JUNE 27, 2016

By Pritam Mahure, CA

1. A broad based tax

IN GST regime, all intra-State 'supply' such as sale, transfer, barter, lease etc. of goods and/ or services made for a consideration will attract CGST (to be levied by Centre) and SGST (to be levied by State). An inter-State transaction will attract Integrated GST (IGST).

As GST will be applicable on 'supply' the erstwhile taxable events such as 'manufacture', 'sale', 'provision of services' etc. will lose their relevance.

It is pertinent to note that certain supplies, even if made without consideration, such as permanent transfer of business assets, assets retained after de-registration etc. will attract GST.

Even importation of service, whether or not for a consideration and whether or not in the course or furtherance of business will attract GST.

Interestingly, even a 'barter' of goods transaction which were hitherto un-taxed in VAT regime, will attract GST.

It is clarified that supply of intangible will be considered as supply of 'service'. Thus, the question whether 'software' is goods or service will finally rest in peace. Similarly, works contracts or construction contracts which involve supply of both 'goods' as well as 'services', in GST regime will be considered as 'service' for levy of GST. This will certainly lead to simplification for construction sector.

2. Valuation

GST would be payable on the 'transaction value'. Transaction value is the price actually paid or payable for the said supply of goods and/or services between un-related parties.

The transaction value is also said to include all expenses in relation to sale such as packing, commission, goods/services supplied free of cost, royalties/license fees payable as a condition of sale, etc. Even subsidies linked to supply will be includable.

Reimbursable expenses, if relatable to sale, will also be part of value on which GST will be payable. However, in case these expenses qualify as 'pure agent' reimbursements, then exclusion from value will be permissible.

As regards discounts/ incentives, it will form part of 'transaction value' if it is allowed after supply is effected. However, discounts/ incentives given before or at the time of supply will be permissible as deduction from transaction value.

As expected, Maximum Retail Price (MRP)/Retail Sale Price (RSP) based valuation, as its existed in current Excise Law, will not be there in GST regime. This will have impact on FMCG companies as they will be now required to have a re-look at pricing of their products for GST regime.

The law also provides for Valuation Rules to help determine value in certain cases. The Valuation Rules appear to be drafted by taking few provisions from current Valuation provisions in vogue in Excise (for e.g. concept of 'transaction value'), Service Tax (for e.g. concept of 'pure agent') and Customs (for e.g. concept of 'goods of like kind and quality').

3. Provisions relating to input credit (or debit!)

3.1 Credit available only if vendor pays and files return

GST law provides that credit of GST will be available provided, inter-alia, the vendor actually pays GST (through cash/credit) and files GST returns. This is currently not the criteria to claim credit in Excise or Service Tax legislation! Thus, this condition could become nightmarish for taxpayer (if they want to claim credit) as taxpayer will have to ensure that their vendor pays GST and files returns.

3.2 Time limit of one year for claiming credit

Time limit of one year from date of invoicing is proposed to be introduced in GST regime. This seems to be borrowed from current Excise and Service Tax legislations. The time limit of one year for claiming credit could lead to a dichotomy in cases of litigation, wherein the GST Authorities will demand tax for say three years but GST credits may get restricted to only one year!

3.3 Tax cascading to continue

It was expected that in GST regime, seamless credit will be allowed to business houses without any denial or any restriction except say goods / services which are availed for personal use than official use (something similar to United Kingdom VAT law). However, surprisingly, credits pertaining to motor vehicle, catering services, employee insurance, construction of civil structure etc. would not available.

This denial of credit will leads to substantial tax cascading in GST regime particularly in view of the fact that rate of GST is expected to be close to 18%. Thus, BPO/KPOs/IT industry can expect the tax cost to increase substantially in GST regime.

3.4 Denial of credit pertaining to private / personal consumption

GST law proposes to deny credit pertaining to private / personal consumption. Given this, another round of litigation on the issue say a lunch with clients - whether it's personal purposes or for official purposes, will crop up.

4. Determining Place of Supply could be the key

Model GST law provides that an inter-State supply of goods / services will attract IGST. Thus, it would be crucial to determine whether a transaction is an 'intra-State' or 'inter-State'.

In this regard, the draft GST law provides separate provisions, as part of Integrated GST Act (IGST), which will help the taxpayer determine the place of supply for goods and services. At the outset, it may be relevant to note that as Place of Supply provisions is part of IGST Act (than CGST/ SGST Act) there is likely to be uniformity in application of Place of Supply provisions throughout India.

The GST law provides that typically for 'goods' the place of supply would be location where the goods are delivered. Whereas for 'services' the place of supply would be location of recipient. However, this generic principle will not be applicable for specific transactions and in such cases specific rules will determine the place of supply as discussed below.

For supply of goods, specific provisions clarify what will be criteria for determining place of supply of goods, as under:

a. In case of transfer of goods by document, location of principal place of business will be relevant criteria

b. In case of installation of goods, location of installation will be relevant criteria

c. In case of supply of goods on a vessel, location where the goods are taken on board will be relevant criteria etc.

For supply of services, specific provisions clarify what will be criteria for determining place of supply of services, as under:

a) In case of supply of services in relation to immovable property, location of immovable property will be relevant criteria

b) In case of training/grooming, location of performance will be relevant criteria etc.

Thus, it appears that in GST regime, businesses will have to scroll through all the Place of supply provisions before determining the place of supply.

5. Time of supply - Challenges galore

Currently, excise duty is payable on removal whereas service tax is payable on raising of invoice or receiving of consideration. As regards VAT, its payable on delivery of goods.

In GST regime, the liability to pay CGST / SGST will arise at the time of supply as determined for goods and services. In this regard, separate provisions prescribe what will time of supply for goods and services. The provisions contemplate payment of GST at the earliest for:

a. Goods - Removal of goods or receipt of payment or issuance of invoice or date on which buyer shows receipt of goods

b. Services- Issuance of invoice or receipt of payment or date on which recipient shows receipt of services

Further, there would be separate provisions for continuous supply of goods/ services, reverse charge, sales return etc.

It can be observed that there are many parameters in determining 'time' of supply. Thus, determining the 'time' of supply will certainly pose major challenge in GST regime. Further, as GST needs to be paid at earliest of many events (such as raising of invoice, receiving of payment etc.) maintaining reconciliation between revenue as per financials and as per GST rules would also be daunting task.

Way forward:

By putting the GST law in the public domain the Government has given a much-needed push for GST in India. In days to come, the taxpayers will have to burn the midnight oil to understand the possible impact of GST law on his business and tune his business for GST regime. Now, it seems GST is an idea whose time has come!