The 122nd Constitution Amendment Bill, 2014 which will pave the way for introduction of the Goods and Services Tax laws has finally been approved after numerous consultations. The fact that the Bill was passed unanimously also sends the right signals about the intent to make this landmark reform a reality. To initiate the dialogue process with the industry, the draft Model GST law was released in June 2016 which gives us a glimpse of what lies ahead. Amongst the various provisions which will overhaul the entire indirect tax machinery, the first ones to have an impact are the transitional provisions.
As we move on to the GST regime, transitional provisions play an extremely critical role. They lay down the blueprint for dealing with the ongoing transactions, contracts etc, whilst the new law will get enacted.
The transitional provisions codified in Section 141 to Section 162 of the draft Model GST law are quite comprehensively written, well encapsulated and intended to cover several aspects of the transactions which would continue during the lay over process.
Let us analyse the provisions in detail to understand what has been covered and the areas which need to be addressed. Since this is a draft document, there is an opportunity to make representation to the government for plugging the gaps to enable a smooth transition without any glitches.
Key aspects of the transitional provisions under the draft Model GST law:
w Every person having registrations under the central excise, value added tax , central sales tax , service tax would be granted a provisional registration under the GST law. A window of six months will be available to submit the documents and get the final registration certificate under the regime. Though the model law does not explicitly specify the basis or the design structure of GST, it can be inferred that the registrations under the GST law would be for central GST (CGST), state GST (SGST), integrated GST (IGST).
w The amount of tax credit reflected in the returns as on the last date will be allowed to be carried forward. Due safeguards have been inserted to enable recovery, under the GST law, of such tax credits carried forward if it is discovered that these had been incorrectly taken by the company.
w The unavailed portion of tax credit on capital goods under the old tax laws can be taken after introduction of GST if it satisfies the conditions.
w If currently exempted goods become taxable under the GST regime, the tax credit of cenvatable duties like excise duty, CVD, VAT etc pertaining to inputs as such or inputs embedded in goods lying in stock, can be claimed. For this purpose, it is essential that the companies retain the necessary invoices evidencing the payment of these duties and taxes. As a corollary, provisions for reversals of tax credits have also been provided, if taxable goods get exempted under the GST law.
w Provisions have also been incorporated for dealing with a situation where the inputs/semi-finished/finished goods have been sent for job work/sold before the introduction of GST laws and returned thereafter.
w The transitional provisions also gives clarity on the way forward on pending litigation or new litigation which can be instituted for the pre-GST period, the recoverability of the confirmed demands and refund, if the companies succeed subject to the adherence to the principles of unjust enrichment.
w Also, the tax treatment for the price revisions of the ongoing contracts which would continue after the introduction of GST has been specified. The consequential tax increase or decrease is permitted by treating such transaction as a supply under the GST law. Again, reduction of tax liability is permitted provided the recipient correspondingly reduces his input tax credit.
Apart from what has been covered above, there are some areas which needs attention:
w There are no provisions which enable dealers registered under the excise law, to carry forward the cenvatable duties like excise duty, countervailing duty in lieu of excise duty, countervailing duty in lieu of sales tax which are lying in balance as on the date of transition. Under the VAT law, the input tax credit lying in balance would get transitioned as part of the credit balance.
w As per the current provisions under the excise law, such dealers do not charge any excise duty but only transfer the credits under the cover of their invoice. Under the GST regime, they will be required to charge GST which will include the CGST component. Thus, enabling provisions for transition of cenvatable duties for such excise dealers is clearly warranted. Therefore, the transitional provisions need to be inserted for registered excise dealers to enable them to take credit of cenvatable duties for goods which are lying in stock as on the last date.
w On introduction of GST, every registered person under the old laws would get a provisional registration certificate. This mechanism will work where the companies are having individual registrations for various locations from where they are operating and there is a transition of registrations under the excise, VAT, CST laws on a one-to-one basis. However, currently under the service tax law, companies can be registered on a centralised basis for multiple locations. There is no clarity on what these service providers would be required to do come the day GST law is operational. Because under the GST laws, in absence of concept of centralised registration, they would be required to obtain registration in every state where they have operations. This will become a mammoth exercise for companies having pan-India operations and having to deal with a single authority will become a luxury of the past.
w There is no specific provision to enable claiming of tax credits under the GST regime in case any old tax credit viz excise duty, VAT etc was not taken as on the last day for any reason. For example, cenvat credit provisions for availing the credit of service tax mandates that the payment to the service provider should be made within three months of the date of the invoice. If it is not done, the credit needs to be reversed and can be taken again on payment to the vendor.
It is possible that such reversal may have been done before GST is introduced and the payment to the vendor is done after its introduction. There is no specific provision intended to allow such credits which could not be taken before the last day due to the prevailing laws.
w It has been provided that if any demand is payable after the GST is introduced due to any litigation pertaining to pre-GST era, then the tax credit of such payment cannot be taken. It is difficult to comprehend why this restriction has been introduced, if the old tax credits are allowed to be carried forward. The government can provide safeguards in terms of eligibility but there is no reason why it should be completely disallowed when it is otherwise eligible as per the current prevailing laws.
It would be a great idea to introduce a scheme whereby companies are encouraged to settle the pending disputes as we move on to the GST regime. With the introduction of the GST law, it can be fairly expected that the new disputes would take some time to get initiated, by the time the dust settles!
The government should use this opportunity to fast track the past cases and remove the backlog which is clogging the appellate system. With a combination of settlement scheme, lack of new disputes arising for first couple of years and fast tracking of past cases, GST will also present a golden opportunity to clear the backlog in the appellate system and start with a clean slate.
The author is partner with Dhruva Advisors LLP
Views are personal