Roadblocks in the transitioning to GST regime

An essential area which seems to have skipped the attention of the lawmakers is with respect to lapse of credit for a refund claim filed by a taxpayer under existing indirect tax laws which is rejected in GST regime. (Photo: Shutterstock)

With the government releasing the model GST law and the Constitution Amendment Bill becoming an Act, India Inc is on its toes trying to decode the GST mystery. This is apparent from the plethora of representations received by the Empowered Committee and various government forums, from multiple industry bodies. While the industry and trade associations have been quite vocal about ambiguities in the model GST law on key concepts such as supply, registration, credit and place of supply, transition provisions under the model GST law seem to have taken a backseat.

Transition provisions entail equal attention from the industry for the fact that these would be instrumental in ensuring the smooth migration of taxpayers into the GST regime.

Companies will have to depend on these provisions for certain critical aspects such as carrying forward existing credits and refunds into the GST regime, avoidance of double taxation on long-term contracts and finalisation of pending assessments and appellate proceedings. In other words, transition provisions are like the hallway which every taxpayer would have to necessarily pass through before they start to operate under the GST regime. Thus, it becomes imperative that transition provisions are well contained and unambiguous.

At first blush of the various provisions relating to transition covered under the model GST law, one feels satisfied that enough thought has been placed by lawmakers to provide some robust transitioning mechanisms. For instance, there are provisions for non-levy of GST on goods sent on approval basis by dealers or manufacturers but are returned within six months of GST implementation.

Similarly, there are provisions for non-levy of GST on payments made after GST implementation for goods and services supplied before GST implementation on which tax was paid under the earlier regime. The subsequent provisions also allow for credit to be taken on inputs held in stock or contained in semi-finished / finished goods by a person who was claiming exemption in existing laws. One of the pre-requisites for claiming such credit is that it should qualify as an ‘eligible credit’ under present laws but the exemption is not eligible as a credit.

Nonetheless, on careful reading, one also notices a few critical missing links. As an example, while the model GST law provides for automatic migration of existing taxpayers into the GST regime, the manner of such migration is conspicuously missing.

This leaves many wondering if taxpayers presently registered under state laws such as VAT would be provided automatic registration under central GST / integrated GST laws and vice-versa. In the absence of an automatic migration, various dealers as well as service providers would have to obtain such registrations before GST is implemented to ensure continuity of their businesses.

The most critical facet of transitioning to GST for various taxpayers involves carrying forward existing credits. To this effect, the model GST law clearly allows transfer of credits reflected in the present tax returns into the GST regime.  However, this transfer has been unnecessarily constrained by a condition of such credit qualifying as ‘eligible credit’ under the GST laws as well. This puts a needless burden on the taxpayers to re-examine validly availed credit from a GST standpoint. This could also lead to taxpayers frantically searching their past records and trying to co-relate the credit reflected in returns with specific goods and services.

Another important provision which seems to be absent from the model GST law and is being heavily represented by the industry is allowing credit of taxes on stock lying with dealers and traders. To elaborate, under present laws, a dealer or trader is not allowed credit of excise duty or additional customs duty in lieu of excise.

However, under GST, supply of such goods would attract GST without allowing credit of the aforesaid duties. This would lead to levy of GST on goods which have already been subject to tax under present regime without availability of any credits, leading to cascading and price distortion. A consequence of this could be dealers rushing to return their existing stock to manufacturers immediately preceding the date of enactment of GST for re-purchase subsequently. Either of these scenarios is not desirable for the industry or end consumers.

Another essential area which seems to have skipped the attention of the lawmakers is with respect to lapse of credit for a refund claim filed by a taxpayer under existing indirect tax laws which is rejected in GST regime. In complex cases requiring interpretation of the law, one cannot rule out the possibility of difference of opinion between taxpayers and authorities leading to rejection of refund claim at lower levels and subsequent grant at higher levels.

In such a scenario, taking away the right of the taxpayer to re-claim credit of rejected refund would lead to unnecessary costs for the taxpayer which could not have been the intent of legislature. Similarly, the provisions which deal with recovery of taxes from the taxpayer as a result of finalisation of pending adjudication, assessment, etc are silent on the corresponding credit eligibility of such taxes.

The attention placed by the legislature to transition provisions by dedicating an entire chapter under the model GST law is well appreciated by the industry.  However, it has to be ensured that the transition provisions are made more robust and all loose ends are tightened, before the final laws are rolled out. This responsibility is to be equally shared by the industry, which should make representations at appropriate forums and bring forth their concerns actively to the attention of the legislature.

- By Payal Tuli, Partner, BMR & Associates LLP with inputs from Poonam Harjani and Nimisha Chaudhary

The thoughts and opinions shared here are of the author.