GST – Some Critical Issues

GST – Some Critical Issues V S Datey

Trailer is good – picture not so good • The idea of GST was initiated to create a national market and to avoid cascading effect of taxes. • Final shape of GST that has come on 1-7-2017 is not good. • In fact, some of GST provisions are ‘terrors’. • Compliance costs are heavy - no ‘ease of doing business’. • Inadequate transitory provisions • Invoice and debit/credit note matching – idea failed

Achievements • National Market – about 70% achieved • Avoid cascading effect of taxes – about 70% achieved • Problems due to overlapping of Vat and service tax – more or less eliminated • Uniform GST Law all over India – 90% achieved

Unique features of GST as introduced in India • Concept of IGST is a unique idea – nowhere else tried • GST on supply and not on manufacture or sale. This changes entire structure of tax • Dual structure of GST • Distinction between goods and services considerably reduced – avoiding overlapping of taxes • Uniform law on goods and services all over India

Special features of Indian GST • Centre State Cooperation at unprecedented level. All the decisions so far in GST Council by consensus and not by voting • Most complex GST law in the world • Bifurcation of taxable persons between Centre and States • No concept of ABC analysis in trying to bring every transaction under GST

Basic philosophy behind GST Law • All taxable persons and crooks and rascals • The taxable persons are not trust worthy and they are out to cheat Government • On the other hand, all tax officers are saints and honest people • Most unfriendly tax administration

Brain Hard Disk has to be formatted • GST conceptually different from excise, service tax and Vat • The old concepts have to be completely wiped off • Not easy to get out of hangover of the past

Failed GSTN • GSTN is the biggest failure • One crore taxable persons to be handled • Difficulties in filing returns and amending them • GSTR 2 and GSRT 3 scrapped – automatic refunds in case of exports – a distant dream • Keep track to know whether supplier has paid tax

Mandatory Registration • In some cases, even if basic service is exempt or under reverse charge, if some taxable service is supplied, then registration mandatory • Example - Education services, hospital services – even Advocate Services • Petrol pumps selling lubricants and other products • Once registered, reverse charge also applies – no exemption of 20 lakhs

Avoidance of dual control • Principle of avoiding dual control is laudable. • So far problem is regarding refund of exports – as State authorities are not familiar with export provisions • Problems for consultants - Some of their clients may be under State Government Control while others may be under Central Government control.

CGST/SGST paid when IGST was payable and vice versa • Interpretation of provisions of ‘place of supply’ and ‘fixed establishment’ are critical in determining whether IGST is payable or SGST/CGST are payable. • A taxable person who has paid CGST/SGST on a transaction but which is subsequently held to be an inter-state supply, shall be granted refund of CGST /SGST • This means that he will have to pay IGST and then claim refund of SGST/CGST paid.

Valuation provisions • Some Valuation provisions copied from present service tax and excise law e.g. ‘related person’ and ‘price is sole consideration’. • Provision relating to related buyer are retained only when the related buyer is ultimate consumer • ‘Value’ includes interest or late fee or penalty for delayed payment of any consideration for any supply. • GST payable on outward freight and packing, if contract FOR

Issues in valuation • Valuation of free flats given to land owners • Valuation of works contract • Reimbursement of expenses

Post supply discounts and price reductions not eligible for deduction from value • Giving trade discounts and price reductions during negotiations after supply of goods and services is very common in business. However, if such post supply discounts were not anticipated at the time of supply, it is not allowed to be deducted from value. • This provision completely ignores business reality. • Further, if payment is not made within 180 days, then input tax credit is to be reversed. This is double whammy.

Artificial disallowances of input tax credit • Disallowing input tax credit on motor vehicle related services makes no sense • Some services like food and beverages and beauty treatment are legitimate business expenses for some kinds of businesses • Construction related services capitalised in books of account not eligible even if in relation to business

SGST and CGST paid in one State • Can credit of CGST and SGST paid in one State be availed in another State? • For example, hotel or rent bill in another State, can ITC be availed? • Doubtful as registration is State specific

Payment of GST on advances received on services to be supplied • GST is payable when advance is received, even if supply of services is to be made at a later stage. • This throws the accounting out of gear. • Input Tax Credit will not be available when GST is paid on advance received. • If you term the amount as ‘adjustable deposit’ in separate account, GST is not payable, though Company Law issues will arise.

Reversal of input tax credit if payment not made to supplier within 180 days • If payment of bill and tax thereon is not made within 180 days, input tax credit is required to be proportionately reversed with interest • The purpose seems to be to avoid bogus invoices. However, since tax has been received by Government, there is no loss to Government when transactions are genuine. • Some deductions from invoices, discounts are common in business.

GST on fringe benefits to employees • Employer and employee have been defined as ‘related persons’ - fringe benefits provided to employees – food, transport, telephone • Gifts uptoRs 50,000 to employees may be exempted. However, reversal of input tax credit may be required.

Composition Scheme - traps • Cannot make inter-state sale of goods • Hence, separate partnership firm or HUF • Applicable to supplier of services if upto 10% of turnover w.e.f. 1-10-2018

Services supplied by HO to branches or divisions and vice versa • Provision made of Input Service Distributor to distribute credit • Issue of services supplied by HO to branches or by one branch to other with distinct GSTIN still relevant - Payment of GST on advances received for services • Services of employee to employer are neither goods nor service – employer is same even if GSTIN is different

Bill to ship to transaction when intermediary is out of India • Third party shipments when both supplier and recipient is in India but intermediary is out of India i.e. Bill to Ship to transaction • As per section 10(1)(b) of IGST Act this is deemed export by Indian supplier and deemed import by Indian recipient

System is the master not human being • There is not likely to be human touch in many aspects of GST • Mistakes difficult to correct • Adjustment of payments on FIFO basis – all at mercy of system • If system fails, whole mechanism of fails.

Confusion about place of supply and location of supplier • Place of supply only determines whether IGST is payable or CGST and SGST payable • Place of supply does not mean registration required at that place • Registration only if a person has fixed establishment at that place • Casual Registration is not mandatory • Renting, erection and commissioning, repairs

Anti profiteering measures • Benefit of input tax credit and reduction in tax rates should be passed on to customer • So far no serious issue has cropped up • Cost Accountant can help both department and taxable persons • No penalty provisions

Many more critical issues • What we have discussed in only tip of iceberg. Many more complications would arise in due course. • No worry about job security to persons in GST department and consultants of GST • Let us hope that GST, as it finally comes out is ‘Good and Sensible Tax’.

Thanks • Thanks • Wish you happy and safe journey in jungle of GST

GST – Some Critical Issues