GST 2.0 - Let's not make ad hoc changes till Roadmap is designed!
TIOL - COB( WEB) - 663
JUNE 13, 2019
By Shailendra Kumar, Founder Editor
THE 35th meeting of the GST Council, the first for the NDA 2.0, has been scheduled in the second half of June 20, 2019. The fact that it is going to be barely for a couple of hours and also to be chaired by the New Chairperson, the efforts are on to keep agenda items to the minimum! Some of the likely agenda items are going to be the past decisions of the Council, relating to amendments in the laws. The Law Committee has finalised the much talked about amendments in Sections 8, 10, 44, 50, 52 & 168. Noteworthy and taxpayer-friendly ones are - a spike in the registration threshold for goods to Rs 40 lakhs; Composition scheme for service providers upto Rs 50 lakhs; Levy of interest only on payment made through electronic cash ledger and also the formation of a Centralised Appellate Authority for conflicting decisions of Advance Ruling Authorities.
Another important but new agenda item is going to be the interim report of the Committee of Officers on e-invoicing system. It is likely to be presented before the Council and there are chances that a Group of Ministers may be formed to further polish this proposal. I am not expecting any quick decision on this issue at this meeting. This is more so because too many IT-driven new proposals have been conceived in the past two months and it would not be wise to rush into all such behaviour-related changes in an avoidable haste!
Here, what adds an element of uncertainty is the new roadmap for implementing new GST Returns. A couple of days back, the Ministry of Finance released a roadmap, subject to approval by the Council. Although the industry and trade were aware of the impending new format of GSTR but it appears that too many changes are being 'stuffed' in too little space of time! For instance, only three months have been allocated for the pilot of GST RET-1. A little more time should be given for the pilot and a feedback should be taken from the large taxpayers about its fall-out on their ERP systems. Since it is finally going to be the common return format for all taxpayers from January 2020, some sort of comfort-feedback needs to be measured to avoid any fuss.
As regards the GSTR-9 & 9C, though the taxpayers and their consultants continue to struggle with various data and technical glitches but the Council is unlikely to extend the due date. One reason is that some Associations of industries have not favoured such extensions and they have communicated the same to the Government through letters. However, it may be considered provided some State Ministers raise this issue before the Council. And I strongly feel that the due date can be extended by at least 15 days as it would do no harm to the Revenue.
Let me now pick up the last week thread generated out of the Punjab Chief Minister's letter addressed to the Prime Minister on 101 possible changes to better the system of GST. The crux of his letter is that in the present design of the GST, the cascading of input taxes is not being neutralised and it is hurting the 'Make in India' efforts of the Union Government. Indian businesses have suffered on account of exclusion of certain vital sectors of the economy. Secondly, it has hugely bruised the competitive edge of the Indian exporters in the international market. Thirdly, it has made imports cheaper than the domestic products. He has also given detailed sector-wise examples such as,
++ Electricity: It can constitute up to 30% of the production costs in certain sectors and in any case remains a key input for nearly all sections of industry. As a result, big businesses which set up their own captive power plants, are benefitted while others (generally MSMEs) who buy electricity from stand alone are disadvantaged. This also results in proliferation of coal-based plants rather than gas-based, as coal is a part of GST. The present structure – whereby electricity is exempted, besides being subjected to electricity duty by States, results in considerable cascading (up to 10% of electricity cost and up to 2%-3% of turnover).
++ Natural Gas: A number of inputs/input services are used in the extraction of natural gas. In order to cut down cascading some rate concessions have been given. Being outside the GST, no IGST is imposed on its imports. Moreover, natural gas comprises an important input in a number of downstream sectors that suffer GST such as fertilizers. There are very few States in India which produce natural gas. Their tax structure is such as to reach natural gas on inter-state basis to Central Government’s fertilizer plants and collect the entire VAT/Sales tax (@ full rate) at origin depriving destination States of the much deserved revenue. Central Government is thus avoidably compensating such plants even though they were earlier entitled to get the gas on payment of CST @2%. Natural gas produced at offshore locations does not suffer either GST or VAT or CST being imports into India. Its inclusion in GST will set right all these aberrations. At the minimum CST sale should continue for use of non-GST inputs for GST outputs and the present law is not worded against but the actual implementation is to the contrary.
++ ATF: It is a critical input for the aviation sector. High and varied State taxes on ATF result in diversion of consumption to other countries (to the extent possible) and within India to low-tax States. Its inclusion in GST will help in optimization of the tax structure to the overall benefit of the country besides opening the entire tax credit chain.
++ Crude petroleum, MS and HSD: Presently, there is a considerable embedding of taxes due to GST inputs going into their production. As a result crude extraction and setting up of refineries in India is no more as competitive as in the pre-GST period. This is also a unique case where the crude produced in India, if exported, will allow refund of all GST embedded taxes and when re-imported will not require payment of GST. All the three products would need to be brought in one go into GST. This will provide level-playing field to domestic extraction of crude oil as well as help establish new refineries.
++ New constructions: At present, Real Estate is liable to GST as long as it has not obtained completion certificate. This distinction is without economic rationale. The Constitution has defined Service”” as anything other than goods. Accordingly, real estate of all kinds is covered by the definition of service and does not require a Constitutional amendment. Imposition of tax on construction is necessary to restore parity between two classes of properties i.e. before completion certificate and afterwards. Consequentially, the entire real estate sector (except old properties and land) should be brought into GST. States can continue to levy their respective taxation on real estate over above GST. Once distinction between under construction and completed properties is removed they should be brought back into tax credit chain with a clear legal requirement that prices will be maintained for a period of three months after the change.
++ Alcohol: Unlike previously discussed items, inclusion of Alcohol in GST will require a constitutional amendment. There is considerable scope to raise overall revenues (including State Excise) from alcohol by subjecting it to the inherent checks of GST (like E-way bill) besides removing the aberration of its exclusion from GST. Here GST rate could in fact be raised so as to also encash the existing cascading.
Till the time, all these goods are brought under the ambit of GST, it is certainly not undesirable to make GST payment OPTIONAL at a nominal rate on these goods so that input tax credit chain is not broken. Such a system exists for the MSMEs whereby one can pay higher taxes and avail ITC even if there is an exemption. Recently, the Association of Restaurant Owners has also demanded a similar system where 12% GST can be levied with ITC or one may continue to pay 5% without ITC. Such a system is not unique as it prevails even in Europe.
It is high time that the GST Council comes up with a detailed roadmap for inclusion of these goods under the GST and also a complete overhauling of the present design of GST so that private investments and FDI could pour in for expansion of the existing production capacities. Secondly, till the time such a roadmap or white paper is ready for discussions, all ad hoc major changes ought to prevent further muddying of the GST waters!