SEPTEMBER 25, 2017

By Meenu Gupta, CS, ACS, MBA( F)

THE Country witnessed the biggest indirect tax reform, namely GST, at the midnight hour of June 30, 2017 receiving a red carpet welcome in Parliament Central Hall. It was a luxury welcome for the long-awaited GST that replaced around 17 federal and state levies and supposedly unified a country of 1.3 billion people into one of the world's biggest common market.

Finally, it looks like GST will solve many of the problems that afflict the country's indirect tax system. Not the least, the staggering fraud that the Value Added Tax (VAT) as a method breathed into the system.

Managing evasion is a nightmare for any revenue administration. Designing indirect tax, especially in a federal polity where taxing jurisdictions differ, had always been a difficult proposition for the tax architect. Then, there is the critical issue of point of levy that makes an optimum balance between administrative ease and compliance.Starting from single-point levy to a matured multipoint tax system in VAT consumption-based indirect tax has really come of age. Indirect Tax in India has two distinct components: Federal level tax on production and tax at the subnational level on distributive trade part. Market-related vagaries are more pronounced on the latter as were the efforts to address them.But all along, whatever the tax planners devised, dodgers seemed to act equally smartly. Ground reports reflect that VAT had become fraudsters delight. This warrants a deeper look into what made VAT fail and how GST offers to address it.

Ideally, VAT operates on the premise that components of transaction chain will always locate each other. In B2B transactions, set-off as input tax credit is given for taxes paid on purchase against that levied on corresponding sales. Assuming a seller would like to understate sales and the corresponding purchaser to overstate purchase, the seller-purchaser duo will always have diametrically ensured that VAT is successful.But a truncated VAT remained a necessary evil. Because on the distributive trade part, it was always confined within the provincial level and the set-off related benefit couldn't extend beyond a state boundary. So, in an origin based set-up for inter-state transactions, tax used to go to the consignor state. Naturally, the consignee state would not afford to offer input credit for a tax that had gone to another state. This leads to the breakup of the chain at the boundary of two VAT set-ups. A very fragile connectivity is conceived by administrative means through the exchange of statutory forms to offer concessional rates of tax as incentive. But such administrative intervention inevitably became susceptible to all kinds of fraud and identifying fraud plays havoc in any VAT set-up.

The primary inroad was made by obfuscating the title of goods right at the onset of any VAT chain. In India's federal polity, a very fertile ground for such operations was inter-state transactions. This was done rather easily via a racket of phantom firms and routing the transactions through them.

To shelve off tax liability on goods brought on paper to their account, these bogus firms habitually availed all kinds of tax exemptions by falsely claiming inter-state sales, stock transfer and even export. To camouflage further, payment, too, was routed through such a chain. VAT being captive for a state, regularly verifying such a volume of inter-state transactions is too daunting.

Camouflaging title for goods and of transactions entities further opens up vulnerability for vital segments of the economy. Right from compromise in quality, say, of cement in real estate to the adulteration of oil for mass consumption, anything that generally moves through states is prone to such a threat. And under the generally facile scrutiny on these shell firms created for VAT-related fraud, to start with, this would soon translate into secure conduit for dirty money in the system.

To fall back on the original notion of market-driven checks by ensuring cross-utilization of ITC even beyond the state boundaries maybe a way to tackle the challenge. The Integrated GST (IGST) model precisely fortifies the concept. In the proposed destination based GST regime, in a case of interstate transactions, tax paid initially to the consignor state is set to be brought back to the state of its final consumption by following the place of supply concept. This will ensure that the subsequent part of chain will remain connected with ITC.

For any VAT handle to succeed, linking the chain right from production to consumption by way of ITC system is important. Only then will the transacting entities find it beneficial to remain in the chain, instead of depending on fake firms and remaining outside it. That is why GST is likely to spell compliance.

Subsuming of various taxes in GST:

GST has subsumed around 17 indirect taxes and 23Surcharges&Cess viz. excise duty, service tax, VAT, CST,luxury tax, entertainment tax (unless levied by localbodies) etc. thus leading to elimination of multiplicity oftaxes levied at the central and state level.

Reduction in manufacturing cost:

Due to elimination of tax cascading and seamless flow of input tax credit to certain extent, there would be saving in taxes at various stages of manufacturing, thereby leading to lower cost of production. This would make the manufacturing sector viable and competitive both in domestic and international markets.

Restructuring of supply chain:

Availability of input tax credit on inter-state supply may lead to re-structuring of supply chain, which will remove unwanted level of warehousing in the supply chain, thereby leading to greater cost benefits to manufacturers.

Reduced logistic time:

The objective of GST regime is to unify the Indian market and assist smooth flow of goods within the country. As more than 22 states have removed the check-posts and remaining are in the process, GST has reduced the hindrances posed by border check-posts.

Elimination of complexity involved in valuation:

In pre-GST law, valuation provisions were complex and varying under different laws. Under the GST regime, the valuation of goods would be transaction value based with the shift of taxable event from manufacturing to supply of goods.

Elimination of cascading effect:

In pre-GST law, the trader was charged CST @ 2% against Form ‘C', (which was not allowed as credit) along with the central excise duty. However, in GST, on inter-state purchases, IGST is to be charged, the credit of which shall be available against the tax liability incurred on supply of goods.

Unified market:

Under the GST regime, traders can sell goods anywhere in India and concentrate on growing their business at large scale because of elimination of multiplicity of taxes, cascading of taxes, double taxation.

Tax limited to value addition:

In GST regime, traders would pay the tax as a percentage of value addition in supply chain and tax paid at earlier stages would be available as set-off for payment of output liability of GST.

However, the GST laws in their present form are complex and deserve to be made simpler in view of serious concerns as GST unfolds:

i. There has been a critique of the multiplicity of rates across various goods. The fact is that there is factually One Nation, One Tax for a particular good all across India for the very first time. However, there is obviously not just one tax rate for all goods. Again, the FM has repeatedly explained why it is impractical to expect a single rate of GST in our Country. The sooner we accept this reality, the better it is for all of us.

ii. In some sectors, especially in services, there are some really burning practical issues on overall GST impact, applicability of credit mechanisms, uncertainty on place of service rules, etc. These aspects clearly need urgent attention and redressal to avoid extra costs being incurred in the system.

iii. By excluding sectors like petroleum, liquor, and real estate from GST, avoidable distortions have been built in resulting cascading costs for consumers. Here again, the FM has clarified he expects a calibrated integration of these sectors into GST over a period of time. The Government must follow this up with quick action to integrate these sectors too into GST.

iv. India Inc. is legitimately concerned about the ‘anti profiteering' provision. While the government's intention to use it only as a deterrent is comforting, however, decades of experience in the field has made business jittery about overzealous action being initiated based on this provision. Government needs to do much more on this front to assuage these legitimate concerns.

v. In today's scenario, the composition scheme is made applicable to select class of persons such as restaurants service, traders and manufacturers. To make GST simpler, the composition scheme must be expanded to cover all service providers including all professionals such as engineers, doctors, chartered accountants, architects etc.

vi. Today, we have just one form which is all inclusive made applicable to every class of registered person. The form contains several tables with each table containing several line items with very many of them having relevance to specific type of taxpayer. For instance, table 4 of GSTR-1/3 on outward supplies of goods or services necessitate information for supplies made through e-commerce operator. Further table 6 warrants information of exports, supplies to SEZ and deemed exports. Between table 5 and table 7, an account is desirable for supplies to unregistered persons based on a cut off of Rs.2 ,50,000 /- for inter-state supplies as well as rate wise classification of below Rs.2,50,000/- numbers for inter-state and intra-state. Of such supplies those made through e-commerce operator are also to be shown separately. Also Table 12 of GSTR-1 and Table 13 of GSTR -2 warrant a taxpayer to furnish HSN wise summary of outward/inward supplies. This is like a duplicating exercise once after rate wise summary of outward supplies is obtained from him in Table 7. Interestingly Table 13 warrants from a taxpayer record of cancelled invoices, challans , vouchers etc. with their number and count. How would a cancelled invoice disclosure be of any relevance except that it adds to more record keeping and, therefore, isunjustifiable. Likewise Table 4 and 5 of GSTR-2 provide for disclosure of imports of services, capital goods from overseas and SEZ units. Table 8 further warrant details of ISD credits received. Likewise Table 9 seeks details of TDS and TCS credits which may have relevance to those persons transacting through e-commerce operators.

Now these kinds of all-inclusive forms could be complex looking for a small trader who does not sell through e-commerce operator nor makes any exports or supplies to SEZ etc. Similarly, for a service provider, these forms make no sense in most of the cases. Thus, it is desirable that the GST Council should bring out a simple series of form for small traders and small service providers with only relevant minimal tables and fields.

vii. In pre-GST Law, companies set up their units making significant investment based on incentives offered by states. In pre-GST regime, states had the flexibility to offer such incentives. However, the exemptions and incentives under the GST regime are going to be less in comparison to pre- GST indirect tax regime. Thus, the companies enjoying such benefits will be affected to a large extent and they have to re-assess their financial & business plans on the basis of incentives and exemptions in GST.

viii. Insertion of provisions regarding restrictions on availability of input tax credit under section 17(5) of CGST Act, 2017 does not go well with the concept of seamless flow of tax credit as concern of ‘tax on tax' will continue to exist on the specified goods/services.

ix. By necessary implication of particular reverse charge provisions of section 9(3) and 9(4) of CGST Act, 2017, the registered taxpayers have not only to pay taxes on their supplies of goods and services but also to account for and pay taxes on the inward supplies received from the other taxpayers who may or may not be registered under the GST laws. In other words, in reverse charge scenario it is like someone's tax that is paid by somebody and it is that somebody who takes credit for such tax paid. On top of it, the Government has provided an exemption from reverse charge vis-à-vis supplies of goods or services (intra state only i.e. within State) below Rs.5000/- in a day from Unregistered persons only to make it more complex as one needs to keep an account of daily inward supplies for their mention in the returns.

Against reverse charge liability, there are mitigating provisions enabling input credit for the like sum paid. The recipient is made to separately account for details of such amounts, further issue self-invoices for the same, discharge liability in cash and thereafter maintain a separate account for input tax credit of such amounts paid. These functions only add more burden of accounting than actually add any value in supply chain. GST is basically a tax on registered persons on supply of goods or services in the course of business. Whereas the law eases out burden for some who have a turnover below threshold of Rs. 20/10 lacs , it has, at the same time, shifted burden upon the registered taxpayer to pay for tax on inward supplies sourced from such exempted persons. Also it calls upon the existing taxpayer to pay for taxes of certain specified taxable services such as services of GTA, advocates, director, sponsorship etc.

The reverse charge provisions in GST laws are thus not just harsh but very burdensome for the taxpayer. These provisions are simply forced upon honest registered taxpayers and do not hold much ground or justification. More so, this lacks any rationaleas there would be no revenue effect as credit for reverse charge payment would be available as input tax credit. Therefore, the concept of reverse charge provisions under sections 9 (3) and 9(4) should be repealed instantly to provide some solace to registered persons . At best, the registered taxpayer may be called upon to furnish separate data for supplies obtained from unregistered persons. All those services that are specified for reverse charge u/s 9(3) may be bundled with composition scheme to make it simpler especially now that the Government has even allowed GTAs to register on voluntary basis.

Conclusion:

It has to be said that GST is simple, yet complex . It seeks to bring the entire body of business transactions into a single integrated digital platform with full transparency. For some businesses, this will cause pain inasmuch as their tax outgo will increase for the simple reason that they were able to successfully operate below the radar all these years. Therefore, in backdrop of the above, every person needs to analyse the impact of GST along with proper planning and a time-bound action plan. The personswho are proactive in preparing for the GST early can gain a real competitive advantage by reducing disruption and maintaining and improving relationships with suppliers and customers alike.

Hopefully, the coming months would be an indicator as to how successful this paradigm shift was!