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Union Budget 2024: Will FM Sitharaman address the complexities in India's tax system?

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By:
Krishan Arora
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India's indirect tax landscape stands at a critical juncture, calling for sweeping policy changes that can propel economic growth and foster a more business-friendly environment. The Goods and Services Tax (GST) has been pivotal in India's tax reform journey, while ever-evolving, it requires further refinement and adaptation to address the evolving needs of businesses. One key area of concern is the complexity of the current GST structure, which often leads to confusion and compliance challenges for businesses. 

To begin with, a significant change that the industry is eagerly anticipating is the inclusion of petroleum products and real estate under the GST ambit. As of now, these sectors remain outside the purview of GST, leading to a fragmented tax system. Bringing them into the GST fold would not only simplify the tax structure but also promote transparency and reduce the cascading effect of taxes. 

Tax rationalisation

The issue of tax rate rationalisation is yet another area that demands attention. While GST was envisioned as a single tax rate regime, the current structure comprises multiple tax slabs. Simplifying and rationalising these rates can reduce classification disputes, improve compliance, and enhance the ease of doing business. A comprehensive review of the existing rates, considering the revenue implications and industry feedback, is essential for creating a more harmonised tax structure. This move aligns with the government's vision of 'One Nation, One Tax,' providing a more cohesive and integrated tax framework.

Another crucial aspect of GST that demands attention is the inverted duty structure. Certain sectors face a scenario where the input tax credit exceeds the output tax liability, resulting in accumulated credits and financial stress for businesses. Rectifying this anomaly by revising rates or providing alternative mechanisms for credit utilisation can enhance the efficiency of the GST system. 

Additionally, the implementation of an e-invoicing system has been a significant step towards digitisation and automation in the GST regime. Expanding the scope of e-invoicing to include all businesses may further streamline the tax administration process, reduce errors, and enhance data accuracy. It also aligns with the broader digital transformation agenda, promoting a technologically advanced tax ecosystem.

GST compliance 

In the realm of GST compliance, the introduction of a simplified return filing system has been a positive development. However, there is room for further improvement. Businesses often grapple with the complexity of return filing, and a user-friendly, intuitive interface can go a long way in easing the compliance burden. Moreover, incorporating advanced data analytics and artificial intelligence in the GST network can help tax authorities identify potential tax evasion and streamline the audit process.

The Production-Linked Incentive (PLI) scheme has been a flagship initiative to boost manufacturing in India but aligning it with indirect tax policies is essential for its effectiveness. Integrating the PLI scheme with GST can help businesses seamlessly claim incentives and foster a conducive environment for manufacturing growth. Clarity on the tax treatment of incentives received under PLI would provide certainty to businesses and encourage investments in strategic sectors. Furthermore, extension of existing schemes as well as inclusion of new sectors would certainly help in promoting Government’s ‘make in India’ initiative.

Foreign trade policy plays a pivotal role in India's economic landscape. Aligning indirect tax policies with the foreign trade policy can enhance export competitiveness and attract foreign investments. Simplifying export procedures, providing quicker GST refunds, and ensuring a hassle-free movement of goods across borders are essential elements to strengthen India's position in the global market. One of the key demands from the industry is the implementation of the 'faceless assessment' mechanism in indirect tax administration. This initiative, which has been successfully introduced in direct taxes, aims to reduce interface between taxpayers and tax authorities, minimising the scope for discretion and corruption. Extending this concept to indirect taxes can further enhance transparency, reduce compliance costs, and instill confidence in businesses.

One of the key demands from the industry is the implementation of the 'faceless assessment' mechanism in indirect tax administration. This initiative, which has been successfully introduced in direct taxes, aims to reduce interface between taxpayers and tax authorities, minimising the scope for discretion and corruption. Extending this concept to indirect taxes can further enhance transparency, reduce compliance costs, and instill confidence in businesses. 

On the international front, aligning India's indirect tax laws with global standards is imperative. With the rise of digital transactions and e-commerce, revisiting the taxation of digital goods and services becomes essential. Adopting measures such as the Equalisation Levy on digital transactions is a step in the right direction, but a comprehensive and internationally aligned approach is necessary to address the complexities of the digital economy. Furthermore, the inclusion of environmental considerations in indirect tax policies can promote sustainable practices. Introducing green taxes or incentives for eco-friendly practices, benefits for sectors promoting same, can align with global efforts towards environmental conservation while encouraging businesses to adopt environmentally responsible practices.

In conclusion, the indirect tax landscape in India may require a holistic tweaking to meet the evolving needs of businesses and promote economic growth. From further refining GST framework to aligning with the PLI scheme, foreign trade policy, and embracing digital transformation, the path ahead is multifaceted. A collaborative approach involving industry stakeholders, tax experts, and policymakers in crafting tax policy may not only fosters economic growth but also showcase the government’s intent at creating a fair, transparent structure. 

The time is ripe for India to embrace these policy changes and position itself as a dynamic and competitive player in the global economic arena.

This article first appeared in The Economic Times on 9 January, 2024.