The past year has been quite fiscally challenging for the government. An overall slowdown in the economy has been ‘taxing’ for the government and businesses alike—with falling revenue collections and leakages in tax collections, going in tandem with reduced business activity.
Budget 2020 will be decisive as a roadmap for recovery. While decisions on critical issues concerning GST are made through the GST Council, the Budget signals the government’s intent. Addressing the pain points of GST could unleash a renewed vigor in enterprises.
Come July 2020, the GST will complete a landmark three years in operation in India despite much skepticism. One is reminded of Francis Bacon in his observation that “What begins in certainty, ends in doubt. What begins with doubt, through patience, must end in certainty.” The GST has been through its trial phase with a flurry of ever-increasing changes and server downtimes, leading to many a sleepless night (and perhaps lost weekends) for businessmen, consultants and tax officials. After much endurance, the GST must now mature and be grounded in certainty. Stability is the most cherished expectation from the industry at this stage.
April 2020 will itself see the rollout of two mammoth processes –a new return system and e-invoicing. There is no doubt that this reform is in the right earnest and essential. What will be truly effective is not so much the concept, but the execution.
The government must be mindful that any change, however minute, is associated with a significant element of costs – in IT upgradation, ERP customisation and human resource allocation. An example would be the recent 10 percent input tax credit (ITC) allowance on unmatched credit. Around 20 percent was the earmarked amount until only very recently, before being downgraded overnight. Such stop-gap changes call for significant rework from a systems configuration standpoint, besides throwing up challenges for business in general.
With a rejuvenated compliance system, it is critical that the government sets in place a framework of lasting value. Freezing various forms and processes is a must, supported by strong back-end infrastructure to withstand any server load. The industry is not likely to have any qualms with a longer gestation period to put this set-up in place—if it has the assurance that the outcome is absolute.
The GST law
It is unfortunate that the GST finds itself at odds with certain common business processes. Notably, these include:
- Samples are commonly provided as a sales promotion strategy, particularly in pharmaceutical sector. Further, various incentives (including free products, holidays) are provided to distributors for achieving certain sales targets. ITC on inputs used to undertake such business strategies is restricted – although this is hardly a ‘gift’ in the true sense but is intimately tied to business activity.
- Indian branches often use logos of their overseas groups. While there is no associated cost charged for such use, this is sought to be taxed as deemed supply of service between related parties. This poses challenges in the case of banking companies and NBFCs or companies engaged in non-GST supplies (such as liquor) – given the credit restrictions applicable to these sectors. This inevitably escalates the cost.
- The issue surrounding intermediary in service tax continues under GST. There is a lack of clarity on what constitutes ‘intermediary’ per se—leading to several pure export services (such as marketing) being tagged as an intermediary function. One question is whether there is a rationale to taxing intermediary in the first instance—given these are prime export-driven industries.
- Businesses engaged in goods attracting lower rates of GST viz., apparel, tea, etc. face challenges of accumulation if ITC, mainly due to significant spends on advertising and marketing services attract higher GST. The restriction of refunds under Inverted Duty Structure to only ITC availed on inputs versus GST on output goods seems unfair as ITC is a pool of credit on both goods and services.
It is earnestly desired that these issues are suitably resolved to enable fairness in the operation of businesses.
The government must also bear in mind that India must integrate with Global Value Chain if it really seeks to reverse the domestic slowdown. Simplification of import-export processes would surely help.
Since a major portion of global trade is carried out by related parties, ‘special’ care needs to be taken for such transactions. Unfortunately, the Special Valuation Branch (SVB) is beset with a large backlog of cases and provisional assessments appear to be pending finality for long periods of time. This can only be resolved through greater staffing and rigorous administration. Further, a requirement of Extra Duty Deposit (EDD) during proceedings should be dispensed with entirely, considering the timeline for conclusion.
Streamlining various exemptions under customs to make this readily discernible for the average trader and simple administrative measures can solve this, including consolidating various separate notifications into a single mega exemption.
Administrative discretion can be a double-edged sword in customs, given physical control over goods. Discretion should not be used as a tool to undermine government policies.
A renewed GST can be a potent tool to spur consumption in a sluggish economy. The government must cast the next version of GST in stone, to provide a solid foundation for business-decision making. The words of BKS Iyengar, “When stability becomes a habit, maturity and clarity follow”, seem so relevant here.
(The writer is Partner, Indirect Tax, KPMG in India. Chartered accountants Aditya Venkataraman and Sandip Jain contributed to the article.)
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Updated Date: Jan 29, 2020 10:46:30 IST