Contemporary indirect tax structure in India exhibits an obscuring experience for any business in terms of multiplicity of taxes, tax rates, tax periods, threshold limits and endlessly diverse and exponentially multiplying provisions.
The actual impact of such a structure is regressive, capricious and sub-optimal in terms of the efficiency of tax efforts. Doing business with such a complex tax framework is certainly arduous. The GST framework circumvents current patchwork of indirect taxes with precision. GST is expected to bring not only uniformity and simplicity but also would reduce the “negative grey area dynamic effects” of cascading taxation.
Improved tax compliance
With appropriate calibration of rates, GST may not only prove to be a revenue/resource gain for both the Centre and the States but also promises a significant improvement in tax compliance. From a day-to-day business standpoint, GST will certainly impact the rate of tax, for almost all the industries. GST addresses the issue of double taxation, tax cascading and transfer of credits which are big challenges for various sectors. While on one hand, GST brings in a fair degree of clarity and certainty on levy of tax, the model GST law is skillfully drafted to ensure a robust compliance framework. While the burden of compliances on assesses, in the form of multiple registrations, Tax Collection at Source (TCS) and returns will increase, the government will be better positioned to identify tax leakages and non-compliance with a strong GST network in place.
While overall tax rates on goods is expected to come down, cost of procurement of services is expected to increase marginally. In the last four years, service tax has sharply risen from 10.5% to 15% with added restrictions of cess credits. However, the GST regime addresses tax cascading by allowing cross utilisation of credits between goods and services. Complete credit of inter-state supplies will reduce cost of interstate procurements and provide an impetus to cross border trade.
End to disputes
The GST is expected to put an end to notorious tax disputes by bringing certainty and clarity with regard to taxation of various supplies on which dual taxation remains a challenge under the present regime. The model law declares works contract, right to use intangibles, restaurant services, development of software and actionable claims as ‘services’ and as a corollary various disputes of double taxation on the same base would be a history. The challenges for real estate (for instance, sale of under construction flats and completed units) and telecom sector (sale of sim cards, franchise fees and maintenance contracts) would hopefully be resolved.
While the manufacturing sector is expected to substantially gain due to tax rates and credits eligibility, as GST would have a major impact on them with respect to stock transfers and free supplies. To adhere to the principle of destination based taxation, stock transfers would be subject to GST with an optimism to remove the requirement of statutory forms. Further, valuation/taxability of free supplies will raise new challenges. The FMCG sector should keep itself ready for these challenges. While it is hoped that entry tax will be eliminated, the clarity on way-bill and check post related compliances will provide the necessary relief to manufacturers.
Fate of area based exemptions is unknown and needs to be addressed pragmatically. Further, subsidies and state incentives linked to the supplies would attract GST. SEZ benefits are expected to continue and supplies to SEZs are expected to be zero rated. As far as valuation is concerned, the automobile sector may witness significant challenges giving a re-birth to the Fiat case controversy. The inverted duty structure issues, especially relevant for pharma sector, have been addressed by proposed refund mechanism.
Valuation of service — a challenge
For the services sector, valuation of services will pose new challenges in case the officer has a reason to doubt the correctness. Unfettered powers with revenue officials to question transaction values will lead to a slew of disputes. The supply of services by way of barter and co-branding would certainly be debated and disputed. However, GST simplifies valuation of certain composite supplies such as information technology, hotels, restaurants and construction. Further, the concept of Input Service Distributor in the GST model law ensures transfer of credits in relation to common input services. While export of services will remain zero rated, the import of services even without consideration would be subject to tax. For service providers having operations across India and providing services to customers located across India, the issue arises as to where to pay GST, and whether this would require splitting of invoices based on various locations of the service provider or the service recipient.
The draft code provides specific provisions for ecommerce players and aggregators. While the provisions of tax collection at source for the ecommerce players would put an additional compliance burden on the sector, these provisions would ensure that no supply escapes tax and that correct state gets the share of the taxes based on the destination based principles. While there would be greater certainty on whether a supply is ‘goods’ or ‘services’ by ecommerce player under different models, taxation of free supplies may pose challenges. Further, aggregators, such as Uber, providing supplies under a brand name will be deemed to be a supplier for the entire value of the supply. Subsuming entertainment duty and luxury tax would positively impact media and entertainment and hospitality sectors. For airline sector, Computerised Reservation Services may become taxable while maintenance, repair and overhaul of aircrafts will clearly be treated as ‘service’. The place of provision for banking and stock broking services is proposed to be based on whether the services are linked to the account of the customer, and hence requires greater clarity on various parameters.
As India Inc faces a major tax revolution, it is time for businesses to brace the change and prepare by revamping existing IT infrastructure, tax compliance frameworks, structuring procurement and supply models. It is hoped that GST ushers a collective gain for industry as well as for the governments, thereby leading to the possibility of collectively positive-sum game.
(The author is the Director of Indirect Tax at PwC India and is assisted by Pratyushprava Saha, Assistant Manager of Indirect Tax at PwC India. Views are personal)