Context:  In the Finance Bill 2020 approved by the Parliament, the government created room to raise the excise duty on petrol and diesel by as much as ₹8 each to take advantage of the low oil price regime and relaxed controversial tax residence proposals.

The Passage of bill:

  • The bill was hurriedly passed in the Lok Sabha without the customary discussion or reply by the Union finance minister and duly returned by the Rajya Sabha as the country headed for a lockdown to fight the coronavirus crisis.
  • The Lok Sabha Speaker and Rajya Sabha Chairman met political leaders in the first half to strike a deal to clear the important bill before Parliament was adjourned.

The amendments:

  • The amendments moved by the finance minister covered the taxation of petrol and diesel, definition of tax residence and clarifications related to dividend distribution tax (DDT).
  • They allow the government to raise special additional excise duty (when needed) by up to ₹18 a litre on petrol, up from ₹10 now and up to ₹12 a litre on diesel, up from ₹4 now. 
  • The intention to raise the taxes on auto fuel comes at a time when the government is looking for resources to announce a financial package to fight the impact of the coronavirus crisis.
  • In direct taxes, a key amendment introduced is to relax the provision relating to tax residence
    • The original Finance Bill had proposed to reduce the time Indian citizens or persons of Indian origin needed to spend in India to qualify as Indian tax resident, from 182 days to 120 days in the previous year. 
    • The amended Bill now provides that the lower 120 day rule will not apply if the Indian-sourced income of such persons is less than ₹15 lakh in the relevant financial year.
  • The bill also gave tax relief to shareholders who receive dividends. 
    • The earlier version of the bill had abolished dividend distribution tax on companies and made dividends taxable in the hands of the recipient. 
    • The amendments now clarify that dividends received by the shareholders after 1 April shall not be taxed if DDT has been paid as per the earlier law.
  • The Finance Bill also widens the ambit of the “equalisation levy" introduced in 2016 on payments made to non-resident service providers for online advertisements or digital advertising space or facilities. 
    • This is expanded to include supply of services including online sale of goods, services or both by e-commerce operators.
  • The Finance Bill also proposed a more progressive personal income tax rate for people who do not avail of any tax incentives.

Reasons for raising  excise duty cap on fuel:

  • Yield revenue to government: 
    • Every rupee hike in excise duty is expected to yield roughly Rs 13,000-14,000 crore annually (Central and state taxes account for 54 per cent of the price of petrol and 45 per cent of the price in Delhi after the hike).
    • The slump in global crude oil prices enables the government to raise these duties substantially without immediately putting the burden on the consumer. 
  • Precarious fiscal situation
    • Possibility of a global economic recession, as major companies are going for production shutdowns, industry players have suggested the government to boost fiscal stimulus in the wake of demand collapse triggered by the coronavirus.
    • This has forced the government to look for avenues to raise revenues to support growth and the government is increasing duties on petrol and diesel in view of a tight fiscal situation. 

Passing of Finance Bill 

  • The Finance Bill is introduced to give effect to the financial proposals of the Government of India for the following year.
  • It is subjected to all the conditions applicable to a Money Bill. 
  • Unlike the Appropriation Bill, the amendments (seeking to reject or reduce a tax) can be moved in the case of the finance bill.
  • According to the Provisional Collection of Taxes Act of 1931, the Finance Bill must be enacted (i.e., passed by the Parliament and assented to by the president) within 75 days.
  • The Finance Act legalises the income side of the budget and completes the process of the enactment of the budget.