The indirect tax space in Budget 2018 was dominated by customs related changes as Goods and Services Tax changes, having acquired a federal character, were already announced after the latest GST Council meeting on 18 January.
However, the magnitude and range of changes introduced by the finance minister, which few expected, is nothing short of a reimagining of the customs law and process.
If we have to classify the focus areas of the amendments involved, we can point to the three pillars of ‘Make in India’, ‘ease of doing business’ and ‘anti-evasion’. It would be important for businesses to take due note of the amendments proposed, as these are not the usual superficial changes introduced year after year, but have the potential to impact the business fundamentally.
Make In India
The finance minister, as he mentioned in his speech, has made a departure from the trend of cutting customs duty rates year after year as a trade-liberalising measure, which would keep the domestic industry on its toes.
The government has made its intent clear that time has come to identify sectors which have huge domestic manufacturing potential, but face increasing pressure in the face of cheap imports.
Increase in customs duty rates: Customs duty rates across sectors, mainly food processing, electronics (mobile phones and lithium-ion batteries) and automobiles have been raised ranging from 2.5 to 50 percent. This will undoubtedly spur domestic manufacturing of goods in these sectors, and address the disturbing trend of a flood of cheap goods from China, which has led to huge trade deficits.
This measure is also in line with the protectionist tendencies we are witnessing around the globe including in the United States.
Introduction of social welfare surcharge: The three percent education cess has been replaced with a giant 10 percent social welfare surcharge to be applied on the basic customs duty which can result in an increase, on an average, of one-two percent of the cost of imports across goods.
Exemption for repairs, processing, and manufacture: A provision has been introduced for exempting goods imported or re-imported after export for the purpose of repair, further processing or manufacture.
Ease Of Doing Business
Keeping with its promise on the much-touted ‘ease of doing business’, the government has introduced a slew of changes.
Show cause notice and adjudication: To address the problem of unchecked and arbitrary show cause and demand notices issued by the authorities, it has been mandated that the officer should have a pre-notice consultation with the assessee in cases not involving fraud and suppression. As per the Economic Survey, 66 percent of pending cases (of less than Rs 10 lakh each) accounted for only 1.8 percent of the value at stake. This measure has been primarily introduced to reduce the immaterial notices.
The most important change in this area is to mandate a deadline for adjudication of show cause notices (six months for cases not involving fraud and suppression and twelve months otherwise). In case the notice is not adjudicated after one extension, it would be deemed that no show cause notice was issued.
Cases of notices lying orphaned without adjudication for years are widely observed, and the proposed measure should put an end to this malaise.
Advance ruling: The government has expanded the subjects for which a person can approach the advance ruling authority which was earlier restricted to determination of duty only. Further, the category of applicants has also been expanded to include any person holding an importer-exporter code. The timeline to dispose of an application has been reduced from the earlier six months to three months.
Customs automated system: Changes have been introduced to facilitate various processes such as clearance of good and filing and presenting Bill of Entry and Shipping bills to be carried out using the customs automated system.
Anti-Evasion
After demonetisation and GST, the government has now focussed on customs legislation also to plug revenue leakage. Some of the key measures introduced are:
Scope of the Customs Act: The scope of the Customs Act has been expanded to include any offence committed even outside India. The definition of ‘India’ which until now extended only up to the ‘contiguous zone’ (24 nautical miles from the baseline), has now been expanded to include the ‘exclusive economic zone’ as well (up to 200 nautical miles). This can potentially resolve the issue faced by many industries such as oil exploration, dredging, etc relating to whether the transport of equipment at-site would constitute ‘import’ into India or ‘export’ out of India.
Customs Audit: A new chapter has been introduced in the Customs Act to provide for auditing the records of the assessee on his premises leading to increased scrutiny and better detection of cases of evasion. Such audits, until now, were only restricted to a few category of assesses such as Authorised Economic Operators.
Supplementary SCN: In the past, many cases were observed wherein a show cause notice was issued and in the event of further aspects of evasion of coming to light, the authorities found their hands tied behind their backs as the adjudicating order could not travel beyond the allegations in the notice. Now, it has been provided that a supplementary notice can also be issued and would have the same effect as an original notice.
Reciprocal exchange of information with other countries: The government can now enter into agreements with other countries to share information relating to the investigation of offences and preventing and detecting cases of evasion. This will have a far-reaching impact on cases where obtaining information about offenders abroad was difficult to obtain.
In a nutshell, the amendments in the customs law can be described as path-breaking, forward-looking with the right checks and balances on both abuse of powers by officers as well as the exploitation of loopholes by assesses. In the years to come, we can expect to witness further refinements in the customs law to keep pace with emerging trends, plug evasions and make authorities more accountable.
Jigar Doshi is an indirect tax partner, Shivendra Dwivedi is a manager at SKP Business Consulting LLP and the views are personal in nature.
(This story was originally published by BloombergQuint)
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