SEPTEMBER 09, 2016

By Rajat Dosi

THE Goods and Service Tax ("GST") can, with no doubt, be termed as a landmark reform in the Indian taxation system. Further, making the Model GST Law available in public domain for assessees is also a welcome gesture from the Government.The Model GST Law has given the trade and industry an opportunity to undertake a detailed analysis of the proposed regime and prepared themselves for a peaceful transition.

However, there remain some critical areas which lack clarity, creating a state of uncertainty in the minds of assessees, especially in a situation where the date for implementation of GST appears to be closing in. This uncertainty can be attributed to certain issues, as highlighted below, and it is hoped that the same will be resolved by the Government with some momentum.

Benefits available to Export Oriented Units

The present central excise regime clearly differentiates between central excise duty payable by a domestic tariff area ("DTA") unit and an Export Oriented Unit ("EOU"). Section 3 of the Central Excise Act, 1944provides for payment of central excise duty at rate specified in the Schedule I to the Central Excise Tariff Act, 1985 on goods produced or manufactured by a DTA unit. For EOUs, it has been provided that goods produced or manufactured and removed in DTA will be subject to central excise duty equal to customs duty payable on such goods. This provision has not been retained in the Model GSTLaw which may result in a state of despair among EOUsin determining the manner in which they shall be taxed under the GST regime.

Further, the existing EOU scheme inter alia grants EOUs an exemption from payment of central excise duty on domestic procurement of goods. In majority of states, however there is no exemption from payment of Value Added Tax ("VAT") / Central Sales Tax ("CST") on supplies made to an EOU. In simpler words, currently domestic procurement of goods is exempt from payment of central excise duty, but such supplies are subjected to payment of VAT / CST.

In this regard, we understand that under the proposed GST regime inter alia both central excise duty and VAT have been subsumed in CGST and SGST, without differentiating / bi-furcatingthe central excise duty and VAT components contained therein. So, if an exemption is to continue for EOU sunder the GST regime, the questions that arise are whether the central excise duty component in the CGST and SGST would be computed separately and exemption be limited only to such component; or whether the entire CGST and SGST would be exempt;or only CGST would be exempt for EOUs. A sense of clarity on this aspect would ease the transition of EOUs towards the GST regime.

Benefits available to Special Economic Zone Units

Similar to the EOUs, there appears to be some ambiguity in respect of supplies to and from Special Economic Zone (SEZ) units. Some of the concerns have been briefly captured below:

a) Whether the present system of rebate on supplies to SEZ unit (treating them as export) would continue or an outright exemption would be granted in respect of supplies to SEZ unit?

b) Presently in many states there is no exemption from payment of VAT on supplies to an SEZ. Here again an issue may arise whether under the GST regime both CGST and SGST would be exempt or the Government will carve out a mechanism for determining and limiting the benefit to the central excise component in the CGST and SGST?

It seems that these issues have been raised and highlighted by the Ministry of Commerce and Industry with the Ministry of Finance, and the task of making changes under the SEZ law to make it compliant with the GST law has been initiated. However, till the time the actual changes are notified or the proposal in this regard is released in the public domain,one cannot be sure of the manner in which benefits would be made available to the SEZ units under the GST regime.

Continuation of incentives by the State Government

Many a times State Governments offer incentives to specified business entities in the form of either refund of VAT or exemption from payment of VAT, for a specified time frame (say five years or ten years). This is done to attract and appeal to such specified business entities to set up their manufacturing units in the concerned State, which helps in generating employment opportunities and increases the State revenue.

Herein again, nothing is specified under the Model GST law for continuity of such incentives already granted by the State Government. Whether such incentives, basis which many entities have set up their operations in a specified State,would continue or not is turning out to be a moot question for such business entities.

Legal principles dictate that in such a situation the doctrine of promissory estoppel would apply and the State Government cannot resile from its promise of exempting tax once the GST regime is formalized. However, with nothing written on paper, it would be interesting to see if and how such incentives are going to be carried forward.

Fate of area based exemptions

Under the present central excise law, various exemption notifications have been issued exempting production or manufacture of specified goods in specified areas. These exemptions are commonly referred to as area based exemptions. These area based exemption notifications are usually issued by the Central Government with a sunset clause (time frame post which benefits will not be available) for promoting manufacturing activities in specified areas. Availability of such area based exemption is a major incentive for entities to set up operations in the specified areas.

The model GST law is silent on the continuation of these benefits or exemptions. In simpler words, it is unclear whether the industries currently availing area based exemption would continue to enjoy the benefit. It is also unclear that if such area based exemption is continued, whether both CGST and SGST would be exempt or again a mechanism would be framed to determine and limit the benefit to the central excise duty component in the said CGST and SGST.

Carry forward of input tax credit

Chapter XXV of the Model GST law entails the transition provisions. Section 143, in this regard, provides that a registered taxable person would be entitled to carry forward unutilized tax credit as indicated in his last returns filed under the erstwhile laws (VAT, central excise and service tax). In simpler words, unutilized tax credit under the VAT, central excise and service tax legislations can be carried forward under the GST regime, for utilization in payment of CGST and SGST, as the case may be.

This provision of carrying forward of unutilized tax credit is however subject to the condition that only such portion of tax credit can be taken forward which is admissible under the model GST law. This requirement has its fair share of problems. One of the biggest problem has been highlighted below.

Section 16(11) of the Model GST law, having a notwithstanding clause, inter alia provides that input tax will be available only in respect of tax which has been actually paid by the supplier . Therefore, this requirement will also be applicable for tax credit which has to be carried forward under the GST regime, for utilization therein under. This will require assessees to ensure that even tax credit to be carried forward under the GST regime pertains to taxes/duties which have been actually paid by the supplier. This is adding un-necessary confusion in the minds of the assessee. A clarity would be welcome on the point whether this requirement would be applicable even for tax credit to be carried forward or only for fresh availment of credit.

Carry forward of credit of Krishi Kalyan Cess

From the model GST law it seems that credit of Krishi Kalyan Cess cannot be carried forward for utilization under the GST regime. This will add to the cost of the business entities, similar to a situation that occurred when education cess and secondary higher education cess was removed couple of years ago without any provision for utilization of available credit of the cess.

When all cesses including Krishi Kalyan Cess are told to have been subsumed in the GST regime, business reasoning dictate that carry forward of at least the available credit of Krishi Kalyan Cess should also be allowed. Since the element of this cess has not been removed per se but made a part of GST itself, then dis-allowing the carrying forward ofunutilized credit of this cess would seem unreasonable.

Benefits available under the Foreign Trade Policy

It is also currently unknown as to how the benefits under various schemes of the Foreign Trade Policy ("FTP"), specifically duty credit scrips under Chapter 3[Merchandise Exports from India Scheme (MEIS) and Services Exports from India (SEIS)], advance authorization and EPCG scheme would be extended under the GST regime. These schemes inter alia either grant exemption from payment of central excise duty or provide for refund of this duty. But no exemption is extended in respect of payment of VAT/CST under the said schemes.

Now, with the advent of GST(CGST and SGST) which has subsumed the existing central excise duty and VAT/CST, it is again a practical query whether both CGST and SGST would be exempted or the Government would device a mechanism for determining and limiting the benefit to the central excise duty component, or only CGST would be exempted. Enabling provisions in this regard along with suitable amendments under the FTP would assist the assessees to analyze and prepare themselves for a smoother transition.

However, it goes without saying that the GST model law, even though introduced in a piecemeal manner, is a gratifying development for the Indian taxation system.

(The author is Partner, RSA Legal Solutions)