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GST has been talk of the town since a decade now. However, there have been some concerted efforts from last couple of months to make it a conscious reality. Various deliberations have been made to work out the modalities of GST structure, its supposed modus operandi which should be simple, transparent, efficient, comprehensive and practicable.

Through this piece, it has been attempted to throw light on key fundamental challenges ahead in enacting GST which needs to be addressed diligently so as to enable GST becoming a successful, simplified and sustainable socio-economic reform.

At present, domestic indirect tax legislation revolves around three taxes;

i. Excise Duty, leviable on manufacture of goods (Central levy)

ii. Service Tax, leviable on provision of service (Central levy)

iii. VAT, leviable on sale of goods (State levy)

GST will be a comprehensive structure comprising goods and services wherein taxable event shall be 'supply of goods and services' subsuming aforesaid tax levies alongwith other miscellaneous taxes viz. luxury tax, entry tax, entertainment tax, purchase tax, taxes on lottery, betting and gambling etc. Being India a Country which runs on policy of cooperative federalism, dual-model GST has been proposed wherein CGST shall be levied by Central Government and SGST to be levied by State Government.

Major Indispensables:

+++Determination of Place of Supply of Service

At present Service tax is central subject wherein service tax is levied uniformly all over India (except J & K) on provision of taxable service and exports are exempted. Place of Supply of Service Rules, 2012 determines whether service is being provided in India (in any State) or outside India. Hence, only with newly perceived GST reform, for the first time service tax will become a state subject wherein CGST shall be levied by Central Government and SGST shall be levied by State Government (constitutional power being provided by Constitutional Amendment Bill).

There is no rocket science to assess that Service being an intangible activity and with e-commerce and Internet of Things, the new game of the dawn, services are being provided on virtual platforms. There may be a situation where service provider registered in Rajasthan, service being provided in Uttar Pradesh, and service being received in Harayana. There are various services viz. Telecom services, transportation service, advertising service, travel agent, Information technology service etc. where it may not be possible to exactly identify the place of provision of service, consequently the charging state and relevant rate of tax. In present regime, we are only concerned to determine whether place of supply of service is within territory of India or outside India to arrive at its taxability. In proposed GST regime, we are supposed to take care of place of provision at each and every state. It shall increase unnecessary compliance and litigation for companies operating across India and companies providing online services and other such services.

In order to ensure that post-introduction of GST the industry does not get logged onto unnecessary litigation and confusion, a robust, unambiguous and hassle-free framework is required to define the place of supply of service, determination of origin state and consuming state, person liable to pay tax, address this challenge taking into confidence all stakeholders at large.

+++Uniformity and Equity

At present VAT structures across the states lacks uniformity, which is not restricted only to rates of tax, but also extends to interpretations, procedures, exemptions, computation etc.

In true sense, GST will benefit industry in effecting seamless and hassle-free trade across country if intent of broad uniformity in respect of rates, credit chain, exemptions, administrative machinery is maintained in long term barring few exceptions where social or administrative differences between states doesn't allow. It is most important atleast in service sector for uniform rates across country as services are easily accessible from anywhere.

+++Tax on electricity

The power to levy tax on the consumption or sale of electricity vests with the State Governments. Though electricity is 'good', sales tax is not imposed on sale of electricity in India. Therefore, it is tax-free goods.

The noteworthy advantage available to the Power Companies is that they can purchase goods for generation and distribution of electricity from other States at a concessional rate of tax (CST) of 2%.

With the abolition of CST Act and inability of these companies to purchase at concessional rate, this sector will certainly be adversely affected, unless sale of electricity is brought within the scope of GST and set-off of input tax credit is allowed for tax paid on purchases.

+++Stock Transfer- whether taxable under GST?

At present VAT is levied on sale of goods. Hence, stock transfer is not taxable being not sale of goods. However, in GST, taxable event is supply of goods or service. Apparently it suggests that since stock transfer is also a mere supply it may come within the purview of GST in case of intra-state transfers and IGST in case of inter-state transfers. Although, this will ensure seamless credit chain but may entail unnecessary burden on assessee operating in more than one states. In that case it is desirable to frame a broad consensus on such transaction and if leviable to GST, then separate valuation rules.

+++Whether GST will reduce cost of service

The biggest advantage of GST is removal of cascading effect of taxes and complete credit chain mechanism from manufactures to retailers. This will certainly reduce the cost of taxes on goods. However, whether GST will render the cost of services cheaper or dearer as against present regime? At present Service tax is applicable at basic rate of 12% (+ 2% proposed in a move towards GST). In proposed GST model, supply of everything whether goods or services will be taxable at consolidated GST (SGST + CGST), the combined rate may range between 16%-20%. Hence, cost of service will only be going to increase and this can be seen as legislative intent to increase tax share in service sector via-a-vis share of service sector in GDP so as to bring parity between goods and services. The service industry should devise strategies and business plans taking into consideration the impact of increasing cost of service.

+++Cross Set-off between CGST and SGST not allowed

As per GST model proposed by Government, CGST and SGST will operate as separate tax and will be having a separate credit chain. That is, cross set-off between CGST and SGST liability will not available (except for IGST liability in case of inter-state transaction). This may defeat the basic purpose of the reform. The only purpose which will be achieved is removal of cascading effect and end of classification disputes over goods and services. But if a national level reform is being chalked out and future structural amendment may not be possible, it is pertinent to address this issue before its enactment.

+++Real estate transactions

A bucket of uncertainties and litigation Real estate transactions (including construction activities) have always been prone to unending litigation at central as well as state levels of taxation. The State VAT and the Service Tax already apply to construction materials and services respectively, but in a complex manner. Then stamp duty is applied on sale of immovable property.

Chairman of 13th Finance Commission, Dr. Vijay Kelkar, also expressed his concern on this issue, stating as under:

"The construction sector is a significant contributor to the national economy. Housing expenditure dominates personal consumption expenditure. Further, the present piece-meal taxation of this sector encourages perverse incentives. Raw material is charged CENVAT, the works contract is charged VAT and stamp duty is levied on the sale. With no provision of input tax credit in place, there is little incentive to record such transactions either at the construction stage or at the sale stage at their correct value. This leads to substantial loss of tax revenues and fuels the parallel economy."

In the case of commercial and industrial land and buildings, their exclusion from the base would lead to tax cascading through blockage of input taxes on construction materials and services. Extending the GST to all real property supplies, including construction materials and services, would bring an end to such disputes, simplify the structure, and enhance the overall economic efficiency of the tax. Further, can we think of merging subsuming stamp duty on real estate properties with GST, which can be game changer for real estate industry. Let's see !

+++Additional Tax @ 1%

The Constitution (Amendment) Bill, 2014 provides for additional tax of 1% over and above GST to compensate for revenue losses in transformational stage. This will impede the true spirit of GST, secondly since it will be out of credit mechanism, it will be a cost to tax payers. If there is need to levy this tax, it should be levied within the purview of GST and credit chain mechanism.

+++Before parting.........

Hon'ble FM in its Budget Speech is determined to introduce GST w.e.f. 01.04.2016. However, looking towards progress so far and steps required to be taken to enact it may not be possible to see way for GST from 2016. Based on present status and assuming Constitutional Amendment Bill gets passed in second round of Budget Session; following is the road map ahead:

i. Passing of Constitutional Amendment Bill by Parliament with 2/3rd of majority

ii. Passing of the said Bill by 50% of States 

iii. Constitution of GST Council to finalise the draft of GST Bill 

iv. Passing of CGST Bills by Central Government 

v. Passing of SGST Bills by respective State Government 

Since it is a transformational big scale reform India is waiting, most important thing is to have on board a well laid out GST structure which addresses all concerns before it becomes reality. Launching something in hurry just for the sake of introducing it doesn't make it a sense. Further industry needs preparation time of atleast 6 months to adapt to new regime of taxation and plan business transactions accordingly.

'Better if rightly timed than wrongly twisted.'

Author deals in Corporate Finance, Strategy & Indirect Taxation can be reached at Article published at


Published by

CA Nikhil Jhanwar
Category GST   Report

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