An April 2017 roll-out of the Goods and Services Tax (GST) seems to be in the offing. Any new law typically entails changes to gear up for; but the proposed complete overhaul of the country’s transaction system can be expected to throw up a series of challenges for businesses to embrace, adapt to or conquer. The model GST law, when read in conjunction with the Business Process Reports released earlier, provides sufficient armour for businesses to embark on a GST impact analysis.
The law reaffirms many aspects of the expected dual GST structure. Tax would be levied on ‘supply’ of goods and services. A Central GST and a State GST shall be concurrently imposed on intra-state supply of goods and services and an Integrated GST on interstate supplies and imports. Transaction taxes, such as VAT/GST, have been traditionally imposed (internationally as well as in India) on supplies. The proposed law seeks to expand the scope of the GST levy to include one-off transactions and certain supplies undertaken without a consideration (free promotional items, for instance).
For a manufacturer, the taxable event has now shifted from ‘manufacture’ to ‘supply’; as a result, the benefit that is now offered by the current central excise law — whereby the job worker can pay excise duty — could well change under GST. This could imply that companies who have fully outsourced their manufacturing operations may have to meet additional compliances. From a trader’s perspective, GST possibly presents an opportunity to minimise tax costs. These taxes are built into the supply chain — both in terms of excise duties as well as service tax not being a creditable tax today. Optimal planning of supply chain for post-sale support must be done in such a manner that GST credits are not accumulated in States where the trader does not have a physical presence.
For service providers, there would be a sea change as they need to gear up for transition into a multi-State registration and compliance landscape. The law appears to suggest that a taxable person shall obtain Central/State/integrated GST registration. They must also undertake compliances in each State where there is a ‘place of business’ in terms of either a “business establishment” or “fixed establishment”.The concept of a centralised billing for services could continue in cases where the services are delivered out of a single office. But many service providers can expect to face the issue of services being delivered under a single contract from multiple branches across the country. The law has simplified the existing provisions to determine “place of supply.” It has also mitigated several anticipated complexities in its implementation. That said, for businesses, the critical aspect would be to interpret and apply “place of supply” regulations such that credits are not accumulated in States where the company has no ability to recoup the same.
Pros and cons
On the positive side, the law has sought to specifically address the bane of an overlap in taxation. For example, some supplies were in the past deemed as sales as well as declared to be services. Now, supply of intangibles, works contract supplies and restaurant supplies are classified as supplies of services. The clarification should hopefully aid in putting an end to the prevailing confusion on their tax treatment.
But on the flip side, the law retains some of the existing input tax credit restrictions and also seeks to introduce complex rules for valuing supplies of goods and services between related or associated enterprises.
Exporters, particularly of services, may need to work with the government to ensure their interests are safeguarded. They may want a viable upfront zero-rating scheme or at least a robust refund scheme.
The law envisages a refund scheme involving sanction of 80 per cent of the refund amount provisionally in a time-bound manner to a notified category of exporters. But there is apprehension over its implementation given the not-so-great experience on service tax refunds so far.