Goods and Services Tax (GST) – What is it and how would it affect Business activity in India ----must read

. Goods and Services Tax (GST) – What is it and how would it affect Business activity in India

GST is by far one of the most awaited tax reforms in the country. With the emerging consensus amongst the political parties and the push voiced by the industry, there is a lot of expectation that the Constitutional Amendment Bill will be passed in this Monsoon Session. If this happens, the Government is likely to push the implementation of GST with effect from 1st April 2017. Though GST is a tax reform, it is going to impact every sphere of business activity, be it procurement, supply chain, IT, logistics, pricing, margins, working capital, etc. as a number of business decisions taken based on the current tax structure may no longer be relevant in the new GST regime.

Given below are the ten important points on this reform:

1.  GST would be levied on ‘supply’ of goods and services and hence the present prevalent concepts of levy of excise on manufacture, VAT/CST on sales, entry tax on entry of goods in local area would no longer be relevant. The ambit of ‘supply’ is quite wide and covers supply of goods and services without consideration from one taxable person to another.

2.   There would be dual GST i.e. both the Centre and the States would concurrently levy GST across the entire goods and services supply chain on a common base.

Centre would levy Central GST (CGST) and States would levy State GST (SGST) on every supply of goods and services within a State. Integrated GST (IGST) would be levied on all inter-state supplies by the Centre and then transferred to the Destination State. Unlike in the present scenario, IGST would have to be paid on all inter-state supplies, be it in the nature of a sale or stock transfer.

3.   Present Central Taxes like Central Excise, Service Tax, CVD, SAD, CST and State Taxes like VAT, CST, Entry Tax, Luxury Tax would get subsumed under GST. Customs is outside GST and hence Basic Customs Duty would continue on imports.

4.  GST is a destination based consumption tax, which essentially implies that the revenue will accrue to the State where the consumer resides. This is unlike the present origin based levy where the revenue accrues to the origin state from where the movement originates.

5.  Seamless flow of credit would be there under GST whereby CGST would be allowed to be set-off against CGST and IGST, SGST against SGST and IGST and IGST against IGST, CGST and SGST in that order. However, CGST credit will not be allowed to be set-off against SGST and vice versa. Thus, under GST, the present cost of 2% CST on inter-state sale will not be there as IGST would be totally fungible in the Destination State.

However, credit fungibility is state-centric as credit accumulated in one State cannot be used against tax pay-outs in another State.

6.   Liability for payment of GST would arise at the time of supply of goods and service. In terms of model law, receipt of advance payments for supply of goods and/or services would be considered as ‘time of supply’ and tax liability would arise on such advance receipt. However, receipt of goods and services is one of the pre-conditions for allowing input tax credit under GST and hence, even if GST is paid on advance payments, credit for the same would be available only on receipt of goods and services.

7.  Registration threshold has been presently kept at Rs. 10 Lakhs (Rs. 5 lakhs in case of North East States and Sikkim) in the draft model law. Existing registered assesses would

be migrated into GST, first provisionally and then finally subject to furnishing of requite information. Assesses have the option to take business segment-wise registration.

8.   Option of composition levy is also prescribed, if aggregate turnover of a tax payer is < Rs. 50 lakhs. Persons adopting composition levy would be neither entitled to charge GST from its customers nor to avail credit of input tax. However, composition levy is not allowable to assesses who affects inter-State supplies.

9.  Under GST, every assessee would have to upload invoice level outward supply details for B2B transactions. Details of inward supplies and tax credit would be auto-populated based on sales details uploaded by the vendor. Hence, a robust IT infrastructure at the end of both supplier and recipient is critical for hassle free tax credits and avoid denial of credits due to mismatch issues.

10.   Provisions relating to payment of tax under reverse charge, tax deductions at source are expected to continue under GST regime for specified persons/transactions. Thus, additional compliances would continue on the part of recipients, so far as tax payments under reverse charge and deduction at source are concerned.

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A fundamental flaw in GST

The trust deficit between the citizens of India and the Government appears to have plummeted new depths. Upon reading the model GST law, it seems as though in one fell swoop, businesses are staring at their death knell — instead of being the promising vehicle for growth, GST has the potential to destabilise all that is good.

Where the faults lie?

The most critical cause of the failure of GST will be in the transference of responsibility and liability of tax remittance to the customers of a supplier (Section 16(11)( c)). Basically, the law postulates that if a particular supplier has failed to comply with the law correctly — by furnishing the correct returns (Section 27(3)) and/or making the correct payment(Section 27(2)) — then its customers cannot avail themselves of the input credit; if given, it will be reversed.

The origin of this provision lies in the history of tax avoidance through false representations by a small section of businesses, and the fact that it is not feasible for the Government to systematically contain this problem. With the framing of this law, the Government hopes that the market will itself weed out the bad eggs — which is not wrong in theory. What is wrong is not understanding the cascading consequences of doing this in practice and the mayhem it will create. While the effort for driving compliance will reduce, the consequential effect of businesses shutting down, and therefore collections going down, have not been treated seriously enough.

What’s the problem?

Let us understand this through visualising a scenario. Assume Business A operates on a retained margin in the range of 8-9 per cent. Because it is (say) an SME, it buys without access to credit terms. So, it has purchased goods worth ₹50,000, and with GST of 20 per cent, has paid ₹60,000 for the invoice. It now sells this at ₹55,000 with an applicable GST of ₹11,000 — and so it raises an invoice of ₹66,000 on Business B.

Business B is a distributor, operating on a margin of (say) 2 per cent. Now, Business B is concerned that the input credit of ₹11,000 may or may not be available to it, in case Business A is negligent in its compliance. Therefore, it refuses to pay the GST amount until it can be certain to get the input credit (which is an entire ‘return’ cycle away). So, it pays only ₹55,000 on an invoice valued ₹66,000. Now, Business A, in order to ‘get’ the balance due of ₹11,000, has to first finish all compliance requirements, including payment of tax, when it has not yet ‘collected’ the tax amount! In contrast, if Business B ‘trusts’ Business A and does pay the ₹11,000, and if, for whatsoever reason (negligence, cash difficulties, mal-intent), Business A fails to complete the compliance, Business B will lose not just ₹11,000, but in effect, the ‘margin’ it makes on 10 other such invoices (since it operates on a thin margin of 2 per cent).

Apart from this, there are going to be collateral problems. For example, when the input credit is denied, will this be formally treated as a ‘business expense’ and not be taxed by income tax? Obviously yes. But at what point do we treat this as ‘contingent expense’?

Will the advance tax payments made on the assumption of ‘possible write back’ be accepted? If not, will we be reimbursed for the cash-flow cost I incurred? How do we report my end-of-quarter and end-of-year? Will banks fund us? Will insurance cover this risk? How much more working capital will we require? Will we be eligible for it?

The problem is not the ‘management of a manifest risk’ – the problem is the side-effects of cash flow, improper accounting, and reduced ability for people to trade with new suppliers and new customers – since there is uncertainty about the business outcome.

Is there a solution?

Of course. One of the greatest benefits of GST is that it is built ground-up as a technology-enabled tax system. In the past, it was not feasible for the Government to systematically mitigate the risk of fraud, since there was no practical human ability to keep track and trace the culprits — who could/would repeatedly create phantom organisations, and/or phantom invoices. Against this history, it is no wonder that the Government wants to control this menace.

However, GST gives extraordinary traceability. For one, it fully eliminates the ability to have phantom invoices. That alone will massively reduce the problem. Second, with the near ubiquity of Aadhaar, and the passage of the Aadhaar Bill, the Government must mandate that all GST registrations are traceable to individuals based on their Aadhaar identity.

Now, the ability to repeatedly create phantom organisations that allow credit to be taken without corresponding payment will rapidly evaporate. And, of course, the sheer traceability of the individuals, and strong public actions showcased for deterrence, will now become effective.

Clearly, GST has all the ingredients to be great. Making it practical and convenient, by removing this one major lacuna, will go a long way in its ‘welcome embracement’ rather than ‘resisted embracement’.

Being technology-led, it also has all the ingredients to spiral upwards the trust deficit, rather than spiral downwards.

(Article Source: Financial Express, published on 03.08.2016)