OCTOBER 11, 2016

By Muralidharan R , Seema Zachariah, Sriharsha KM, Deloitte Haskins & Sells LLP

MODEL Goods & Services Tax (GST) Law comprising draft GST Act, 2016, Integrated Goods and Services Tax Act, 2016 (IGST Act) and GST Valuation (Determination of the value supply of goods and services) Rules, 2016 have been placed on public domain by Ministry of Finance during June 2016. The chapter XXV of the model GST law provides for draft rules for transition from existing Indirect Tax laws to GST law. There was confusion existing in the minds of taxpayers on transitional provisions inspite of various representations made by Industry players to the Ministry of Finance. Further, on 21st September 2016, CBEC has issued 276 pages FAQ document on GST with an intention to clarifying the doubts existing in the minds of the tax payer. In this article, we are discussing the areas where the model GST law and FAQ do not provide the required clarity on certain provisions. The issues are discussed below.

a) Migration of Existing Centralized Registered assesses under Service Tax to GST:

Section 142 of the Model GST Law provides for migration of existing tax payers to GST and as per this section on the appointed day, every person registered under any of the earlier laws shall be issued a certificate of registration on a provisional basis. From this it is clear that the assesse registered under Central Excise, Service Tax & VAT would be issued a provisional registration certificate. However, under the GST model, assessee requires to take registration separately in each of the states and there is no concept of centralized registration. There is an ambiguity in the minds of Centralized registered Tax assesses under Service Tax having branches located across the country as to whether the department would issue only one provisional registration or separate provisional registration to all the branches located in various states. Further, the transitional provisions & FAQ does not provide the clarity on whether separate registration would be issued for all the branches state wise based on the centralized registration or only one provisional registration for centralized branch / head office from which returns are filed to the department. This problem is also being faced by the assessees registered as Centralized Registration with Large Tax Payers Unit.

b) Distribution of Credit of Centralized registration:

Section 143 of the model GST law provides for carry forward of closing balance of CENVAT Credit to the electronic credit ledger of the GST law. In case of service provider who is having Centralized registration, the Centralized office, would be filing the Service Tax return and may be having accumulated CENVAT Credit balance. The Closing Credit balance consists of CENVAT Credit of various branches located across the country in different states. There is no clear provision provided under the GST law as to how the accumulated CENVAT Credit of the Centralized branch could be distributed to different branches of the assessee located across the country. If entire credit is distributed to the Centralized office in the GST Electronic Ledger, there may be accumulation of Credit in the head office and it is also not logically correct to distribute the CENVAT Credit of all the states to one state. The need of the industry is a clear mechanism for distribution of accumulated Credit of Centralized office to various branches located in various states which would be registered separately under the GST law.

c) Credit of eligible duties and taxes on inputs held in stock to be allowed on switching over from composition scheme:

Section 146 of the model GST law provides mechanism for availment of CENVAT Credit on the inputs held in stock under composition scheme under the earlier law subject to condition that such inputs and goods are used or intended to be used for making taxable supplies under GST. The VAT Acts of various States provides a definition / provision for Composition scheme and there may be no confusion under State laws for VAT assessees. However, under Central Excise and Service Tax, there is no concept of Composition Scheme and there is a confusion in the minds of the taxpayers on to whom under Central Excise & Service Tax this provision would be applicable. Also, the model GST law used the word Composition taxpayer under the old law and the model law / FAQ does not provides the definition of composition taxpayer. Under Central Excise, Notification 01/2011 CE dated 01-03-2011 provides for payment of Central Excise duty @ 2% subject to condition that the assesse should not avail CENVAT Credit. Further notification 12/2012 CE dated 17-03-2012 provides nil rate / reduced rate of Central Excise duty for various Tariff headings subject to condition that assesse is not eligible to avail the CENVAT Credit. Further under Service Tax, notification no. 26/2012 ST dated 20-06-2012 provides abatement in the rate of Service Tax rate for few services (e.g. Service provided by foreman of chit fund, Renting of Motor Cab, Transport of passengers with or without accompanied belongings) subject to condition that CENVAT Credit not to be availed. There is a confusion in the minds of assessees of above categories on whether this provision would be applicable to them. The Industry needs adequate clear definition of the assessee who would be covered under section 146 of the model GST law.

d) Credit of Taxes paid under reverse charge after the appointed day:

As per the provisions of CENVAT Credit Rules, 2004, the CENVAT Credit of Service Tax paid under reverse charge mechanism can be availed only after making the payment of Service Tax to the department. Assume a scenario where GST would be implemented from April 2017 and Service Tax payment under reverse charge mechanism for the month of March is paid by the assesse on 2 nd April (with two days delay) and CENVAT credit can be availed under the old law only in the month of April 2017 i.e. after the appointed day. The transitional provisional provides for carry forward of only the closing balance of CENVAT Credit on the appointed day and also explanation to section 144(1) provides for availment of unavailed CENVAT Credit of Capital goods and does not provide for this scenario i.e. where the eligibility of availment of CENVAT Credit of Service Tax under the old law is after the appointed day. The Industry needs adequate clear transitional provisions for this type of scenario.

e) Re-availment of CENVAT Credit after the appointed day:

As per the provisions of CENVAT Credit Rules, 2004, the CENVAT Credit of Service Tax can be availed on receipt of the invoice. However, if payment is not made within 90 days from the date of invoice, the CENVAT Credit availed is to be reversed and can be re-availed after making payment to the vendor. Also, under Central Excise, CENVAT Credit on the Inputs sent for Job work to be reversed if the same not received within 180 days and can be re-availed once goods are received. There may be scenario where Credit reversed due to above provisions in the pre-GST era and payment made / goods received after the appointed day in the GST era. The model GST law does not provide any mechanism for these types of transactions for re-availment of Credit to the Electronic Credit register. The Industry needs adequate clear transitional provisions for this type of scenario.

f) Utilization of Education Cess, SHE Cess and KKC Cess:

There is no clarity in the model GST law on carry forward of closing balance of Education Cess, SHE Cess and KKC Cess to electronic credit ledger of GST.

g) Pending refund claims to be disposed of under earlier law:

Section 154 of the model GST law provides that every claim for refund of any duty/tax filed by any person before the appointed day, shall be disposed of in accordance with the provisions of earlier law. From this provision it is clear that any pending refund claims on the appointed day would be disposed as per the provisions of earlier law. However, practically, the refund application for a particular tax period would be filed after a period of two or three months from the tax period. Under Central Excise and Service Tax law, there is a time limit of one year to file the refund as provided under Section 11B of Central Excise Act, 1944. Assume GST would be implemented from 01 st April 2017, practically the refund application of following types would be filed for the pre-GST period (before one year limit) after the appointed day i.e. after two or three months but before within one year.

a) Refund of CENVAT Credit under Rule 5 of CENVAT Credit Rules, 2004

b) Refund of erroneous Tax paid as per Section 11B of Central Excise Act, 1944

c) Refund to SEZ units under notification no. 12/2013 ST.

The transitional provisions provides disposition of refund filed before the appointed day and does not cover a scenario where refund claim would be filed for the pre-GST period after the appointed day.

Further, the provision to section 154 mentions that any claim for refund is partially or fully rejected, the amount so rejected shall lapse. There is confusion in the minds of taxpayers whether Appeal provisions would be allowed for rejection of refund claim. Since, the filing of the appeal against the adjudication order is the legal right of the assesse, the same is to be provided and clearly provided in the provisions. Also under the current provisions of law where a refund claim under Rule 5 is rejected, the assessee can avail the credits in the books in respect of such rejected claims. Transition provisions should provide for such re-availment under the GST regime.

To conclude, transition from present taxation regime to the GST regime is one of the key areas in the implementation of GST. The final GST law should cover the provisions for the above issues to provide required clarity to the tax payers, to avoid unnecessary litigation and also to ensure smooth transition from existing indirect tax laws to the GST laws.

(Authors: Mr Muralidharan R - Senior Director, Ms Seema Zachariah - Senior Manager; and Mr Sriharsha KM - Deputy Manager with Deloitte Haskins & Sells LLP. The Views expressed are strictly personal.)