New Delhi: Adding to the overall flutter and chaos over the fate of the GST Bill, the government on Thursday selectively leaked out its ‘Model Draft of Central/State Goods and Services Tax Act, 2016’.
The draft GST law, uploaded on VATinfoline’s portal on Thursday evening, has generated considerable debate about its authenticity, timing and whether it was obtained through lawful means. Putting such fears to rest, VATinfoline, in an email communiqué to its members has clarified: “We would like to confirm that we got it from authentic and reliable source, the document was very much in public domain and of course, we got it by lawful means.”
The portal has further, invited feedback and comments on the Model GST Act, 2016 for publication on its website and circulation to members. This indicates that the government is keen on testing waters by leaking the model GST law unofficially rather than uploading it on its official website.
The leak has occurred on the eve of the submission of recommendations on a suitable revenue neutral rate (RNR) agreeable to all stakeholders by a panel led by Chief Economic Advisor, Arvind Subramanian. The report, which was originally slated for a September release, has been delayed on account of the need to accommodate multi-stakeholder inputs. (Report has been submitted to the government. You can read details here.)
There are two brand new features that stand out in the leaked draft GST Bill. The first is that GST will be levied on MRP rather than on the transaction value, which means effective tax rates will be higher, killing any joy over discounts either for physical or online purchases. So if Amazon or Flipkart give you a 50 percent discount, you will still pay GST on the full price. Similarly, in a mall, GST will be paid on the MRP even if the actual price is a discounted one.
Second, GST will also be levied on securities, which covers the stock market. However, there is no clarity on whether this will be in addition to the prevailing Securities Transaction Tax, or in lieu of it.
What is not new, but confirms suspicions already highlighted is that this exercise is more about taxing what should not be taxed as well as what we did not imagine could be taxed. By adding ambiguous phrases in the Constitutional Amendment Bill and adding new definitions, GST, under this Act, can now be levied on a gift, dowry, inheritance and so on.
If the amounts are below Rs 50 lakh, you will pay GST at the compounding rate to be set later by the GST Council when it is eventually constituted.
Listed below is a preview of the five sections and phrases that have been smartly introduced in the leaked GST Act to enable such taxes. Read together, these changes enable the government to tax anything at any value.
Definition of Business in the Act
GST is supposed to be a tax on business. But the definition of business includes “ …. any similar activity whether or not it is for a pecuniary benefit”. Pecuniary benefit means monetary benefit.
Then the definition of business goes on to say, “ … whether or not there is volume, frequency, continuity or regularity of such transaction”. This implies that the taxman can send you a notice for personal transfers like gift, inheritance, dowry, and so on.
Definition of Consideration or Transaction Value
Any tax has to be levied on a transaction value. However, the definition of consideration contains “ …. The monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the person or by any other person”. Here, ‘consideration’ is equated with ‘value’. In case of an inheritance or gift, there is no sale and hence no consideration, but a monetary value. By introducing the concept of ‘monetary value’ in the definition, the government has effectively widened the scope of the tax.
Definition of taxpayer
Who is liable to pay a tax? The list includes the term ‘individual’, and not a proprietary ‘concern’ as it should be. This insertion will enable tax on personal transfers.
Definition of Supply
GST is a tax on ‘supply’. Under the definition of supply, Schedule I has been included, which lists 5 items which will be taxable even if there is no transaction value. This list can be expanded to 20 or more at a later date, as and when the government feels like.
Free goods have been explicitly made liable for tax under GST.
Another damning feature of this GST Bill is that it has discarded transaction value completely for valuing any transfer or supply between related persons. Though this should be zero in most cases, the government wants to tax personal transfers/ non-commercial transfers on its monetary value. Further, the monetary value is to be determined by its transfer pricing team.
Industry sources say the government does not have the capacity to complete the limited international transfer pricing assessments in a time-bound manner. If all domestic transactions are opened up, tax volumes will increase a hundred times more, which will increase the complexity of doing business in India multifold, increase harassment and litigation and also possibly breed corruption.
The other nightmare that will be caused by taxing internal transactions is demand for tax on services rendered by any head office of any company to its branch offices in other states. This will effectively serve to balkanize the country from one tax paying unit/ geography to many states with virtual borders.
There is a long list of businesses that cannot take input credit as well as a list of scenarios where input credit will be denied. Industry sources say the government’s own estimates point to up to 30 percent additional tax collection through denial of input credit. This again, will make this GST defective while increasing inflation.
In essence, the first impact of this leaked GST legislation is that it does not seem to have been written by a progressive government looking to transform India into a business and manufacturing powerhouse, but by a tax collector who is seeking to legalize his entry into every home and office to demand his pound of flesh/bribe.