II: Important changes proposed in Goods and Services Tax vide Finance Bill 2021

The GST is now almost 4 years old, has its own highs and lows in terms of practicality. With the intent of easing compliances, the GST council has brought up several measures to streamline and simplify the compliances in the past. Such measures include the nil return through SMS, QRMP (Quarterly returns and monthly payment scheme) for small taxpayers, e-invoicing, validation of input statement in GST portal, pre filled GST returns and introducing staggered filing of returns.

In furtherance to the earlier measures during the timely GST council meetings, the Ministry has now announced few yet major decisions with reference to GST.

1. Doctrine of Mutuality is no longer a shelter for tax payers

The introduction of new clause (aa) in the definition of Supply has reversed a notable and remarkable decision in case of Court in State of West Bengal & Ors. vs Calcutta Club Limited decided on 03/10/2019 under the service tax laws.

The insertion of a new clause in the definition on Supply under the CGST Act, 2017 and deletion of Clause 7 in Schedule II of CGST Act, 2017 has now brought in a settled position to the debatable query for transactions between the associations to its members or constituents and vice versa.

Many taxpayers falling under the said clause of proposed amendment had adopted the decision of Hon’ble Supreme Court in the aforementioned case.

Any services provided by an association of persons whether incorporated or not to its members will be considered as taxable supply under GST. Thereby denying the concept of Doctrine of Mutuality. The concept of mutuality between the club and members does not exist in the GST regime as the proposed amendment would be retrospective once notified. The GST law considers the members and the association as two different legal persons and hence, when the same is used in the course of business, tax is payable.

2. Additional condition to avail valid credit under GST

The Section 16 of the CGST Act, 2017 prescribes the conditions for availing valid credit under GST. Earlier credit was available when the same is used in course or furtherance of business, taxpayer is in possession of valid tax invoice and has received the goods or services or both. However, the condition that the recipient is in position of valid tax invoice will no longer be an appropriate argument as the proposed amendment requires that the supplier declares the same in GST returns for outward supplies.

The credit becomes eligible for set-off to the recipient only when the supplier in his return for outward supplies declares the same. This move would enable establishing a stronger supply chain. The proposed amendment requires follow up to a greater extent with suppliers for timely filing of GST returns. It also provides a valid support to the debate existed on validity of Rule 36(4) of CGST Rules, 2017.

Further, taking an appropriate advantage the supplier would be able to maintain a better working capital cycle by ensuring invoice is uploaded and filed through GSTR 1 only when buyer honors the invoice within the specified timeline.

One may argue that only mandatory condition is to file the return for outward supplies whereas there is no guarantee that tax has been paid or not through the simplified returns. In this connection, the GST portal has already inbuilt feature to enable suppliers file GSTR 1 for next month only when the GSTR 3B of previous periods is filed. Thereby ensuring payment of tax to the government exchequer. Mismatch if any in the turnover as reported in GSTR 1 and GSTR3B of the supplier would lead to interest outflow from supplier’s end without affecting the valid credit claimed by the recipient as per GSTR 2A.

Taxpayers are initially facing huge compliance issues with respect to filing of returns by suppliers enabling them claim a credit reflected in GSTR 2A plus 5% of provisional credit (as per Notification 94/2020 CT dated 22.12.2020). This proposed amendment has done away with the provisional credit ensuring a stricter and streamlined credit flow process in the supply chain. However, it will be right to say that the rationale of ease of compliance will be successful in the long run only after initial hiccups are handled which will streamline the credit availment process.

3. Self-Certified Reconciliation Statement

The Clause 101 & 102 of the Bill has proposed to remove the requirement of audit certifications by professionals. Rather a self-certified statement is required to be furnished by taxpayers along with the annual returns. This proposed amendment in the long run may lead to increased cases of litigations due to non requisite of audit by a professional and adding the burden to tax payers.

4. Interest on net Liability basis

The requirement to pay interest only on net cash liability was always a concept of the Service tax regime. However, not taking into cognizance that interest was levied to compensate the payment of tax on belated basis to the government exchequer, and where credit is already a part of government revenue; the officials raised demand on gross liability basis. The proposed amendment was always a talk of the town and an amendment was also recommended in 39th GST Council Meeting. Thereby an amendment in the Act now would provide greater transparency and clarity amongst the taxpayers and officials.

5. Stronger Compliance action for movement of goods:

The Section 129(1) (a) of the CGST Act, 2017 is proposed to amend the provisions relating to detention, seizure of goods in transit wherein the penalty payable is increased to 200% of tax payable on such goods where the owner comes forward to pay the same. However, the requirement for payment of tax has been removed for releasing the detained or seized goods or conveyance and only penalty is payable.

In a case where the owner does not come forward to pay tax, the penalty has been increased to 200% of the tax payable or 50% of value of goods whichever is higher. However, the requirement for payment of tax has removed away for releasing the detained or seized goods or conveyance and only penalty is payable.

The taxpayer further does not have any further option to execute a bond instead of upfront payment of penalty in cash. Hence, for any seized or detained goods or conveyance to be released, the payment of penalty would only enable release of the goods/ conveyance.

The relevant officer would now be required to issue the notice (MOV-07) and pass order (MOV-09) for penalty payable within a period of 7 days from detention or seizure. However, the same shall be passed only after providing an opportunity to be heard. Such notice has to be responded by the taxpayer within a period of 15 days from the date of receipt failing which officials can take appropriate action.

6. Zero-rated Supply under GST:

The proposed amendment to the IGST Act, 2017 refines the term Zero rated supply. The supply of goods or services or both to a SEZ Developer or Unit for authorized operations will only qualify for zero rated supply under GST. The list of authorized operations for a unit/ developer is not defined in the act or legislature. It is implicit that any supply of goods or services that have relation to the final output generated by such SEZ developer/ unit will qualify as authorized operations. Although the intention behind such amendment is to streamline the benefit of zero-rating to taxpayers, going forward, it would be an additional compliance for a DTA registered person to understand if the supply he provides to SEZ qualifies for the benefit of zero-rating or not. Further, it is also recommended to seek a declaration from such unit/ developer stating the requirement for authorized operations only.

7. Important requisite for claiming refunds under GST:

Exports are provided a benefit of zero-rating to ensure flow of foreign currency in India. On the other hand, benefit of refund of input tax on goods and services is allowed to the exporters. The Budget 2021 has proposed to include an essential requirement to realize foreign exchange within the maximum period prescribed under the Foreign Exchange Management Act, 1999 (FEMA) i.e.,9 months from the date of export. Incase where refund of tax paid on input goods and services is received without satisfying the condition of foreign currency flow in India, interest is liable to be deposited for refund realized within 30 days from the expiry of period prescribed under the FEMA Act.

8. Refunds route for notified tax payers:

Export under GST law was allowed under 2 routes – (i) Export without payment of tax, where refund of ITC accumulated on inputs and services can be availed.  (ii) Export with payment of tax, where refund of tax collected on invoice is provided for inputs services and capital goods. However, certain categories of taxpayers who have availed benefit of at-source exemptions were denied the benefit of refunds under export with payment of tax mechanism. Therefore, taxpayers falling under Rule 96(10) of the CGST Rules, 2017 were not able to encash their credit under export with payment route on capital goods.

In addition to the above taxpayers, it is now proposed to explicitly notify taxpayers who can opt to claim refund of taxes under with payment mechanism. However, it is recommended to taxpayers to take proactive steps and apply for refund by way of export with payment of tax before the officials are issuing any notification.

Conclusion:

To sum-up, this Budget 2021 was a budget to drive the economy from a stagnant phase during the Covid times to a considerable growth phase at present times. The amendments in the budget have at one end tried to simplify the procedures for the long run and other end invested in its people’s progress and welfare (Make in India). Hence, we can rightly say that the Budget has seen its “Light at the end of the tunnel”.

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6 Comments

  1. rahul rambhajani says:

    Hello Neha,
    I have one query regarding Zero rated Supply. You are requested to please clarify one the same. The issue is
    Zero Rated Supply means the entire value chain of the supply is exempt from tax. It means that incase of zero rating not only is the output exempt from payment of tax there is no bar on taking/availing credit of taxed paid on the input side for making/providing the output supply. This definition is given under section 16 by ICAI in its module no 3 page no. 14.32 & 14.33 then what is the refund calculation under rule 89 (4) ? what does it mean that?

    1. NehaJain1180 says:

      Dear Rahul

      As you have correctly said, the output tax payable on exports is zero and the input credit is allowed for the same. RUle 89(4) comes into play where a tax payer has turnover of zero rated supplies and other domestic supplies also.There will be certain credits in a business which will be attributable to both zero rated and domestic supplies. Hence the rule 89(4) provides a mechanism to compute proportionate credit which will be attributable to zero-rated supplies and can be granted as refund.

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