Tax caFE: Correct the GST law

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Published: July 3, 2015 12:56:00 AM

If properly planned, the journey towards GST is not going to be challenging. Otherwise, it will just prove to be a twisted VAT

GSTGST is the biggest tax reform the country has ever proposed to enact. It will make India one single market with only consumers in mind and there will be no barriers across states.

The goods & services tax (GST), introduced in Parliament as The Constitution (122nd Amendment) Bill, 2014, got passed in the Lok Sabha but the Rajya Sabha referred it to a a 21-member panel within the Rajya Sabha to review and submit their recommendations on the last day of the first week of the monsoon session. Once this is done, at least 50% of the states have to pass the Bill before the Presidential Assent is given.

GST is the biggest tax reform the country has ever proposed to enact. It will make India one single market with only consumers in mind and there will be no barriers across states. GST will allow services to be taxed by state governments and sale of goods to be taxed by the central government.

GST has proposed to subsume all the taxes levied by the Centre as Central GST (CGST) and all the state levies into one single tax called State GST (SGST). For all inter-state movement of goods & services, it shall be called Integrated GST (IGST) which shall have CGST and SGST. The revenue neutral rate (RNR) has been plugged at 27% with CGST at 14% and SGST at 13%. Some features of the GST are:

* All the invoices will be uploaded on the GST Network (called GSTN) and matching of input tax credit will be tracked (for example, Form 26AS in the income tax-TDS is a small project, but the matching tax credit is a big task).

* It is a huge automation process envisaged by the government. Both the Centre and states should have the bandwidth to handle taxpayers.

* Registration, return filing and assessment shall be on e-mode.

* There will be lesser governmental meddling and an emphasis on e-audits and notices for discrepancies or errors.

* There will be no cascading effect, as all channels of distribution shall be subjected to tax on value addition only, and a total transparency shall exist.

* With increase in the tax base, the overall growth of the economy is estimated at 1.5-2%, after GST’s debut.

* Being a consumption-based taxation, the tax burden will be on value addition only and there shall be no relevance for MRP-based pricing or Transaction Valuation Rules.

However, a few corrections are needed in the GST law. A departure from the ideal GST to an India-specific one has inserted “a levy of an additional tax of 1% on supply of goods, in the course of inter-state trade or commerce to be collected by the government of India for a period of two years, and assigned to the states from where the supply originates.”

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The phrase “cess levied for specific purposes” has not been amended by the Clause 10 of the Bill which proposes to amend Article 270. The powers under Article 270 are likely to continue even though the Statement of Objects and Reasons to the Bill state that all cess levies at central and state level will be subsumed. R&D cess and automobile cess might be a cost if continued. Municipal cess or local levies by municipal bodies must be subsumed in their respective states, particularly Octroi in Maharashtra. Otherwise, GST cannot be called a reformist tax to simplify doing business in India across states but will remain just a twisted VAT.

Clause 14 of the Bill vide Article 366, clause 12A of the Constitution proposes to define “goods and services tax”. It means any tax on supply of goods or services or both except taxes on supply of alcohol for human consumption. It leads to an open-ended definition putting “any tax to be included under GST”. It does not explain “supply of goods and services which includes job work activities, free supplies and stock transfers” under the GST regime. Further, it fails to insert the objective of “value addition for a valuable consideration only to be taxed, giving credit for the goods or services purchased for use in the business of making taxable supply of goods or services or both”. As noted, real estate and petroleum sectors are excluded from the GST regime.

The Supreme Court held in the case of State of Punjab vs Bajaj Electricals that “trade in its primary meaning is exchange of goods for goods or goods for money; in its secondary meaning, it is repeated activity in the nature of business carried on with a profit motive, the activity being manual or mercantile, as distinguished from liberal arts, learned professions or agriculture.” It means that professional/vocational activities will not be covered, if it is done with a “not for profit” motive. GST regimes elsewhere use the catch-all term “economic activity” instead.

For companies enjoying sales tax incentives or sales tax deferral schemes in certain states, there might be a cash flow impact as recovery will take longer than the current structure due to CGST and SGST being separated.

Despite these anomalies and lack of clarity on how the law will shape up, GST will play an important role in the warehousing and logistics sectors. There will be huge demand for big warehousing spaces which shall be an end-to-end activity of storage, distribution and sale—right from inwarding, storing & stacking, invoicing, packing & re-packing, labelling & re-labelling, and dispatch to various locations across India. GST will remove state-wise barrier, entry tax and forms as well as check-posts every 100 km. Manufacturers can think of “one India” as a customer if properly positioned.

GST will make all companies look at their procurement patterns, job work models, manufacturing and supplies, dealer/distribution models, warranty and replacement of parts up to the end-customer. Every stage of activity and value addition will be critical to the business in cutting the corners to garner an advantage, given that all the channels will be subject to the GST chain, across states. However, a few things need to be done.

n All sales invoices to be uploaded to GSTN, the governmental website, and input tax credits from seller to buyer shall be validated through the website itself (Form AS26 model followed for TDS deductions).

n With all distributors/dealers across states for each of the auto companies for sale of cars and parts, the IT network and the ERP system need to be compatible.

n The filing of tax returns and assessment might go e-model with lesser interference.

n More emphasis on audit and penal provisions for defaults is going to be the order of day, post GST.

n It is important to be more automated rather than manual and try to work with suppliers and customers as well to make the distribution chain complete and GST-compliant.

Since the business has given heads-up to the GST law and the government following suit, it is not going to be chaos but a paradigm shift in taxes levied and managed. Also, the tax base and assessee base will be widened. If properly planned, the journey towards GST is not going to be challenging.

The author is head of taxation, General Motors India.

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