Navigating goods and services in GST

The model GST law, which has been released, is a product of thoughtful deliberations among the policy-makers and has been endorsed by state finance ministers. The draft law tries to integrate the multidimensional taxability norms of the erstwhile laws and the varying expectations of different categories of taxpayers. The law comprises 25 chapters that provide the framework for levy and collection of Central GST (CGST), State GST (SGST) and Integrated GST (IGST), and the related provisions on registrations, tax payments, input tax credits, returns, refunds, audits, appeals, etc. The law does not provide the rates of GST, which are likely to be decided during the July meet of Empowered Committee of State Finance Ministers. At present, no tax rate schedules are annexed to the model law and the clarity on classification and rates of taxes will, thus, come in due course.

The IGST law provides the framework for taxation of interstate supplies and lays down principles for determination of place of supply for goods and services. The transition provisions provide much-needed clarity on transition of zero date credits, pending refunds, goods returns post appointed date and cases pending under litigation.

The government has taken into consideration various concerns raised over the last decade on the GST framework by states, industry and other stakeholders. The law clarifies most of the controversial aspects like taxation of intangible property, works contracts, transfer of right to use goods, job work, supply of goods on board a conveyance, supplies by government, valuation of stock transfers, etc. The controversial issue of taxation of e-commerce operators, which was a major concern for states under current VAT laws, has been put to rest by inclusion of specific clauses on collection of tax at source by such operators in relation to any supplies made through their online platforms.

The law also seeks to widen the tax base by prescribing a tax registration threshold of Rs 9 lakh (Rs 4 lakh for north-eastern states including Sikkim) and a tax payment threshold of Rs 10 lakh (Rs 5 lakh for north-eastern states including Sikkim). Though the earlier proposed threshold was Rs 25 lakh, intending to keep small dealers outside the GST net, this reduced threshold may pose challenges for small dealers. But a composition levy of 1% has been prescribed for dealers with a turnover up to Rs 50 lakh, which may offer ease in compliances for small and medium scale dealers.

On the flip side, the law raises fresh concerns. To name a few, it seeks to tax actionable claims, barters and exchange transactions, without much clarity on their valuation. It proposes to tax import of services without any consideration and irrespective of the fact whether such imports are in the course of or in furtherance of business. Schedule I to the model law also provides to treat certain transactions without consideration as a “supply”. One key clause under this schedule is “the supply of goods and/or services by a taxable person to another taxable or a non-taxable person in the course or furtherance of business.” The intention of this clause seems to tax free supplies made by a business to consumers as an established marketing strategy. If this were the case, the consumer goods industry may be significantly impacted and they may either need to absorb higher marketing costs or revamp their marketing and pricing strategies. In addition, much clarity is desired on the place of supply rules. While these rules cover most scenarios, certain important ones seem amiss from the place of supply rules for services; for example, the place of supply for online services, repair and maintenance services, agency services, etc. It would be prudent to clearly lay down principles for determining the place of supply for composite supplies like annual maintenance contracts which not only involve both goods and services but also multiple locations of delivery and consumption.

On the compliance front, the law provides for multiple filings and tight time-lines. As all filings will be electronic, much depends on the GST Network’s performance and to what extent it brings in efficiencies in terms of time and analytics for both the government and taxpayers. Penal provisions are stringent, as is always the case when laws are simplified, as non-compliance under simplified laws does not, in most cases, involve a reasonable cause. The law allows officers the powers of arrest, prosecution and imprisonment in specified cases, and it is only hoped that the government will take a lenient view in invoking these provisions in the initial days of GST implementation.

The model law clarifies the basic architecture of GST and meets the expectations of the stakeholders for the most part. This government has done a lot of hard work to build consensus and bring GST to this stage. The next step is to consider the suggestions of the trade and industry who alone can bring the operational issues of implementation to the table. It is hoped that the government would clarify grey areas and take on board the suggestions of the industry at the time of finalising the law and releasing GST Rules. The industry is looking forward to the implementation of this transformational tax reform.

R Muralidharan is senior director and Monika Arora is director, Indirect Taxes, Deloitte Haskins & Sells LLP