In this article, Rittika Chowdhary pursuing M.A, in Business Law from NUJS, Kolkata discusses Implementation issues in GST.
GST – the next big thing!
We are standing at the brink of the biggest change in the taxation structure in one of the strongest economies of the world now; the whole business community is waiting with baited breath as to how this change is going to impact one and all in the times to come. Analysis of possible losses on account of higher tax rates; presentations on how the working capital requirement is going to shoot up in the coming few months!
Yes! We are talking about the much talked of, much looked forward to – Goods and Service Tax, more commonly known as GST, and its implementation in India.
GST – brief overview
Just a brief heads-up on the tax that is aimed to make way for the integrated tax structure in the Indian economy, the following is an excerpt from the “Concept Paper” published by the Government of India on Goods & Service Tax.
The salient features of GST are as under:
- GST is applicable on “supply” of goods or services. Earlier the provisions stated that tax was applicable on the manufacture of goods or on sale of goods or on provision of services; GST is based on the principle of “destination based consumption” taxation vis-a-vis the existing origin based taxation.
- GST is a dual charge, with the Centre and the States simultaneously levying it on a common base. Centre would levy Central GST (CGST) and States (including Union territories with legislature) would levy State GST (SGST). Union territories without legislature would levy Union territory GST (UTGST).
- In place of CST, Integrated GST (IGST) would be levied on inter-State supply of goods or services. IGST would be collected by the Centre. This is to ensure that the credit chain is not disrupted (Manufactureràwholesaleràretaileràconsumer)
- Import of goods would be treated as inter-State supplies and therefore, IGST will be applicable on it. Additionally applicable customs duties will also be leviable; import of services would be treated as inter-State supplies and will attract IGST.
- Some of the taxes that are currently levied by the Center which GST would replace are:
- Central Excise Duty;
- Special Additional Duty of Customs(SAD);
- Service Tax;
- All cess and surcharge;
These taxes are collected by the Centre.
- State taxes that would be subsumed within the GST are:
- State VAT;
- Central Sales Tax;
- Purchase Tax;
- Luxury Tax;
- Entry Tax (All forms);
- Entertainment Tax; Taxes on advertisements, lotteries, betting and gambling;
- Cess and surcharge that are related to supply of goods or services.
- Exports would be exempted, that is zero-rated.
- Credit of CGST paid on inputs may be used only for paying CGST on the output and the credit of SGST/UTGST paid on inputs may be used only for paying SGST/UTGST. In other words, the two streams of input tax credit (ITC) cannot be cross utilized, except in specified circumstances of inter-State supplies for payment of IGST. The credit would be permitted to be utilized in the following manner:
- ITC of CGST allowed for payment of CGST first and then IGST;
- ITC of SGST allowed for payment of SGST first and then IGST;
- ITC of UTGST allowed for payment of UTGST first and then IGST;
- ITC of IGST allowed for payment of first IGST, then CGST and then can be adjusted for SGST/UTGST.
- ITC of CGST cannot be used for payment of SGST/UTGST and vice versa.
The Input Tax Credit (ITC) will be made on a broader base; it will be made available in respect of taxes paid on any supply of goods or services or both used or intended to be used in the course or furtherance of business.
GST – what it means for the common man?
One of the benefits of GST is that there are no more hidden taxes, and a consumer is being made more aware of what all taxes he is actually bearing. Instead of just the sales tax or the service tax that he sees in the invoices that he gets in his hands for the restaurants or malls, what are the other taxes that are making way out of his pocket, without him realizing the same!
However, the more basic questions which are still cropping in the minds of common man is whether GST good for the economy; whether it is going be good for a common man? How does it affect the common man, what difference does it make for him? Why is it that everyone seems to be scared of GST? Will it lead to inflation?
“Change” is something which we try to avoid as long as possible, which is why there is a study to that effect as well, which is more popularly known as “Change Management”.
With India moving towards GST, what the entire industry is facing is effect of Change Management. We are all very comfortable and used to the idea of “Excisable Goods” / VAT / octroi; and here we have another tax to capture – a new tax to adhere to. So there are bound to be hiccoughs in the same.
Implementation issues in GST
Let us see what all are the potential implementation issues in GST. Summarizing them in no particular order:
GST is undoubtedly a revolution. A country like India which comprises of more than 30 states shall come under one tax law. However, integration of the different tax laws in one bracket is a huge challenge for the government as well. Initially several states were opposing inclusion of products via. Alcohol, tobacco etc. under GST as they may cause loss of major revenue to the State Government. Compared to the other existing provisions there is lot ambiguity in the definition and meaning of many transactional terms. Altogether new procedures are followed on all transactions on every day basis; still we have a long way to go. Government must focus on effective superseding GST with existing tax laws of d country
Lack of clarity on provisions
GST is coming up with a set of provisions which are much similar to the existing guidelines, as because the fundamentals of taxation are still the same. GST is aimed at making the “extremely complex” tax structure of India into a simplified one. So it is obvious that there will be some points which the lawmakers are unable to see from an execution point of view. Some of these are discussed below:
Tax Returns for GST
From the preliminary discussions on the tax returns, the number of returns to be submitted seemed to have grown manifold, as the provisions requires separate returns for each of the state where a assessee is registered. If one makes a unbiased judgement, then adding all the returns prepared under all the taxes prevalent in the country, the number of returns under GST seem to be same. But what is important and what is different from the older returns is the nexus that is drawn between two assessees. The tax credit which say Mr. A is claiming (as the tax charged by Mr. B), must reflect in the return of Mr. B as payable tax, in order for Mr. A to take benefit of the input credit. This requires a robust infrastructure with appropriate nomenclature for identification of invoices / vouchers is enabled (in the least), so that no credit is lost in the value chain. It also requires huge preparedness for the industry as well to adhere to the strict time lines for availing credit.
Forms related to sales tax
As per the Central Sales Tax law, for availing the concessional rates of sales tax (in case of inter-state sales), certain forms were issued by the dealers. Such forms have been done away with. It effectively means that there is no “concessional” sales tax rate now. The absolutely positive part of it is that the extra burden of this sales tax (CST was non-cenvatable), has been done away with. So at one hand, there is some breathing space, but there is always another side to the coin as well. The transitional provisions do not specifically talk about the manner in which the Forms for the pre-GST period will be dealt with.
Road permit issuance
This is a rather interesting clause, as there are states like Haryana, Maharashtra where there is no requirement of a road permit for movement of goods in those States, and then there are states like Jharkhand, Andhra Pradesh where strict guidelines for Road permits are in place. There is ample ambiguity as to how the state wise check-posts will be functioning in the absence of the road permits for states where they were earlier a necessity. An entrepreneur will actually have to be on their toes in the first few weeks, as we are in a country where there are unscrupulous characters trying to take advantage of the ignorance of the transporters on various fronts. We have seen ample number of such cases when Andhra Pradesh was split into 2 States.
IT infrastructure preparedness for implementation
Another key implementation issue could stem from the proposed technology backbone of the GST system. GST system will be the aggregate of seamless documentation, recording of debits, and dispersal of credits, in addition to the already existing IT system which is in place for the existing tax laws. The Goods and Services Tax Network (GSTN) is the information technology platform that will be used in order to record all GST-related transactions. An ambitious endeavor, the platform aims to hold up to 70 million user accounts.
For manufacturers and traders, GST requires an extremely robust accounting system where there is minimum gap between receipt of invoices and their subsequent booking. Earlier the concept of taking credit was based on the receipt of goods from the vendors; now the concept will shift drastically to “booking” of invoices. Where a seller has booked his sales invoice and made payment of the taxes on the same to the government, it is equally important for the buyer to book his purchase in order to claim the credit. The knock-off has to happen in the government records in order to have the benefit of the tax credit. It requires huge discipline on the part of the entire industry to enjoy the maximum benefit of this ambitious tax structure.
Consensus on tax rates between Centre and States
There were lots of talks of the revenue neutral tax rates which were to be decided between the Centre and the States. For all states which are high on manufacturing capacity, the revenue loss for them is going to be huge. For GST to be a success, all hands must come together to make the push.
Carry forward of Input tax credit from old regime to GST regime
The GST regime begins from 1st July 2017 at midnight. It subsumes a whole net of taxes, both cenvatable and non-cenvatable. For the stock of goods lying with the traders/manufacturers as on 30-Jun-2017, there is a Input Tax Credit of Excise Duty, Input Tax Credit of Service Tax, et al which would seemingly become cost to them overnight. In order to mitigate the loss, the lawmakers gave the option to take credit of excise duty and service tax for all possible invoices till 30-Jun-17. The result of this clause has been that manufacturers are trying to push maximum material so as to reduce their stock, and the corresponding costs. The manufacturers are taking credit for all material received till such date.
Makeshift arrangement for revenue loss for States
GST has the significant effect on the revenues of the state. Each State had the full authority to use the amount collected through local sales tax without any further sharing formula or subject to the approval from Central Government. This was a major tussle in the implementation of GST in the past. Several State Governments has restrained their support in the implementation of GST due to this fear of potential revenue loss. State Governments were demanding compensation from Center as they foresee major dent in revenue due to GST. The demand for compensation was for 5 years however nod was given Central Government only for 3 years and the debate is still ongoing.
Settlement of old taxes dispute cases
As all are aware there are several running issues with the existing tax system of the country. Issues might be the results of improper drafting of legislation, incorrect understanding and interpretation of statue or may be even the benefit of doubts due to the facts of the law. With the effect of all these several cases are running at the various levels of tribunals or courts at present. Introduction of new tax law may help in overcoming the legal issues under one legislation, however there has to be proper alignment of the existing cases with the new tax law. Accurate planning of managing and closing the existing disputes at the earliest will be required from the government authorities, in order to prevent administrative burdens and confusions.
GST provision pertaining to “taxable event”
This is a totally practical problem which users will face one the GST regime is in place, and till such time there are adequate rules and guidelines issued as to where the sales is to be declared. GST is a destination based tax. So for a user who is providing services for commissioning a plant in Visakhapatnam, even though he is registered in the state of Maharashtra, for this one service, his tax liability actually arises in the state of Andhra Pradesh, even though he has no registration in that state. Invoices are required to be booked within a fixed tenure after providing the services; in the industry, we have several instances where the customers do not act in good faith to acknowledge the services so received. This calls for direct loss to the service provider. Other instances pertaining to supply of goods has yet another implication on whether IGST is applicable for movement of goods within the same state, but just that the consignee and the buyer are different entities, and based in different states. Rules, notices on clarity for the same are required to be issued by the government for these.
Shortening of the list of exempted goods & services
Since the objective of GST is to reduce the complexity of the plethora of taxes and the exemptions thereupon, and also to increase the tax net, several of thebenefits/concessionss that were available to assessees in the older tax regime have been done away with, or so to say. The list of exempted goods and services has been left to bare minimum, thereby taxing almost everything. Furthermore, the limits for mandatory registration for assessee has been lowered from the old tax schemes, thereby increasing the base on which tax will now be applicable.
Increase in Working capital requirement
GST comes with a rate which is seemingly on the higher side. Earlier excise duty was chargeable on manufacture of goods, but was paid when goods moved from the manufacturer premise. There was a timing gap nonetheless. Now even stock transfer is taxable. Nothing goes out from the GST net. One potential issue that could arise as a result of the administrative shift is the non-payment of taxes by the supplier. In that case, the buyer will end up having to pay for not only her share of the tax, but also for the supplier’s share of the tax under the proposed tax code. Further, problems could arise, if for some reason there are inconsistencies found in the supplier’s documentation at some later stage. Under this scenario, the buyer will be forced to pay back the tax reimbursement to the government with interest. This problem is usually fixed by market forces, however, as any non-compliant suppliers will soon find themselves losing customers as a result of their negligence. The government has also put in place a mechanism to help with the issue, by providing a publicly available compliance rating system which will allow consumers to pinpoint defaulters as the system starts to take effect over the coming years.
GST is being sold as a concept that aims to bring down costs for the consumer. How this benefit is to be passed, is something which has not been adequately addressed in the legislation so far. The clause included in the GST legislation requires that businesses pass any benefits from the change in tax systems to the end consumer; but it does not provide any mechanism for the monitoring of anti-profiteering activity. There is no way to capture the savings made by the user. As has been suggested by the authorities, the clause, and any subsequent investigation, will instead be triggered by “credible complaints”. How does one really ensure the credibility of the complains?! In a way, this is like giving the tax officials a free hand regarding what is savings and what is not! This kind of situation will give rise to yet another plethora of court cases in front of the various appellate authorities and like.
GST – blessing or not
The GST Scorecard will be out shortly. But for the real result of whether GST is actually the tax which unifies India under one tax head will be evidenced in the coming days.
GST is a much-needed tax reform, and if implemented correctly, can do wonders for India’s economy. Not just that it will eliminate double taxation and lower the product prices, GST will also assimilate the informal sector into the greater Indian economy and provide a much needed boost for India’s flagging export market. Yet there are implementation issues that could be problematic for India’s small businesses and, perhaps more importantly, undermine public trust in GST.
The documentation requirements and their subsequent effects on cash flow and small businesses are difficult to sort out. It is something that one has to live with, given the fact that GST is but the future of the indirect taxes of India.
The GST is an ambitious plan, and government has set similarly formidable benchmarks for its implementation. If not implemented correctly, this version of the GST can have adverse-negative affect the Indian economy for years to come.
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