Budget 2021: How indirect tax can provide a roadmap to recovery

The Union Budget 2021 promises to be unique in many ways. Apart from the fact that it will be a budget amid a full-blown pandemic, it will perhaps also present challenges that no previous Finance Minister has encountered in the history of the country. Along with managing the Budget deficit, the government will have to balance the asks of multiple sectors, including health, tourism and infrastructure. As the Finance Minister navigates through the myriad challenges, revival of demand and investment, tax reliefs and schemes to provide impetus to domestic manufacture and exports, feature prominently on India Inc’s wish list.

Government’s revenues have been hit hard by the pandemic with both direct and indirect taxes suffering. But there is still an opportunity to help economic revival through export facilitation measures. The pandemic has also forced countries to revisit their supply chains and shift focus from being import reliant to in-country manufacturers. This outlook favours India and presents an opportunity for the government to catapult the country into a global manufacturing hub.
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The “Atmanirbhar Bharat Abhiyan” launched by the Prime Minister in 2020 echoes this sentiment and could be exactly what India needs to boost its manufacturing sector and help the country play a pivotal role in global supply chains in the near future. The Product Linked Incentive (PLI) scheme rolled out under the Atmanirbhar Bharat Abhiyan in April 2020 covered mobile manufacturing, manufacturing of bulk drugs and medical devices.

Following the positive response received on the scheme, in November 2020, it was expanded to cover ten new sectors including electronic products, automobiles, telecom and networking products, textiles, food products etc. The details around the schemes for these sectors are still awaited and it is hoped that the budget announcements would provide some clarity on this. There are also talks about extending the Phased Manufacturing Program (PMP) which initially led to a series of investments by mobile phone manufacturers to other sectors, especially the consumer durables sector which has been severely impacted by the pandemic.

All these initiatives will help further investments in infrastructure and connectivity which are critical if India is to draw more FDI at the regional level. The focus of the Budget is likely to sustain focus on duty concessions on capital investments and to expand benefits provided in key sectors such as electronics, automobile, telecommunication, etc., particularly in the SME and MSME sectors.

The government also recently introduced the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme from January 1, 2021, which is set to replace the Merchandise Exports from India scheme. A committee under the chairmanship of the Union Secretary is expected to give its report shortly, based on which the final rates for refund would be notified. This scheme is expected to set the tone for the next decade for exports from India.

Electronic ICT products are covered under the Information Technology Agreement (ITA) and attract a BCD of 0%. This puts domestic manufacturing at a disadvantage and there is therefore a need to extend benefits offered to the export sector, to domestic manufacturers of ITA products as well. There is a need to review this issue and this Budget could consider providing a level playing field to domestic manufacturers’ vis-à-vis importers.

Industry has also been waiting for a scheme to permit manufacturing operations for both domestic supply as well as exports from the same facility, without foregoing the duty exemption claimed on procurement of raw materials/ capital goods. The recently revamped and expanded ‘manufacturing under bond’ scheme addresses exactly this. While the government has been issuing clarifications on several aspects of the scheme, it is expected that the upcoming Budget would formalise some of these to alleviate industry apprehensions and popularise the scheme amongst exporters.

Another area that needs consideration is a relook at some of the recent measures aimed at encouraging ease of doing business in India. The adoption of the Faceless Assessment program by Indian Customs under the Turant Customs framework showed great promise in improving India’s ranking in ease of doing business and was a step forward in the move toward paperless clearances. However, contrary to expectation, companies have been facing delays in clearance of goods owing to on-ground challenges. There is a need to undertake joint sessions for importers as well as Customs officials in order to heighten awareness and help resolve the issues faced by importers.

India’s journey in boosting the manufacturing sector has been challenging but the timing coupled with the global scenario offer a unique opportunity to push forward policy reforms that will help aid the manufacturing sector. It is hoped that the Budget would not only focus on increasing manufacturing footprint in India but also bolster higher value addition and a rise in R&D investment.

(The writer is National Leader & Indirect Tax Partner, Deloitte Touche Tohmatsu India LLP)

Budget 2021: How indirect tax can provide a roadmap to recovery Budget 2021: How indirect tax can provide a roadmap to recovery Reviewed by TechCO on 1/22/2021 Rating: 5

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