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Lots of talks going on GST implementation by 1st April,2016 as promised by our Hon'ble Finance minister Shri Arun Jaitley. With the hope of passage of GST bill in monsoon session of Parliament, it was completely a washout as discussion on GST bill could not be taken up, thanks to the opposition party Congress for raising innumerous number of irrelevant issues causing delay. Looking at the on-going protests in the parliament, I fails to see the sunlight of implementation of GST by 1st April'2016. In one of the interview Shri Arun Jaitley quoted "If GST bill get delayed in this session and its legislation get delayed, the responsibility will be squarely on the Congress party which is refusing to advice itself adequately."

The Select Committee has issued a report on 122nd Constitutional Bill, but didn't bring out much debate or heat as was expected when the bill was forwarded to them. Lets us take a glance of few of the issues taken up in the report as well as pointed out by different section of industries.

Issues -

1. RNR rates -

Revenue neutral rates (RNR) in lay terms, is the rate that allows the Centre and State to sustain the current revenues from tax collection and, therefore, takes within ambit, amongst others, any tax losses because of tax subsumed, grant of input tax credits as well as sharing of tax base i.e. taxation of goods and services. RNR rates is linked to the tax base i.e. number of items within the GST. With erosion of tax base, it would eventually lead to the higher tax rate. Initially it was reported that the RNR rates would come upto 27% which would end up in higher inflation and loss of consumer confidence upon the biggest tax reforms. However Mr. Arun Jatley in the Lok sabha conceded the rate to be around 20 to 23 percent considering 27% to be much higher.

In the select committee reports, dissenters has recommended the ceiling of 18%. But however, it is to bring to your light till date no exhaustive study has been done to come up with the RNR rate. It is purely pragmatic considering the rate adopted by other countries while implementing the GST/VAT regime. In most of the countries the GST rate floats around 16% - 20%.

One more thing is to keep in mind, as GST will done away with multiplicity of taxes, it would eventually help to reduce both visible and invisible cost incurred by the investor for maintaining the compliances of various law. Further the Government administrative cost would also be reduced because of the single GSTN network.

2. One percent additional tax on interstate supply of goods -

It was proposed to levy additional 1% tax on all inter-state supply of goods and services in addition to GST rates for a period not exceeding 2 years or such further periods as recommended by the council. This Additional Tax on supply of goods shall be assigned to the States from where such supplies originate and no input credit would be available. It is completely against the spirit of the GST regime. When we talk about GST two points immediately come to our mind - (a) single tax rate (b) no cascading effect.

As input credit of this 1% additional tax cannot be claim, it would eventually lead to distortion. Suppose the goods travelled to 3 different states from manufacturer to dealer to wholesaler to retailer. It would add up 3% additional tax for which no input credit is available which ultimately add up to the cost leading higher inflation.

In the select committee report, committee has recommended to add an explanation to clause 18 that word "supply" would means - Supply: "All forms of supply made for a consideration". It would bring relieve in case of stock transfer as no additional 1% tax would be levied since no consideration received for stock transfer.

But, dissenters recommended to done away with 1% additional tax as it would lead to market distortion in view of the fact that Central Government proposed 100% compensation for first 5 years to State that might loss revenues.

3. Exclusion of alcohol from GST ambit -

It was proposed in the 122nd Constitutional bill to keep the alcoholic liquor for human consumption outside the ambit of GST. The Finance minister defined GST in the bill as "any tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption." It is to be noted that only alcohol or human consumption is outside the GST ambit. All other forms of alcohol like alcohol for industrial use or medical and toilet preparation have been included in the GST.

But the question arises what's the need to keep the said alcohol outside the ambit. Considering one of the main purpose of GST i.e. to prevent cascading effect, in order to

keep intact the input credit chain it should be brought under the GST regime like other demerit goods i.e. tobacco and cigarettes. In case of demerit goods i.e. tobacco and cigarettes it was proposed to levy state excise duty in addition to GST rate, the same analogy can be applied in case of alcohol also. The advantage would be (a) there would be no infringement of input credit chain (b) tax base would be widened. It is to be noted that the same principles have been applied by other EU countries on demerit goods in order to cover up the difference between GST/VAT rate and prevalent rate.

4. Bandwidth rate for SGST -

In the 122nd Constitutional Bill, the State Government has been given power to vary the SGST rate within a band. Although these steps has been taken in order to win the state confidence but taking a glance of the GST regime with each State with different SGST rate doesn't goes well with the industry demand for a single national market with a objective of uniform tax regime.

Dispersal in rates across various States compromises the objective of single common market. The matter becomes more adverse in case bandwidth has been permitted in case of services also. As service being intangible, it's difficult to identify its consumption place.

5. Article 366(29A) deemed sale -

We all know that composite contracts have went into several litigation from the date it was introduced in the Finance Act and it still going through a nebulous phase. It would be worth noted that in 2011 when 115th Constitutional bill was introduced, it was proposed to delete the entry related to works contract in Article 366(29A). Interestingly, no such deletion was proposed in 122nd Constitutional Bill,2015. This throws up many questions especially because the concept of ‘sale’ would be done away with under GST while this Article deals with the taxation of ‘deemed sales’. Therefore, there is ambiguity as to whether the concept of ‘deemed sale’ and consequently ‘works contract’ would survive or retention of Article 366 (29A) is only an unintended omission by the law makers. Impact of shift in taxation from sale or rendering of service, to supply will need to go through the test of time.

6. Definition of Service -

The constitutional bill vide insertion of clause 26A in Article 366 define "services" as under -

"Services means anything other than goods".

The definition provided above have been left for the interpretation of the same to the assessee as it covers a very wide boundaries which would nothing but ultimately lead to the litigation. Lets us take paradigm of a real estate industry -

As per section 2(7) of the sale of goods act, "goods" means "Every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of land which are agreed to severed before sale or under the contract of sale. In shorts it does include immovable goods.

Under the Finance Act, in case of construction service of a building, once the completion certificate has been issued by the local authority, the property becomes immovable and no service tax ad VAT is being charged on it. Now if we interpret the definition of service inserted in clause 26A, "Service" means anything other than movable goods i.e. immovable goods covers under the ambit of "service", thus making liable under GST.


It cannot be concluded that dual structure GST brought up is a perfect one. As lot of issues are still needs to be refine before implementation. But looking at the on-going protests certain compromises becomes pertinent in order to clear the bill. But it always a hope of array with enduring process of implementation, corrective measures would be adopted in order to make more beneficial for the Indian economy. It's high time to move forward with the imperfect GST. I would like to conclude by quoting "Imperfection are not inadequacies, they are reminders to make more effort".

- By CA Harsh Gadodia
(Email - harshgadodia12@gmail.com)


Published by

Harsh Gadodia
(indirect Tax Consultant)
Category GST   Report

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