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GST Pinpricks

Vijay Kalia , 22 September 2017  
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GST may unleash flood of litigation on the tax brackets, classification and issues arising out of GSTIN network glitches a concern many entities face under the regime affecting the revenue these entities generate. The GST rates has four bracket 5, 12, 18, besides 0.25% on rough diamonds, 3% on gold and a different rates of cess on demerit goods. The law on GST is bound to have spat of litigations and the one that is already being litigated in Rajasthan HC, Delhi HC and Delhi HC in a legal system that is already grappling with backlog of 24 million cases. There were one lac cases of indirect appeals clogging India's judicial system even before the coming of GST at the end of March 2015 locking $23billion in potential government revenue.

Litigations to Mount:

The claim of the government that the GST system will decrease tax related disputes, is simple and a one nation one tax appears to be a misnomer in many ways. The saga of McDonald Corp. is twelve year old where to have soft serve ice cream being classified as a tax exempt product and not ice cream which attracted 16% duty and the potential for such law suits in GST regime being tried in courts of law and their palpable outcome are going to be aplenty. The huge compliance requirement and scope for central vs. state government disputes makes the tax a litigation-prone law besides the classification issues that would result in many more disputes. The government needs to come out with subordinate laws and regular administrative guidance to address such classification issues leading to fewer disputes besides providing necessary guidance to the assessing officers. Arvind Datta a noted Supreme Court lawyer says that that the present GST law is the most complex legislation in the world. It belies the claim of the government about its being a very simple tax and easy to comply! The present law is likely to escalate dispute regime on account of valuation, classifications, profiteering, margins accruing, the assessee will try to push their case to a lower tax bracket where he has legitimate scope for doing so.

Soft serve ice cream cones in McDonald's case the issue raised was if ice cream were dutiable was a also a long drawn battle between the assessee and the department where SC ultimately decided in favour of the latter that the ice cream cones must suffer duty. When there are two brackets someone will want to fall under the lower tax bracket. SC ruled that coconuts were neither dry fruit nor vegetable but an entity unto itself that must attract duty. Delhi HC recently ruled that footwear without back straps were sandals rather than slippers which the government contended. Lawyers went to the court themselves when certain category of lawyers were brought under service tax net arguing that it is against the constitution's aim to ensure justice to all. The then FM of UPA government who himself was a lawyer surprisingly said that in their case it was not a service! The government too is quite like an aggressive litigant as FM recently advises the CEBC officers to take the matters to the Supreme Court where the tax rate is disputed by the entities in high courts.

The success rate of the government appeals fell down to 26% in 2015 against 33% in 2013 as per a recent report of the government. Inspite of the federally organized GST Council, during negotiations many state governments could also legally challenge the legitimacy of the Council in courts as per the opinion of a leading firm of lawyers. The law on GST will settle down in another five to ten years said Lakshmikumaran, founder and managing partner of Lakshmikumaran & Sridharan. Judicial precedence would be there and people will adjust to it and wrinkles will be ironed out.

Compliance Burden a Big Drawback:

GST rates have been fixed as close as possible to the tax burden under old tax laws on goods and services. But the sector specific quakes are emerging in autos in respect of high end cars with unintended benefit and benefit for lower tax rate benefit denied to electric cars considering the focus of the government on environment.

Small traders, manufacturers and restaurants with annual turnover of less than Rs.75lac can sign up presumptive tax scheme and pay 1% for traders, 2% on manufacturers and 5% on restaurants tax on their turnover by opting for the composition scheme till 30th of September, 2017 avoiding the compliance burden of large businesses.The turnover of Rs.75lac is lower at Rs.50lac in nine specified states. The filing is quarterly and with bill of supply being given unlike others giving details of invoice, total turnover. It would be quite prudent to have half yearly returns as was prevalent under the service tax regime with quarterly payment of tax to provide much needed relief from compliance burden so that they can concentrate on their business in the distressful business environment. There is no logic to restrict the composition scheme to restaurants, a particular segment of the service sector. Why it is not extended to other services, is an approach that is muted. Only with the exception of certain goods, it is applicable to all others.  

Woes of Industries:

There are certain sectors like textile sector especially in Gujarat who are unhappy over 5% GST on job works given to allied sectors. There are different GST rates on yarn and fabrics a concern voiced in Telangana which will result in benefit to large integrated mills. Increased compliance burden is one of the cause of unrest in Andhra.The claim of the Revenue Secretary in many TV programme that there are only twelve returns with one annual return is far from true as you need to access the GST portal every time for uploading outward supplies made and observe the auto populated data with return filing sequencing. The claim of the tax payers that virtually there are 36 returns with another annual return is not misplaced.

The distress of the Road developers in Gujarat state who say that state-level contracts have 'no change in law' clause. The developers have to absorb any extra tax cost from GST rollout. This may be true of other class of tax payers also. Furniture makers in Delhi are also unhappy over 28% GST rates. Gujarat diamond workers demand lower than 3% GST. Fertilizer and pesticide dealers in Punjab are demanding lowering of 12% GST on fertilizers and 18% on pesticides.

The export sector is also under great change with compliance burden imposed and claiming refund, the process is going to be longer than expected. There has been a jurisdictional change in the matter of preferring bonds and undertaking. Audit trails compulsion is having its effect on this sector than the one that was prevalent in the past which is proving to be an impediment in growth of exports that is shelved for these initial months.

There is a deluge of working capital strains not only in export sector but also in other sectors as well which the government appears to be listening but not addressing for the bureaucracy's main thrust remains harped on collections and not on how does the trade meets that out, an obligation thrust upon by the tax laws even when the sales or service proceeds have not been realized by them. It is one of the great demerits of the GST law as of now. Service sector like that of professionals who have very low input credit  to ease their liability towards output tax are under strain to pay an additional three percent under the GST regime with increased compliance burden for small and medium tax payers. The GST law requires them to pay on accrual basis where they have their accounting on receipts basis is another drawback in rendering of service with many clients not honoring the bills timely and fully. The small tax payers need respite against large tax payers both in rate of tax and put their energies in filing monthly returns to help them remain competitive and achieve growth.    

It is not a simple tax as is made out by bureaucracy which is divorced from the pangs of the industry even though voiced in different forums one such being dry fruits (cashew nuts) where one category taxed at lower rate while others brought under higher rate whereas they are largely dry fruits. However, the sympathy of the tax department is not aroused easily. Such disparities are prevalent in manufacturers of confectioneries who use to blend different sweets' varieties but now suddenly stop their inventiveness due to higher taxation. The legacy of value added tax jargons and that of service tax and excise duty are found in the new set up, it is a case of old wine in a new bottle that is GST.

Pangs of RCM are discernible in host of sectors with those unregistered dealers who have to willy-nilly fall a prey to the onslaught of GST sword with manufacturers desiring them to go for registration pay tax for uninterrupted credit of ITC being enabled not going in for another window of RCM where the credit is enabled in large number of cases of reverse charge mechanism except in cases of metered cabs, tour operators and GTA. It is a very deft move of the bureaucratic coinage built into the concept of RCM where unwilling unregistered dealers too have to seek registration for the sake of their buyers of inputs of goods and services. It is a self actualization mechanism which speaks in the rigors imposed under RCM. Unregistered dealers beware as they will leave an audit trail while supplying to various registered dealers. It may not be possible for them to evade their count of supplies in the GSTN network.     

The remedy lies for so called easy and simple law in reducing the compliance burden with half yearly returns at least for the small and medium sector assessee with willingness to address the genuine woes of the trade and free them from bureaucratic administrative clichés of the law that has crept in from old legacy of classification. In Indian context where branded and unbranded goods having the same essential character remains the very same goods be it Atta or edible oil still tax is differently charged. The rationale of the government is devoid of reasonability in discriminating such cases for it is nobody's case that the poor should consume the unbranded flour or other such goods deriding them on branded ones. GSTIN network too needs to be free from glitches which have crept in due to hasty implementation by the government and the assessees have to bear the brunt of inadequacies of the setup resulting in great loss of time and unintended consequences visited upon them under the law.


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Category GST, Other Articles by - Vijay Kalia 



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