The countdown to the implementation of a Goods and Services Tax (GST) on April 1, 2017 continues. The government on November 26, made available a revised copy of the Model GST law. It may be recalled that earlier this year on June 14, the government had shared the draft Model GST law for public feedback and comments.
The revisions in the Model GST law indicate that the government has gone through and incorporated the feedback and comments received from various stakeholders.
Exclusion Of Securities
When the first version was released in June, one of the biggest concerns that had emerged was the inclusion of ‘securities’ under the ambit of GST. The same had created confusion in industry circles especially stock markets, brokers, banks and mutual funds, as levy of GST on securities would create difficulties in the finance sector and hamper investment activities.
Taking into view these concerns the government has now specifically excluded securities from the definition of ‘goods’ under Section 2(49) and ‘services’ under Section 2(92) of the revised GST law. As a result, securities will not attract any tax under GST law.
This will be welcomed by the industry and market participants as the government has made it clear that it does not intend to include stock market transactions in the indirect tax net.
Supplies To Special Economic Zones – The Benefits Continue
One of the main reasons for the increase in the contribution of Special Economic Zones (SEZ) in India’s exports in the last decade is due to the number of tax benefits available to them, especially from an indirect tax point of view.
The ambiguity over taxation of supplies to SEZ units in the earlier Model GST law was perplexing as such units have been exempt from indirect taxes so far.
After representations by industry, trade associations and the Ministry of Commerce, supplies made to SEZ units will now be treated as ‘zero-rated supplies’ under the revised GST law i.e., such supplies will now attract nil rate of tax under GST. Further, in case GST is levied by a person supplying goods or services to SEZ units, then the SEZ units shall be eligible to claim refund of the same from the Government.
Thus the new GST law has ensured that benefits provided to SEZ units under the current indirect tax laws will continue to be extended under the GST regime, thereby helping in the growth of these units and indirectly contributing to the exports of the country.
Temporary Application Of Business Assets Or Services To A Private Or Non-Business Use
Generally, business organizations tend to provide certain perquisites to their employees in the form of cars, laptops, mobile phones and treat the same as business assets in their books.
Such business assets or services may be used by the employees for their personal consumption to a certain extent. Under the earlier Model GST law, the use of such business assets or services for private or personal use was included in Schedule I: ‘Supply without consideration’, meaning such transactions was expected to attract GST. This, in turn led to confusion among business as it would be difficult to distinguish between business usage and personal usage of such assets and the valuation of such supplies.
This concern has been addressed in the revised GST law wherein the said Schedule has been revised to remove such transactions from the ambit of ‘supply’. This means that such perquisites enjoyed by employees will not attract GST, irrespective of whether they are used for business purposes or personal consumption.
Place of Supply Extends Beyond National Borders
Although ‘place of supply’ is one of the most important determinants for levying GST, under the earlier Model GST Law it had been discussed in a limited way. However, the revised GST law has introduced new provisions for supplies that are made where location of supplier is different from the location of service recipient. The new place of supply provisions introduced for services are almost similar to the Place of Provision of Service (POPS) rules present under the current service tax law.
Thus the complexities that prevail under the current service tax law due to POPS rules will continue to persist under the GST regime, one such complexity being the dispute over classification of supplies as ‘intermediary’ supplies.
Accordingly, while there was a huge relief for agents in India providing their services to overseas entities as the place of supply under the earlier Model law, the same has again been brought back on location of supplier i.e., India, which is at par with current service tax laws.
Therefore, even if the revised GST law has broadened the scope of place of supply, it has also broadened the possibilities of litigation that may arise under the GST regime.
The onset of GST might bring a reason to cheer for consumers as an anti-profiteering clause has been introduced in the revised GST law which casts the responsibility of every company to pass on the benefit of GST to its end consumers.
This clause states that an authority will be created which will ensure companies do not solely benefit from GST and the end consumer is also entitled to receive the same. Since indirect tax is a regressive tax where the burden to pay tax is borne by end consumers, this clause is a welcome move and will be supported by every consumer. The impact of the clause ensures that prices charged to the consumer are fair and also that transparency is maintained in the pricing mechanism and policies of every company.
Also, non compliance of the provision will attract a penalty, thereby hopefully ensuring strict compliance.
However, on a separate note, while the intent is to safeguard consumers, there will be practical challenges faced by industry in demonstrating the same. The Malaysian GST law also experienced similar challenges when such provisions were implemented.
Principal – Agent Relationship A ‘Taxing Relationship’
The most economic way to expand a business is by way of having agents across various locations. Since VAT/CST is not applicable on stock transfers under the current tax regime, the agency model proves to be feasible for most companies.
Under the revised GST law, supplies made by principal to agent and vice versa shall be covered under the ambit of supply. This means that all kinds of supplies made between principals and agents would attract GST, irrespective of the fact whether the same is for a consideration or not.
Thus supplies made in every state will be taxed under GST, which may lead to additional costs to company. On the other hand, the recipient of such supplies will be eligible for IGST (inter-state) credit, which he may use to set-off his output IGST, CGST and SGST liability.
As a concluding remark, it appears that the Government has heeded the pleas of various sections of industry in revising the law and has tried to incorporate the representations made by them. Despite the positives, the law, in certain aspects, appears to increase the level of complications. Hence, it will be interesting to see how the new provisions pan out post their implementation as the government is actively taking steps to ensure that the GST law meets its designated deadline of April 1, 2017.
Pratik Shah and Jigar Doshi - Partner, SKP Business Consulting LLP
The article represents the personal views of the authors, which should not be construed as views of the firm.