GOODS AND SERVICES TAX – AN OVERVIEW

[Srikantha Rao T]

The Goods and Services Tax has frequently been in the news for the last one year or so ever since the new Government has come to power. It is worthwhile noting that introduction of GST as it is referred to, has been in the pipeline for nearly a decade now with the initial announcement being made in 2007-08 to the effect that the introduction would be with effect from 01^st April 2010. This has not happened due to various reasons with one main reason being the complexities involved in introducing a tax which would be acceptable to both the Union and States with ours being a federal tax structure. This factor alone has gone a long way in delaying the GST roll-out as harmonization process would involve amendments to Constitution as well as consent of the States to the proposed model. Nevertheless, we have made some progress from the day the First Discussion Paper on GST was announced on November 10^th 2009 containing the detailed view of the Empowered Committee of the State Finance Ministers regarding the structure of GST along with a FAQ (Frequently Asked Questions) on GST for discussion with industry and trade circles.

In this article the author has sought to analyse the basic provisions of the proposed GST law based on the Model GST Law drafted in September 2015 including the proposed Integrated Goods and Services Tax Act of 2016 and released by the Empowered Committee of the State Finance Ministers as would be found useful by assesses/tax payers in general, against the backdrop of the initial framework announced almost six years ago.

Why GST?

The present tax structure has quite a few shortcomings. At the Union level, we have non-inclusion of several Central taxes in the overall framework of CENVAT, such as additional customs duty, surcharges, etc., besides non-capturing of value added chain in the distribution chain beyond the manufacturer in the CENVAT scheme. The introduction of GST at the Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief avoiding cascading effect of taxes, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade.

At the State level there are several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., which are yet to be subsumed in the existing VAT. In addition to this, CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and leading to that extent to a cascading effect of taxes. Apart from this, present VAT does not involve integration between VAT on goods and tax on services which has also contributed to litigation before Courts on levy and valuation issues in respect of contracts where both goods and services are involved.

Resolving the above issues would mean constitutional amendments i.e. for instance to enable States to tax services. The objective of GST is to provide relief to industry and trade apart from consumers by lowering if not avoiding altogether the cascading effect of taxes through a more comprehensive and wider coverage of tax set off mechanism. It is also expected to result in higher tax collections for the Union in the long run on account of wider coverage of distribution chain as well as better compliances through revamped administrative processes.

GST Model

A dual GST structure is being followed with two components – one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes to the extent possible. The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration and to be paid to the accounts of the Centre and the States separately. Since these would be treated separately, no cross-utilisation between the two would be possible except in case of inter-state supply of goods and services.

How would it work?

It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. This has also been illustrated in the First Discussion Paper on GST with a simple example where the manufacturer of goods would sell to a wholesaler who would in turn sell to a retailer with margins being enjoyed at each stage. The example is given below –

Stage of supply chain	Purchase value of Input	Value addition	Value at which supply of goods and services made to next stage	Rate of GST	GST on output	Input Tax credit	Net GST= GST on output - Input tax credit
Manufacturer	100	30	130	10%	13	10	13-10 = 3
Whole seller	130	20	150	10%	15	13	15-13 = 2
Retailer	150	10	160	10%	16	15	16-15 = 1

 

Every transaction of supply of goods and services within a State that has to suffer GST would attract both Central GST and the State GST. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of CENVAT. While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, the concerned SGST would be chargeable only when the supplier and the recipient are both located within the State. The tax in effect would only be on value addition as set off can be claimed by the seller i.e. CGST paid on purchases set off against his CGST liability while SGST paid on purchases within the State could be used and set off against CGST liability. CGST on purchases cannot be used for SGST payment on sale and vice-a-versa. Within CGST and SGST, cross utilization would be allowed in terms of tax on goods and services.

Intra-state transaction or transaction within a State

Going by Section 14 of the model law this would cover supply of goods within the same state or where the movement of goods commences and terminates in the same State even if goods pass through the territory of another state during such movement. In case of supply of services, the service provider and the service receiver have to be located in the same State.

Time of supply of goods

The liability to CGST and/or SGST would be at the time of supply. In respect of goods, it shall be the earliest of the following –

• the date on which the goods are removed by the supplier for supply to the buyer, in a case where the goods are required to be removed and
• the date on which the goods are made available to the buyer (i.e. placed at his disposal), in a case where the goods are not required to be removed; (i.e. where goods physically cannot be moved or are supplied in assembled or installed form or are supplied to himself or to his principal or agent) or
• the date on which the supplier issues the invoice with respect to the supply; or
• the date on which the supplier receives the payment with respect to the supply; or
• the date on which the buyer shows the receipt of the goods in his books of account.

In other words, it shall be the earlier of date of removal (or being made available in case of non-movement of goods) or the date of receipt of payment or date of invoicing. In case of part invoicing or payment, supply shall be considered to the extent invoiced or to the extent payment is received.

In case of continuous supply of goods (goods subject to such treatment to be notified by the Central/State Government), where successive statements of accounts or successive payments are involved, the time of supply shall be the date of expiry of the period to which such successive statements of accounts or successive payments relate. If there are no successive statements of account, the date of issue of the invoice (or any other document) or the date of receipt of payment, whichever is earlier, shall be the time of supply.

Sale on approval etc.

If the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, the time of supply shall be at the time when it becomes known that the supply has taken place or twelve months from the date of removal, whichever is earlier.

In other cases the time of supply shall in a case where a periodical return has to be filed, be the date on which such return is to be filed, or in any other case, be the date on which the CGST/SGST is paid.

Time of supply of services

In respect of services, it shall be –

• the date of issue of invoice or the date of receipt of payment, whichever is earlier, if the invoice is issued within the prescribed period; or
• the date of completion of the provision of service or the date of receipt of payment, whichever is earlier, if the invoice is not issued within the prescribed period; or
• the date on which the recipient shows the receipt of services in his books of account, in a case where the above two clauses do not apply

Cessation of services before completion

In a case where the supply of services ceases under a contract before the completion of the supply, such services shall be deemed to have been provided at the time when the supply ceases.

In case of continuous supply of services (services to be notified by Central/State Government), where the due date of payment is ascertainable from the contract, the date on which the payment is liable to be made by the service receiver, whether or not any invoice has been issued or any payment has been received by the service provider. Where the due date of payment is not ascertainable from the contract, each such time when the service provider receives the payment, or issues an invoice, whichever is earlier. Where the payment is linked to the completion of an event, the time of completion of that event.

The aforesaid clause would pose issues to notified services where the point of completion cannot be known owing to practical difficulties. Even if payment terms are known from contract, delays in payment by clients could impact supplier of service as liability would be based on timing of accrual of dues based on contract.

Timing of liability in case of reverse charge liability

It shall be the earliest of the following dates –

1. the date of receipt of services, or
2. the date on which the payment is made, or
3. the date of receipt of invoice, or
4. the date of debit in the books of accounts.

Where aforesaid clauses are not applicable, the time of supply shall in a case where a periodical return has to be filed, be the date on which such return is to be filed; or in any other case, be the date on which the CGST/SGST is paid.

Place of supply of goods and services

The place of supply of goods u/s 15 of the Model GST Law shall be the location at which the goods are delivered to the receiver where the supply involves movement of goods. This would also cover a scenario where the goods are supplied to a buyer located in another State and the supplier arranges the transport of goods. Where the supply does not involve movement of goods, the place of supply shall be the location of such goods at the time of the delivery to the receiver. This would apply to constructive delivery of goods where title is transferred without physically delivering goods to the buyer. Where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly.

Where the goods are supplied on board a conveyance, such as a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the location at which such goods are taken on board.

The place of supply of all services u/s 16 of the Model GST Law, except specified services made to a registered person shall be the location of the service receiver. Where made to any person other than a registered person shall be the location of the service provider. The specified services which are subject to different norms for determination of place of supply can be indicated as follows –

• Based on location of the immovable property or boat or vessel or intended to be located –

1. Services in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or coordination of construction work or
2. Services by way of lodging accommodation by a hotel, inn, guest house, homestay, club or campsite, by whatever name called and including a house boat or any other vessel, or
3. Services by way of accommodation in any immovable property for organizing any marriage or reception or matters related therewith, official, social, cultural, religious or business function including services provided in relation to such function at such property.

• Based on location where services are actually performed – restaurant and catering services and services in relation to training, performance appraisal, personal grooming, fitness, beauty treatment, health services including cosmetic and plastic surgery
• Based on location where an event is held –

1. Services by way of admission to a cultural, artistic, sporting, scientific, educational, or entertainment event or amusement park or any other place, or
2. Services by way of organization of a cultural, artistic, sporting, scientific, educational or entertainment event including supply of service in relation to a conference, fair, exhibition, celebration or similar events, or
3. Services ancillary to such admission to or organization of any of the above events or services, or
4. Services by way of assigning of sponsorship of any of the above events.

• Based on the location at which such goods are handed over for their transportation – where services by way of transportation of goods, or mail or courier to an unregistered person is involved. Where the person is registered, it shall be the location of the service receiver.
• The place of supply of passenger transportation service shall be the place where the passenger embarks on the conveyance for a continuous journey. Where the right to passage is given for future use and the point of embarkation is not known, location of the service recipient where recipient is registered and location of service provider where the recipient is not registered
• The place of supply of services on board a conveyance such as vessel, aircraft, train or motor vehicle, shall be the location of the first scheduled point of departure of that conveyance for the journey.
• The place of supply of telecommunication services including data transfer, broadcasting, cable and direct to home television services to any person shall –

1. in case of services by way of fixed telecommunication line, leased circuits, internet leased circuit, cable or dish antenna, be the location where the telecommunication line, leased circuit or cable connection or dish antenna is installed for receipt of services;
2. in case of mobile connection for telecommunication and internet services provided on post-paid basis, be the location of billing address of the service receiver on record of the service provider;
3. in cases where mobile connection for telecommunication and internet service are provided on pre-payment through a voucher or any other means, be the location where such pre-payment is received or such vouchers are sold. (This is subject to location of service receiver as indicated in service provider’s records being considered where pre-payment or recharge is by internet banking or electronic means)

• The place of supply of banking and other financial services including stock broking services to any person shall be the location of the service receiver on the records of the service provider subject to location of service provider being considered where services are not linked to account of the receiver.
• The place of supply of insurance services shall:
  1. to a registered person, be the location of the service receiver; and
  2. to a person other than a registered person, be the location of the service receiver on the records of the service provider.
  3. For all general insurance services related to an immovable property, be the location of the property
• The place of supply of advertisement services to the Central Government, a State Government, a statutory body or a local authority meant for identifiable States, shall be taken as located in each of such States and the value of such supplies specific to each State shall be in proportion to amount attributable to service provided by way of dissemination in the respective States as may be determined in terms of the contract or agreement entered into in this regard.

Inter-state transaction

The Central Government would levy IGST (Section 4 of The Integrated Goods & Services Tax Act 2016) which would be CGST plus SGST on all inter-State transactions of taxable goods and services. For the purpose, explanation to Section 2(c) of The Integrated Goods & Services Tax Act 2016 regards supply of goods and/or services in the course of import into the territory of India as supply of goods and/or services in the course of inter-state trade or commerce. In order to constitute an inter-state sale, the location of supplier/service provider and the place of supply of goods or services are to be in different States going by Section 3 of The Integrated Goods & Services Tax Act 2016 proposed.

Place of supply of goods and services under IGST Act

The concept of place of supply of goods and/or services is identical to the one under Model GST Law covering CGST and SGST for taxing transactions within a State. One additional clause though is regarding place of supply of gas which would be the location where gas is used and consumed. It has been sought to be clarified that the view of the Central Government on place of supply for B2B supplies is that the location of service recipient would be the determining factor unless otherwise specified for certain specific cases.

The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Central Government the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Central Government will transfer to the importing State the credit of IGST used in payment of SGST (Section 9(2) of The IGST Act 2016). The relevant information is also submitted to the Central Agency which will act as a clearing house to verify the claims and inform the respective governments to transfer the funds. The tax set off scenario could be explained by the table given below –

Tax to be paid (Output tax)	Tax incurred on goods/services procured (within State)	Tax incurred on goods/services procured (inter-state)	Set off available on tax on procurement
CGST	CGST SGST	IGST	CGST IGST
SGST	CGST SGST	IGST	SGST IGST
IGST (on inter-state sale)	CGST SGST	IGST	CGST SGST IGST

The aforesaid scenario has been confirmed by proposed Section 2(36) of the Model Law in respect of goods or services used or to be used in the course or furtherance of taxable person’s business. This model would replace the existing Central Sales Tax on inter-state sale of goods reducing the cost of procurement to the inter-state buyer owing to set off being available on IGST.

Readers have to note that other provisions Model GST law applicable to CGST Act 2016 like for instance valuation, registration, returns, input tax credit, time of supply of services, exemption, tax payments, audit etc. are applicable to IGST Act and these have not been covered separately going by Section 11 of IGST Act 2016.

Import and Export

Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import of goods and services. Exports would be zero-rated with similar benefits to supplies to processing zones within Special Economic Zones (SEZs). No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed. Since exports have been zero rated, credit of input tax related to such supply (i.e. exports) would be allowed even though no tax is payable on exports. This has been covered specifically by proposed Section 2(77) of the Model GST Law. The term “export” would require taking out of India to a place outside India.

This has to be read with proposed Sections 2(42) and 2(43) dealing with the location of the service provider and service receiver in the context of services which are similar to the ones under Place of Provision of Service Rules 2012 under service tax. The Author here would like to highlight the fact that some clarity is needed on the proposed provisions which would govern export of services out of India as barring those cases specifically covered u/s 16, in other cases the location of the service recipient would be the determining factor for place of supply of services. This comes with the condition that the service recipient is registered. This may not work in case of service recipient being outside India. In such cases, the need for him being registered should ideally be done away with. This could help a taxable person to determine whether or not services are exported unlike in case of goods where physical movement of goods out of India would establish fact of export.

Who is liable? What is liable?

As per proposed Section 7(2), the liability to CGST/SGST would be on the taxable person. This has to be read with Section 7(1) where levy is on all intra-state supply of goods and services (with IGST being dealt with separately) and by the taxable person. The definition of “goods” is similar to the one prevailing now going by Section 2(31).

The term supply would generally include all forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal, and importation of services, made or agreed to be made for a consideration by a person in the course or furtherance of business and also includes a supply specified in Schedule I, made or agreed to be made without a consideration. It is interesting to note that export has not been made part of the definition though it remains to be seen whether this definition is subject to amendments moving forward.

The definition of service gives it a wide meaning and that is anything other than goods. Here readers may note that concept of declared service as is prevalent under service tax has been brought under GST law. Works contract has been sought to be regarded as service. This should help in resolving valuation related issues being faced presently by contractors though we are yet to get final rates under GST. Moreover, owing to applicability of transaction value norms, inter-corporate related party transactions could be under scrutiny not only for works contracts but all declared services as well.

The term taxable person u/s 9 would mean a person who carries on any business at any place in India or the concerned State and who is registered or required to be registered under Schedule III of this Act for payment of tax. This Schedule requires all taxable persons having turnover above the threshold being required to register.

Turnover would include supplies on his own account as well as those on account of principal. A person supplying inter-state would be liable to register irrespective of his turnover. Casual taxable person (occasional supplier with no fixed place of business in the taxable territory) and person liable on reverse charge mechanism have also been covered.

Readers may note that while employees providing services to employer have been excluded from being regarded as taxable person, Central Government and State Government along with local authorities would be regarded as taxable person in respect of activities or transactions in which they are engaged as public authorities unless they are exempted on recommendations of the GST Council.

The term business has been defined to include any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit. Regularity or otherwise of the transaction would be immaterial.

Readers who are familiar with the definition of “person” under Service Tax may note that the term has been similarly defined under proposed Section 2(50).

Input tax credit

Under proposed Section 18 of the Model GST law, every taxable person shall be entitled to take credit of input tax and deduct the same in respect of a tax period from the output tax pertaining to the same tax period subject to conditions to be prescribed. Tax period is the period for which tax return is required to be filed. It remains to be seen whether free carry forward of credits for utilisation beyond tax period would be allowed at all moving forward as present Cenvat scheme has no restrictions on utilisation once credit is admissible. One can only hope that there would be no restrictions in this regard. Where the goods and/or services are partly used for business purposes, credit attributable to business use alone would be admissible.

Similar condition exists for usage of goods (excluding capital goods) and services within the business for taxable supplies as well as non-taxable supplies and exempted supplies (other than zero rated supplies). Readers may observe here that relaxation would be admissible for capital goods as long as they are used for business. In other words, if not used for business even credits thereon would require to be split.

Owing to the dual structure, there are conditions in terms of manner of utilisation of credits. For instance, IGST credits should first be utilized for IGST payment and then for payment of CGST and SGST in that order. The CGST credits should first be applied to pay off CGST dues and balance if any can be used for payment of IGST. Similarly, SGST credits left over after utilisation for paying off SGST can be used to pay off IGST. Cross utilisation between CGST and SGST has been specifically prohibited (Sec. 18(5)(d) and Sec.18(5)(e)). Any unadjusted input tax credit at the end of the period could be claimed as refund by the taxable person where accumulation is on account of exports (provided no export duty exists on such goods) or on account of input tax rate being higher than output tax rate. Refund would be subject to adjustment of pending tax dues as the case may be.

Ineligible input tax credits

Input tax credit at the moment has been sought to be disallowed on the following –

• motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services-

1. transportation of passengers,
2. transportation of goods,
3. imparting training on motor driving skills

• goods or services provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee
• goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery
• goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery
• goods and/or services on which tax has been paid under section 8 of the Act i.e. compounded levy; and
• goods and/or services used for private or personal consumption, to the extent they are so consumed.

The restrictions here are similar to the ones prevalent under Cenvat Credit Rules 2004. As far as petrol and petroleum products are concerned, these are not to be subsumed in GST and question of set off of tax thereon would not arise. Even when subsumed credit thereon would be denied. In the humble opinion of the author, the two clauses highlighted above dealing with works contract scenarios would require clarity (or even possibly amendment) as there is every possibility of the matter seeing considerable litigation based on differences in perception between assesses and the Authorities.

The credit would be allowed only on a valid tax invoice and once the tax so stated thereon has been paid to the credit of the appropriate Government in cash or through utilisation of input tax set off as the case may be at vendor’s end. Credit transfer mechanism in case of sale of business as is prevalent under Cenvat Credit Rules 2004 has also been carried forward to GST Model law.

Non-resident taxable person – whether needing to register?

Readers may specifically note that the term u/s 2(46) of Model GST Law means a taxable person who occasionally undertakes transactions involving supply or acquisition of goods and/or services whether as principal or agent or in any other capacity but who has no fixed place of business in India. There is apparently a suggestion to include non-resident taxable person within Schedule III requiring them to register under law which if done, could lead to practical issues. Ideally this should be avoided.

Deeming provision on goods and services and supplies without consideration

The proposed Schedule I to the Model GST law presently includes the following as supplies deemed to be without consideration for taxability -

1. Permanent transfer/disposal of business assets.
2. Temporary application of business assets to a private or non-business use.
3. Services put to a private or non-business use.
4. Self-supply of goods and/or services.
5. Assets retained after deregistration.

Section 3 of the Model Law proposed also provides for the Central Government or the State Government to notify transactions/supplies which may not be regarded as supply of goods and/or supply of services. Schedule II also contains matters which may be treated as supply of goods or as supply of services. The following is the specification under Schedule II –

• Any transfer of the title in goods is a supply of goods.
• Any transfer of goods or of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.
• Any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, is a supply of goods.
• Any lease, tenancy, easement, licence to occupy land is a supply of services.
• Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.
• Any treatment or process which is being applied to another person’s goods is a supply of services.
• Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.
• Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services.
• Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.
• Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless-

1. the business is transferred as a going concern to another person; or
2. the business is carried on by a personal representative who is deemed to

be a taxable person.

Consideration and transaction value

The term “consideration” going by proposed Section 2(20) would include payment in money or kind or even monetary value of any act or forbearance (whether or not voluntary) in response to supply of goods or services and by the recipient or any other person. This has the potential in the humble opinion of the Author to lead to litigation on valuation issues. This definition has to be seen in the context of proposed Section 17 which deals with value of taxable supply.

The value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and recipient of the supply are not related and the price is the sole consideration for the supply. This would be subject to any additional consideration not being part of the price being required to be added to arrive at the value. This would be similar to the valuation methodology presently being followed u/r 6 of Central Excise Valuation (determination of Price of Excisable Goods) Rules 2000. Readers may note that this would now apply to services as well and not just to goods.

The transaction value above shall not include any discount allowed before or at the time of supply provided such discount is allowed in the course of normal trade practice and has been duly recorded in the invoice issued in respect of the supply. This could mean post supply discounts being subjected to tax.

Reference to Valuation Rules

The proposed GST Valuation (determination of the Value of Supply of Goods and Services) Rules 2016 would have to be referred where transaction value cannot be followed. This would be in the following scenarios –

• the consideration, whether paid or payable, is not money, wholly or partly;
• the supplier and the recipient of the supply are related;
• there is reason to doubt the truth or accuracy of the transaction value declared by the supplier;
• business transactions in the nature of pure agent, money changer, insurer, air travel agent and distributor or selling agent of lottery;
• such other supplies as may be notified by the Central or a State Government in this behalf.

Readers here need to note that Section 17(5) requires tax to be charged on Maximum Retail Price for the goods (excluding tax component under this law) where the sales of goods are to a person who cannot be regarded as a taxable person and such price needs to be declared on the package under The Legal Metrology Act 2009 or the rules framed thereunder. The issue here is whether any abatement from the MRP is going to be notified moving forward as there could be increased tax burden to consumers in some cases.

Pure agent concept for reimbursement in respect of services

The concept of “pure agent” as is prevalent under service tax has been carried forth to GST in respect of services provided despite the Courts holding reimbursements as not being subjected to tax. The concept of transaction value u/s 17 includes anything charged by the supplier of goods and/or services at the time of or before delivery of goods or at the time of or before provision of services. This could mean reimbursements being kept out of tax net only where the concept of “pure agent” is satisfied.

Concept of “related person”

The definition proposed u/s 2(55) is wider in scope as compared to the present one under Section 4 of Central Excise Act 1944 and would apply to transaction in goods or services. Persons (including legal persons) shall be deemed to be “related persons’’ if only –

1. they are officers or directors of one another's businesses;
2. they are legally recognized partners in business;
3. they are employer and employee;
4. any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;
5. one of them directly or indirectly controls the other;
6. both of them are directly or indirectly controlled by a third person;
7. together they directly or indirectly control a third person; or
8. they are members of the same family.

Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other shall also be deemed to be related. The transaction value would be accepted even in case of related party transactions if the relationship has not influenced the price charged for the transaction.

Transfers between agent-principal and within business

These transfers or supplies from agent to principal or vice-a-versa or from one place of business to another place of the same business (irrespective of State in which parties are located) would also be at transaction value.

Valuation Rules – When can transaction value be ignored for goods and/or services?

The valuation provisions under the valuation rules could be summarised as follows –

• The value of goods and/or services shall be the transaction value (value determined in monetary terms) unless the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any goods and/or services based on -

1. the significantly higher value at which goods and/or services of like kind or quality supplied at or about the same time in comparable quantities in a comparable commercial transaction were assessed
2. the significantly lower or higher value of the supply of goods and/or services compared to the market value of goods and/or services of like kind and quality at the time of supply; or
3. any mis-declaration of goods and/or services in parameters such as description, quality, quantity, year of manufacture or production.

• Where transaction value cannot be followed, the value has to be determined by following the below steps sequentially -

1. the value shall be determined on the basis of the transaction value of goods and/or services of like kind and quality supplied at or about the same time to other customers, adjusted for

1. difference in the dates of supply,
2. difference in commercial levels and quantity levels,
3. difference in composition, quality and design between the goods and/or services being valued and the goods and/or services with which they are compared,
4. difference in freight and insurance charges depending on the place of supply.

                  b. Where the value cannot be determined based on the aforesaid comparative method, it would be on computed value which shall include –

1. the cost of production, manufacture or processing of the goods or, the cost of provision of the services
2. charges, if any, for the design or brand
3. an amount towards profit and general expenses equal to that usually reflected in supply of goods and/or services of the same class or kind as the goods and/or services being valued which are made by other suppliers.

The Rules provide for residual method consistent with principles of the said Rules where both the aforesaid methods cannot be followed. The author here is of the humble view that while analyzing comparative price details for goods would be easier, application of the same to services could pose problems.

Compounding Scheme

The upper ceiling in terms of gross annual turnover for composition scheme is expected to be ₹ 50 lakhs. A review of proposed Section 8(1) of the Model GST Law reveals that while the turnover limit has been kept at rupees fifty lakhs, the rate is expected to be more than one percent unlike the earlier indicated base rate of 0.5%. However, the turnover limit would be computed on all India basis for the assesse including those on goods and services (whether taxable or not) put together. A reading of proposed Section 2(73) reveals “turnover” defined to mean the aggregate value of all taxable and non-taxable supplies, exempt supplies and exports, of goods and/or services, to be computed on all India basis and excludes taxes, if any, charged under this Act.

The compounding benefit would not be available to a seller who sells goods or supplies services inter-state or to a person who is liable to pay tax on reverse charge basis. The composition tax benefit would be available subject to condition of non-availment of input tax credit and non-collection of tax from the buyer/customer.

Tax rates

Going by present indicators, there could be different rates for goods of basic importance, those to attract general rate and special rate for precious metals and luxuries. The standard rate is expected to be around 18% while the base being around 12%. The higher rate for luxuries could be around 40% though this could change over time.

Reverse charge liability-whether mechanism exists?

It is worthwhile noting that proposed Section 7 of the Model GST Law as per Report of Sub-Committee II of Empowered Committee of State Finance Ministers incorporates a clause i.e. clause (3) which allows Central or State Government to specify by Notification, the categories of supply of services on which tax is payable on reverse charge basis. While this mechanism presently exists in service tax, the State Governments too henceforth would have the power to notify services for collecting tax on reverse charge basis. One saving grace as of now seems to be the fact that Section 2(49) regards tax payable on reverse charge basis as output tax.

A similar provision exists in Section 4 of The Integrated Goods & Services Tax Act 2016 proposed which enables the Central Government to specify categories of supply of services where the location of the service provider and the place of supply of service are in different States in which case, the recipient would be liable to pay service tax on reverse charge basis in the course of inter-state trade.

Recovery of tax not paid or short paid

The time period for issue of Show Cause Notice has been fixed at three years from the relevant date. This is followed by another one year for issue of statement of dues post issue of SCN, for the subsequent period as long as the grounds are the same as those in earlier notice. The ceiling for penalty is ₹ 5000 or ten percent of tax due whichever is higher. The period for SCN in cases of fraud or mis-statement however has been kept at five years while penalty has been fixed at fifteen percent of tax due. The aforesaid clauses in the humble opinion of the author need to be reviewed so as to reduce period for regular cases other than those involving fraud or mis-statement as three year period seems harsh.

Where any tax not required to be paid, is collected by the taxable person from another, the same would have to be deposited to the Government.

Registration and returns

The person liable would have to register himself within thirty days from the date on which it is due. The person would have the option of separate registration for each business vertical within a State. For registration a basic requirement would be that of PAN under Income Tax Act. The registered person would be required to maintain proper registers for sales, purchases, input tax, output tax besides movement of goods to and from business premises as well as processes within his business premises. The period of retention of records would be sixty months from the date of the annual return.

The registered person would be required to file various returns as indicated in the Report of the Joint Committee on Business Processes for GST on GST Returns. A common e-return for CGT, SGST and IGST is envisaged. While a compounding tax payer would be required to file GSTR 4 at quarterly intervals within 18^th of the month following the quarter, regular tax payers would be required to file GSTR 3 (monthly return) within 20 days from the end of the month. Input service distributors would be required to file GSTR 6 monthly within 15 days of the succeeding month. Annual return would be in form GSTR 8 within 31^st December of the succeeding financial year. TDS return would be filed in form GSTR 7 within 10^th of the following month. Regular tax payers would also be required to file GSTR 1 and GSTR 2 monthly for outward and inward supplies respectively within the 10^th and 15^th of the succeeding month.

The records would be subjected to audit once the prescribed turnover limit for audit is exceeded and this would be required to be conducted by a Chartered Accountant of a Cost Accountant. The audited financial statements would also have to be reconciled with the returns filed by the taxable person and the statement thereof submitted along with the audited statements.

Refunds

The time limit has been kept at two years from the relevant date (not applicable to payments under protest). Refund is to be granted within sixty days from the date of application where on account of export of goods and ninety days where on account of export of services. For unadjusted credits other than the earlier cases, it would be forty five days. Refund would be subject to condition of non-claiming of the tax from customer/recipient within India. Relevant date would in general refer to date of payment of tax with the exception of exports where it would be date of filing of relevant return. Where refund is on account of return of goods, it would be date of return to premises. In respect of unadjusted input tax, the end of the financial year in which claim arises.

Constitutional Amendment

The Constitution (One Hundred and Twenty Second Amendment) Bill 2014 has sought to insert Article 246A in the Constitution providing the Legislature of every State power to make laws with respect to goods and services tax imposed by the Union or by such State. However, the Parliament alone would have exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Article 269A which is sought to be inserted provides for levy and collection of goods and services tax in the course of inter-state trade or commerce and it would be collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council which in turn is to be set up under Article 279A. In this context, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce with the Parliament formulating the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

The term “goods and services tax” has also been sought to be defined in Article 366(12A) to means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. Amendments have also been sought to be made to Union and State Lists in the Seventh Schedule to the Constitution with the net result being petroleum and petroleum products not being subject to GST till such time recommended by GST Council. The following taxes would be subsumed into GST –

• Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services
• State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services

The Bill seeks to dispense with the concept of declared goods of special importance and also has a clause for a much debated additional levy of one percent on inter-state supply of goods which could be levied for two years or more as decided by the GST Council and collected by Central Government and assigned to the Sates from where the supply originates.

Administration

The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply that the Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre. The thresholds are expected to be ₹ 10 lakhs in terms of gross annual turnover for goods and services for the State GST (including Union Territories) and ₹ 1.50 crores for goods under Central GST. The threshold for services under central GST should ideally be going up from the present ₹ 10 lakhs under service tax. GST would not be levied for turnover below these thresholds.

GST Council

The Council (provided for in Article 279A of the Constitution) shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in-charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government. It would be responsible for recommendations to the Union and States on –

• the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;
• the goods and services that may be subjected to, or exempted from the goods and services tax;
• model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply;
• the threshold limit of turnover below which goods and services may be exempted from goods and services tax;
• the rates including floor rates with bands of goods and services tax;
• any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;
• special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
• any other matter relating to the goods and services tax, as the Council may decide.

While discharging its functions, the Goods and Services Tax Council is to be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services.

The author in this article has sought to summarise the basic provisions of the model GST law based on information available at the time of release of this article to provide readers a bird’s eye view of essential provisions. Readers may also note that there could be changes in the proposed model law which could alter the nature of discussion moving forward from this date. They are therefore advised to keep themselves updated regarding further announcements by law makers in this regard. For any queries regarding this article readers may contact the author at [email protected]