Under the GST regime, it is the term ‘supply’ which will hold the greatest significance and shall be critical in determining the taxability of all transactions.
GST draft suggests a massive broadening of the coverage of taxability.
Last week, after getting an in-principle nod from the Empowered Committee of State Finance Ministers, the Union government finally rolled out a draft of the model goods and services (GST) law. Interestingly, the release of the draft marks a decade of GST being in the offing (since its inception in the 2006 budget). Among the various government reports issued during this period, the draft happens to be the most comprehensive on the form and structure of the GST.
Modelled as a piece of legislation, the draft sets out provisions on taxing event, place of supply, time of supply, credit availability and valuation, among others. The draft also deals with the various administrative and procedural aspects of the levy, including the issuance of demands and refunds, procedures for upkeep of accounts and records, registration, filing of returns, assessment, audits, search, seizure and arrest, and the adjudicatory and appellate processes.
Under the GST regime, it is the term “supply” which will hold the greatest significance and shall be critical in determining the taxability of all transactions, whether commercial or otherwise. A “supply” will include transactions in goods and services, as also transactions made without a consideration, such as permanent transfer/ disposal of business assets, services put to a private or non-business use, and free-of-cost supplies of goods and services by a taxable person to another in the course of or furtherance of business. Significantly, the term “service” has been defined in a “catch-all” manner to mean anything which is not goods, including intangible property and actionable claims, thereby signalling that under the GST the demarcation of all transactions will be either as goods or as services.
The draft law also provides for “declared” species of goods and services. For instance, while transactions involving any transfer of the title in goods would be treated as goods, making goods available for limited purpose, lease transactions and licence to occupy land/building would be treated as services. Notably, with the classification of intangible property as service, various long-standing issues of duality (for example, in relation to IPR and software) under the existing regime are expected to abate.
E-commerce operators find a special mention by way of specific provisions, assigning liability to them for deduction of tax at source on payments made to suppliers of goods/services trading through such e-commerce platforms. Suppliers will be entitled to claim credit of the TDS so paid. Aggregators continue to be liable to discharge tax on the services supplied under their brand/trade name.
Overall, the draft suggests a massive broadening of the coverage of taxability. While it was hoped that an enlarged tax base would be accompanied by unrestricted credit availability, unfortunately, the draft retains a negative listing of goods and services for which input tax credit will be blocked.
Radical changes have been made on the aspect of valuation of supplies. For the first time, the concept of “transaction value” has been extended to services—the value of a supply of service will be the price actually paid or payable for the said supply, provided that the supplier and recipient (of service) are not related, and price is the sole consideration. However, if the parties are related, price is not the sole consideration, and/or if the tax authorities have reasons to doubt the accuracy of the declared value of the service for any other reason, they will be well within their discretion to reject such declared value and determine the appropriate value in accordance with the rules.
While valuation has always been one of the most litigated aspects of tax levies, its extension to service transactions is only expected to multiply such disputes manifold, especially given the fact that the valuation provisions (largely adopted from the customs/excise law) have never been applied in the context of services. The service sector should indeed take a serious look at their current transaction models, while they prepare for the transition to GST.
One of the other highlights of the draft is the principle of appropriation of taxes between states in a situation of supplies involving multiple states. The place of supply rules do not prescribe a clear formula for division of the tax between states, and surprisingly, leaves the determination to each state. Given the infamous reputation of states to garner maximum revenue in blatant disregard for due process, the absence of a clear formula for division of taxes between states can turn out to be extremely distressing for businesses.
A welcome assurance in the draft is that most of the rules, including those granting exemptions, will be in accordance with the recommendations of the GST council. In effect, the decisions would come from a “collective” council rather than the “unitary” wisdom of states. This may go some way to address concerns that post the deletion of the Dispute Settlement Authority, the GST council is ill-equipped to keep states in check, and prevent deviations from its recommendations.
Be that as it may, the final form of the model GST law will be dictated by a host of factors, such as the GST Constitutional Amendment which may necessitate consequential changes, taking on board the comments of all stakeholders (states, industry and tax administrators) and practical difficulties or sector-specific requirements. Further, successful implementation of a uniform GST will rest on how best states adopt and implement the model law. However, if this version is any indication of what is in store, the industry has its work cut out for GST.
Kumar Visalaksh and Divya Jeswant are, respectively, partner (taxation) and senior associate at Economic Laws Practice. Views are personal.