India Tax Insights – eighth edition
Model GST Law: need to shed the legacy mind-set
Harishanker Subramaniam, Partner and National Leader – Indirect Tax, EY India
With the passage of the Constitution Amendment Bill (CAB) in the Parliament’s Monsoon Session, there are renewed hopes of a GST rollout in 2017. The recent release of the Model GST Law (the Law) for stakeholder consultation is an important milestone in the GST journey. The draft law provides a ringside view of the GST contours and gives an opportunity to the industry to critique and advocate changes. The industry hopes that an open consultation will result in a law that is efficient, certain and easy to comply with.
The Law is a 190-page document, raising questions around its complexity to interpret. It has some positives but also carries a legacy mind-set. Since it is still work in progress, it should attempt to move away from this mind-set and be forward-looking for the GST to be effective.
It is now evident that all supplies of goods and services will be subject to Central GST (CGST) and State GST (SGST) on intra-state supplies or Integrated GST (IGST) on inter-state supplies. The Law also envisages GST on self-supplies without consideration between taxable persons. It is indeed a relief that the earlier proposed non-creditable 1% origin tax on inter-state supplies of goods has been dropped in view of both political and industry objections. The GST framework may, however, have complexities of dual administration, multiple registrations/assessments and multiple credit pool tracking and reporting at the transaction level.
The services sector, which till date was subject to service tax levied by the Center, will now have to deal with states with multiple registrations. This may be particularly onerous for sectors such as telecom and financial services. The industry has highlighted the issues of the services sector in various forums, but the law has not come forth with any solution at this stage. While states rightly want their share of the revenue pie from this sector, it is important that they do not compromise the existing ease of compliance. It would be worthwhile to explore options of centralized registration using the existing Large Taxpayer Unit (LTU) structure for these sectors. The mechanism of revenue allocation on the basis of the place of supply rules can then be explored through an IGST settlement mechanism. This will require serious engagement with states for a viable solution to evolve.
The concept of Maximum Retail Price (MRP) Valuation under excise and customs rules, prevalent across several sectors, will not feature under GST. Supplies of goods and services will now be subject to “transaction value” with attendant valuation rules. This shift may create its own interpretative challenges and can be litigative similar to the pre-MRP-based valuation system where transaction value was used as the base.
The fact that supplies without consideration from one taxable person to another taxable person — i.e., between two registrations within the same company — will be subject to GST will add another dimension. Branch transfers will therefore attract GST and will be subject to valuation provisions for both goods and services, though the embedded GST will be pass through. The concept of transaction value, with its sequential methodology for arriving at the taxable base, is used for goods, but its application for services could pose a serious challenge.
It will be important to enact these valuation provisions with caution, especially for intra-company transactions, to avoid unnecessary disputes.
The taxation of digital e-commerce transactions merits a special mention, given the growing importance of this sector. However, the provisions of the Law suggest a myopic understanding of the dynamic business models of the sector. Service aggregators providing services under their brand name on a digital platform are liable to pay tax, while e-commerce operators facilitating the supply of goods and services on their digital platform (marketplace models) will have to collect an amount of tax and deposit it with the Government.
Fundamentally, the idea is to establish a trail of transactions, which is fraught with compliance burden and needs a rethink. Equally important are issues around multiple registrations and treatment of their bundled supplies under the proposed place of supply rules. This sunrise sector needs to seriously engage with the Government and ensure that it does not lose its edge under GST.
GST’s objective: removal of cascading
GST’s main objective is to provide an efficient indirect tax regime that removes the cascading of taxes under the current regime that renders Indian manufacturing uncompetitive. GST’s credit provisions become critical in achieving this objective.
A perusal of the definitions of “input tax” and “input tax credit” suggests that the intention is to broad-base the credit mechanism with minimal cascading. This is indeed a welcome step and we hope this intention carries through in the final law with no ambiguity. Appropriate tweaks may be needed in certain other definitions.
The transition provisions will be critical to minimize trapped taxes and duties during the switch over to GST. The Law states that credits of taxes and duties available under the current laws will be allowed a carry forward and be available in the future GST law.
The treatment of embedded taxes/duties on both input and distribution side inventories during the transition is still ambiguous. It will be important to bring absolute clarity in the transition provisions to avoid additional costs to businesses.
An important pillar in any law is the dispute-resolution mechanism. The Law has several areas of concern. For instance, the provision for the extension of the limitation period for the recovery of short levies to three years may result in assessments technically being “open” for a longer time, creating uncertainty. Another critical provision is allowing revenue officers to file appeals against advance rulings to the appellate authority. This channel of appeal against advance ruling negates the very principle of certainty. The industry is looking forward to a law that brings clarity, minimizes the scope of disputes and provides an effective mechanism to deal with any disputes that may still arise.
The Law is a reaffirmation of the Government’s determination to implement GST in the coming year. It is no small achievement to put together a legislation that harmonizes the views of the Center and the states on the new tax. Like any other new law, it has its share of glitches that need to be ironed out. The industry must use the window provided by the Government to understand the nuances of the Law and provide its candid views. A meaningful engagement with the Government will help in having a law that meets the objectives of certainty, efficiency and ease of compliance.