Budget 2017 could be inflection point in India’s integration with global value chain

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Published: January 18, 2017 6:27:53 AM

Budget 2017 would be interesting and unique in many ways for the people watching the indirect tax proposal space of the annual budget exercise.

Besides the fact that this is the first time that the Budget is being presented in the first week of February, this could very well be the last time that customs, central excise and service tax estimation would be discussed as part of indirect tax revenue proposal in Union Budget. (Reuters)Besides the fact that this is the first time that the Budget is being presented in the first week of February, this could very well be the last time that customs, central excise and service tax estimation would be discussed as part of indirect tax revenue proposal in Union Budget. (Reuters)

Budget 2017 would be interesting and unique in many ways for the people watching the indirect tax proposal space of the annual budget exercise. Besides the fact that this is the first time that the Budget is being presented in the first week of February, this could very well be the last time that customs, central excise and service tax estimation would be discussed as part of indirect tax revenue proposal in Union Budget. For that portion of the budget which deals with revenue estimation post the date of Goods and Services Tax (GST) roll-out, in the indirect tax proposal there would only be two key sources of indirect tax revenue estimation, i.e., customs and GST.

Currently, there is a strong interplay of customs law with other indirect taxes like central excise, value added tax (VAT) and service tax. More than half of the customs duty collection at the time of import is currently contributed by countervailing duty (CVD)—collected in lieu of central excise duty, and additional duty of customs—collected in lieu of VAT; hence, more than half of what is perceived as customs duties would change with the rollout of GST.

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It is also expected that in this Budget the complete framework of interaction and linkages between custom and various other indirect taxes will likely be revisited and rewritten in the context of GST. As most of the IGST paid at the time would be eligible for credit—unlike the current regime where there are restrictions on credit of duties other than the basic customs duty—a new normal will emerge in the framework of customs and degree of engagement with post import indirect tax credit chain.

Proposed introduction of GST may have the following key impacts on customs duty and procedures:

Harmonised system of nomenclature (HSN), which is global language of trade in goods, will de-facto become the language of trade for GST. As a consequence, it is expected that the domestic trade in goods would adopt the global language in its day-to-day functioning, and hence gradually feel more integrated with global trade

Adoption of the global trade and customs language would gradually also mean adoption of global processes and procedures. So, this Budget may work out to be the most important point of inflexion in India’s integration with global value chain

Effective rate of customs duty would change as would the elements of customs duty. As under GST there would only be two components of customs duty—the basic customs duty and IGST

The policy and approach to duty exemptions would change and it is expected that the exemptions would reduce in numbers and influence. The span of influence of ‘exemption driven’ policy initiative would reduce. It is to be seen as to how the influence of foreign trade policy and related customs exemptions, would change with the introduction of GST; and to what extent this issue can be addressed

The key differentiators in customs approach to assessment between the manufacturer and the trader should fade away and we should expect a new normal to emerge which would be more balanced and equitable

Comparison of the pre-GST customs and post-GST customs and its impact on day-to-day administration and business, would be an important area in the indirect tax proposals. Logical playing out of the customs policy changes would have to be carried through in the Foreign Trade Policy (FTP), but it’s schedule has not yet been put in the public domain. Normally, the timing of change in FTP and corresponding change in customs are aligned to be effective from the month of April, but this year a lot will depend on the timing of roll out of GST.

Customs is the most portable and global of the Indian indirect taxes. Thus, changes in customs and trade compliance space are not only influenced by national events—like the proposed introduction of GST, but also by external changes shaping the global trade compliance space. Through this budget and proposed introduction of GST, India gets another window of opportunity to adopt and engage more closely and meaningfully with the global trade trends.

The author is partner, indirect tax, BMR & Associates LLP.

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