Comments of the Department of Revenue (DoR) on the First Discussion Paper on GST
Prepared by :
CA Pradeep Jain
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“GST”, commonly known as Goods and Service Tax has now become the buzz word of the industry as a whole. Any news, views or comments on this topic influences the industry at large and when the comments are from the Department of Revenue the impact is surely gigantic. Recently, the Department of Revenue has released its comments on the First Discussion Paper on GST. In this article we are attempting to highlight the key comments made by Department of Revenue alongwith the possible future prospects emerging there from.
The Various issues and their comments are as follows: -
The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States [hereinafter referred to as State GST]. This dual GST model would be implemented through multiple statutes (one for CGST and a SGST statute for every state). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. should be uniform across these statutes as far as practicable.
Comment by DoR : -
The Department of Revenue rightly agreed on the issue but also proposed that in addition to the two levies (i.e. CGST & SGST) IGST on inter-State transactions should also be levied by the Centre. Further, they commented that in case of levy of SGST on imports is concerned it should be levied and collected by the Centre and later on should pass on the same to concerned States on the basis of destination principle.
Comments by author: -
It is very good proposal. The chargeability, definition of taxable event, classification will remain the same. This will lead to uniformity between states which is totally absent earlier in current VAT regime.
Secondly, t is not possible to collect the custom duty by the states. The custom department working under Centre is doing the same. In this place, the Central government will collect the tax and pass on to the state. This is also a practical solution.
The present thresholds exemption limits prescribed in different State VAT Acts varies from State to State. A uniform State GST threshold across States is desirable and, therefore, it is recommended that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept Rs.1.5 Crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.
The Department of Revenue has commented that there should be a uniform threshold for goods and services for both SGST and CGST and it could be Rs.10 lakh or even more than that. Further, they commented that such threshold exemption limit should not be applied to dealers and service providers who undertake inter-State supplies. They recommended that the problem of dual control is better addressed through a compounding scheme as well as administrative simplification for small dealers through measures such as:
Registration by single agency for both SGST and CGST without manual interface
No physical verification of premises and no pre-deposit of security
Simplified return format
Longer frequency for return filing
Electronic Return filing through certified service centres / CAs etc.
Audit in 1-2% cases based on risk parameters
Lenient penal provisions
There may not be any need to have direct link between compensation package, if decided for, and the threshold for registration for North-Eastern and special category States.
Comments of author:-
Firstly, it is clear that the Central Government does not want to give exemption limit of Rs. 1.5 crore as currently available to industry. The Centre intends to give exemption of same limit as given by states. Even the higher service tax exemption limit for service providers is not acceptable to Centre. But by saying that they are ready to give more than Rs. 10 Lakhs if the states are also ready to give the same, they have moved the ball to the court of state. Further, the same exemption will also apply of IGST transaction. The simple registration, no physical verification and no pre-deposit, simple electronic and longer frequency return will also be welcomed by trade. But these should be implemented in its true spirit. We have seen that many declarations are given but later on the field formalities functions in their own style.
The States are also of the view that Composition / Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular there will be a compounding cut-off at Rs.50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme should also allow option for GST registration for dealers with turnover below the compounding cut-off.
The Department of Revenue has agreed on the above scheme. They also commented that the said scheme should also be applied to the CGST. They said, “Centre may also have a Composition Scheme up to gross turnover limit of Rs. 50 lakh, if threshold for registration is kept as Rs.10 lakh. The floor rate of 0.5% will be for SGST alone, in case Centre also brings a Composition Scheme for small assesses.” They also suggested that the Centre should leave the administration of Compounding Scheme, both for CGST and SGST to the States.
Comments of author:-
As the Centre is not interested to give more threshold exemption than the states, hence they intend to apply the same composition scheme for Centre also. A composition scheme upto Rs. 50 Lakhs will there which will address the problems of small players. This was porposed for SGST but the centre wants a separate and new scheme for centre. But it is not told that whether the same will passed on to the buyer and whether he will be able to get the credit of the same and set off against his CGST and SGST liability. If he is not able to do so then it will disadavantageous position for the small units.
The taxpayer would need to submit periodical returns , in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.
They recommended that in addition to above returns the taxpayers having inter-State transactions shall also be required to submit returns to related Central IGST authorities.
Keeping in mind the need of taxpayer’s convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.
The department of Revenue commented that as the tax base is to be identical for the two components, viz., CGST and SGST, it is desirable that any dispute between a taxpayer and either of the tax administrations should be settled in a uniform manner and possibly a harmonised system for scrutiny, audit and dispute settlement shall be developed for sake of taxpayers.
Comments of author:-
This is welcome step but we once again reiterate that the same should be implemented in its true spirit. The experience at grass root level is bitter for assesses.
Inter-State Transactions of goods & services: The Empowered Committee accepted the recommendations of the Working Group of concerned officials of Central and State Governments for adoption of IGST model for taxation of inter-State transaction of Goods and Services The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of 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.
The major advantages of IGST Model are:
Maintenance of uninterrupted ITC chain on inter-state transactions.
No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer.
No refund claim in exporting State, as ITC is used up while paying the tax.
Self monitoring model.
Level of computerization is limited to inter-state dealers and Central and State Governments should be able to computerize their processes expeditiously.
As all inter-state dealers will be e-registered and correspondence with them will be by e-mail, the compliance level will improve substantially.
Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.
The Department of Revenue agreed. It may however be noted that IGST model will work smoothly only when there is a common threshold for goods and services and for Centre and States. Having more than one rate either for CGST or SGST will complicate the working of IGST model.
GST Rate Structure: The Empowered Committee has decided to adopt a two-rate structure – a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For upholding of special needs of each State as well as a balanced approach to federal flexibility, and also for facilitating the introduction of GST, it is being discussed whether the exempted list under VAT regime including Goods of Local Importance may be retained in the exempted list under State GST in the initial years. It is also being discussed whether the Government of India may adopt, to begin with, a similar approach towards exempted list under the CGST.
There should be a single rate of SGST both for goods and services. A two rate structure for goods would pose the following problems:
Likelihood of inversions in duty structure with raw materials and intermediates being at a higher rate and finished goods being at a lower rate, especially as the intention is to apply the lower rate to necessities.
Inversions would result in input credit accumulation and demand for refunding the same from time to time.
The general rate (RNR) would have to be higher than under a single rate structure.
Currently, services are chargeable to tax at a single rate. Adopting a dual rate for goods would generate a similar demand for services too.
Having different rates for goods and services would imply that the distinction between goods and services should continue.
Around 99 items presently exempted under VAT may continue to remain exempted in GST regime. There should be no scope, with individual States, for expansion of this list even for goods of local importance. Efforts will be made by Centre to substantially reduce the number of items presently exempted under CENVAT regime. At the end, there must be a common list of exemptions for CGST and SGST.
Comment of author: - The Centre wants only one rate should be there for GST. Even he wants to add ahcolic products, pan malsala, gutka etc. to this list and intend to impose further duties, if necessary. But he does not want that any product should be outside the GST. Moreover, Centre is of the opinion that single rate should be there on all goods and services whether essential or otherwise. The list of exempted product or services should be separately circulated and it should also be minimum.
Conclusion:- The main dispute between Centre and state is being figured out after this comments from DoR. It is also relating to threshold exemption as well as relating to two tier rates. This also brings about that the centre does not want to give states the power to change the rates of SGST. This is good from point of view of assessee also. Otherwise, it will seem that the old system of VAT and excise is operating. But whether the states will agree to the same? Time will tell. Moreover, there is bad news for industry also. Earlier, the industry was enjoying exemption upto Rs. 1.5 crore but now the centre is not prepared to give same exemption to them. It said that it will be at par with the states. Even the service tax assessees expecting higher exemption limit are disappointed after the comments of DoR. However, simplification is good news for them.