If a business happens to buy raw material from another which is not GST-compliant and loses input tax credit, would the government compensate the former for the latter's fault?
If a business happens to buy raw material from another which is not GST-compliant and loses input tax credit, would the government compensate the former for the latter’s fault? Area-based tax sops can’t be abruptly terminated for reasons of propriety and law but how will the Centre and states share the burden of retaining these for the residual periods given that GST will transform their relative rights to tax revenue? How will the states that have used VAT waivers to spur business activities within their geographies adjust to GST which is more gainful for consuming states?
When the first question was raised by an industry participant at a GST outreach programme organised by the central excise department along with the Okhla Industrial Association last week, the answer was spontaneous laughter. What it indicated is the government’s limitations in addressing businesses’ pain under the GST regime. Businesses will have to take care of themselves and unless they aren’t well prepared for the transition, troubles could come their way.
At the outset, an assistant commissioner of the department emphasised at the Okhla meet that businesses should not be in any doubt that GST implementation could be pushed back to September or even next year. “This would prove to be a fatal mistake,” he added.
The session was anchored by a PowerPoint presentation on GST, interspersed by patient explanation by Sanjiv Srivastava, commissioner of central excise. The long, 150-minute presentation contained the background on GST, and the journey thus far. However, the over-50-strong delegation from industry erupted with a volley of questions as soon as the presentation ended, reflecting industry’s continuing apprehensions over several aspects of the design and implementation of the new indirect tax.
The first couple of questions revolved around the promised continuation of area-based exemptions provided by certain states like Uttarakhand and Himachal Pradesh for industries set up there. Who will bear the cost of retaining the excise and VAT exemptions, as both these taxes are to be subsumed in GST? Srivastava said since GST militates against exemptions, if a state wants to retain VAT concessions to make itself attractive for investment, it will have to work out a system of subsidies through reimbursements, rather than upfront tax waiver. The GST Council had earlier decided that for units set up on the promise of excise/VAT sops being available for fixed periods, these sops will be continued for the residual period.
This means that for late entrants (those who joined in 2009/10) the sops will be available till 2020/2021. Since states are going to have an equal share of the tax on manufacturing in the GST regime, in addition to what they get from the Centre right now under the Finance Commission formula, the Centre feels that it unfair on their part to expect it to bear the burden of retaining area-based excise sops for hilly states. The revenue forgone on these excise sops is to the tune of Rs 20,000 crore a year. Most likely a system will be worked out by the GST Council shifting the burden of these sops to the respective states, sources indicated. However, when pressed, Srivastava said the government was “working on a process for states that will be compatible with GST”.
At the Okhla conference, industry executives asked whether there wasn’t a case for the government to compensate businesses for non-compliance by suppliers as it would anyway get at them and make them pay the taxes with interest and penalty. The excise department officials, however, remained non-committal.
“Under GST, the businesses will also require to change their strategy to be successful. The strategy would include choosing suppliers with a high compliance rating,” Srivastava said. He added that the GST Network was working on an algorithm to assign compliance ratings to businesses registered on the portal.
Despite soaring temperatures and barely functioning air-conditioning in the conference hall, the gathering asked questions on a wide range of topics that also included concerns over the e-way bill and availing credit on the closing stock, among others.
By and large, the local businesses didn’t seem overly concerned about the impending law, though. “We have seen the pain and chaos that any transition brings… We have the experience of VAT. There is no doubt that similar teething problems will have to be dealt with in the initial days of GST, but it’s also a fact that GST is a more efficient taxation system that will ultimately benefit the industry, the consumers and the economy as a whole,” said Sandeep Verma, a member of the Okhla Industrial Association.