Make GST law unambiguous, easy to understand

The first month of GST in India has been full of action. To the credit of the government, it has gone all out to clarify many grey areas of the law in print and social media. Certain sectors such as textiles and branded basmati rice traders are up in arms against the government because of high rates of tax that could knock them out of business.

Exporters are having problems galore since even the tax department seems clueless on the nitty-gritty of letters of undertakings and bonds. Some progress has been made on uploading documents on the portal though much more remains to be done.

The frenetic pace of activity and clarifications are expected to continue for a couple of months at the least after which things should hopefully smoothen out. We can expect a lot of amendments in GST in the Union Budget 2018 to be presented in February.

However, one thing that can be done with immediate effect is for the Department of Revenue to issue notifications that are simple to understand and convey the message unambiguously. Probably one of the harshest and much-discussed provisions in the CGST Act is Section 9(4).

It states that the central tax in respect of the supply of taxable goods or services or both by an unregistered supplier to a registered person shall be paid by such person on reverse charge basis. The recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

In short, the Section states that if a person with a GSTIN number purchases goods or services from a person without a GSTIN number, the purchaser would need to pay tax at the applicable rate for the goods or service.

The purchaser is permitted to claim credit on this payment - the only impact this could have would be on the working capital of the purchaser which could be blocked for some time. Banks could make a killing if they offered a “GST Bridge Loan” that would fund working capital shortages that arise due to GST.

In an effort to clarify the numerous questions that arose on this clause, the Ministry of Finance issued notification No. 8/2017(Central Tax) dated June 28, 2017 which exempted intra-state supplies of goods or services or both received by a registered person from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the CGST Act, 2017 (12 of 2017).

A proviso added that the said exemption shall not be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds Rs 5,000 in a day.

To summarise, the notification clarified that the concept of reverse charge would not apply for purchases of goods and services from unregistered dealers so long as the amount of such purchases did not exceed Rs 5,000 per day from all unregistered vendors. The obvious intention was to provide some relief to the marginal players who generally deal with unregistered dealers.

As can be expected from notifications these days, notification 8/2017 also asks more questions than answers. One of the first questions that is going to arise is whether we can extrapolate this exemption and state that all purchases from unregistered dealers are exempt up to Rs 1,50,000 per month (Rs 5,000x30).

The need to agree on this is because in any entity, it is going to be well nigh impossible to keep a daily account whether their purchases are from registered/unregistered dealers. The second question that arises is what would happen if an entity crosses Rs 5,000 per day only on two days in a month. On all other days, the purchases are below Rs 5,000 but the total for the month is below Rs 1,50,000.

No clear guidelines

Going by the spirit of the law, it appears that tax would have to be paid on reverse charge for the two days. The provisions are silent as to what would happen if the goods purchased are returned after a week. Since tax has been paid on reverse charge, it is expected that the entity should create a debit/credit note on itself for which there are no clear guidelines.

The crux of the issue with this notification is that it has tried a one-size-fits-all formula in granting the exemption. A sum of Rs 5,000 is the limit for a billion dollar software company making profits as well as a beleaguered infrastructure entity with huge losses.

While the unwritten subtext behind the GST Act is to encourage entities to deal only with registered taxpayers, it should not be implemented in a manner that every transaction gets taxed at some point. It would be improper to grant exemptions based on turnover limits leaving the government would only once choice — link the exemption to the threshold limit.

The Department of Revenue should come out with a corrigendum to this notification at the earliest and clarify that the reverse charge mechanism would not apply if the unregistered supplier has a turnover below the threshold limit of Rs 20 lakh. The purchaser should obtain a declaration from the unregistered supplier to this effect.

Rs 5,000 per day works out to an amount just in excess of Rs 18 lakh which is close to the threshold exemption limit. The limit of Rs 5,000 per day would be meaningless then and hence should be done away with. The department could be of the view that this could lead to a lot of false declarations resulting in loss of some revenue. While this could be true to some extent, it will probably be better than rampant under-invoicing just to remain within the limit of Rs 5,000 per day.

(The writer is a Bengaluru-based tax expert)