GST - SIVAKUMAR

[GURU]

By S Sivakumar, CA
THE much awaited First GST Discussion Paper is out and is largely on
expected lines. One is however disappointed to see that the Paper does
not contain any specific proposals, which would have made it more
relevant for the Industry. Let's take a quick look at some of the
salient points covered in the Discussion Paper.
1. The Paper does not give any indication about the GST rates, the
most important issue under the GST. The least it could have attempted,
is to specify the revenue neutral rate. In a ‘hypothetical example'
given in the Paper, there is a mention of 10% CGST and 10% SGST. I
don't know if this is an indication of the likely high tax rates under
the GST regime. We will keep our fingers crossed, for the present.
2. The Paper talks of the Central Excise, Additional Central Excise,
Service tax, CVD, Special Additional Customs Duty (SAD), Surcharges
and Cesses to be subsumed within the CGST, while VAT/Sales tax,
Entertainment Tax, Luxury Tax, Taxes on lottery, betting and gambling,
states cesses and surcharges in so far as they relate to supply of
goods and services and entry tax in lieu of octroi. It now looks
certain that stamp duty would be outside of GST and so would octroi
and entry tax. This is bad news for the Realty Sector and for
purchasers of flats, etc.
3. Para 3.7 of the Paper makes a bold statement that exports would be
zero rated and that, SEZs might also get covered. The para also makes
it clear that sales from an SEZ to DTA would not get the benefit of
zero rating. It now seems clear that exporters would need to claim
refunds of the CGST and SGST from the Central and State Governments,
respectively. The world of exemptions would seem the thing of the past
now, even for SEZs. The very objective of zero rating of exports can
be achieved only under an exemption regime and the Government knows it
well. The record of refund of indirect taxes incurred on exports by
the Central Government has been pathetic, to say the least. Exporters
would now have to knock the doors of the State Government, as well,
for refund of the SGST paid on inputs and input services.
4. Para 3.8 of the Paper talks of GST on imports. The Para states that
b oth CGST and SGST will be levied on import of goods and services
into the country. The incidence of tax will follow the destination
principle and the tax revenue in case of SGST will accrue to the State
where the imported goods and services are consumed. Full and complete
set-off will be available on the GST paid on import on goods and
services. Issues could crop up in terms of complex transactions
involving, let's say, a typical transaction involving import at the
Chennai Port, imported goods passing thro' Andhra Pradesh and
reaching, let's say, Bangalore, the destination. It could be hard to
enthuse the guys in Tamil Nadu to facilitate an import transaction,
for which, Karnataka would get the tax revenue. One hopes that a set
off mechanism gets introduced to get over issues of this kind.
5. In terms of the threshold limits, the Papers indicates that the
threshold for CGST for goods may be kept at Rs 1.5 crores (which is
the current exemption limit under central excise).There is no
indication about the threshold limit for services. In terms of the
composition/compounding scheme, the Paper talks of a cut off limit of
Rs 50 lakhs and the floor rate of 0.5% across the states. This could
be an issue with the works contractors, who are currently entitled to
go under the composition scheme under the state VAT laws, irrespective
of any cut off limit. There is definitely a need to look at a
composition scheme for works contractors, on the lines of the existing
provisions in the VAT and Service Tax law.
6. The Paper talks of credit in terms of the CGST and SGST under the
respective streams, without any cross utilization being allowed. One
good thing is that, the Paper also talks of refund of accumulated
credit arising on account of mismatch in the tax rates wherein the
input tax rate is higher than the output tax rate, purchase of capital
goods, etc., apart from, on account of, exports. Refund of accumulated
credit due to a mismatch is currently allowed only in the state VAT
laws and not under the central excise and service tax laws. If the GST
is able to bring about a scheme for refund of excess input credit even
in respect of non-exporters, we should hail this as a great step
forward.
7. It is disappointing to see that the Paper makes no mention of how
works contracts would be treated under the GST. Neither is any mention
on how the Realty Sector would be treated. There have, of course, been
reports that the Government is contemplating a legislative provision
for deeming the first sale by a builder as a taxable transaction under
GST but this does not find a place in the Paper.
8. The Paper states that the IGST (‘Inter State GST') Model would be
followed for inter-state transactions, under which, the Centre would
levy IGST which would be CGST plus SGST on all inter-State
transactions of taxable goods and services. The inter-State seller
will pay IGST on value addition after adjusting available credit of
IGST, CGST, and SGST on his purchases. The Exporting State will
transfer to the Centre the credit of SGST used in payment of IGST. The
Importing dealer will claim credit of IGST while discharging his
output tax liability in his own State. The Centre will transfer to the
importing State the credit of IGST used in payment of SGST. The
relevant information is also submitted to the Central Agency which
will act as a clearing house mechanism, verify the claims and inform
the respective governments to transfer the funds. On the fact of it,
this seems to be an excellent way to go about, in respect of inter-
state transactions, though one can foresee some issues cropping up in
respect of complication transactions like sale of goods in transit, to
a dealer in a third state, etc.
9. It is disappointing to see that the Paper makes no mention on how
the carried forward / unutilized credit, both under the central laws
as well as under the VAT laws would get treated under GST. In the
absence of any mention of the intent to restrict the carried forward
input tax credit, one hopes that the Government would allow for this
unutilized credit to be carried forward under the GST regime without
any restrictions.
10. In terms of the endeavour to have common rules and procedures to
be followed in respect of both the CGST and the SGST, the Paper makes
a generic statement that such uniform procedure would be prescribed,
to the extent feasible. The Paper does not even say that there would
be common returns. There is no guarantee that we would have a near
common legislation applicable to both CGST and the SGST. This could be
bad news for the Industry as one should expect the nightmares of
handling the State Revenue Collection machinery to continue under the
GST regime.
11. As expected, the GST makes a mention that alcoholic beverages and
petroleum products will be outside of GST, while tobacco products
would come under GST. It has been expressly stated that the Central
Government could levy central excise duty on tobacco products, over
and above the GST. It is heartening to know that tobacco would
continue to be a milking cow for the Government, even under the GST.
As a non-smoker, I have no complaints.
12. The proposal to have a PAN linked taxpayer identification number
is a good move in as much as, a single number can perhaps be used for
both direct and indirect taxes, for the first time.
13. The Paper has no provisions on the procedural aspects concerned
with GST including on, assessments, movement of goods, scrutiny,
audits, etc. It does look like that the inter-state check posts could
continue under GST.
Before concluding........
++ The cost of compliance under the GST would go up significantly,
given the fact that the Paper talks of separate records to be kept for
the CGST and SGST purposes. Without a rationalization in terms of
returns, assessments, appeals, etc. in respect of the CGST and the
SGST, one should expect the compliance costs to go up significantly,
especially for services providers who are currently outside the
purview of the State Governments.
++ That there is no unanimity even in respect of the GST rates is
perhaps, proof of the fact, that a lot needs to be done, going
forward.
++ With time running out for the D-Date, it would be a Herculean task
for the Government to meet the implementation date target of April 1,
2010, despite its good intentions. If the Government is serious on
introducing GST from April 1, 2010, it would need to move much much
faster.
++ One cannot but wonder as to why the Government has not made use of
the opportunity and included specific proposals in the Discussion
Paper, which could have set the ball rolling for the GST
implementation from April 1, 2010. Is the First GST Discussion Paper
then, a damp squib?
(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)