India's lower house of parliament on Wednesday passed key legislations that could enable the government to launch a nationwide goods and services tax (GST) from July 1
Image: Shutterstock.com (For illustrative purposes only)
At last the GST bill was introduced in the Parliament this week. This is now the third draft after the June and the November draft of model GST law that we are seeing and each one is slightly different than the others. Today let us understand some of the few important changes it has brought in the new avatar.Are past taxes really a history?
GST is supposed to subsume all present indirect taxes from central excise and VAT to Octroi/ LBT and even various cesses. Section 173 and 174 of the CGST act omits/repeals such taxes. We are told that Excise duty, service tax even taxes like Medicinal and Toilet Preparations act, Additional Excise duties on textiles etc would no longer survive after GST is introduced. The SGST acts of the States would, in a similar manner, repeal State taxes like VAT, entry taxes, luxury taxes - but these SGST acts are not in the public domain today.
However one question that comes to my mind is what will happen to cesses
– the customs education cess on imports, automobile cess, NCCD or infrastructure cess on motor vehicles, Krishi Kalyan cess and Swatchh Bharat cess introduced in the last two years – which were the nemesis of the tax payers especially their accountants and IT system engineers - One of my clients took almost a month to configure his IT system to accommodate non creditable Swatchh Bharat cess in his ERP System.
Unfortunately there is no mention of repeal of these cesses in the CGST law that we see today. Some of the cesses were introduced through finance bill during different years while some cesses are levied under different acts (like automobile cess owes its origin to Industrial (Development and Regulation) Act 1951, though collected as duty of excise). Hopefully these respective acts will be repealed under a separate bill in the current session of the Parliament as there would be no time for that later if GST were to be introduced by 1 July. It may be worthwhile to mention here that ‘the Statement of Objects and Reasons’ which provides the background of the Constitution Amendment bill when it was introduced in the Parliament, mentions that the proposed bill sought to subsume all central surcharges and cesses so far as they relate to the supply of goods and services. Therefore theoretically all these cesses and duties would need to be eliminated when GST is introduced – it is now a question of when the theory will convert itself into reality.
One of the glaring omissions is however Central Sales Tax (CST)
charged on inter-State sales. It is tax levied by the Central Government which is administered and retained by the exporting State – a very unique model of taxation. One may recall that the Constitution Amendment act had not removed CST from the list taxes in Seventh schedule of the Indian constitution the way it removed VAT or excise duty. Government has also not repealed it in the GST law. So theoretically States may still charge CST on inter-State sale if the CST act is not repealed under some other method. The Objects and reasons mentioned above also had promised subsuming of CST. Putting that into action would be another task at hand for the Government in the coming days.Octroi and LBT
are taxes of great interest for taxpayers in Maharashtra. The Statement of Objects in the Constitution Amendment bill mentions that Octroi and entry taxes will be subsumed in GST. States will have to repeal them though a separate bill if they are not repealed though the repeal provisions of the SGST act. Compensation Cess on automobiles
In order to compensate States for loss of CST revenue, Central Government will collect a cess on specified goods like tobacco products, motor vehicles, aerated drinks etc. This cess will continue for a period of five years during which States will be compensated based on their revenue from CST during 2015-16 adjusted to annual growth of 14 percent per annum. The Cess act gives a schedule mentioning the maximum rates of cess that could be applied to the goods specified there. While cess on Pan Masala, for example, is capped at 135 percent, for aerated beverages and for motor vehicles it is capped at 15 percent. Cess will be charged over and above the GST rate.
While cess on vehicles is supposed to cover only luxury cars, the entry in the Schedule mentions all motor vehicles covered under heading 8703 of the Customs tariff which broadly covers cars, SUVs, MUVs (of seating capacity less than 10 persons) and even three wheelers. As smaller cars or three wheelers are expected to be out of this cess, a notification to that effect would have to be issued by the Government in such case.
There is a misconception that this cess will not be creditable. However the Cess act provides that credit of cess can be taken and used to pay cess at the next stage. The cess will therefore not be a cost in the supply chain of that particular product.
One interesting observation is the last entry in the Schedule -“any other supplies” -on which cess up to 15 percent can be imposed by the Central Government. Is this a future planning by the Central Government in case it needs resources to adequately fund its compensation operations? Though any cess can be levied by the Central Government only on recommendation of the GST council, the purpose of this blanket entry is a big mystery for the time being.Purchases from unregistered person taxable in purchaser’s hands
The new bill mentions that if a person registered under GST purchases goods or services from an unregistered person, such purchases will taxed in the hands of the purchaser under reverse charge. An overtly innocuous provision holds a great potential for cutting the size of unregistered suppliers in the economy. Let us see an example.
GST paid on services like catering, restaurant services or cab services are not available as credit to any taxpayer. In such a case it would always be advantageous for such taxpayer to buy these services from an unregistered vendor as he would not charge GST on his supplies. Often such vendor may not be registered despite crossing the basic threshold limit. The provision introduced is likely to make such purchases uneconomical as the registered person purchasing such services would now have to pay tax under reverse charge and complete all compliances – like a TDS under income tax. He would therefore be reluctant to procure services from unregistered suppliers. This will push many unregistered suppliers out of business.
Another advantage of such provision is that Government will also have a database of unregistered businesses if they supply goods and services to registered tax payers. This would be another attack by the Government on the unrecorded economy in line with slew of measures unleashed after the demonetisation three months back.
There are many changes that have been introduced now over the draft GST law that was released in November. There are still some gaps that are seen in the present Bill. The Government, for example, still wants to deny the taxpayer credit when payment for supplies is not made to the supplier in 6 months. How the Government will get to know if the purchaser of goods/ services has made payment to the supplier is a one big question but the more fundamental question is why Government should worry about the payments made by the buyer to the purchaser when the tax that was due to the Government has already received in its coffers. Let the businesses handle their affairs while Government handles its own.
Questions like these will crop up and would have to be addressed by the Government in the comings days and months. What is good is that the mist surrounding GST is clearing fast - one only hopes it brings in sunny days.(By Waman Parkhi, Partner, Indirect Tax at KPMG. All views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG in India.)