Indirect tax: Budget 2022 expected to continue the themes of the last two years

| Budget 2022: Experts list out direct, indirect tax expectations

From the perspective of legislative changes for GST, I expect that changes would be made to remove distortions in levy of taxes and to, ensure seamless flow of credit. Place of supply rules for domestic services needs to be reviewed in cases where B2B transactions are being taxed based on criteria other than location of service recipient. Being an indirect tax, all B2B taxes should be recoverable. Therefore, rules relating to immovable property (including hotel accommodation) need to be amended in order to remove the blockages.

Similarly, rules for international transactions need to be changed in order to ensure all services are zero rated. That would enable seamless exports of the “value added” and avoid exporting taxes. In this context, intermediary related provisions clearly need a review. Agency and broking services should be allowed to be zero rated if the client is offshore; in line with other VAT jurisdictions.

Doing that would also prevent taxpayers from conducting such activities through their branches/ offices outside India in order to avoid such non-recoverable taxes. Interestingly, the 139th report of Rajya Sabha, issued in December 2017, also recommended that intermediary services should be moved to the recipient-based rule.

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Another major concern of the industry relates to inverted duty refunds. Exclusion of services from this scheme, coupled with the overly complex formula to determine amount eligible as refund is causing disruption, cash flow blockages and litigation. The provisions need to be updated and made simple, and comprehensive. This is particularly important since inverted duty refunds exists to ensure that businesses are not negatively impacted due to taxes.

One of the “progressive updates” to the GST regulation could be permitting payment of reverse charge taxes using input credits. It is established in several court rulings that input tax credit is tax paid by the buyer and held with the Government treasury. Therefore, if businesses are treated as “deemed” suppliers for reverse charge categories, they should be allowed to use their input credits for the same. This will certainly aid in reducing credit accumulation and ensuring better cash flows.

I also believe that some more work needs to be done regarding input credit provisions. Firstly, the condition of tax “actually paid” by the vendor should be removed, as it cannot be ascertained in any manner. Secondly, the provisions related to triggering reversals on “transactions in securities” need another look. The Rules provide that an ad-hoc amount of 1% of total securities sold in the year would be treated as value of exempt supply, thus triggering input reversals.

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In my view, this provision needs to be re-jigged in two aspects – one, the word “transactions” needs to be replaced by “trading”

Furthermore, it needs to be clarified that credits would be permitted on CSR expenses and COVID related costs. The time limit for claiming credits of a financial year should also be extended up to the date of filing the Annual return, allowing 3 extra months.

With regard to the powers of the tax office, I believe, certain additional checks and balances may be necessary. For example, right now the Commissioner has the power to attach bank accounts and property

Similarly, introducing mandatory penalties in case of detention of goods in road-checks with no option for provisional release against guarantees is quite harsh. Power to arrest may be used to coerce statements from taxpayers, which are admissible as evidence , and therefore this power needs to be used judiciously and preferably with a multi-layered approval process. Power to block ability to use input tax credits or suspend registration without allowing for any opportunity to be heard can also cause major disruptions to genuine taxpayers.

Overall, in my view, the FM is likely to continue the path of reform under indirect tax. Changes may be limited to address specific needs, which, I believe would also be the ideal approach!

-The author Divyesh Lapsiwala is Partner, Indirect Tax at EY India. With inputs from Nikki Poddar, Tax Director, at EY. The views expressed are personal.