Key Adjustments to GST and Customs from India's 2020 Union Budget

The Union Finance Minister, Smt. Nirmala Sitharaman, presented the Union Budget 2020 on February 1, 2020. While much attention focused on anticipated income tax adjustments, it is also essential to be aware of modifications to the government's primary revenue sources: Customs duty and Goods and Services Tax (GST).The changes announced for GST were mainly procedural, aiming to tackle the issue of fraudulent invoicing. These GST legislative amendments, which were part of the Finance Bill 2020 (later enacted as the Finance Act 2020), had previously been suggested by the GST Council. Concurrently, new measures for customs law and foreign trade were introduced to support domestic industries and boost exports.

Key GST Amendments from the 2020 Union Budget

The Finance Act 2020 will implement these amendments following the President's approval.

Main GST Modifications

1. Individuals involved in or benefiting from fraudulent Input Tax Credit (ITC) claims will face a penalty equivalent to 100% of the tax amount concerned.
2. The composition scheme is now restricted, excluding taxpayers engaged in inter-state supply of services, supplies not subject to GST, and supplies made through e-commerce operators where Tax Collected at Source (TCS) is applicable.
3. The date of the debit note will independently determine when input tax credit can be claimed, no longer relying on the invoice date.
4. Transitional provisions have been retroactively applied from July 1, 2017, to override the Gujarat High Court's ruling in the Siddhartha Enterprises case.
5. Powers have been granted to specify the format of the TDS certificate and to waive late fees (previously Rs. 200 per day, capped at Rs. 5,000) for failures in issuing TDS certificates.

Other Significant GST Changes

1. A new provision permits the cancellation of voluntary GST registration for distinct entities.
2. The Additional Commissioner and Commissioner are now authorized to excuse delays of up to 30 days in applying for the revocation of cancellation.
3. Refunds related to inverted duty structures for tobacco products are now prohibited with retrospective effect from July 1, 2017.
4. A 6% CGST rate (total 12% IGST rate) was made applicable retrospectively for the supply of pulleys, wheels, and other products used in agricultural machinery between July 1, 2017, and December 31, 2018.
5. Ladakh has been formally added to the definition of Union Territory, and Jammu & Kashmir will establish its own appellate tribunal.
6. The law has been amended to extend imprisonment to individuals who 'cause to commit' offenses and those 'retaining the benefit,' broadening accountability beyond just the perpetrator. This punishment applies to persons fraudulently claiming ITC without a valid invoice, making these offenses cognizable and non-bailable.
7. A retrospective GST exemption has been granted for the supply of fishmeal from July 1, 2017, to September 30, 2019.
8. The period for the Central Board of Indirect Taxes and Customs (CBIC) to issue 'removal of difficulty' orders has been extended from three to five years, effective from July 1, 2017.
9. Board approval will no longer be required for orders determining expenses in special audits.
10. A provision has been introduced to extend the deadline for returning inputs and capital goods from a job worker.
11. Powers have been conferred to specify the timing and method for issuing invoices for particular categories of supplies or services.
12. The entry in Schedule II to the CGST Act concerning 'Transfer of business assets' will now exclude transactions conducted without consideration.

Customs and Foreign Trade Amendments in the 2020 Union Budget

Below are the key updates regarding foreign trade and duty rate revisions.

Indirect Tax Forecasts for the 2020 Union Budget

The following were the primary expectations concerning GST prior to the Union Budget 2020:

New GST Return System Anticipated After Legislative Amendments

GST return filing has undergone significant transformations over the past two and a half years. Another major change was expected with a new system scheduled to take effect from April 1, 2020. Consequently, the government was poised to propose and enact the necessary revisions to the GST law and its associated rules concerning GST returns. These changes required parliamentary approval and were thus presented during the Union Budget 2020. The new return forms (RET-1, RET-2, or RET-3), along with annexures (ANX-1 and ANX-2), were designed to replace the existing GSTR-1 and GSTR-3B forms.

Potential Changes to GSTR-9 and GSTR-9C Functionalities

The GST Council had previously simplified GST annual returns and waived the mandatory filing requirement for small taxpayers. Despite these concessions, compliance rates remained low, even close to extended deadlines.

Data up to January 24, 2020, indicated that approximately 44% of taxpayers had filed GSTR-9 and only 19% had filed GSTR-9C. This highlighted deficiencies in the system and suggested a need to re-evaluate compliance obligations for upcoming years. GSTR-9C, in particular, carries greater importance, necessitating further refinement to establish a robust system. Taxpayers also frequently requested revisions to the GSTR-9 form, which the government considered. The Union Budget 2020 was expected to prompt the GST Council to re-examine these compliance requirements.

Realistic GST Collection Targets Implemented

The government aimed to set achievable revenue targets for the financial year 2020-21, adopting a cautious approach in the Budget 2020. A senior Ministry of Finance official stated that revenue targets would align with the prevailing economic conditions, with conservative goals being established. The corporate tax reduction, announced earlier by the Finance Minister, was expected to yield benefits in subsequent years.

NITI Aayog and the Economic Advisory Council participated in a Ministry meeting. The government had projected tax revenue growth of 25.26% for the current fiscal year. However, due to an economic downturn, tax collections were subdued. This underperformance was also attributed to last year's corporate tax rate reductions and lower GST collections. Central Tax GST collections significantly missed the budgeted estimate by about 40% during April-November 2019-20.

GST Rate Cuts Deemed Improbable in Budget 2020

Numerous industries, including the automotive and healthcare sectors, had advocated for a review of GST rates on specific goods. However, this issue was more likely to be addressed by the GST Council. A revenue augmentation committee had already been formed during a prior Council meeting to examine aspects of a new GST rate structure. Given widespread industry demands across India, these matters would be handled with careful consideration.

A significant request from various associations was to reduce the GST rate on motor vehicles from 28% to 18%. The healthcare sector anticipated the Budget 2020 would classify healthcare services as Nil rated. Furthermore, key stakeholders also expected health insurance premiums to be designated as a zero-rated item under GST.Following these, requests for uniform rate imposition also came from restaurants, wood dealers, and garment manufacturers. Among other items, potential GST rate reductions were sought for marketing investments, subsidized training programs, online education systems, occupational insurance, auto LPG, and its conversion kits.

Addressing Inverted Duty Structure Issues

An inverted duty structure was identified in the personal care industry, affecting products like toilet soaps, soap noodles, and shampoos. Raw materials such as palm fatty acid distillate (PFAD) and crude palm stearin (CPS) could be imported at a Nil customs duty rate under an 'actual user' condition in June 2017. The 2019 Budget, however, imposed a 7.5% duty on these raw material imports. Conversely, finished goods like toilet soaps and shampoos could be imported at a zero-duty rate. This disparity incentivized the import of finished goods, negatively impacting domestic manufacturers. A similar situation was observed with the import of coke (used in steel production) compared to imported steel.

It was anticipated that the Union Budget 2020 would address these cases of inverted import duty structures.

Lowering Import Duty on Capital Goods and Inputs

The automotive industry hoped for a complete exemption from import duty on lithium-ion battery cells. This measure would foster the manufacturing of electric vehicles in India, a sector that gained tax prominence since the 2019 Budget.

Another relevant item impacting the automotive and white goods industries concerned customs duty on imported motors and PCBs, which incurred a 7.5%-10% duty. These are crucial raw materials for manufacturing electric appliances such as washing machines, air conditioners, and refrigerators. Any reduction in import duty on these raw materials would help decrease the overall cost of white goods, making them more competitive globally.

Reducing import duties on raw materials like rock phosphate and sulfur would stimulate domestic production of fertilizers such as Diammonium Phosphate (DAP). The government was expected to consider lowering these import duty rates in the Budget 2020.

Streamlining Customs Duty and Foreign Trade Regulations

For the pharmaceutical sector, a new export incentive scheme to replace the then-ineffective Merchandise Export from India Scheme (MEIS) was a key expectation. This initiative aimed to facilitate the establishment of bulk pharmaceutical manufacturing units within India. Although the MEIS scheme was announced in 2019 to be succeeded by the Rebate of State and Central Taxes and Levies (RoSCTL), the specifics were yet to be notified. The new scheme was also intended to comply with WTO regulations and offer attractive incentives to the export sector.

Similarly, several customs law provisions required re-evaluation to assess their overall contribution to the balance of payments. Some of these provisions were expected to be reformed in the Budget 2020.