A flawless Union Budget is utopian, yet expectations were rife that the proposals would aid in reviving the economy, without putting undue stress on businesses along with simplifying tax compliance and administration. With dust settling around the analysis and the impact surrounding the budget proposals, the time is ripe to determine whether the Budget met expectations specifically with respect to indirect taxes.

To take a step back, it is paramount to note that with the introduction of GST, independent India witnessed one of its biggest tax reforms, which assumed greater significance since it emanated from a constitutional amendment resulting in the State Governments and the Union Government giving up on their respective taxing powers and agreeing to concurrently tax goods and services. This surrendering of taxing power was based on the premise of widening of the tax base on account of simplification of the tax regime. To allay apprehensions, the Union Government further undertook to compensate State Governments for any loss in tax revenue on account of introduction of GST.

While measures such as digitisation of the economy through filing of online GST returns, use of big data analytics and other means of surveillance were introduced to plug tax leakages, faceless assessment mechanisms were implemented to ease the taxpayers’ burden. However, while it was hoped that such processes would result in an increased tax base, the reality has been poles apart. This is also evident from an analysis of the tax to GDP ratio which has remained constant since 2005.

The Finance Commission in its report for 2020-21 stated that the economic slowdown being faced in India has also resulted in short term troubles in the implementation of structural reforms such as the introduction of GST. The Finance Commission also highlighted the troubling fact of the growing reliance of State Governments (21 out of 29 states) on the GST compensation to meet their overall revenue requirement in recent times. The commission, in this regard, recommended various measures such as capacity building and identified that the Government’s efforts towards removing of teething troubles (such as the simplification of forms) under the GST laws will result in improved tax collections and increase the tax buoyancy.

Subsequently, GST collections have seen an upward trend during the period November 2020 to till date with a collection of more than 1 lakh crore in each of the five months. While the collections remain to be far less than the original estimates, the upward trend and the anticipated V shaped economic recovery, gave the Government much-needed fiscal freedom for Union Budget 2021, to focus on the long-term structural changes required in the GST regime rather than focussing on increasing tax revenues in the short term.

Such farsighted thinking was critical in creating a sense of optimism and to send a strong message to the taxpayers around the country that the Government is not just seeking to increase its revenues at the expense of the taxpayers, amidst a recuperating economy.

Credit in this regard must be given to the Government for not increasing the GST rates, and introducing measures such as rationalizing customs duty rates to promote domestic manufacturing, phasing out old customs exemptions, simplifying tax procedures, etc. However, the Government did miss an opportunity by adopting a myopic view with certain short-term measures. For instance, the Government took away the option for exporters to pay output GST and relegated them to avail refund of unutilized credits, which will create a cash flow shortage on a month-to-month basis and affect working capital. The Government also amended the definition of ‘supply’ and continued with its often frowned upon policy of enacting retrospective amendments to negate judicial decisions. The ongoing issue of restriction of input tax credit in case the supplier fails to upload necessary details in its return of outward supplies was further solidified by way of amendments, to add to the agony of genuine businesses.

With the Government has shown tremendous restraint, by not pressing the panic button and introducing measures which are being welcomed by the industry, a few unwanted proposals have taken the sheen off the Union Budget and added to the institutional pessimism which currently exists in the eyes of an average taxpayer. All in all, while the budget did not hit the bull’s eye, it was not too far off the mark!

The authors are Partner and Senior Associates, Shardul Amarchand Mangaldas & Co.

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.GST