Budget 2023 – Pre-Budget Expectations on Indirect Taxes
As an outcome of the various GST Council meetings, there have been several rate notifications issued. There have also been various talks about a re-jig of the GST rate structures but so far there has been no announcement regarding such re-jigs or changes in the GST slabs. Most of the rate changes that seem to be announced were done with an intent to reduce the number of exemptions and to comply with the international trade and tariff norms such as WTO guidelines. While the move to reduce exemptions and rationalise the GST rates is imminent, few sectors have been affected by these moves. They have expressed concerns over these announcements and are expecting some relief in the Budget. In this article, we analyse a few of these sectors.
- HORECA Industry
Hotel Accommodation Services
The rate of GST on the Hotel accommodation services depend upon the quoted room tariff per day. The GST rate on hotel units with a tariff of up to INR 1,000 per day, which were exempted earlier are now taxable at 12% GST with effect from 18th July 2022. Thus, now all services of hotel accommodation with declared tariff up to Rs. 7,500 would be covered under the 12% GST net. The withdrawal of exemption has affected many small hotel owners, who have already suffered grave losses due to COVID era. The Federation of Hotel and Restaurant Associations of India (FHRAI) fears that the inclusion of economy rooms under 12% GST as well as no reduction of GST rates from 18% to 12% applicable to units exceeding room rates of INR 7,500 would affect business and the sector at large. They expect some kind of relief in the said regard. Many experts feel that there is a need for differential GST rates between the luxury and the economy segment. We expect some announcement in said regard in the Budget.
India is becoming a major hub for international events, exhibitions and conferences. It is expected that the Meetings, Incentives, Conferences and Exhibitions (MICE) market will see a huge uptick in revenues. Many foreign trade bodies and industry associations are looking at India as a serious MICE destination. A reduction in GST rates for such services will put India more prominently on the MICE map and would bring in much needed revenues to the hospitality segment of India. We are expecting some relief to the MICE sector in this Budget.
Restaurants and Cafés
Presently the GST rate of 5% without benefit of input tax credit is levied on restaurant services whether air-conditioned or not. Even restaurants in hotels with declared tariff below Rs. 7,500 fall within the same slab and do not get benefit of input tax credit, irrespective of category of hotel. There have been suggestions from restaurant industry to revert to a higher GST rate structure which allows benefit of input tax credit rather than a flat 5% GST rate. We understand that the GST Council was open to these suggestions and expect an update on these in the Budget.
- Health-care sector
The concept of healthcare in India has become more and more critical each day. From a GST standpoint, the healthcare sector enjoys various exemptions. Recent measures which seek to rationalise the GST rates and phase out exemptions have also affected the healthcare sector.
One of the pressing concerns in healthcare segment is the dependence on imports for fulfilling the need for medical devices. A lot of efforts being undertaken and several initiatives proposed by Government of India to provide a fillip to local manufacturing, but these initiatives would be structural and would have a long gestation period. It will take time before the investment in building local capabilities would bear results and substitute imports. Thus, we do not expect that there would be any changes on the GST as well as Customs front as far as medical devices are concerned. In addition to these devices, there is a GST applicable on the software embedded in these devices, which is presently at 18%. We expect that the GST rate on the software component may be reduced to 12%
India is also a hub for research and development services related to the pharmaceutical industry. In said regard, with a view to mitigate the challenges faced with respect to assessing the place of supply for such research and development services, the Government had issued a notification mentioning that the place of supply for certain specified R&D services would be the location of the recipient. Despite this notification, industry is facing several departmental notices alleging that services provided by them are in nature of intermediary services or performance-based services. The department are relying on advance rulings, which have failed to consider the Notifications issued. We expect that the Budget would provide some clarification or directives on how these instances should be dealt with. This would save such R&D service providers from unnecessary legal hassles and litigation.
Bearing resemblance to the concerns expressed by the hospitality industry operators, even the hospitals and clinical establishments are facing challenges due to recent rate changes. Effective July 18, 2022, hospital rooms (excluding ICUs) exceeding room tariffs of INR 5,000 per day are assessable to GST at the rate of 5% without claim of any corresponding input tax credit. in our view, there is an imminent need to re-consider of taxability of room accommodations or there is a need to provide for admissibility of input tax credits on the expenses incurred by these establishment. This would truly assist in making healthcare affordable and accessible to all.
- IT and IT enabled Services
The IT and IT enabled services industry in India is one of the top foreign exchange earners and contributors to the rising GDP of India. With growth of innovations such as artificial intelligence, machine learning, ChatGPT, Metaverse, it is expected that this industry will keep seeing growth. Further, India regularly ranks as the most attractive offshoring destination due to talent availability, English communication, and cost arbitrage. One of the contentious issues is the place of supply aspects, especially for software driven services and back office services. The CBIC has made lot of efforts to clarify the place of supply aspects and the concept of intermediary services, by issuing department Circulars and guidelines. However, despite these clarifications, we find that there are adverse actions by department authorities, who are denying GST refunds on grounds of place of supply. These are happening because of the advance rulings and similar judicial precedents which were issued before such circulars were issued by the CBIC. There is a need to harmonize the department procedures so that taxpayers do not face unnecessary litigation and obtain their refunds in time bound manner. The delays in refund have impact on working capital and any relief in said regard would be appreciated by the industry and tax consultants alike.
In the previous budget, it was mentioned that the updated Foreign Trade Policy and the new legislation related to Special Economic Zones would be announced soon. In the Budget, we expect an update on these policies. Several IT and ITeS enterprises are situated in SEZ’s because of the fiscal incentives and any updates to these may impact their business models.
The IT industry is waiting with bated breath for the incentives on services exports. The withdrawal of the previous Service Exports from India Scheme (SEIS) had affected several players and it is expected that the new Foreign Trade Policy would be unveiled around the Budget time or in March 2023. We expect that the Budget speech of the Hon’ble Finance Minister will give clarity on these timelines.
Online gaming industry, especially betting and gambling, has been subject of much debate and discussion on the GST front. The recent GST Council meeting could not take up the taxability of this sector due to paucity of time. We expect that the Budget will provide much needed clarity on how these services are to be taxed and the GST rate applicable for different types of games, whether they are games of skill or games of chance.
Due to the concept of OIDAR services and non-resident taxable persons, several companies which do not have physical presence in India but are supplying services or goods to Indian customers, are required to register in India and pay taxes. Presently, in India, there is no threshold limit for such cross-border supplies which is resulting in various hassles. Many such companies are facing issues in remitting funds to GST authorities. Thus, we believe defining a threshold limit in GST, similar to Equalization levy, which has a limit of INR 2 crores (approx. USD 250,000) for such cross-border supplies would be a welcome move.
- Telecom sector
Without a doubt, the rollout of the 5G network is expected to revolutionize India. The 5G ecosystem would also entail the use of several Next Gen technologies and bring about a digital revolution in India. There is a need to rationalise the GST rates that are currently in force for telecommunication services. We expect that the Budget would also provide waiver of customs duty and Integrated GST applicable on imports of 5G network equipments. The telecom industry Besides, the telecom body has also appealed for removal of GST on license fees, spectrum usage charges, etc. It is an expectation that the Budget will provide clarity on these aspects.
- Auto and Auto Ancillary Industry
As India is looking to provide a fillip to manufacturing by announcing various schemes such as Make in India and Production Linked Incentives Scheme, the auto and auto ancillary industry is certainly on the radar. The Government’s focus has been on import substitution and export promotion through Free Trade Agreements with large and lucrative markets. The RoDTEP scheme, which is more WTO compliant and replaces the MEIS Scheme, also offers various incentives by using the remission model. The industry consensus is that the rates mentioned in the RoDTEP scheme for automobiles and auto components are lower than the MEIS scheme and therefore, need to be revisited. We are expecting that the entitlements under the RoDTEP Scheme may be enhanced.
As the automobiles industry has taken its big move towards bringing in electrically operated vehicles into the market, and considering the segment being novel and at an evolving stage, the EV makers optimistically expect support from the government in the form of reduction in import duties on raw materials and a uniform GST rate of 5% on spare parts utilised in the manufacturing of electric vehicles. Presently several components are taxed at 18% and some even at 28%, and this is creating an inverted duty structure putting stress on working capital for this nascent and buoyant sector.
It is also a matter of debate that despite the eco-friendly nature of these vehicles, they are being taxed at the same slab as that of other automobiles such as petrol and diesel cars. Presently, the rate of tax on these vehicles (and on several auto components) is 28% and in addition, Compensation Cess is also being levied. We expect that considering sustainable development is an agenda of the government, the rate structure and compensation cess levy on the electric vehicles may be addressed in the Budget.
One of the other issues that EV industry is facing in India is the lack of infrastructure to charge these vehicles. It is expected that the Finance Ministry may announce certain incentives on Customs as well as GST front to accentuate the infrastructure creation for such electric vehicles.
- Educational sector
Educational services, other than pre-school education, education up to higher secondary school and other legally recognised qualifications are charged at GST Rate of 18%. The Indian Edtech Consortium (IEC) emphasises the reduction in GST Rates for provision of educational services for currently taxable non-recognised courses, other educational services by private institutions from 18% to 5%-12%. This would enable to curb the rising educational costs in the country and encourage students and professionals to opt in for professional development and career enhancement courses.
- Gems & Jewellery Sector:
On the GST front, based on the recommendations of Gems and Jewellery Export Promotion Council and assisted by RSM India, the rate of GST on cut and polished diamonds was enhanced to 1.5% from the erstwhile 0.25%. These changes were effective from 18th July 2022 and we understand that this has helped solve the issue of input tax credit accumulation to a great extent. India is the largest hub for cutting and polishing of diamonds and is also fast catching up in the jewellery exports category.
A reduction in customs import duty on gold is strongly recommended by the Ministry of Commerce in order to provide impetus to export of gold jewellery from the country and also to reduce the import duties. There had been a raise in import duty rates from 10.75% to 15% [Basic Customs Duty (BCD) 12.5% + Agriculture Infrastructure Development Cess (AIDC) 2.5%] in mid-2022 to limit growing imports of gold. These have had an impact on the jewellery segment of this industry and it is expected that there should be some rationalization.
There is no set-off of basic customs duty available against other indirect tax liabilities such as GST. Thus, for the jewelers who are using gold as a raw material for their ornaments and for creating jewelry, there is no other option but to pass on the hikes in basic customs duty to the end consumer.
- Chemicals and Petrochemicals Industry:
In high anticipation, the Production Linked Incentive (PLI) scheme is set to get extended to the Chemicals and Petrochemicals Industry through Union Budget 2023. With a view to push the indigenous manufacturing of agrochemicals, the Crop Care Federation of India (CCFI) has suggested customs duty on imports of the technical grade be enhanced from 10% to 20%. In a similar fashion, customs duty on ready-made formulations has been suggested to be increased from 10% to 30%.
- Banking and Financial Services Sector
The banking and financial services segment is critical for employment and economic progress. In recent times, the focus has been on banking the underbanked or unbanked, with focus on microfinance and SME’s. Further, fintech and blockchain is also revolutionizing the way banking services are being offered and are promoting inclusiveness in banking.
Our expectation for the Budget with respect to the financial services space, is the focus on inclusiveness. We expect clarity to be provided on GST applicability with regards to subventions and incentives offered by the government. We also expect clarity on ISD and cross charge mechanism and its applicability to this segment.
Further with creation of the GIFT city, there is expected to be a major boost in the BFSI, airline leasing, offshore financial services, capital markets and allied IT and ITeS activities. The services received by companies located in the GIFT city are exempted from GST and we expect that these exemptions would continue.
- Miscellaneous Aspects
In the recent GST Council meeting, several issues could not be taken up due to paucity of time. We expect that in the Budget these aspects may be discussed. Some of these are summarised below:
- Taxability of pan masala and guthka: The GST Council had constituted a Group of Ministers to look into capacity-based taxation for commodities like pan masala and guthka. There is an issue of tax evasion in these products and it was proposed to introduce a tax based on maximum retail prices of these commodities and to shift the burden of taxation to the manufacturing stage. The Group of Ministers felt that efforts should be focused on maximising GST collections at fist stage of manufacture as the leakages were found to be concentrated at the retailer levels. In our view, these measures may not reach fruition very easily as there are various constitutional challenges that would arise in implementing such a levy. The taxable event under GST is supply and implementing the levy in such a form may be against the spirit with which GST was enacted. Further, tax evasion is not an outcome of just rates and if the intent is to curb tax evasion, it will require various other measures.
- Constitution of GST Tribunal: The GST Tribunal represents the second stage of appeal in the GST judiciary. The GST Tribunal is yet to be formed and we understand that while this is a priority and focus area for the government, there are some teething challenges in constitution of this judicial body. Currently, taxpayers who are aggrieved by adverse orders passed by the authorities are compelled to approach High Courts for redress. This is resulting in delays in serving justice and also not bringing any clarity with regards to interpretation of vexed issues in GST. While the Budget may not be able to give a clear cut idea about the constitution and specific aspects of the GST Tribunal such as jurisdiction, we anticipate that the Finance Minister would provide an update on the GST Tribunal process, challenges anticipated in speedy rollout and expected timeline for operationalization of the Tribunals.
- Reorganization of the GST rate slabs: Although there have been talks of merging the 12% and the 18% GST slabs, we do not anticipate any major overhaul of the rate structures. Tax collections under GST are robust and consistent and any structural changes to the rates may adversely impact the collections. Also, inflation is a serious concern for India and the globe and the impact of indirect tax rates on inflation needs to be seriously considered before any rate slab alterations are concluded. The intention of GST authorities only seems to be to rationalize GST rates to address the issue of inverted duty structures.
- E- Invoicing Implementation: The GST authorities have been implementing E- Invoicing in a phased manner and this has resulted in greater transparency and buoyant GST collections. Presently, all businesses with aggregate turnover exceeding INR 10 crores are required to issue e-invoices. It is expected in the Budget that more taxpayers could be brought in the E- invoicing net. We expect that soon, all businesses with aggregate turnover exceeding INR 5 crores could be required to comply with E- invoicing.
Rise in minimum threshold for GST registration: At present, all businesses with an aggregate turnover exceeding INR 20 lakhs (INR 10 lakhs for select states) are required to register under GST. The minimum threshold has not been revisited since GST implementation and we expect that the government, on grounds of ease of doing business, may consider increasing this threshold. It must also be mentioned that all e-commerce operators, irrespective of their turnover are required to register under the GST law. Considering the rise of entrepreneurship backed by e-commerce revolution, it may be prudent to also extend a minimum threshold for registration to such electronic commerce operators.