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published on 28 June 2019 | reading time approx. 4 minutes
Since implementation of the landmark indirect tax reform in the Republic of India, the GST Acts have only been amended once. One major reason for finite amendments is the federal structure of the nation. All State Governments are required to amend the corresponding State GST laws simultaneously, which due to the inherent legal and procedural requirements, takes substantial time. For these reasons, the amendments that were proposed to the enactment last year came to see day light in February, 2019 only. While the amendments brought some sense of relief and clarity on certain aspects, there’s a long way ahead to stabilise effective and smooth operation of the dynamic yet immature indirect tax. As for instance, there was ambiguity on applicability of GST on sales that were effected while the goods were of High Seas or kept in the bonded warehouse pending Customs clearance. The law was suitably amended to exclude the levy of GST on such transactions.
The upcoming budget that will be presented before the Parliament by the new Finance Minister captivates diverse stake holders. Apropos the GST law, some of the expectations are as under:
With the salutary objective of controlling inflation on account of transition to the new Indirect tax, the law makers approved anti profiteering measures to be incorporated in the GST law. Considering that the GST Act has been pruned vis-à-vis anti-profiteering measures, there’s a compelling need to bring clarity in the GST law itself to achieve the desired objective of providing fair pricing to the end consumer. The by-laws on anti-profiteering have not been clear on the process that the stakeholders need to follow to be anti-profiteering compliant. While the last GST council meeting headed by the new Finance Minister approved extension of the tenure of the Apex Anti Profiteering regulator, it will be imperative for the laws to bring more clarity and bring transparency.
Every economy including the largest democracy in the world thrives on tax collections from tax payers. Double taxation though can be sanctioned expressly by the legislature creates distrust within the taxpaying fraternity towards the Government. India is not new to the concept of double taxation and there have been cases where express double taxation has also received approval of judicial courts. For instance, sale of software and works contract was subject to the levy of erstwhile State Value Added Tax as well as Service Tax with overlap in the base value for levy.
Under the GST law, there are cases which continue to be within the sweep of double taxation. The component of Ocean freight suffer from Integrated Goods and Services Tax (“IGST”) as a duty of Customs at the time of import of goods into India. The same component is also amenable to the domestic GST Law and IGST has to be paid by the importer under Reverse Charge Mechanism. Some taxpayers have already approached Constitutional Courts for judicial scrutiny of such double taxation. Another instance would be supply of goods from a Special Economic Zone (“SEZ”) to the Domestic Tariff Area (“DTA”). Upon removal of goods, IGST is levied as a duty of Customs and there is also an IGST under the domestic GST Law on account of deemed inter-state movement of goods. The upcoming budget should cater to these areas in order to bolster confidence amongst stake holders.
The GST law envisages taxation under 04 broad tax brackets being, 5, 12, 18 and 28 per cent. However, rate structuring was further made complex by introduction of additional tax brackets (for example, 3 per cent on precious metals, etc.) and with the levy of a GST Compensation Cess. The Government on recommendations of the GST Council has been actively pruning rates. Most items now fall under the tax bracket of 12 and 18 per cent, while luxury/sin goods attract 28 per cent. It will be imperative for the Government to continue to prune GST rates, to the extent possible, in order to bracket maximum goods and services under a single tax bracket. This will in turn help in avoiding classification disputes and prolonged litigations.
The present law provides that the recipient will not be entitled to credit of GST paid by him unless the supplier of goods and/or services actually makes payment of GST to the Government. There can be cases where an honest recipient makes payment towards value of supply and the GST, thereon, but the supplier defaults in actually remitting the GST component to the ex-chequer. This draconian provision somewhat influenced from the concept of caveat emptor causes undue hardship to honest tax payers by disallowing credits for no fault of their own. The said provision is already under judicial scrutiny and has been challenged on constitutional grounds. The legislature while protecting the interest of the Revenue Authorities should balance the interest of tax payers. Suitable amendments should be carried out to the law to safeguard interest of the honest taxpayers.
The GST law in order to avoid cascading of taxes has vested rights on the tax payers to claim input credits. GST paid on goods and/or services that are used or intended to be used in the course or furtherance of business are available as input credits to offset the outward GST liability. However, the law at present has a negative list wherein no input credits are available. To the extent possible, the said negative list should be rationalised to allow seamless flow of credits thereby avoiding cascading of taxes.
With the new Finance Minister taking charge on the most critical ministry in the Governmental setup, it will be interesting to see how the newly elected Government responds and amongst other things, makes the Prime Minister’s ‘Make in India’ campaign high yielding.
Petroleum products being petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel are within the ambit of GST. However, the Parliament has vested the power to levy GST (as opposed to the present taxes) on the Government upon recommendation of the GST Council. There have been debates around inclusion of the aforementioned goods within the sweep of GST in order to rationalise the pricing of these products to end consumers. Considering that taxes levied on petroleum products constitute a major chunk of Central and State level revenues, making the said goods part and parcel of the GST law will certainly be a colossal challenge. However, the Government should consider early inclusion of petroleum products in the GST net in order to curb the inflammatory prices that have to borne by tax payers.
Martin Wörlein
Partner, Head of India practice
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Anand Khetan
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