GST has been
talk of the town since a decade now.
However, there have been some concerted efforts from last couple of
months to make it a conscious reality. Various deliberations have been made to
work out the modalities of GST structure, its supposed modus operandi which
should be simple, transparent, efficient, comprehensive and practicable.
Through this
piece, it has been attempted to throw light on key fundamental challenges ahead
in enacting GST which needs to be addressed diligently so as to enable GST
becoming a successful, simplified and sustainable socio-economic reform.
At present,
domestic indirect tax legislation revolves around three taxes;
- Excise Duty,
leviable on manufacture of goods (Central levy)
- Service Tax,
leviable on provision of service (Central levy)
- VAT,
leviable on sale of goods (State levy)
GST will be
a comprehensive structure comprising goods and services wherein taxable event
shall be ‘supply of goods and services’ subsuming aforesaid tax levies
alongwith other miscellaneous taxes viz. luxury tax, entry tax, entertainment
tax, purchase tax, taxes on lottery, betting and gambling etc. Being India a
Country which runs on policy of cooperative federalism, dual-model GST has been
proposed wherein CGST shall be levied by Central Government and SGST to be
levied by State Government.
Major Indispensables:
+++Determination of Place of
Supply of Service
At present
Service tax is central subject wherein service tax is levied uniformly all over
India (except J & K) on provision of taxable service and exports are
exempted. Place of Supply of Service Rules, 2012 determines whether service is
being provided in India (in any State) or outside India. Hence, only with newly
perceived GST reform, for the first time service tax will become a state
subject wherein CGST shall be levied by Central Government and SGST shall be
levied by State Government (constitutional power being provided by
Constitutional Amendment Bill).
There is no
rocket science to assess that Service being an intangible activity and with
e-commerce and Internet of Things, the new game of the dawn, services are being
provided on virtual platforms. There may be a situation where service provider
registered in Rajasthan, service being provided in Uttar Pradesh, and service
being received in Harayana. There are various services viz. Telecom services, transportation
service, advertising service, travel agent, Information technology service etc.
where it may not be possible to exactly identify the place of provision of
service, consequently the charging state and relevant rate of tax. In present
regime, we are only concerned to determine whether place of supply of service
is within territory of India or outside India to arrive at its taxability. In
proposed GST regime, we are supposed to take care of place of provision at each
and every state. It shall increase unnecessary compliance and litigation for
companies operating across India and companies providing online services and
other such services.
In order to
ensure that post-introduction of GST the industry does not get logged onto
unnecessary litigation and confusion, a robust, unambiguous and hassle-free
framework is required to define the
place of supply of service, determination of origin state and consuming state,
person liable to pay tax, address this challenge taking into confidence all
stakeholders at large.
+++Uniformity and Equity
At present
VAT structures across the states lacks uniformity, which is not restricted only
to rates of tax, but also extends to interpretations, procedures, exemptions,
computation etc.
In true
sense, GST will benefit industry in effecting seamless and hassle-free trade
across country if intent of broad uniformity in respect of rates, credit chain,
exemptions, administrative machinery is maintained in long term barring few
exceptions where social or administrative differences between states doesn’t
allow. It is most important atleast in service sector for uniform rates across
country as services are easily accessible from anywhere.
+++Tax
on electricity
The
power to levy tax on the consumption or sale of electricity vests with the
State Governments. Though electricity is “goods”, sales tax is not imposed on
sale of electricity in India. Therefore, it is tax-free goods.
The
noteworthy advantage available to the Power Companies is that they can purchase
goods for generation and distribution of electricity from other States at a
concessional rate of tax (CST) of 2%.
With
the abolition of CST Act and inability of these companies to purchase at
concessional rate, this sector will certainly be adversely affected, unless
sale of electricity is brought within the scope of GST and set-off of input tax
credit is allowed for tax paid on purchases.
+++Stock Transfer- whether
taxable under GST ?
At present
VAT is levied on sale of goods. Hence, stock transfer is not taxable being not
sale of goods. However, in GST, taxable event is supply of goods or service. Apparently
it suggests that since stock transfer is also a mere supply it may come within
the purview of GST in case of intra-state transfers and IGST in case of
inter-state transfers. Although, this will ensure seamless credit chain but may
entail unnecessary burden on assessee
operating in more than one states. In that case it is desirable to frame a
broad consensus on such transaction and if leviable to GST, then separate
valuation rules.
+++Whether GST will reduce cost
of service
The biggest
advantage of GST is removal of cascading effect of taxes and complete credit
chain mechanism from manufactures to retailers. This will certainly reduce the
cost of taxes on goods. However, whether GST will render the cost of services
cheaper or dearer as against present regime? At present Service tax is
applicable at basic rate of 12% (+ 2% proposed in a move towards GST). In proposed
GST model, supply of everything whether goods or services will be taxable at
consolidated GST (SGST + CGST), the combined rate may range between 16%-20%.
Hence, cost of service will only be going to increase and this can be seen as
legislative intent to increase tax share in service sector via-a-vis share of
service sector in GDP so as to bring parity between goods and services. The
service industry should devise strategies and business plans taking into
consideration the impact of increasing cost of service.
+++Cross Set-off between CGST and
SGST not allowed
As per GST
model proposed by Government, CGST and SGST will operate as separate tax and
will be having a separate credit chain. That is, cross set-off between CGST and
SGST liability will not available (except for IGST liability in case of
inter-state transaction). This may defeat the basic purpose of the reform. The
only purpose which will be achieved is removal of cascading effect and end of
classification disputes over goods and services. But if a national level reform
is being chalked out and future structural amendment may not be possible, it is
pertinent to address this issue before its enactment.
+++Real estate transactions- A
bucket of uncertainties and litigation
Real
estate transactions (including construction activities) have always been prone
to unending litigation at central as well as state levels of taxation. The
State VAT and the Service Tax already apply to construction materials and
services respectively, but in a complex manner. Then stamp duty is applied on
sale of immovable property.
Chairman
of 13th Finance Commission, Dr. Vijay Kelkar, also expressed his concern on
this issue, stating as under:
“The construction sector is a
significant contributor to the national economy. Housing expenditure dominates personal
consumption expenditure. Further, the present piece-meal taxation of this
sector encourages perverse incentives. Raw material is charged CENVAT, the
works contract is charged VAT and stamp duty is levied on the sale. With no
provision of input tax credit in place, there is little incentive to record
such transactions either at the construction stage or at the sale stage at their
correct value. This leads to substantial loss of tax revenues and fuels the
parallel economy.”
In
the case of commercial and industrial land and buildings, their exclusion from
the base would lead to tax cascading through blockage of input taxes on
construction materials and services. Extending the GST to all real property
supplies, including construction materials and services, would bring an end to
such disputes, simplify the structure, and enhance the overall economic
efficiency of the tax. Further, can we think of merging subsuming stamp duty on
real estate properties with GST, which can be game changer for real estate industry.
Let’s see !
+++Additional Tax @ 1%
The
Constitution (Amendment) Bill, 2014 provides for additional tax of 1% over and
above GST to compensate for revenue losses in transformational stage. This will
impede the true spirit of GST, secondly since it will be out of credit
mechanism, it will be a cost to tax payers. If there is need to levy this tax,
it should be levied within the purview of GST and credit chain mechanism.
+++Before parting.........
Hon’ble FM
in its Budget Speech is determined to introduce GST w.e.f. 01.04.2016. However,
looking towards progress so far and steps required to be taken to enact it may
not be possible to see way for GST from 2016. Based on present status and assuming
Constitutional Amendment Bill gets passed in second round of Budget Session;
following is the road map ahead:
- Passing of
Constitutional Amendment Bill by Parliament with 2/3rd of majority
- Passing of the
said Bill by 50% of States
- Constitution
of GST Council to finalise the draft of GST Bill
- Passing of
CGST Bills by Central Government
- Passing of
SGST Bills by respective State Government
Since it is a
transformational big scale reform India is waiting, most important thing is to
have on board a well laid out GST structure which addresses all concerns before
it becomes reality. Launching something in hurry just for the sake
of introducing it doesn’t make it a sense. Further industry needs preparation
time of atleast 6 months to adapt to new regime of taxation and plan business
transactions accordingly.
‘Better
if rightly timed than wrongly twisted.’
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