India ushering into GST regime

By | August 8, 2016

The Indian trade and industry together with other stakeholders, witnessed a historical measure on 3rd August 2016, when the much anticipated 122nd Constitutional Amendment Bill 2014 (“GST Bill”) with certain changes, received unanimous assent of the Upper House (“Rajya Sabha”) of the Indian Parliament. The GST Bill which earlier sailed through the Lower House (“Lok Sabha”) on 6th May 2015 was tabled at Rajya Sabha with one of the major changes to drop 1% additional GST on inter-state supply of goods and/or services, perhaps to meet the demands of the opposition and industry. Yet, other proposals of the opposition such as transparency on rate of GST and modalities of dispute resolution between centre/ state (s) and state (s) over GST matters has been stalled till the GST Council comes up with its recommendations.

Globally, GST is a single tax structure. In India, the salient feature of proposed GST Model is due to the dual tax structure. Tax to be levied by the Central Government would be referred to as Central Goods and Service Tax (“CGST”) whereas, those imposed by Sate Government would be known as State Goods and Service Tax (“SGST”). Apart from CGST and SGST, Integrated Goods and Service tax (“IGST”) would be levied by Central Government in case of inter-state supply of goods and/or services.

CGST and SGST, both shall apply parallel in case of supply of goods and/or services where such supply is made within the state. In case of Inter-State supply, IGST (i.e. combination of CGST & SGST) would be attracted.

The GST Bill proposes to subsume present indirect taxes and duties which majorly comprises of Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty (“CVD”) and Special Additional Customs Duty (“SAD”) including Surcharge and Education Cess levied by Central Government, in the GST era. State level taxes like VAT/ Sales Tax, Central Sales Tax, Entertainment Tax, Entry Tax, Purchase Tax, Advertisement Tax and Luxury Tax would also be incorporated in GST.

However, Basic Customs Duty on import of goods, Stamp duties, Research & Development Cess, Electricity Duty, and Profession Tax would be exceptions under the GST tax base. Further, items like tobacco products, alcoholic liquor for human consumption and petroleum products would be outside the purview of GST till a certain period as determined by the GST Council. Tax levied by the States and the Central Government i.e., Sales Tax/VAT, CST and Excise duty would continue to be levied on such products in the interim period.

Taxable event under GST would be the supply of goods and/or service and therefore, the term supply would be of paramount significance in the GST regime. Consequently, taxable events such as “manufacture”, “sale”, “provision of service”, etc. would lose their relevance. Under the GST regime, transactions involving job-work transfers and branch transfers would also attract GST unless otherwise exempted.

Another welcome move by the Central Government was to come up with the Model “Goods & Service Tax” law (“GST law”) on 14 June 2016 for comments on the draft version, setting an important milestone towards implementing GST. It also indicates the inclination of government towards industry expectations to expedite the transitioning of present indirect tax structure to GST rule.

The proposed draft can be equated to a blend of all major indirect tax laws in existence today. The model GST law seems to borrow valuation provisions from the Customs laws, audit and TDS provisions from VAT laws and registration provisions from service tax laws. Place of Supply Rules which was one of the much awaited topics under GST regime to determine application of CGST, SGST & IGST has also been released along with other rules.

Goods have been defined in the model GST law to mean every kind of movable property and it includes securities as well, whereas, services means anything other than goods. Further service also includes intangible property and actionable claim within its ambit. Supply means all forms of supply of goods and/or services such as sale, transfer, barter, exchange, etc. It is apparently clear that the coverage of GST is intended to be wide enough to cover each and every type of supply such as barter and actionable claims which are presently not taxable under VAT and service tax laws respectively. Taxing services provided in Jammu & Kashmir in the GST era is another example, which presently is not the case.

It is proposed that every person engaged in supply of any amount of taxable goods/ services with an aggregate turnover (including taxable, non-taxable, exempt, export) of exceeding INR 0.9 million (INR 0.4 million for north-eastern states) shall obtain registration. CGST & SGST shall be levied on all taxable intra-state supplies where aggregate turnover exceeds INR 1 million (INR 0.5 million for north-eastern states) and in case of inter-state supplies, IGST shall be levied irrespective of turnover ceiling. In case of certain class of persons such as those involved in inter-state supplies, person liable to pay tax under reverse charge mechanism, non-resident taxable person, etc. registration is mandatory.

Interestingly, electronic commerce industry (E-commerce) has gained much attention of the government for levying GST. Accordingly, persons engaged in facilitating supply of goods/ services through electronic platform (such as arranging/ booking transport, stays, online order of goods, etc.) would also be entrusted to collect taxes (TCS) on the amount payable to supplier towards supply through e-commerce operators.

Time of supply rules to decide the occurrence of taxable event has been drafted so as to attract tax at the earliest stage.  Eg. On supply of goods, tax shall be attracted at the removal of goods, receipt of goods/ payment, issuance of invoice, whichever is earlier.

GST is expected to be a destination based tax and accordingly the place of supply rules has been rolled out. In case of supply of goods where goods are required to be moved, the location of supply shall be the place where goods are delivered. Similarly, for supply of residuary services it shall be the location of registered service receiver; whereas in case of an unregistered person, it shall be the location of recipient as per records when available or location of supplier.

While service tax is required to be paid by the service receiver presently, in certain cases, the same concept has been extended to GST regime, where receipt of not only certain services but even certain goods would render the receiver liable to tax.

Presently, service providers are not entitled to Input Tax Credit (ITC) of VAT paid on purchase of goods. Similarly, dealers are not entitled to enjoy ITC of service tax paid on inward services. GST is supposed to plug in such gaps through seamless flow of ITC without discriminating between business status of dealers, manufacturers and service providers. However, the irony of ITC mechanism under GST is that cross verification of ITC is required. ITC shall be allowed on provisional basis and ITC claimed in return by a person shall be matched correspondingly with the taxes declared by respective suppliers return to verify the genuineness of ITC claimed. Details of discrepancies shall be communicated for rectification and ITC shall be allowed after rectification. In case of mismatch of ITC with the supplier, ITC shall be disallowed and interest shall be applied. Another important aspect of ITC provisions is that only registered tax payers would be entitled to ITC. Further, time-limit for availing ITC, recovery of wrong ITC taken, etc. has been prescribed.

Compliances would be increased under GST model, due to increase in number of returns and item-wise details of all ITC, invoices, etc. Tax payers are required to file monthly returns for outward supplies (GSTR-1), inward supplies (GSTR-2) and consolidated monthly return (GSTR-3) along with an annual return (GSTR-8). Separate return forms are prescribed for special class of persons such as compounding tax payers, casual tax payers and non-resident tax payers. Audit in case where turnover exceeds prescribed limit shall be an additional compliance for business.

Transitioning provisions have also been given emphasis to ensure smooth shifting of present indirect tax structure to GST regime. All pending matter under earlier laws shall be disposed off according to the earlier laws. Most importantly, ITC available under present tax laws (ITC of VAT, excise duty, customs duty, and service tax) has been allowed to be carried forward to the GST rule subject to its availability under proposed law. Provisions have also been drafted to avoid double taxation under present taxes and GST simultaneously during the transition era.

MRP based valuation to levy tax in respect of certain class of goods, including FMCG goods, would go away in absence of any provision in the model law which calls for change in the pricing methodology in the FMCG and other relevant industry. Transfer of shares, securities, etc. could also be taxed. The software industry shall be relieved from the ghost of double taxation of VAT and service tax on single transaction. GST is also expected to bring an end to the tax complexities involved in special transactions such as works contract. However, it cannot be ruled out that for service providers, increase in the rate of tax from 15% to expected revenue-neutral-rate rate of 17%-19%, (as proposed by the expert committee headed by Chief Economic Advisor) would be a matter of concern. The industry is also expecting that the assessment provisions in CGST/ IGST and SGST shall be drafted rationally so as to avoid taxpayers being assessed more than once under separate GST laws at national and state level.

Going forward, because of the amendments made in the GST Bill, it would be send back to the Lok Sabha for approval of 2/3rd majority once again. Afterwards, the Bill shall be required to be receiving assent of the President along with the ratification of atleast 51% of the states with simple (i.e. 51%) majority in order to validate the biggest tax reform. Clearly the government has required voting power in the Lok Sabha and taking into consideration the political consensus shown by Rajya Sabha, the process of GST Bill becoming an Act does not appears to be difficult. Further, the President would constitute a GST Council which shall be entrusted to recommend on various key matters such as drafting of GST Bills, rate of GST, goods/ services to be kept outside the purview of GST, dispute resolution mechanism, etc. which is still a dilemma for the stakeholders.

The government is aiming at April 2017 to implement GST in India, for which the CGST & IGST Bill shall have to be approved by the Parliament and simultaneously, SGST Bill shall be approved by the respective State Assemblies, with simple majority. It is also likely that the draft version of CGST, IGST & SGST Bill shall be rolled out for further discussions and required approvals, during winter session of the Parliament. Nonetheless, the Model GST law gives a comprehensive overview of the expected Bills to be introduced in future. The industry needs to be ready with the essential infrastructural and strategical arrangements beforehand such as IT support for invoicing, tax returns and payments, pricing strategy, utilizing maximum ITC, effective transitioning, etc. to avoid any last minute hassle.

By CA Rinku Panbude

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