With the introduction of the goods and services tax (GST)-related Constitution Amendment Bill (GST Bill) in the Lok Sabha last week, the industry is abuzz with the contours of the new GST regime. The GST Bill is explicit regarding its framework, inclusion of petroleum products within the GST and providing a constitutional framework for determining state compensation. It is noteworthy that an upper time limit of one year has been stipulated in the GST Bill for the existing laws taxing goods or services to expire, beyond which they would cease to apply. This period of one year would commence from the date of amendment of the Constitution pursuant to the passage of the GST Bill. Thus, there seems to be a time-bound commitment under the constitutional framework to carry the GST agenda forward. While the GST Bill provides clarity with respect to the structural framework of the GST regime, it throws up some interesting questions, some of which would hopefully be answered through the model GST legislation.
It is noteworthy that ‘goods’ are defined in the Constitution to include all material, commodities and articles. Services are not defined in the Constitution but only under the service tax laws (i.e., Finance Act, 1994). The GST Bill proposes to define services under the Constitution as ‘anything other than goods’. This is a very expansive definition of services and one would have to watch out for the GST legislation for any possible narrowing down of the taxable event under the GST regime.
In addition to GST, an additional tax on supply of goods, of up to 1% on inter-state trade or commerce, would also be imposed for a period of two years or such period as identified by the GST Council. Interestingly, this is not an enhanced rate of GST but an ‘additional tax’ to be assigned to the ‘originating’ state. Therefore, credit of such additional tax is also jeopardised since origin-based taxation is incompatible with flow of credit to the consumption state. Further, since the sunset date for the levy of such additional tax can be extended, this levy could potentially extend for several years leading to two streams of taxes, one a consumption-based tax, i.e., GST and the other, an origin-based tax.
Amidst all speculations, the GST Bill has made certain key inclusions and exclusions. Entry tax and local levies such as Octroi and the local-body tax, which were a subject matter of debate with the states for a long time, have been specifically mentioned in the list of levies which would be subsumed in GST. On the other hand, stamp duty and electricity duty continue to be out of GST and therefore, the cascading effect of taxes would continue for real estate and power sectors.
One of the key highlights of the GST Bill has been to include petroleum crude, petrol, MSD, ATF and natural gas in the GST regime. However, in the initial years, these items would be taxed under the current indirect tax regime, thus attracting VAT or sales tax and excise duties. This could present complications for the petro-chemical industry which manufactures the above items as well as other petroleum products such as lubricants which would be subject to GST. Thus, on the whole, such manufacturers would need to pay excise, VAT and sales tax on manufacture of certain products but GST on certain others. This will be further complicated as most of their procurements would attract GST.
Also keenly watched would be the cesses that are ultimately subsumed in the GST. The debate could be more so in respect of cesses that are not specifically called out as ‘excise duties’ in the respective legislations, especially in view of the residuary power of Parliament to levy ‘any tax not mentioned in the state list or concurrent list’.
While, on the one hand, the fate of certain existing levies is uncertain, the life-line of several exemptions under the customs laws are also uncertain. The GST Bill suggests that IGST would apply on imports since imports have been deemed to be at par with inter-state supplies. Thus, while it is likely that countervailing duty (CVD) and additional customs duty (ACD) would not survive, it would need to be seen whether CVD and ACD exemptions, for instance, in relation to mega power projects, exploration and production activities, aviation MRO projects, etc, are grandfathered under the IGST regime for imports.
While the Bill is a definitive step towards the introduction of GST, there is a long way to go for effective implementation of the GST regime. The GST legislation, place-of-supply rules and valuation rules would really define the GST story. It is now for the government and industry to come together and brainstorm the nuances before the critical legislations are finalised.
With inputs from Saurabh Kanchan, Director, BMR & Associates LLP
The author is Leader, Indirect Tax, BMR & Associates LLP.
Views are personal