By Pratik Jain
The outcome of the Goods and Services Tax (GST) Council meeting on February 18 was on expected lines.
The remaining legislative issues were apparently thrashed out, with an understanding that the GST laws would be formally approved in the next meeting scheduled for March 4 and 5. The compensation law was formally approved by the council, which is likely to be presented before Parliament along with the Central GST (CGST) and Integrated GST (IGST) laws in the second half of the Budget session, starting on March 9.
With this, we are all set to see GST from July 1, 2017. Good news, indeed. But are the laws in line with what India Inc expected? Probably not.
Make no mistake. A lot of hard work has been put in drafting these laws, particularly in aligning the central laws (excise, service tax, etc) and state value-added tax (VAT) laws, which differ from state to state. However, the need to balance the views of all stakeholders, coupled with the fear of revenue loss and tax evasion, has resulted in a law that is perhaps only incrementally better than what we have now.
The biggest problem is that the complexity of levying tax on services at the state level has not been appreciated and addressed adequately. While place-of-supply provisions do exist to determine the state where services can be said to be consumed, several ambiguities remain.
One of the major issues is where the service provider and recipient are located in more than one state. In such cases, the location ‘most directly concerned’ of the service provider and recipient needs to be determined. Interpretation as to which office or state is more directly concerned has been left to the service provider.
If the law continues in this form, it could be a source of litigation for many years to come. India Inc is grappling as to which state it should raise the invoice from and how to pay tax. Since GST paid in business-to-business would mostly be a ‘wash’ transaction, the law can be simplified significantly by providing the billing addresses of both the service provider and recipient, as the relevant states from and in which GST has to be paid.
Pass the Parcel
The other proposal causing concern is the ‘anti-profiteering’ clause, which requires the businesses to pass on the benefit of reduced rates or increased credits to the customers. Given the short time available to the industry and the government for the introduction of GST, this provision could lead to complex paperwork and widespread audits, much like what happened in Malaysia recently.
Also, there is no time period prescribed for the applicability of such a provision, which should ideally be enforced during the transition phase for a few months only.
India Inc was also expecting a much more simplified input credit provision, in line with international best practices, wherein all GST incurred on business purchases would be allowed as set-off against GST payable.
However, the draft laws still contemplate restrictions on many business expenses, such as employee-related benefits (medical insurance, cabs, cafeteria, etc), construction of office building and factories, and so on. This would mean that even after GST is in place, cascading of tax would continue in some form.
For a successful transition to GST, it is important to ensure that minimum disruption is caused to businesses. Therefore, transition rules become extremely critical.
This is also an area that hasn’t got the attention it deserves. For example, it is still not clear as to whether and how the benefit of excise duty paid on closing stock lying on the date of GST implementation across the distribution chain would be available.
The intention, though, seems to be to provide such a benefit.
If this is not addressed, then a major disruption would be caused in the run-up to GST, as there would be an attempt to minimise the inventory by distributors and retailers on the transition date.
Last, but not the least, the penal provisions appear to be much harsher than the current laws. The law seeks to penalise businesses by denying them the input credit of GST paid on purchases if the vendor has not deposited the tax, or fails to report the transaction on the GST Network. This effectively shifts the burden of compliances from vendors to customers.
Cut the Rope
The authorities have been given wide-ranging powers for the enforcement of laws, including those relating to arrest that appear much broader than existing laws. Given that GST is a radically different tax system than what we have, and a short window of time is available from the finalisation of the laws and GST’s implementation, it would have been better if such provisions were a little softer in the initial couple of years.
So, the current version of the GST laws leaves a lot of scope of improvement. It needs to reflect the desire of a quantum jump in reforms and not merely an improvement in the current system. One hopes that this is only a beginning, and all stakeholders, slowly but surely, work towards an ideal GST system.
(The writer is partner, PwC India)