Budget 2021: Industry body seeks modest tax reforms; What does it mean?

January 25, 2021 1:24 PM

Union Budget 2021 India: Finance minister Nirmala Sitharaman should have no difficulty in accepting the three pre-budget proposals made by the Confederation of Indian Industry (CII) to the Ministry of Finance (MoF) concerning indirect taxes on defence materiel.

Budget 2021-22, Union Budget 2021The cost of this blocked capital is an additional burden that the private industry must bear vis-à-vis the public sector, affecting the former’s competitiveness.

By Amit Cowshish, 

Indian Union Budget 2021-22: Finance minister Nirmala Sitharaman should have no difficulty in accepting the three pre-budget proposals made by the Confederation of Indian Industry (CII) to the Ministry of Finance (MoF) concerning indirect taxes on defence materiel. For one thing, these are trivial, and for another, not without merit. The main proposal concerns extension of the Customs Duty (CD) exemption to the private sector on import of defence materiel to bring them at par with the Public Sector Units (PSUs) which have probably enjoyed this benefit all along, except for a brief period following its withdrawal in the union budget for the Financial Year (FY) 2016-17 till July 2019 when the facility was restored.

It defies understanding why the private sector was deprived of the CD exemption all these years. Restoration of the exemption, exclusively for the PSUs, including the ordnance factories, in 2019 was more inexplicable because by that time the government was aggressively pushing for private sector participation for making India a manufacturing hub, especially in the defence sector.

Denying level-playing field to the private sector vis-à-vis the public sector is hardly the way to go about making India self-reliant in defence production.

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According to some estimates, more the three-fourths of the defence materiel is imported directly by the MoD and defence services, or by the PSUs for use in the manufacturing of the defence equipment, on which no CD is payable. Therefore, extending the CD exemption to the remaining one-fourth of imports is unlikely to cause any financial distress to the government.

It is true that the CD and other taxes actually paid by the private industry on imports are reimbursed by the MoD, but it does not weaken the case for the extension of CD exemption to the private industry as the reimbursement takes place only on completion of the contract. This results in a significant working capital remaining held up for a significant time which, according to the CII, could be as high as 31per cent of the value of imports.

The cost of this blocked capital is an additional burden that the private industry must bear vis-à-vis the public sector, affecting the former’s competitiveness. At any rate, since the cost of capital likely to be so blocked is included in the price quoted by the bidders at which the contract is awarded, it is the MoD that ultimately ends up bearing this additional cost.

If nothing else, it will go a long way in providing some relief to the private industry if the MoD tweaks the standard terms of payment to enable reimbursement of CD and other taxes on incidence and not on completion of the contract. This change in the payment terms may not even require MoF’s approval.

The second proposal concerns reduction of incidence/zero-rating of the Goods and Services Tax (GST) on the war-going apparatus (WA).

The GST rates for the WA of the armed forces vary from 5per cent to 12per cent, and in some cases, 18 per cent. This anomaly is more pronounced in the case of warships, submarines, aircraft, and helicopters that are taxed @ 5 per cent, while most of the WA of the Indian Army (IA) is taxed @ 18per cent.

The industry body wants the incidence of GST on the entire range of WA to be at the same minimum rate or to be zero-rated. This is a fair demand. In fact, there will be a strong case for zero-rating of GST if the imports are exempted from CD. It will be odd to exempt imports from CD but persist with GST, even it is at the lowest rate, on indigenous products.

It has also proposed that the indigenous products could be considered as ‘deemed export’ for extending the benefit of zero-rating or refund of GST. This option also fits into the government’s commitment to promoting defence production in India, although the paperwork involved in claiming the benefit of ‘deemed export’ and the likely delays in obtaining reimbursement of the GST could be frustrating for the industry.

Lastly, the industry chamber has sought removal of an anomaly in the Department of Revenue Notification 19 of 2019 in which the HS Code -Harmonised Commodity Description and Code System, which is a common standard used worldwide to describe commodities crossing international customs borders- in respect of certain category of defence products are shown as 8906 9000 instead of just 8906. This is clearly a typographical error.

That these modest proposals, albeit consequential from the industry’s viewpoint had to be made by the industry chamber in the run-up to the formulation of the union budget for the next fiscal reflects poorly on the government’s commitment to ease-of-doing-business in the absence of a mechanism to address micro issues confronting the industry as and when any such issue arises, and not let them simmer till the pre-budget stage.

(The author is a former Financial Advisor (Acquisition), Ministry of Defence. Views expressed are personal and do not necessarily reflect the official position or policy of Financial Express Online.)

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