Revised Model GST Law – Clear, Business Friendly And With Balance To Benefit The Common Man

The government released the Draft Central GST, Integrated iGST and States Compensation Bills for public consideration on Saturday. Proposed to be introduced in the Parliament, these bills are in near final form and provide the clearest ideas about GST till date. The government should get credit for the good work put in to make the draft clearer, comprehensive and business friendly. At the same time, the draft laws also wants to keep the businesses honest to ensure that the benefit of GST is passed on to the common man. So let us briefly look at what are some of the changes the new law proposes.

Rate cap

First up, the political demand for a rate cap has been addressed in the Model iGST law by prescribing a cap of 28 percent.

There is a proposal for capping the CGST and SGST rates at 14 percent. This is probably the earliest indication that the rate of GST under the central and state laws may be same.

We expected, based on analysis of the current rate structures, that the state GST rates may be slightly higher than the central GST rates and so slightly different caps for CGST and SGST. Of course these rates are likely to be debated when the bills are introduced in the Parliament and may undergo changes now and in the future. Suffice to say, the required rate cap as per opposition demand has been met.

Securities out of GST ambit

Securities had been included as goods in the first draft of the Model GST law. It was a massive departure from the current VAT and Service tax laws, which never taxed securities.

The new draft puts an end to the issue by excluding securities from the definition of goods.

Read: Securities Excluded From The Ambit Of GST.

This will go a long way in putting to rest a lot of concerns expressed by the financial services industry and the treasury departments of major companies.

There is still some confusion created by including actionable claims in the definition of goods. The explanation that, moveable property shall not include intangible property, has been deleted. This brings about some uncertainty as to taxation of intangibles as goods or services. However, it is expected that treatment of intangible property may be clarified by way of an entry in Schedule II which distinguishes matters to be treated as supply of goods or supply of services.

Input Tax credit

The move towards a business friendly GST regime is evident from the liberal credit rules. Inputs and input services have been widely defined to mean any goods or service used or intended to be used in the course or furtherance of business. Credit shall be allowed on pipelines and telecommunication towers including their foundation and structural support.

Transition Provisions: comprehensive and commendable

The biggest concern for businesses was transition. It was expected to be swift and chaotic. The earlier transition provisions left a lot of questions unanswered.

The new transition provisions have been thoughtfully prepared. Clearly, industry’s concerns have been heard.

The transition provisions now deals with situations of first and second stage dealers and dealer importers to maintain the credit chain. Benevolent provisions have been introduced with respect to dead credit due to exemptions and abatements in the earlier regime. A one-month window would be allowed for claiming credit of taxes, paid under old regime, on the goods and services in transit. The status quo with respect to inputs, semi-finished goods and finished goods removed from the factory to a job worker’s premise has been maintained. The complication of sold goods being returned and return of goods sent on ‘sale on approval basis’ has also been adequately catered. The CENVAT credit reversal due to non-payment of consideration to the service provider, would be allowed as credit in the GST regime once the payment is made. The centrally registered service providers would be able to carry over the accumulated credit into appropriate registrations across different states. Supplies spreading across the present regime and GST regime would be taxed in the present regime to the extent point of taxation has arisen pre-GST appointed date and the remainder would be taxed in the GST regime. These changes are comprehensive and commendable.

Anti-profiteering measures: benefits to reach the common man

In the past, when India transitioned to VAT regime from the earlier sales tax regime, there were reports that the benefit of such transition was retained by business and not passed onto consumers. During transitions to GST in other countries, similar GST benefits were not always passed onto the consumers. If unchecked, it can lead to overall inflationary effect. Many countries implemented anti-profiteering measures under their GST laws to curb retention of benefits by business. Such measures were absent in the earlier draft.

The new draft clearly provides for anti-profiteering measures. It is designed to protect the common man.

To prove that GST benefits of reduced tax rates and widened credit have been commensurately passed on, businesses will have to justify the variance between current and GST regime profit levels.

It is certainly a grey area and concerns will lie in its execution by business and the department. More guidelines may be expect

Supply, point of tax, place of supply, valuation: better than before but some concerns remain

The provision for deeming transaction between a principal and an agent as supply of goods or services has now been restricted to only goods. It provides relief to services.

The concept of ‘establishments of a distinct person’ is a new addition. The GST law would treat each registration of an entity having same PAN as a distinct person.  Transfers between registrations will be within GST ambit.  Its valuation, however, is still a grey area.

The concept of composite supply and mixed supplies has been dealt with effectively. Composite supplies would be treated as the supply of goods or service which plays the dominant role. Mixed supplies would be taxed at the highest rate of goods or service comprising such mixed supply.

The point of taxation law has been simplified by clear references to date of invoice generation and receipt of consideration. However, the distinction between an advance and deposit is not clear.

The subsidies received from central and state governments have been excluded from the transaction value. However, interest or late fee or penalty for delayed payment of any consideration has been included in the transaction value. This is a departure from well-understood GST principles. There is likely to be more clarity once the valuation rules are released.

The place of supply shall be the location of importer in case of import of goods and the location outside India in case of export of goods. For services, separate treatment has been accorded to supplies where the supplier and recipient are located in India. In case the supplier or recipient of service is located outside India, separate provisions have been made for such a scenario. special economic zone (SEZ) supplies have also been covered and defined as inter-state supply.

Final comments: over to business now

The government received a record number of representations following the release of the first Draft Model GST law. There were concerns in the industry that the government is likely to be lost dealing with such volume of requests. However, the government has listened to the real concerns and has made an honest attempt to ensure the GST law is as clear as possible and make the transition as smooth as possible. We expect further fine tuning of the law driven by public comments but this draft shall provide encouragement to businesses that GST will ultimately result in benefits for both itself and its customers. With a system driven compliance platform and clarity in law, the government is moving in the right direction. Now it is over to business get ready and put its preparation and implementation in order.

L Badri Narayanan is a lawyer and partner with well known law firm Lakshmikumaran & Sridharan. He specialises in advising technology companies on corporate, commercial, intellectual property and tax laws. Shashank Kumar, is a Senior Associate, also at Lakshmikumaran & Sridharan.


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