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GST Bills - A Bundle of Pain & Relief, both!

TIOL - COB( WEB) - 547
MARCH 30, 2017

By Shailendra Kumar, Founder Editor

QUITE predictably, the Lok Sabha passed all the Four GST Bills with a thumping majority. Certain provisions of the CGST, the IGST and the Compensation to States Bill did provoke some heated debate but the common thread of concern running through the feeble-voiced Opposition parties was the slicing away of the power of the legislature in the overall legal framework of the proposed indirect tax regime. Although the Union Finance Minister, Mr Arun Jaitley, did deftly articulate the harmonious reading of Articles 265 and 246A and prevailed over the Congress leader, Mr Veerappa Moily but there was ample merit in his concern with respect to erosion of sovereign power of the Parliament.

Notwithstanding the fact that the plenary power to pass the legislation remains with the Parliament but the condition precedent to do so is to act upon the recommendation of the GST Council which was rightly described by Mr Jaitley as a new experiment to put in place a truly First Federal Institution in India. Going by the 101 Constitution Amendment Act, the fact that the GST Council is a creature created by the Parliament itself, the Members of the House should not really feel threatened by it or shed tears over the loss of sovereignty. It is indeed a bold experiment but there was no other Constitutional way out if the GST was to be introduced in India.

As per the existing scheme of the Constitutional framework, the Parliament has no other option but to depend on the recommendations of the GST Council for making any change in the GST rates brought before it. If the Parliament disagrees with the recommendations of the Council and votes in favour of certain alterations, the Union Government has no choice but to go back to the Council for fresh recommendation. In such a scenario the only two things which may happen are - 1) The Council may disagree with the views of the Parliament and may stick to its recommendations. Then the Parliament may refuse to pass the legislation or alterations in the Bills and a stand-off may continue. 2) The bills may move back and forth till the time the Council and the Parliament comes to a common ground where the bills could be passed. In this background, Mr Jaitley rightly urged the Members of the House to back this new experiment and see how it works as a permanent body which has been mandated to introduce this new and bold fiscal framework in the country,

Let's now move to the content of the four Bills. Immediately after the Bills were made public, the exclusion of Jammu & Kashmir triggered a new wave of concern among the experts and the trade & industry. However, the same was nicely explained by Mr Jaitley in the House yesterday. Even if he would not have explained it, a quick glance at the Compensation Bill made it clear that the Jammu & Kashmir was a part of the larger reform agenda but since it has its own Constitution it is constitutionally mandated to pass its own bill and then join the GST bandwagon. It is expected to do it in the next two months and a harmonious amendment would be done in the GST Bills, not through the Parliamentary route but by a Notification as stated by Mr Jaitley.

Sometime back in December I had raised the issue of related party complication (Employer-Employee Services: GST Model Law really intends to tax Diwali & Christmas Gifts?). I am indeed happy that this concern has been partly addressed by the GST Bill by amending the scope of a taxable event i.e SUPPLY. The earlier version of the law had taken the employer-employee relations under the sweep of related parties. Thus, even if any supply of service (like Diwali Gift) was for no consideration it was a taxable event. The Bill now proposes to grant exemption to such gifts up to a limit of Rs 50,000. But why such a low threshold? I guess the law makers believe that if a corporate can spend Rs five lakhs on gifts it might as well afford to pay another Rs 50K or 60K for the welfare of the Exchequer!

Another area of my concern was the inclusion of Actionable Claims in the definition of Goods. This was indeed a sweeping decision as there are all kinds of actionable claims including Mehr (alimony) which a Muslim husband is liable to pay his wife in case of Divorce or death. But, was it really the intention of the GST Council to tax such claims? Certainly not, and it has been made clear that apart from certain items like lottery, betting and gambling, others are out of the purview of chargeability of GST.

Thankfully, the Composition Scheme has brought some smile on the face of MSMEs. The tax rate for manufacturer has been lowered to 1% and 0.5% for the traders. From the services sector, Restaurants have been given relief with 2.5% tax rate. May be in future, based on the feedback, the GST Council may include more from this sector as the GST system matures. To reduce the interface with the taxman, the requirement of seeking permission has been done away with. Based on the previous year turnover, one may opt for this scheme.

Borrowing a few principles from the Income Tax Act, the concept of TDS has been introduced in the Bill. Initially, the provisions of TDS would be confined only to the Government Departments and Agencies. All supplies made to Government agencies would be subjected to TDS @ 1%. Given the fact that the Government accounts for almost 35% of total procurement of goods and services annually, this would be a good instrument to not only mop up revenue but also spread the wings of tax net to tax evaders. Some of the supplies which would bear the initial pain are the Defence, Railways, power and civil supplies. The internal analysis of the Government is that there has been massive tax evasion by suppliers who used to split their supplies from different entities to avoid paying taxes. Now, the GST agencies would have reliable data to study and identify such suppliers if they continue to be outside the GST network. This would indeed help widen the tax net.

The last minute decision to allow input tax credit on services like health insurance, life insurance and rent-a-cab is certainly welcome. In the extant service tax regime, disallowing credit on such services was based on a different shade of fiscal philosophy. Under the GST regime, the basic premise should not be damaged by artificially limiting the availment of ITC. Similarly, the confusion over the levy of GST on renting of immovable property has been cleared. I guess when the Rules are notified, the renting of residential property would be taken outside the ambit of GST.

In the background of all these positive changes, the only negative facet which I find in the Bill is the tough future that millions of unregistered dealers are going to face in this new system. Given the fact that India is a country of largely unregistered dealers who are small and tiny in size and turnover, they would be ill-treated by this new system. But it was indeed known to us even before the discussions over the legislations commenced. The GST is largely a system which brings small suppliers under its sweep by holding their collars.

The GST Bill has proposed to bring them under the Reverse Charge regime. Any purchase of goods from an unregistered supplier will put liability to pay GST on the buyers of their goods i.e large corporates. And they will be paying tax on the reverse charge basis. This would basically mean that a good number of manufacturers of goods or service providers would shy away from procuring goods or services from small suppliers. And the real victim would be the socio-economic equity which must be ensured by the law makers. But the GST is notorious on this count as it fails to do positive discrimination. The design of the GST System is such that it encourages or favours only those suppliers who are within its 'cosy' arms.

Moving away from the Bills, tomorrow is going to be yet another important day for the GST as the Council is expected to approve the detailed Rules for the Business Processes and the same may be put in the public domain for final feedback. After the GST Bills are passed by the Parliament the GST Council would be meeting again and more Rules would be approved in the month of April. Apart from the GST, the Govt would also be tabling the Taxation Amendment Bill in the Lok Sabha today so that the provisions of Customs Act and Central Excise Act could be harmonised with the provisions of GST. Let's look forward to a smooth roll-out of the historic GST.

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Sub: GST on reverse charge basis for procurement of goods or service from unregistered persons

The provision contained in Clause 9(4) of CGST Bill, 2017, which provides for payment of Goods and Services Tax on reverse charge basis by registered person in respect of procurement of goods / service from unregistered person may increase compliance costs for the registered person as they will have to keep track of even small procurements of goods / services, will have to first pay GST on reverse charge basis on such procurements and then to avail Input Tax Credit of such GST paid. Failure to pay such tax on reverse charge basis may lead to litigation.

The Value Added Tax, by its very nature, makes provision for payment of tax by registered person in respect of goods / services procured from unregistered persons.

For example, If a registered person purchases goods of assessable value of Rs. 100/- involving GST of Rs. 18/- on it from a registered person, and sells the said goods for Rs. 150/- attracting GST of Rs. 27/-, he can pay Rs. 18/- from Input Tax Credit Account and balance Rs. 9/- in cash through Challan.

On the other hand, if the same registered person purchases goods of Rs. 100/- from unregistered person and sells the said goods for Rs. 150/- attracting GST of Rs. 27/-, he would be required to pay this entire amount of Rs. 27/- in cash through Challan. In either case, total tax of Rs. 27/- is paid in cash to the Government Account.

Thus, it appears that the object of levying tax on procurement of goods / services from unregistered persons is inbuilt in GST scheme even without Clause 9(4) of CGST Bill, 2017, and the procedure contained in the said clause will only increase compliance costs of the registered persons.

(The views expressed herein above are personal)

Posted by Rameshchandra Kabra