A sneak preview into the new tax regime for businesses as well as consumers
Some private tax portals have posted a copy of a ‘draft GST law’. While its authenticity is yet to be verified, this article tries to look into what it may have in store for businesses and consumers. Here are some of the aspects it touches upon.
What does GST being applicable on ‘supply’ mean?
In GST regime, all ‘supply’, such as sale, transfer, barter, lease, import of services etc of goods and/or services made for a consideration will attract Central GST (to be levied by the Centre) and State GST (to be levied by the State). As GST will be applicable on ‘supply’, erstwhile taxable events such as ‘manufacture’, ‘sale’, ‘provision of services’ will lose their relevance.
Certain supplies, even if made without consideration, such as permanent transfer of business assets, self-supply of goods or services, assets retained after deregistration, will attract GST. Even ‘barter’ of goods transaction which were hitherto un-taxed in the VAT regime, will attract GST.
When is GST payable?
The liability to pay CGST and SGST will arise at the time of supply as determined for goods and services. The provisions contemplate payment of GST at the earliest for:
Goods: Removal of goods or receipt of payment or issuance of invoice or date on which buyer shows receipt of goods
Services: Issuance of invoice or receipt of payment or date on which recipient shows receipt of services Given that there could be many parameters in determining ‘time’ of supply, maintaining reconciliation between revenue as per financials and as per GST could be a major challenge for businesses.
How is place of supply determined?
It would be crucial to determine whether a transaction is ‘intra-State’ or ‘inter-State’ as GST (i.e. CGST plus SGST or IGST, as the case may be) will be applicable accordingly.
For ‘goods’, the place of supply would be location where the goods are delivered. For ‘services’ the place of supply would be location of the recipient.
However, there are multiple scenarios such as for supply of services in relation to immovable property, wherein this principle will not apply and specific rules will come into play. Thus, the business will have to scroll through all the place of supply provisions before determining the place of supply.
On what value will GST be levied?
GST would be payable on the ‘transaction value’ — the price actually paid or payable. The transaction value is also said to include all expenses in relation to sale such as packing and commission. Even subsidies linked to supply will be included. The law also provides for Valuation Rules to help determine value in certain cases.
How will the input tax credit mechanism work?
The current CENVAT credit regime disallows CENVAT credit on various services such as motor vehicle related services, catering services, employee insurance, construction of civil structures.
Similarly, State VAT laws restrict input tax credit in respect of construction, motor vehicles etc. This denial of credits leads to unnecessary cost burden on the assessee.
It was expected that in the GST regime, seamless credit will be allowed to business houses without any denial or any restrictions except, say, goods/ services which are used for personal rather than official use (similar to the UK VAT law).
However, credit pertaining to specified procurements such as catering services, employee insurance would not available.
This denial of credit will lead to substantial tax cascading.
What is this additional tax on inter-State supply of goods?
The draft GST law provides that an additional tax up to 1 per cent will be levied by the Centre on inter-State supply of goods (and not on services) made for consideration.
Thus, effectively inter-State stock or branch transfers will not attract this 1 per cent additional tax.
This additional tax will be applicable for a period of two years and could be extended further by the GST Council.
The credit of this additional levy will not be available as thus it will be a cost in the supply chain.
Thus, the current practice of inter-State sale masquerading as stock transfers may continue to save this 1 per cent extra tax.
What are the threshold limits under consideration?
Currently, the threshold limit under excise is ₹1.50 crore, in service tax it is ₹10 lakh whereas in State VAT it varies from State to State. The model GST law is silent on the threshold limit for GST registration.
Also, the model law does not provide the list of goods/services which will be exempt from GST.
What is the expected rate of GST?
The rate of GST is not specified in the draft GST law.
However, the panel headed by Chief Economic Advisor Arvind Subramanian recommends a standard rate, applicable to most goods and services, of 17-18 per cent. Further, there could be lower rate (of 12-14 per cent) for concessional goods and a higher rate (up to 40 per cent) for luxury goods.
However, given the large unaccounted economy, it would be preferable to start with a minimum possible rate to ensure that people start complying.
Will the old provisions return?
Most of the current provisions such as reverse charge, tax deduction, pre-deposit, prosecution, arrest have been retained in the proposed draft GST law.
So, the model GST law seems to be new wine in old bottle.
The writer is a chartered accountant and can be reached at [email protected]