JULY 14, 2010

By Pritam Mahure, CA

A business group venturing in different business segments usually forms different companies / legal entities. A real life example is India's biggest business group which has approximately 97 companies operating in diverse business interest such as software, tea, consumer products, automobile, communication, infrastructure, insurance, chemicals, housing, financial services, hotels, power etc. Usually, in such cases more than 90% shareholding and effective control will rest with the said business conglomerate.

The existing VAT laws oblige each company to independently comply with VAT/Sales tax compliances, payments and returns though it may be owned by the same group. Hence, to ease the GST related compliances and also administrations of GST, many countries have introduced the concept of 'GST group' in their GST regulations.

The concept of 'GST Groups' is like this. GST Department, on satisfaction of certain conditions, grants permission to closely held companies to form a ' GST group' and allows an 'identified member' of this 'GST group' to take up the responsibility to comply with GST formalities. Further, inter-group transactions are generally excluded from the purview of GST.

ADVANTAGES OF FORMING A GST GROUP

Following table depicts how the concept of 'GST Group' drastically reduces the compliance levels. Assuming five closely held companies come together and form a 'GST Group':

When a 'GST Group' is formed the output GST is paid by the 'representative member' and not by the member who makes the taxable supply. From the above it can be observed that after the five group companies opted for 'GST Groups', the compliance level has drastically reduced (by approx. 80%).

Similarly the input credit is available to the 'representative member' rather than the company which acquire the taxable input. Only the representative member files the return. Interestingly, intergroup transactions are not liable to GST except in certain exceptional cases.

HOW TO FORM THIS 'GST GROUP'

To form a GST group, different companies/entities having common/joint control needs to come together and apply. Additionally, they should satisfy certain conditions such as:

The entities should apply jointly and identify one of the member as 'representative member' who will comply with the all the GST formalities

They should have same legal existence (such as all should be companies or all should be partnership firms)

All these entities should be either:

i. Under same management or

ii. Should have common financial and organizational ties or

iii. Should have common control

iv. Should have similar accounting policies and accounting period

INTERNATIONAL PRACTICES

The concept of 'GST Group' is prevalent in UK, Australia, New Zealand, Singapore etc. However, many countries such as Canada, Brazil, China, France, have refrained from introducing this concept in their GST regime.

POSSIBLE ISSUES

It may be noted that many possible issued may arise on introduction of 'GST Groups' in the proposed GST legislation. Few of them are listed below:

How to lay down the criteria to determine eligibility to form a 'GST Group' ' Its difficult to lay down the criteria to determine the eligibility to become the member of the group. This is due to the fact that 'control' is 'qualitative' feature than a 'quantitative' feature. Also, even if a company becomes a member of the group the so called effective control may change and bring its own sets of complexities.

Companies are in different businesses ' The reason for formation of a different company is different businesses. A group company may operate in manufacturing arena whereas other in service sector. Further, each business have different taxable and exempt supplies. So, if formation of 'GST Group' is permitted, the problems solved by forming different companies may just boomerang (and multiply) by forming a 'GST group'.

How to opt out of the 'GST Group' ' If at a later point of time, a member company plans to opt out of the group then issues such as how to transfer the credit may arise.

Control issues ' It may happen that a business conglomerate which has formed 'GST Group', may not have proper accounting and control. This will lead to a situation wherein neither the business conglomerate (which owns all the companies under GST group) nor the GST Department will have control over the activities of the group members. Further, in such cases, there are chances of large scale frauds and in absence of proper accounting it would be difficult to identify and take legal action against the companies.

IMPLIMENTATION IN INDIAN SCENARIO

It may be noted that the core reason for emergence of the concept of 'GST groups' is two-fold,

one is reduction in compliances and another is making the 'inter-group' supplies zero rated. However, it may be noted that rather than introducing the concept of 'GST Groups'these objectives may anyways be achieved by introducing the following:

For reduction in compliances - A concept on the same footing as the 'Large Taxpayer Unit' concept - This concept is already operational in Excise and Service Tax. Further, to reduce multiplication of compliances, appropriate provisions can be made wherein a Principal may undertake to pay the GST liability of the agent in case of principal-agency relationships. This concept is presently used to reduce compliances in Service tax. Herein instead of the agents, the Mutual Fund or Insurance companies pay the applicable Service tax as a receiver of service. This concept is commonly known as 'Reverse Charge Mechanism'

For zero-rating the Inter-group supplies - Special provisions can be made for inter-group supplies made to closely held companies and thereby the inter-group transactions can be effectively 'zero rated'

WAY FORWARD

In this article I have made an attempt to abreast the reader with the concept of GST. This article does not deal with certain issues such as fraud at this stage. These issues can be considered later once the basic idea of 'GST Groups' is agreed upon/ discussed. Till that time, it would be in the interest of the trade that the trade and various associations joins hands and discusses pros and cons of 'GST Groups' and whether the same should be made part of the GST legislation to be introduced.

(The views expressed in the article are strictly personal)