Budget 2018: Contrary to mass expectations about a populist budget, the Union Budget 2018 proved to be pro-development. While the financial report card showed improved average tax buoyancy because of better tax compliance along with an increased tax base, the government managed well to maintain a fine balance between fiscal stimulus and fiscal prudence amidst slightly unsatisfactory presumptive tax collection along with lower non-tax revenues. Perhaps that is the reason why the government’s focus was on encouraging entrepreneurship and job creation rather than dolling out tax sops and concessions for businesses and individuals, in a budget leading up to crucial 2019 elections.
Some were curious to see how the Goods and Service Tax amendments would pan out as this was the first budget after the roll out of a seminal yet maiden tax regime. Excise duties (to a large extent) and service tax have been subsumed in GST, along with corresponding duties on imports. Naturally, Budget 2018 did not bring much to the table in terms of GST apart from renaming the CBEC to Central Board of Indirect Taxes and Customs. The proposals were predominantly from the customs front. Bucking the trend set in recent years, customs duty on several products were hiked and this was a well calibrated move to protect domestic businesses and create more indigenous jobs in the manufacturing sector.
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Putting immense faith on the potential for domestic value addition in the countries manufacturing capabilities, customs duty on strategic products such as processed food, perfumes, toiletry preparations, electronics (including cellular mobile phones, smart watches / wearable devices), auto components, footwear, toys and furniture were increased, making these imports more expensive and building on to the Prime Minister’s dream project, ‘Make in India’. While It is hoped that making imports dearer will boost the indigenous industry providing employment opportunities increased customs duty collections should also fairly compensate for the dip in non-tax revenue on account of several factors such as deferment of spectrum auction. Customs duty on some of the items which are crucial inputs for domestic manufacturers, such as refractory items and solar tampered glass used for manufacture of solar cells / panels / modules have been reduced / nil rated.
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Budget 2018 also saw replacement of cesses for specific purposes with new ones having substantially broader objectives. One is reminded of the saying that there are no free lunches as one examines the levy of Social Welfare Surcharge @ 10% of the aggregate duties of customs which was applicable at 3%. Goes without saying, this collection is also going to come from imports thereby putting the domestic manufacturers at an advantage and provide funds for social welfare at the same time. Similarly, Additional Duty of Excise (Road Cess) applicable on petrol and high speed diesel at Rs. 2 per litre, will be replaced by a Road and Infrastructure Cess will be applicable at Rs. 8 per litre. While the cess amounts may appear to have inflated, this will not impact the total excise duty on these products as the basic excise duty rates on these products have been proportionately reduced.
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To encourage consumption of greener fuels, the Road and infrastructure Cess has been exempted on ethanol blended petrol and diesel blended with biodiesel. 50% duty exemption is provided to petrol and diesel manufactured and cleared from specified refineries in the North-East Region to give some incentives to oil manufacturers in these remote locations. Apart from the rate aspect, other changes in the customs law seem to improve ease of doing business in cross border trade, align certain provisions with the commitments under the Trade Facilitation Agreement, smoothen dispute resolution processes and to reduce litigation. Certain amendments have been made to provide for pre-notice consultation, definite timelines for adjudication and deemed closure of cases in case of non-adherence to timelines.
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While the Union Budget 2018 has not delivered much relief in terms of providing for too many GST related amendments and we will have to pin our hopes on the GST Council meetings for that. While the Government could have done more and there is no end to wishful thinking. Overall, our Finance Minister has done a commendable job in living up to the aspirations of the Indian manufacturers. Hopefully, this will encourage the shift in focus of entrepreneurs from service based start-ups and lead to more manufacturing ventures in the days to come.
By Abhishek A Rastogi, Partner at Khaitan & Co., supported by Pratyushprava Saha.