‘Model GST Law Needs To Be Critiqued Wisely’

GST action has gained ground in the last few weeks of June 2016 with the Empowered Committee of State Finance Ministers convening for a two-day meeting after some hiatus. There is also renewed confidence displayed by the government for passage of Constitution Amendment Bill in monsoon session of Parliament. All these developments augur well for GST implementation in April 2017.

Another key milestone was release of the Model GST Law by Ministry of Finance on 14 June 2016. This is a significant development and provides for the first time to industry a ringside view of proposed GST framework.

The Model GST Law is a 190-page document and first question that comes to mind is how complex will this new GST be for industry to interpret and comply. The law is a mixture of legacy mindset with a few new concepts which was as expected.

We all know the proposed GST framework with our federal structure will be complicated. All supplies for goods and services under GST will suffer the Central GST (CGST), State GST (SGST) for intra-state transactions and the Integrated GST (IGST) for inter-state transactions. We believe the 1 per cent origin tax proposed on inter-state transactions of goods (including branch transfers) which is non-creditable will hopefully not see the light of the day. This therefore entails tracking of three GST labels, multiple registrations, dual administration and multiple assessments. So there is work cut out for the industry on tax compliance, ERP framework changes, processes, etc.

The serious compliance burden that services sector will have to confront is the problem of multiple state registrations for SGST under the proposed Model GST Law. This would be critical for sectors like Telecom, Financial Services and others that today only deal with a Central Service tax and may have just a centralised registration. These industry forums have had several interactions with the government on this subject but the solution for a centralised registration concept has eluded them so far.

Tricky Situation
While the states have the right to revenues on these sectors, it’s worthwhile to consider some options wherein a centralised registration concept using the existing LTU structure can be explored with state registration at the principle place of business of these sectors. One can then explore all other transactions as inter-state transactions under IGST and revenues be allocated to destination states basis place of supply rules through the envisaged clearing mechanism. These solutions may not be easy but worth exploring. One needs to understand that ease of doing business under GST is equally paramount.

Another concept that emerges from the Model GST Law is ‘transaction value’ versus the current maximum retail price valuation under excise which is prevalent in several sectors. This will create its own challenges and can be prone to interpretation and litigation as the clock turns back. Also the fact that supplies without consideration from one taxable person to another taxable person, i.e two registrations even within the same company will be subject to GST for all supplies of goods and services will add another dimension to the valuation discussions. Therefore branch transfers between two registrations will attract GST and valuation of such transfers will be a discussion point both for goods and services though the embedded GST will be pass through. These are new concepts that industry has to grapple with and will require robust documentation, processes and IT framework to comply going forward. It’s therefore important that law makers treat these valuation issues especially within company transactions in a way that valuation does not become onerous and litigative.

Doubts Over Online Trade
The emerging area of digital e-commerce has found a special chapter in the Model GST Law. While this is welcome and recognises the importance of this channel, what is worrying is the doubt with which authorities are dealing with this sector. The service aggregators in an electronic platform providing services under their brand name are liable to pay tax under the Model Law, while the electronic commerce operator facilitating supply of goods and services on their digital platform (marketplace models) will have to collect an amount of tax before paying their vendors and deposit with the government. This tax collected and deposited by the electronic commerce operator will be available as credit to the vendor with respect to his tax liability.

Fundamentally, the idea is to establish trail of the transactions, but this has met with mixed reactions from the industry. Further, for vendors operating under such market places there would be no threshold for registrations so they would have to be mandatorily registered under GST.

GST’s main objective is to provide an efficient indirect tax regime that removes the significant tax cascading that the current Central and State regimes have. So the credit provisions under the law becomes critical. Perusal of ‘input tax’ and ‘input tax credit’ definition and attendant credit provisions suggests that the intention is to broad-base the credit mechanism so that there is minimal cascading. This is welcome and hope this intention carries through in the final law.

Transition provisions are another critical area and what it states is that credits of taxes and duties available in current laws will be allowed to carry forward and that they should also be available in the future GST laws. The industry will therefore have to closely watch the duty/tax paid inventory both of inputs and finished goods during the transition to avoid costs.

It’s important we use this window of next few weeks wisely to understand the nuances of the Model GST Law and critique it appropriately and engage with the government to ensure we have a law that provides certainty, ease of compliance and meets the objective of providing an efficient tax regime that removes cascading and creates a common market.