The Union Budget in India is a policy document presented by the Finance Minister in the Parliament that outlines the Government’s estimated receipts and expenditure for the forthcoming financial year. The Union Budget is an essential tool for the Government to manage the economy, allocate resources, and implement fiscal policies. This includes legislative changes to the tax laws, including GST law, such as changes in GST rates, the introduction of new taxes, modifications to existing tax structures, and adjustments in tax exemptions and deductions. With the upcoming Union Budget 2024, these changes aim to align GST provisions with economic objectives, enhance compliance, and address operational challenges.
In this blog, we have discussed the impact of the Union Budget under the GST law.
2. Background
The GST Council, as the apex decision making body for the GST law, plays a crucial role in shaping the overall structure of the GST law. It ensures uniformity in the GST administration across the country and addresses issues related to the GST implementation. The council is responsible for making recommendations to both Union and State Governments on various GST-related issues.
The Union Budget and GST Council meetings are two distinct processes that shape the GST law. While both aim to streamline and improve the GST system, they have different scopes and mechanisms for implementing changes. The comparison of the proposals that can be expected through the Union Budget under GST law and how they differ from GST Council meeting recommendations is discussed below.
2.1. Union Budget Proposals under GST Law
The Union Budget, presented annually by the Finance Minister, may introduce amendments to the CGST Act and IGST Act based on recommendations of the GST Council. The proposals made in the Union Budget need to be presented in the Parliament, which is then passed by both houses of Parliament and receives the President’s assent to become an Act.
Once the amendment is enacted through the Official Gazette of India, it is directly made effective in the CGST Act and IGST Act through the Finance Act itself or effective dates of the amendments are later notified.
2.2. GST Council Meeting Recommendations
The GST Council’s recommendations cannot directly make amendments in CGST Act and IGST Act. Instead, these recommendations are placed before Parliament.
The GST Council can directly recommend amendments to the CGST Rules, IGST Rules, notifications, and circulars, which are implemented through the issuance of relevant notifications or circulars by the Central Government or respective State Governments.
2.3. Judicial Review and Interpretation
Amending the GST law is a multi-step process that involves proposal, drafting, approval by the GST Council, legislative scrutiny, presidential assent and notification. This structured approach considers that amendments are thoroughly considered and implemented effectively, maintaining the integrity and adaptability of the GST framework in India.
Amendments to the CGST Act and IGST Act are subject to the judicial review. Taxpayers and other stakeholders may challenge the constitutional validity or interpretation of the amended provisions in High Courts and the Supreme Court of India. Consequently, the Judicial interpretations by the High Courts and the Supreme Court can also highlight certain ambiguities or issues within existing GST provisions.
Based on these interpretations, the GST Council may propose amendments to the GST law to provide clarity, mitigate any hardships faced by taxpayers, and ensure that the amended provisions align with the Constitution and established legal principles. Thus, judiciary decisions often serve as important precedents that influence legislative and administrative changes. Also, the Judicial pronouncements provide clarity and guidance on the application of the law.
3. Impact of Budget on the GST provisions
The Union Budget in India has a significant impact on the GST provisions. Below are certain areas of how the Union Budget can affect the GST provisions and the overall GST regime.
3.1. Introduction of new provisions in the CGST Act or IGST Act
The Union Budget may insert new provisions under the GST law to settle existing challenges, enhance compliance and streamline tax administration.
For example, ITC on Corporate Social Responsibility (CSR) expenditure has been brought within the preview of blocked credit under Section 17(5) of the CGST Act, 2017 by the Finance Act, 2023. This provides that ITC, with respect to such inward supplies, would not be available to the registered person even if it meets all other conditions provided under the GST law. The above insertion has been made to resolve the conflicting rulings passed at the level of Advance Ruling Authorities on the given issue.
3.2. Modification of the existing provisions
The Union Budget can propose amendments to the existing provisions to correct anomalies and simplify compliance procedures. Some of the examples where modifications have been made to the existing GST law are listed below.
3.2-1 Mandating ISD mechanism for distributing common ITC
The Finance Act, 2024 has made amendments to the definition of Input Service Distributor (ISD) and the manner of distribution of ITC by ISD as per Section 20 of the CGST Act. The revised definition mandates that where an office receives input services on behalf of deemed distinct persons, it would be considered as ‘ISD’, and thus, it would become liable to comply with the relevant provisions for distribution of common credit as per ISD provisions.
The impact of this amendment will require the person to obtain mandatory registration as an ISD if they receive common ITC as a deemed distinct person. For the distribution of ITC of services liable to RCM, the tax is required to be paid by the normal registration in the state of ISD. The given provision is yet to be made effective under the law.
3.2-2 Time limit for ITC on debit note delinked from original invoice
The time limit for availing of ITC on a debit note was previously linked to the original invoice date as per Section 16 of the CGST Act. This linkage created issues such as inconsistent time limits for availing ITC on debit notes and difficulty in tracking the linkage between debit notes and original invoices.
To address these issues, the Finance Act, 2020 provided an amendment in Section 16(4) for de-linking the debit note from the original invoice date. With effect from 01 January 2021, the time limit for availing ITC on the debit note is based solely on the date of its issuance. This amendment simplifies the process, eliminates inconsistencies, and makes it easier for taxpayers to manage their ITC on debit notes.
3.3. Retrospective amendments
The Budget can introduce certain amendments to existing provisions or by inserting a new provision with effect from the retrospective date. Some of the examples are listed below, where provisions have been amended with retrospective effect.
3.3-1 Amendments in Section 50 of the CGST Act with retrospective effect
Interest payable only on delayed payment of net tax liability from cash ledger
Taxpayers faced a lack of clarity on whether interest on late payments of tax should be charged on the gross tax liability or only on the amount debited through the electronic cash ledger, i.e., after the reduction of the amount of ITC utilized. The Union Budget, 2019 clarified that the interest for late payment shall be levied only on the portion of the tax paid by debiting the electronic cash ledger, i.e., on a net basis.
Later, the Union Budget, 2021 extended this amendment to apply retrospectively with effect from 01 July 2017. Consequently, interest on the late furnishing of Form GSTR-3B is now applicable only on the net cash liability from the date of GST implementation.
Applicability of interest on wrongly availed and utilized ITC
There were ambiguities relating to interest liability on ITC wrongly availed, i.e., whether there should be any interest liability on the amount that is not even utilized for the payment of tax under GST. In order to remove the scope of any ambiguity, the Finance Act, 2022 amended Section 50(3) of the CGST Act in relation to the levy of interest on wrongly availed and utilized ITC. This amendment provided that interest is leviable only when ITC has been wrongly availed and utilized, and not merely availed.
Additionally, the interest rate for the same has been reduced from 24% to 18% per annum.
These set of amendments were made applicable retrospectively from 01 July 2017.
3.3-2 Inclusion of In-bond sales and High Sea sales under Schedule III
The eighth entry in Schedule III is retrospectively inserted with effect from July 01, 2017 vide the Finance Act, 2023, and it covers the following transactions:
- Supply of warehoused goods to any person before clearance for home consumption
- Supply of goods by the consignee to any other person, by the endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption
Thus, the above transactions are not been taxable under the GST law since their inception.
Initially, the above entry was inserted with effect from February 01, 2019. Based on the recommendations of the 48th GST Council meeting, the above amendment has been made. Such an amendment ends the ambiguities for the period between 01-07-2017 and 31-01-2019.
However, the Finance Act, 2023 further provides that no refund shall be made of all the tax which has been collected, but which would not have been so collected, had the given provision been in force at all material times. In other words, no refund option is available for taxpayers who have already paid for such transactions/ activities during the period 1-7-2017 to 31-1-2019.
3.4. Advancement of digital economy
In addition to the above changes, the Budget can also introduce new provisions with the aim of promoting digital tools and e-governance in GST administration to enhance efficiency and transparency.
Example, the Union Budget, 2019 introduced a simplified return filing system for taxpayers under the composition scheme. This system allows the taxpayers to pay taxes quarterly in Form CMP-08 and file return on an annual basis in Form GSTR-4, simplifying the compliance process for small businesses.
3.5. Impact on small and medium enterprises (SMEs)
Vide Union Budget, the Government can introduce certain relief measures for SMEs, such as increased thresholds for GST registration, simplified compliance requirements and concessional tax rates.
Example: The Finance (No. 2) Act, 2019 introduced an amendment to compute the aggregate turnover of a person to determine his eligibility to pay tax under the Composition Scheme. The amendment provided that aggregate turnover shall not include the value of the exempt supply of services provided by way of extending deposits, loans, or advances in so far as the consideration is represented by interest or discount. The given amendment allowed more businesses to take advantage of the simplified compliance procedures under the composition scheme.
Conclusion
In conclusion, the Union Budget in India plays an essential role in shaping the GST law. The interplay between the Union Budget and the GST Council is crucial. While the Council makes recommendations and oversees the GST implementation, the Budget enacts legislative changes that formalize these recommendations.
As discussed, the Union Budget’s impact on the GST provisions is multidimensional, which includes the introduction of new provisions, modifications to existing laws, retrospective amendments, and advancements in digital governance. These changes aim to resolve ambiguities, simplify compliance, and support the growth of small and medium enterprises.
Overall, the Union Budget is vital for refining the GST law, thereby contributing to a more robust and efficient tax system in India. As the economy evolves, the Budget will continue to be a crucial mechanism for implementing strategic changes that will help with economic growth and stability. For those looking to stay updated with the latest developments and analyses related to the Union Budget, Taxmann stands out as the best source. With its comprehensive coverage and expert insights, Taxmann ensures you have all the information you need to navigate the complex landscape of tax and economic policy changes.
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