With the passage of the Goods and Services Tax (GST) Constitutional Amendment Bill in Rajya Sabha earlier this week, the finance ministry is gearing up to implement the tax measure from the scheduled deadline of 1 April, 2017.
While the proposed roll-out may still be a good nine months from now, one needs to carefully look at the Draft Model GST Law introduced in June, as its drafting and finalisation is no less than a herculean task in itself.
With introduction of Draft Model GST Law in June 2016 (Model law), India Inc is inching closer to witnessing GST as a reality in recent times to come. While the fate of GST bill is yet to be seen during ongoing monsoon session, drafting and finalisation of GST law is no less than a herculean task in itself.
Model Law affirms dual GST structure with levy of State GST (SGST) & Central GST (CGST) on intra-state supplies of goods and/or services and Integrated GST (IGST) on import as well as inter-state supplies of goods and/or services.
Model law provides that GST will subsume service tax, entry tax, entertainment tax, luxury tax completely whereas applicability of central excise & state value added tax (VAT) laws which otherwise would also be subsumed, shall continue to apply to few specified goods namely alcohol, petroleum (for the time being) and tobacco.
Though some important aspects such as tax rates, exemptions, abatements etc. are missing under Model law, the current draft does provide the broad framework of how GST legislation would look like and operate. The intent of government by releasing the Model law, is clearly to establish a connect with industry in seeking their inputs and comments to ensure that the legislation is not only drafted with full clarity but the concerns of industry are met to the extent possible much in time when India Inc. adopts a brand new regime which soon would become a way of life for them.
Model law, in substance, appears to be a combination of existing key Indirect tax laws namely Central Excise, Customs, Service tax & VAT. While valuation provisions seem to have been borrowed from Customs law, provisions relating to tax
credits/adjustments appear to be mix bag of existing State VAT laws and Cenvat Credit Rules. Further, provisions relating to registrations, assessments & appeals appear to be borrowed from State VAT/CST laws also. While the over machinery provisions have been sensibly clubbed together, there are many important aspects which do not seem to have been addressed at all or need more clarity.
A single taxable event of ‘Supply’ would replace multiple taxable events i.e. manufacture, provision of service and sale. Though the term ‘Supply’ has been defined only in an inclusive manner, interpretation of same shall be critical in determining taxability or otherwise of all commercial transactions. The scope of supply is also being extended to supplies without consideration, a concept which has been foreign to indirect taxation, especially in case of service providers and traders. However, from a reading of relevant provisions, there still appears to be ambiguity around taxability of stock transfers between units of same legal entity and more specifically when such units are located within the same State.
And if yes, at what value would they be taxable is also unclear since the valuation provisions prescribe ‘transaction value’ concept for all supplies even though stock transfers are usually effected at transfer price or cost plus basis. Similar valuation disputes may arise in case of supplies between principal-agent, free supplies, samples, etc. There ought to be an independent valuation methodology for such all such supplies as is presently also applicable under Excise laws. Similar
clarity is needed for taxability and valuation of intra-unit supply of services within a legal entity. Place of supply has been made the determinative factor for determining the nature of supply i.e. inter-state or intra-state, which is largely in alignment with existing practices (general rule being based on location of customer), with certain other rules for specified transactions. However, provisions relating to place of supply for specific activities such as ‘intermediary’ and ‘performance based services (like repair, maintenance etc.) do not find mention. These activities having been accorded specific treatment in current regime owing to their nature need to be appropriately clarified for industry to factor the tax impact of such services under GST.
Time of supply of goods which determines the taxable event under GST has been made akin to services i.e. earliest of event of issuance of invoice, payment, movement of goods etc. is considered as time of supply. Hence, it appears that even advances received at time of entering into contract without supply of goods would be taxable at time of receipt of such advances as against actual transfer of goods which is currently the case.
However, the law is silent on taxability of other modes of receipts such as security, mobilization advance, liquidating damages, fines for breach of contract, etc. Similarly, treatment of events such as bad debts, cancellation of supply contracts after receiving consideration need appropriate addressal. Most of these aspects are very essential part of normal business and tax treatment of these has always been a suspect and a cause of litigation under current regime as well.
Talking of ‘rate’, a uniform single rate of GST still appears to be wish list, owing to separate definitions and treatment of ‘goods’ and ‘service’ under Model law with separate rate structures also proposed for both, basis its combined reading with
various GST official documents. ‘Service’ has been defined in a “catch-all” manner to mean anything other than goods, including intangible property & actionable claims, thereby implying that demarcation of all transactions will continue to be either as supply of goods or as services.
Certain disputed transactions of today such as software, renting of immovable property, works contract, transfer of right to use without title have been specifically notified as deemed supply of services, thereby aiming to reduce the scope of litigation in terms of classification and valuation. However, there needs to be absolute clarity on scope and definition of each of such deemed supplies especially software, activities covered as part of renting etc. These aspects need further addressal since businesses would still need to internally categorize the elements of goods and services involved in their costs and given that the applicable rate for goods and services may differ in certain cases.
The taxable base is kept as transaction value i.e. price actually paid/payable for goods/services subject to certain adjustments, including tax subsidies. The valuation provisions prescribe that in case of doubt about truth or accuracy of transaction value, valuation can be done inter-alia by comparison i.e. value of goods/services of like kind or quality subject to commercial adjustments. Extension of such comparative valuation rules to service transactions is only expected to multiply valuation disputes manifold as such provisions (largely adopted from customs/excise law for goods) have never been applied in context of services. Similarly, in cases where goods and/or services are supplied below cost due to valid compelling reasons require absolute clarity in terms of valuation as these are quite prevalent in normal trade.
Credit restrictions prevalent under Current laws have been proposed to be carried forward under GST. Credit of construction works contract, cab/motor vehicle and employee related expenses is still disallowed, which is totally against the spirit of free-flow of credits as envisaged under GST regime. Owing to significant rise in input cost on account of GST, credit provisions need to be revisited specially construction related expenses for business purposes as they are directly linked for undertaking business activity and considering renting of business premises would be fully creditable.
Further, in terms of official documents issued thus far, IGST and CGST were promised to be under common pool for an assessee having pan India operations. It needs to be clarified as to whether or not and how the pool can be utilized by an assessee having multiple registrations at multiple locations while discharging its liability at each such location. Likewise, similar clarity is required on whether separate input credit registers/ details would need to be maintained for IGST and CGST at every location.
Contents/format of compliances appears to have been simplified i.e. common due dates, challans, forms etc. across India which should reduce the administrative hassles around dealing with compliances/tax authorities and overall tax management. However, the requirement of atleast 3 monthly filings for each registration, coupled with large volume of data to be reported electronically may undermine this advantage.
Further, there is no clarity on whether CGST & IGST registrations shall be on PAN India basis or state specific basis despite both being central levies. From bare reading of model law, it appears that once an assessee becomes a taxable person in any one location, it would be mandatory for it to take IGST and CGST registrations under each state of operation which is contrary to what was initially promised.
However, both being central levies could have been administered at a central level on PAN India basis. Further, for sectors like FMCG, telecom, etc. law may require uploading all data on Government portal every month, which itself would become a huge challenge considering the mere volume of transactions. Government ought to think of alternate and more efficient ways with regard to such requirements, for example requirement of uploading only relevant details of supply rather than uploading all copies of invoices month on month.
While drafting and release of Model law by the Government and sharing it with industry at large for seeking suggestions ahead of time is a welcome move, it is evident that a lot of work still needs to be done to remove ambiguities and ensure
clarity and ease in terms of tax treatments, compliance and effective record management. GST being the most awaited national law probably in this century, should not be released in a haphazard manner given the overall impact it would have on all facets of business and economy; law makers ought to rationally consider these aspects and take adequate time to present a well drafted comprehensive and inclusive law to India Inc., after discussions and involvement of all stakeholders.
It is the quality of legislation that will ultimately determine the success and economic growth that GST would bring given the socio-economic environment of India where the federal and state structure is here to stay.
Amit Sarkar is Partner and Krishan Arora is Director at Grant Thornton India LLP