Union Government has finally unveiled the Model Goods and Service Tax Law (MGL) for comments from Public and interested parties on 14th of June, 2016. It is single most important tax reform since 1947 and has been subject to so many restraints and hesitation from state governments over the loss of power to levy and collect indirect taxes and also the concerns over the loss of tax revenue for the state.
Amidst so much politics, GST bill has finally become law by the assent of President of India. Government is moving at jet speed to roll out GST by April’ 2017, however there are various problematic areas which will make the road of GST difficult for the assessees to ride upon. In this article, some of the problems have been summarized as under:
Tax on interstate branch transfers of goods/services
Presently traders/service providers who are assessable under State VAT Act or Finance Act, 1994 are not liable to pay respective taxes on interstate branch transfers of goods/services.
However, now the Draft MGL, has proposed to tax such interstate branch transfers of goods/services. Section 4 of Daft IGST Act, 2016 is the charging section for levying GST on all interstate transfer of goods/services which provides as follows:
Section 4 of Daft IGST Act, 2016
“(1) There shall be levied a tax called the Integrated Goods and Services Tax on all supplies of goods and/or services made in the course of inter-State trade or commerce at the rate specified in the Schedule to this Act and collected in such manner as may be prescribed.”
The aforesaid section has made it clear that GST shall be leviable on all interstate supplies of goods/services irrespective of the fact that supplier and purchaser are same person. Tax on interstate branch transfers of goods/services by same assessee will have adverse impact on the assessee as the large amount of funds will be blocked in taxes due to time gap in sale of goods/services from destination state.
This provision will also create a new problem for service providers who have branches in various states as the services provided by one branch to other branches/HQ or by HQ to branches will also be brought under the GST net which is not chargeable to tax in present Service tax laws. They will have to quantify the value of service and pay GST on such services and also it might lead to litigation as to how the valuation of service is to be done by respective state GST officers.
Purchasing Dealer can avail Input credit only if selling dealer has paid GST
In the current regime of taxation, the service recipient or purchaser of goods is not under obligation to ensure that the seller or service provider has discharged their tax liability so as to enable the recipient to avail Input Credit. However, now in the proposed GST Bill, legislature has casted an additional obligation on the recipient to ensure that the seller has discharged its tax liability. If seller makes default in payment of its dues, then the recipient of goods and services shall not be entitle to avail input credit.
This draconian provision will lead to harassment of the assessees as it is not possible for buying dealer to determine whether the selling dealer has paid taxes on the supply of goods/services or not. It is against the principle of natural justice to punish someone for the default of other. Government should instead propose to impose heavy penalties on the defaulting dealers rather than imposing such harsh restrictions on honest taxpayers. Service Tax Assessees will have to take registration in all the states of operation
Presently service tax assessees having offices in various states have the option to take centralized registration at the premise where either the centralized books of accounts are maintained or centralized accounting is carried out. However, in the proposed GST regime, there is no such provision and service providers having offices at multiple locations shall have to take registration in every state.
It will not only lead to additional compliance cost but also it will have negative impact on the working capital of the assessee as now the amount available as input credit in one state shall not be adjusted against the output SGST of other state. They will be more prone to litigation as presently they are subject to only one jurisdictional commissionerate, but now they shall be subject to all state jurisdictions in which they are registered.
Concept of TDS and TCS - More the Compliances More the Difficulties
Tax Deduction at Source is not a new concept in Indirect Taxes, but it was limited to state VAT laws only. Further the concept of TCS is introduced for the first time in the indirect taxes. Now, since various taxes are proposed to be subsumed in the GST, the scope of TDS and TCS provisions has been substantially extended. The assessee has to incur heavy cost on compliance with TDS and TCS provisions.
TDS and TCS provisions are already present in Direct Taxes and it is a common area of litigation due to disallowance of benefit of TDS or TCS where the deductor/failed to deposit the same with the department or there is mismatch in filing TDS or TCS details in their returns, leading thereby losses to the deductee. If the same situation arises, it might endanger the existence of a business of the deductee.
Various returns for a particular tax period
Generally all the indirect tax statutes prescribe one single return for a particular tax period, however in the proposed GST regime, various returns viz., return for inward supplies, return for outward supplies, one complete return with details of inward supplies, outward supplies, input tax credit etc have been prescribed and with different due dates.
It will create an additional burden on the small dealers who will now have to hire professional consultant for all the additional compliances as all the returns have different due dates. Any delay in filing any one return will attract penalties on the dealer, therefore they have to be compliant with the provisions of GST
No provision for Change in rate of tax in case of supply of goods
In the current regime of indirect taxation, the manufacturer or dealer is liable to tax on manufacturing or sale of goods as the case maybe. There is no provision for taxation on advances received before the manufacture/sale of goods. However in the draft MGL, it has been proposed to levy GST on the advances received by the supplier against manufacture/sale of goods.
However, the draft MGL did not provide for the situation where there is a change in rate of tax between the date of receipt of advance and the date of invoice towards supply of goods. This situation will become more complex when the supplier will be in receipt of part payment as advance and part payment after delivery of goods. Draft MGL failed to provide clear statutory provision as to which rate of tax shall be applicable in such case.
No time limit prescribed for issue of Show cause notice
Presently every indirect tax law provides for last date of issuance of notice for assessment. However they does not provide any last date for issuance of assessment order due to which huge sum of revenue remains blocked in litigation.
In the draft MGL, government has prescribed the last date of issuance of order without providing for the period within which a show cause notice can be issued. It might help the department for speedy recovery of revenue but it will also put pressure on department as they will be keen to issue order in hastily manner in time barred cases without giving proper opportunity to assessee to represent its case thereby dragging it in unnecessary litigation.
GST under reverse charge on Personal use services
This is one of the major issue in MGL as currently final consumers are not liable to pay any indirect tax under Reverse Charge Mechanism, but in the draft MGL it has been prescribed that any person receiving specified services for personal use of value exceeding specified limit shall be liable to pay GST under reverse charge.
It will put burden on general public who avails specified services for personal use and they shall be brought under the net of GST. They have to take registration with the department, file timely returns, pay taxes etc.
Agricultural produce by companies liable to GST
Presently agricultural activities are exempted from indirect tax levy whether carried out by any individual, partnership of company. Such activities are outside the purview of indirect tax levy.
In the Draft MGL, it has been proposed to keep agriculturist out of the purview of GST and the term “agriculturist” has been defined as a person who cultivates land personally. The impact of this definition shall be that the companies/partnership firms who are farming agricultural produce shall be brought under the GST net.
It was never the intent of legislature to tax agricultural activities, therefore it was kept outside the purview of all indirect tax levies. Therefore, this clause needs major amendment as if this clause is implemented as it is, corporates engaged in the agriculture sector will come under GST.
No Input Credit to Real Estate Sector
The draft MGL has proposed that there will not be any credit available either to a contractor or the developer involved in construction of immovable property, meaning thereby any GST paid by them on procurement of goods/services shall not be adjusted against the output GST on supply of its services. It is against the intent of legislature to allow seamless flow of credit, therefore, the correction in this regard is expected in the Final GST Act.
Date of deposit shall be actual date of credit in government accounts
In the present structure of taxation, the date of deposit of cheque in bank or date of NEFT transaction is considered as the date of payment of tax irrespective of actual date of credit in the government accounts.
Whereas, draft MGL has proposed that the date of payment of tax shall be the date of credit of amount in the government account. If there is any delay in crediting the government accounts, such payment shall be considered as late payment. GST assessee will have to bear interest if they have made the payment of GST within due time limit but the same is not credited to the government accounts within the due date.
It is true that GST is biggest reform in Indian taxation history and it will boost the GDP of the country by 1-2%, but if GST is implemented in its current form, it will bring nightmares to the assessee. Successful transition to GST will be the biggest issue to the industry, so it’s high time for industry to roll up their sleeves for applying provisions of GST in their organization.
The author can also be reached at firstname.lastname@example.org.
Disclaimer: The views in this article are author's point of view. This article is not intended to substitute the legal advice. No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used, without the express written approval of the author. The Copyright of the article is with the author.