1 Comments on Model GST Law July 28, 2016 The implementation of GST will be a major indirect tax reform that cuts across both Central and State level indirect taxes. The Model GST law that has been uploaded by the Finance Ministry provides a road map on how GST is likely to be implemented. The EEPC India had circulated this Model GST draft to its members and based on the comments received from its constituents, we wish to make the following suggestions. The note here attempts to help the Government in making the new law more conducive so that the value creators and foreign exchange earners of our economy buy into this major reform in the indirect tax framework of the country. Broad Framework Issues EEPC India members are primarily exporters of engineering goods. As per the Model GST, exporters will have to pay the GST and then claim refund thereof. The past experience is that refunds can anything between 6 to 9 months. This means the following for the exporter: A. Pay the GST. While the Standard Rate has not be announced but it could be around 18 %. Thereafter, the exporter will then undergo the process of refund which shall take not less than 5/6 months and may go beyond any time. Even we consider 6 months on average the impact will be: 01. Additional working capital requirement equivalent to ONE MONTHS TURNOVER ( 18 % tax amount x 6 months ) 02. Additional cost on account of interest. It shall be around 1.1 % of the material value. Considering the interest rate at 13 % p.a. it shall come to 1.1 % 03. Whether banks shall provide additional working capital to the exporters. Banks are cutting down the limits. Many sectors are negative and they are even cancelling the limits / seeking for additional security etc. 04. Requirement of submission of huge documents and undergo the process of scrutiny for every return and refund claim 05. Requirement of additional staff to deal with the refund 06. Diversion of the exporters from core activity of exports to the lengthy and complicated process of refund. 07. Shall have major impact of working of exporters and also pressure on working capital requirement. B. Merchant Exporters, who account for a minimum of 15% of total exports from the country will be hit the hardest as their product will become costly and they will become noncompetitive. It is felt breaking the chain should be held sacrosanct and the chain be allowed to be broken one step ahead by granting exemption to Merchant Exporters. Thus, they should
not be required to pay tax and claim refund. Moreover, this will be much easier for Government also as they shall also not be required to go through various documents of merchant exporters for refund claim. C. Condition of availing Input tax credit only after payment of tax by the supplier is a highly retrograde condition. Departing from the current practice in central excise and service tax, it is proposed to allow Input tax credit only after the tax charged in respect of such supply has been actually paid to the credit of government. This is a highly difficult condition for the purchaser to fulfil. It will be extremely difficult for the purchaser to keep a track of when/whether the tax is paid by the supplier or not. The purchasers will now have to ensure that their vendors have robust IT infrastructure and compliance process, so that the vendors do not default on timely and appropriate payment of taxes. D. Tax will be required to be paid even on advance payment received for a future sale of goods. Currently, there is no provision to pay tax on advance received in respect of an agreement to sell. This provision is there only in service tax. However, in the proposed GST regime, the same provision will also apply to goods as well. There are a lot of problems even in the current regime particularly in those cases where the order is cancelled or amended. These problems instead of getting solved will get compounded in the GST era because even the goods are now proposed to be brought under the ambit of same regime. E. The Model GST law does not talk about deemed exports. F. There are still a large number of grey areas like the status of Origin Tax. If the 1 % tax on Inter State Sale is to be paid to the State from the Goods that are moving out, then this tax is no creditable and not adjustable. Hence, however if such tax is imposed, it should be exempt for export sales or else it shall seriously affect the costing of exports. Media reports indicate the Cabinet has decided not to include the 1% Origin Tax. If this is correct, then that is a major relief for business and industry, including the exporting community. G. Compliance burden will increase manifold: There is a very benevolent provision of centralized registration in service tax. Thus, a service provider can take a single registration for providing services across the country. This is now sought to be done away with. Now, a service provider operating in various states will have to obtain registration in each state. This will not only increase the burden of obtaining so many registrations but will also increase the compliance burden manifold. On a rough estimate, service provider operating in many states will have to file 4.5 times more returns than being currently filed under service tax and VAT taken together. This is because, 3 returns per month (and an annual return) are proposed to be filed under GST regime for every registration whereas currently much lesser number of returns are required to be filed under centralized service tax registration and VAT taken together. For illustrative purposes, the number of returns per state per year, would be as follows: Details of Returns Number of Returns per State per year Return of outward supplies 12 2
Return of inward supplies 12 Periodic return 12 Annual Return 1 Total (*) 37 (*) The above count does not include the returns mandated at the time of tax deduction at source as well as the returns for an input service distributor. In case a person is providing the services in 28 states, he would be required to file a minimum of 1036 returns per annum!! Further, it is made mandatory for the person involved in "interstate taxable supply" to get registered irrespective of the threshold specified. This is unfair and will harm small taxpayers involved in such transactions and hence the same needs to be removed. Specific Issues with suggestions Sr No Subject Issue Suggestions 1. Inadequate definition of Supply in the Model GST Law The term "SUPPLY", the most critical expression in the proposed law is defined in an inclusive manner, without stating what it actually means: "1) Supply includes..."(as defined in Section 3 of the Model Law) It is suggested that the proper way to define would be to begin with "It means... and then also includes..." to avoid future litigation particularly in the context of contentious supplies such as captive consumption, branch transfer, depot transfer, job-work transfers, transfers for repairs, sales returns etc. For example, it is not clear whether the following will constitute a supply: I)Captive Consumption-whether deemed supply? ii)whether provision for deeming the supply between the Principal and Agent will mean that all transactions between principal and agent will now be treated as principal to principal OR only those transactions where the agent receives the goods or services and then distributes the same to the customer (third party)? 3
2. Valuation Rules are laden with lot of exclusions/inclusions and bestow immense arbitrary power on the departmental officers to reject the transaction value. 3. Rules regarding place of supply and Time of supply are extremely difficult to understand and implement for an ordinary business entity. Valuation disputes relating to assessable value either in the case of Central Excise or Customs or taxable value in the case of Service Tax continue to clog the courts in view of so many ifs and buts attached to every rule. Except for large corporate, who can afford to hire experts, ordinary businesses would be hard put to understand the intricacies of the rules relating to time of supply and place of supply. There will be frequent mistakes in ascertaining the correct time and place of supplies leading to massive tax demands on the businesses and huge litigations. For example, it will be difficult for a small trader to fix place of supply in those cases where the person ordering the goods is situated in a different state from the person to whom the goods are delivered. iii)whether supplies by way of gift, charitable activities are covered under the meaning of the term supply? vi)whether allocation of expenses by head office to branches (and viceversa) and between group companies will be treated as supply. v)in the absence of a detailed definition, prolonged litigation will follow as happened in the case of manufacture defined in a similar (inclusive) manner in central excise law. Clarity is required on basic issues, among others, like: --Valuation of services between branch and head office --Valuation in the case of cost allocation of common services --Valuation for captive consumption --Valuation in the case of subsidy Accordingly, these rules require considerable simplification and refinement before they can be put in the statute. 4
4. Transfer of unutilized balance of Cenvat credit, Service tax credit & Vat credit. Section 132 (2) (viii) of the Model GST Law deals with transfer of unutilized balance of Cenvat Credit, service Tax Credit & Vat Credit, provide, subject to such conditions as may be prescribed, for the carrying forward of the unutilized balances of cenvat credit of the duties of excise and the service tax, under the Cenvat Credit Rules 2004, (or of VAT credit under the state VAT credit rules) lying with the taxable persons on the date of their switching over to GST; There is no clear cut guideline given in the Model GST Law. Therefore It is suggested that unutilized cenvat credit balance and VAT credit balance be allowed to be set of against payment of CGST, IGST, SGST interchangeably. Alternatively opening balance on as on specified date of GST implementation should be refunded by the respective authorities. 5. Payment under protest In the said law there is no specific provision for payment under protest, which assumes importance for calculating time limit when interest will be calculated & refund is filed and hence a provision for the same may be included. To incorporate the payment under protest similar to existing laws. 6. Determination of tax not paid or short paid or erroneously refunded. Section 51 of the said law deals with issuing of demands. The sub section (A) and (B) deals with "Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful misstatement or suppression of facts / by reason of fraud or any willful misstatement or suppression of facts" respectively. In both the sub sections there is no time limit prescribed for issuing notice. However, time limit of 3 years and 5 years respectively is fixed under sub section 50 A(7) and 50 B (7) of the section for adjudication of notices issued under the aforesaid sections. It is requested that time limit for issuing demand in both the situations covered under sub section (A) and (B) of section 51 may be fixed. 7. GST liability on supply of goods on advance. 5 As per the model GST law, GST has to be discharged against Receipt of payment of advance towards such supply. It is difficult to control and monitor timing of supply of goods on advances to discharge tax liability. It does not give the feeling / comfort of certainty The model GST law requires a relook into receipt of advances towards supply of goods which mandates discharge of GST liability.
in discharging of GST liability and is certainly prone to litigation on account of complications involved. 8. Reverse Charge Mechanism (RCM) Currently RCM is applicable only for receipt of certain services. Under model GST Provisions (Section 72), RCM shall be applicable both for receiving goods and/ or services. RCM involves complications for assesse and hence alternative simpler mechanism should be developed and RCM should be done away in GST regime. 9. Input Tax Credit to Customer only on Payment of Tax by Supplier 10. Mismatch of Reconciliation of Debit Notes and Credit Notes : As per Section 2 (56) of Model GST Law, input tax credit is available to the buyer of the goods / services only on payment of tax by the supplier of the goods / services. The Assesse does not have any control over the supplier whether he pays the taxes to the government. The Government has the machinery to collect the taxes from the defaulters (Assesses). However Government wants to penalize the assesse for Non- Payment of taxes by entity beyond their control. If there are rejections due quality of goods or some other reasons on which buyer has no control, and he issues Debit Note to the supplier and settles balance payment. It is not practical for buyer to see whether the supplier has accounted the Credit Notes for those claims in his books of accounts. The buyer is unnecessarily asked to match the credit notes which are not in his control. Input tax credit should be allowed to the buyer and it should not be linked to payment of tax by supplier as buyer does not have any control on supplier to pay the tax. Recovery of the taxes from the defaulters is the responsibility of the Government and should not be passed on to assessee. Buyer should not be held responsible or made accountable for any job to be done by the Seller and deprived of his legal right of GST credit. 6
11. Stringent Valid Registrations and blacklisting provisions 12. Central & State Dual Control 13. Personal visits by Government officers to the place of business. 14. General Penalty Under GST 7 There are stringent rules on account of valid registrations and blacklisting provisions in the Model GST Law. The buyer has to check the validity of the registration of the supplier and see whether the supplier has not been blacklisted by the department. If the buyer has purchased / availed the services and he is unaware of the fact that Seller is blacklisted by the department, the buyer will come to know only when he will upload the transaction of purchase in the next month while filing the return. As per Model GST Law, the Assesses will have controls from the Central Government and State Government Officers. In case the view taken by Central Govt. officer and State Government Officer are different, the assesse will be subjected to un necessary harassment and litigations. There is a specific provision in Model GST Law about personal visits by Government Officers to the premises of the assesse. Such visits will cause unnecessary disturbance to the operations of assesse. As per Model GST Law, there is a provision of Penalty of Rs. 10,000/- for each occurrence. The definition of the minor breach is not clear. The amount of tax involved (Rs. 5000) is very small in nature. When a person voluntarily discloses to a tax authority the circumstances of breach of the tax law, regulation or procedural requirement prior to the discovery of the breach by the tax authority, the tax authority may To protect interests of the buyer, necessary provisions should be made to avoid any genuine hardship the buyer. Buyer should be able to check supplier s status at the time of payment and should not be held responsible for the default caused between the period of payment and reconciliation. To recover the dues from the defaulted assesses is the responsibility of the Government and not the buyer of the goods / services. There should be only one Govt. authority with whom the assesse would interact for the provision under the GST law. Whosoever authority decides first, the decision of the said authority shall be binding on others. When there are stringent provisions of Self-Assessment, Return, Audit, Special Audit, Search & Seizure of the premises of the Assesse, a provision of visit to Assesses premises is unnecessary and is against Ease of doing Business. The model GST law requires a relook and should be modified suitably. The definition of minor breach should be modified to cover the tax amount below Rs. 1, 00,000/- instead of Rs. 5,000/-. If the assesse voluntarily discloses the breach to the tax officer and tax amount does not exceed Rs. 5, 00,000/- the penalty under GST law should not be levied.
consider this fact as a potential mitigating factor when establishing penalty for that person. 15. Threshold to trigger arrest Currently, the monetary threshold for tax authorities to conduct arrest for any offence under the provisions of the Central Excise Act, 1944, is Rs 1 crore, and Rs 2 crore under the Finance Act, 1994, (dealing with the service tax law). The threshold was raised from Rs 50 lakh for service tax to Rs 2 crore in the Finance Act, 2016. However, it is proposed to revert to the Rs 50-lakh threshold to trigger arrest in the model GST law. This is a retrograde step, particularly when the GST provisions would be new, and the government should tackle such issues with understanding than through threats of arrest. As such the threshold should be raised to Rs crores. To Conclude A major reform is likely to be fraught with complications. However, the success of the reform will largely be dependent upon whether the stakeholders, particularly, those who create value, output, employment and foreign exchange for the country, irrespective of their scale, category buy in to such a major reform. The Model GST law that has been circulated falls short in various aspect as per the feedback that we have received from our constituents. In this note an attempt has been made to raise some of these issues, not from the perspective to criticise the reform but to help in the process of progressive rule making so that business and industry, the value creators can continue to carry on with their job. It may be mentioned that ease of doing business is one of the cornerstone of this Government and hence it is even more important to ensure that the new law does not take us back to creating fetters for businesses. It is in this perspective, we hope the suggestions and comments will be accepted and amendments made accordingly. 8