Baby Needs No Bath­wa­ter

With GST all set to be rolled out, there are some con­cerns that re­main for In­dia Inc

The Economic Times - - The Edit Page - Pratik Jain

The out­come of the Goods and Ser­vices Tax (GST) Coun­cil meet­ing on Fe­bru­ary 18 was on ex­pected lines. The re­main­ing leg­isla­tive is­sues were ap­par­ently thrashed out, with an un­der­stand­ing that the GST laws would be for­mally ap­proved in the next meet­ing sched­uled for March 4 and 5. The com­pen­sa­tion law was for­mally ap­proved by the coun­cil, which is likely to be pre­sented be­fore Par­lia­ment along with the Cen­tral GST ( CGST) and In­te­grated GST (IGST) laws in the sec­ond half of the Bud­get ses­sion, start­ing on March 9.

With this, we are all set to see GST from July 1, 2017. Good news, in­deed. But are the laws in line with what In­dia Inc ex­pected? Prob­a­bly not.

Make no mis­take. A lot of hard work has been put in draft­ing th­ese laws, par­tic­u­larly in align­ing the cen­tral laws (ex­cise, ser­vice tax, etc) and state value-added tax (VAT) laws, which dif­fer from state to state.

How­ever, the need to bal­ance the views of all stake­hold­ers, cou­pled with the fear of rev­enue loss and tax eva­sion, has re­sulted in a law that is per­haps only in­cre­men­tally bet­ter than what we have now.

The big­gest prob­lem is that the com­plex­ity of levy­ing tax on ser­vices at the state level has not been ap­pre­ci­ated and ad­dressed ad­e­quately. While place-of-sup­ply pro­vi­sions do ex­ist to de­ter­mine the state where ser­vices can be said to be con­sumed, sev­eral am­bi­gu­i­ties re­main.

One of the ma­jor is­sues is where the ser­vice provider and re­cip­i­ent are lo­cated in more than one state. In such cases, the lo­ca­tion ‘most di­rectly con­cerned’ of the ser­vice provider and re­cip­i­ent needs to be de­ter­mined. In­ter­pre­ta­tion as to which of­fice or state is more di­rectly con­cerned has been left to the ser­vice provider.

If the law con­tin­ues in this form, it could be a source of lit­i­ga­tion for many years to come. In­dia Inc is grap­plin­gas to which state it should raise the in­voice from and how to pay tax. Since GST paid in busi­ness-to-busi­ness would mostly be a ‘wash’ trans­ac­tion, the law can be sim­pli­fied sig­nif­i­cantly by pro­vid­ing the billing ad­dresses of both the ser­vice provider and re­cip­i­ent, as the rel­e­vant states from and in which GST has to be paid.

Pass the Par­cel

The other pro­posal caus­ing con­cern is the ‘anti-prof­i­teer­ing’ clause, which re­quires the busi­nesses to pass on the ben­e­fit of re­duced rates or in­creased cred­its to the cus­tomers. Given the short time avail­able to the in­dus­try and the gov­ern­ment for the in­tro­duc­tion of GST, this pro­vi­sion could lead to com­plex pa­per­work and wide­spread au­dits, much like what hap­pened in Malaysia re­cently.

Also, there is no time pe­riod pre­scribed for the ap­pli­ca­bil­ity of such a pro­vi­sion, which should ide­ally be en­forced dur­ing the tran­si­tion phase for a few months only.

In­dia Inc was also ex­pect­ing a much more sim­pli­fied in­put credit pro­vi­sion, in line with in­ter­na­tional best prac­tices, wherein all GST in­curred on busi­ness pur­chases would be al­lowed as set-off against GST payab- le. How­ever, the draft laws still con­tem­plate re­stric­tions on many busi­ness ex­penses, such as em­ployee-re­lated ben­e­fits (med­i­cal in­surance, cabs, cafe­te­ria, etc), con­struc­tion of of­fice build­ing and fac­to­ries, and so on. This would mean that even af­ter GST is in place, cas­cad­ing of tax would con­tinue in some form.

For a suc­cess­ful tran­si­tion to GST, it is im­por­tant to en­sure that min­i­mum dis­rup­tion is caused to busi­nesses. There­fore, tran­si­tion rules be­come ex­tremely crit­i­cal.

This is also an area that hasn’t got the at­ten­tion it de­serves. For ex­am­ple, it is still not clear as to whether and how the ben­e­fit of ex­cise duty paid on clos­ing stock ly­ing on the date of GST im­ple­men­ta­tion across the distri­bu­tion chain would be avail­able. The in­ten­tion, though, seems to be to pro­vide such a ben­e­fit.

If this is not ad­dressed, then a ma­jor dis­rup­tion would be caused in the run-up to GST, as there would be an at­tempt to min­imise the in­ven­tory by dis­trib­u­tors and re­tail­ers on the tran­si­tion date.

Last, but not the least, the pe­nal pro­vi­sions ap­pear to be much harsher than the cur­rent laws. The law seeks to pe­nalise busi­nesses by deny­ing them the in­put credit of GST paid on pur­chases if the ven­dor has not de­posited the tax, or fails to re­port the trans­ac­tion on the GST Net­work. This ef­fec­tively shifts the bur­den of com­pli­ances from ven­dors to cus­tomers.

Cut the Rope

The au­thor­i­ties have been given wide-rang­ing pow­ers for the en­force­ment of laws, in­clud­ing those re­lat­ing to ar­rest that ap­pear much broader than ex­ist­ing laws. Given that GST is a rad­i­cally dif­fer­ent tax sys­tem than what we have, and a short win­dow of time is avail­able from the fi­nal­i­sa­tion of the laws and GST’s im­ple­men­ta­tion, it would have been bet­ter if such pro­vi­sions were a lit­tle softer in the ini­tial cou­ple of years.

So, the cur­rent ver­sion of the GST laws leaves a lot of scope of im­prove­ment. It needs to re­flect the de­sire of a quan­tum jump in re­forms and not merely an im­prove­ment in the cur­rent sys­tem. One hopes that this is only a be­gin­ning, and all stake­hold­ers, slowly but surely, work to­wards an ideal GST sys­tem.

The writer is part­ner, PwC In­dia

Hope floats

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