SEPTEMBER 23, 2019

By Puneet Bansal, Managing Partner and Ashutosh Mishra, Associate, NITYA Tax Associates

THE heart of a State's development lies in taxation! The Indian economy is surely witnessing turbulent times at present. In these times, an out of box approach towards taxation front can provide an all needed flip to bring the economy back on track. In this context, September 20, 2019 was a historic day where all stakeholders had lot of expectations from the government on the economic forefront, and the Government did not disappoint.

The day began with a significant rate cut in rates of Income Tax for corporates and foreign investors. These measures will not only boost the profitability of the Companies but will also give them leverage to reduce the price of their output.

When the GST Council ('Council') met later during the day, there were similar expectations from GST standpoint except on the rate front. As the Union Government had already forked out almost Rs.1.5 Lakh crores in Direct Tax concessions, the massive rate cuts in GST were unlikely.

The Council delved upon a variety of issues and took some key decisions (exemptions, rationalisation, clarifications etc.). Overall, the Government must be appreciated for its efforts both on Direct as well as Indirect Tax front. These measures are likely to provide an impetus to economic growth for the nation.

This article highlights the key decisions taken by the Council.

Proposed changes under GST

The Council did not propose any significant rate reductions in contrast to the expectations from sectors like automobiles, FMCG, real estate etc. The Council followed a more pragmatic approach to cater to the concerns of specific industries/ sectors like hospitality, agriculture, pharma, IT & ITES etc.

Key rate changes

The most critical rate change was reduction in rate of GST for hospitality industry. These services have now been removed from the highest slab of 28 per cent. Further, the GST rate on outdoor catering is reduced to 5 per cent (with a restriction on input tax credit) except if provided in hotels having tariff value (per unit per day) more than Rs. 7,500/-. These changes will give a significant boost to the tourism and hospitality industry.

The rate of GST on railway wagons, coaches, rolling stock of Chapter 86 has been increased from 5 to 12 per cent. It will enable liquidation of input tax credit ('ITC') for taxpayers in railway business. However, refund of accumulated ITC will continue to be barred for such goods.

The services of storage and warehousing of several foodstuffs like jaggery, coffee, tea, indigo etc. have been exempted. This measure will lower the tax incidence for agricultural sector.

Also, a reduction in the rate of Compensation Cess has been proposed on motor vehicles designed to carry 10 to 13 passengers, having engine capacity less than 1500 cc (diesel) / 1200 cc (petrol) and length less than 4000 mm, from 15 to 1 per cent. This decision will have a limited impact.

Legal changes

The most appreciable move on the legal front is the withdrawal of controversial Circulars on Intermediary (Circular No. 107/26/2019-GST dated July 18, 2019) and post-sale discounts (Circular No. 105/24/2019-GST dated June 28, 2019). Apart from these Circulars being legally incorrect, these Circulars created a big hue and cry, the former Circular for ITES companies and the latter for all B2C companies.

Another critical change is the place of supply of R&D services (clinical trials etc.) provided by pharmaceutical companies to their overseas clients. The place of supply of such services will be the location of recipient meaning thereby such services will qualify as export, even without this amendment, such services qualified as export only. Though the move will provide certainty going forward, this will rake up disputes for the services provided in the past as well as open a pandora box for similar services provided by non-pharmaceutical companies.

There is one adversarial decision which is likely to have far-reaching implications for every taxpayer. ITC shall be restricted if the vendor does not furnish details in GSTR-1. This is in clear violation of Section 16 of the Central Goods and Services Tax Act, 2017 which mandates a taxpayer to claim ITC if the vendor has paid tax in the government account. The law does not entail furnishing of GSTR-1 by vendor for claim of ITC to the recipient. With the new return system getting implemented from April 2020, such an amendment will pose a big operational challenge for the taxpayers in the transitional phase. With the new return system likely to address all such issues, there was no rationale for introducing this change now.

Compliance changes

In a major relief to MSMEs, annual return, i.e. GSTR-9 has been made optional for taxpayers having turnover up to Rs.2 Crores for Financial Years 2017-18 and 2018-19. As such taxpayers anyway fall below the threshold limit for filing reconciliation statement in Form GSTR-9C, this amendment has effectively done away with annual compliances for such taxpayers.

The Council has constituted a Committee for simplification of GSTR-9 and GSTR-9C, another welcome move. An important question that arises is the position of the taxpayers who have already completed or intend to complete their annual compliances as no timeline for the 'proposed' simplifications is provided. With no announcement for an extension of date of undertaking annual compliances for Financial Year 2018-19, the due date continues to be December 31, 2019.

To expedite refunds to taxpayers, the Council has approved an integrated refund system with disbursal by single authority effective September 24, 2019, onwards.

Conclusion

With the rate cut in Direct Taxes along-with a garnish of appropriate rate, legal and procedural changes on GST front, the Government has done its bit to bring the economy back to the burner.

(The views expressed are strictly personal.)