Chapter 1 - GST - An overview PDF Download

CHAPTER 1
GST - An overview

1.1 Background of GST

The present structure of Indirect Taxes in India is based on three lists in Seventh Schedule to Constitution of India, which came into effect on 26-1-1950. These lists are mostly based on Government of India Act, 1935. The provisions were based on situation prevailing in 1935. That structure has become outdated due to changes in situations, technology etc.

World has moved towards common Goods and Services Tax (GST) long ago. However, so far as India is concerned, GST is the tax for twenty first century [It is rightly said that India is like elephant. It takes time to start, but once started, it is very difficult to stop it].

Barring unforeseen circumstances, GST is likely to come into effect on 1-7-2017.

1.1-1 Major defects in present structure of indirect taxes

Following can be summarized as major defects in present structure of indirect taxes :

• Central Sales Tax (CST) is payable for every movement of goods from one State to other. If the sale is direct, CST is payable, Even in case of stock transfers or branch transfers, there is incidence of tax as input service credit (set off) of input taxes is not fully available.
• Central Sales Tax is an orphan. Hence, if there is any difficulty, there is no authority to sort it out and find solutions. This creates numerous problems in CST.
• Cascading effect of taxes cannot be avoided due to CST and Entry Tax.
• Movement of goods in European Union (EU) is free across al l countries without any incidence of tax. However, in India, movement of goods from one State to other is not tax free.
• India does not have a national market due to invisible barriers of central sales tax, Entry Tax and State Vat and visible barriers of check posts.
• Mil lions of man-hours and truck hours are lost at check posts. Besides, huge corruption is involved.
• Central Government cannot impose tax on goods beyond manufacturing level [CST though levied by Central Government is col lected and retained by State Government only].
• State Government cannot impose service tax.
• Over the years, distinction between goods and services has become hazy, due to which there is overlapping of State Vat and Central Service Tax on transactions like works contract, food rated services (restaurants, outdoor catering, mandap services), Software, IPR Related services, lottery, SIM cards, renting of movable property etc.
• Same transaction is taxed both by Central and State Government which creates confusion, litigation and double taxation in many cases.

1.3 What is Goods and Services Tax?

Goods and Services Tax means a tax on supply of goods or services, or both, except taxes on supply of alcoholic liquor for human consumption [Article 366(12A) of Constitution of India inserted w.e.f. 16-9-2016]

Note that the word used is 'supply' and not 'sale'. Thus, stock transfers, branch transfers will also get covered under GST net.

GST will be payable on free supplies made to related persons. GST will not be payable to free gifts and free samples to unrelated person, but input tax credit in respect of such goods will have to be reversed.

IGST will be payable on inter-state stock transfers and branch transfers [Though CGST Act and IGST Act have not been extended to J&K, IGST will be payable].

For stock transfers or branch transfer within the State (except J&K), SGST and CGST will be payable only where the taxable person has more than one GST registrations within the State. If there is single registration within State, 'Bill of Supply' (challan) will be sufficient.

Basic scheme of GST is as follows —

• Goods and Services Tax (GST) will be on 'supply' of goods or services or both, in India except Jammu and Kashmir. Area upto 200 nautical miles inside sea is 'India' for purpose of GST.
• For supplies within the State or Union Territory - (a) Central GST (CGST) will be payable to Central Government and (b) State GST (SGST) or UTGST (Union Territory GST) will be payable to State Government or Union Territory (as applicable). Area upto 12 nautical miles inside sea is part of State or Union Territory which is nearest.
• For inter-state supplies (supply from one State or Union Territory to another State or Union Territory), Integrated GST (IGST) will be payable to Central Government. IGST is payable if supply is beyond 12 nautical miles but upto 200 nautical miles.
• In addition, GST Compensation Cess of about 12% will be payable on pan masala, tobacco products, coal, aerated waters and motor cars.
• Basic customs duty. Education Cess and Secondary and Higher Education Cess of Customs, IGST and GST Compensation Cess (on goods were Compensation Cess is applicable) will be payable on import of goods.
• Distinction between goods and services will be mostly eliminated. This will eliminate problem of dual taxation presently faced by construction industry, works contract, food related services like restaurant and outdoor catering, leasing and hire services and software services.
• GST is based on Vat concept of a lowing input tax credit of tax paid on inputs, input services and capital goods, for payment of output tax. This will avoid cascading effect of taxes.
• GST is consumption based tax i.e. tax is payable in the State where goods or services or both are finally consumed.
• The rates of GST - (CGST + SGST/UTGST) -Nil, 3%, 5%, 12%, 18% and 28%. These rates will apply to IGST also.
• Though tax is payable to both Central Government and State Government, control will be exercised by State Government Authorities on 90% of GSTN holder having supply upto rupees1.5 crore and 50% of GSTN holder having supply above Rupees 1.5 crore and Central Government Authorities on 10% and 50% respectively on random basis . For Fresh GSTN Holder ,one case will go to centre and other to state This will avoid dual control.
• GST Council (Goods and Services Tax Council) is Apex Constitutional body which will determine policies of GST.

1.3-1 Broad definition of 'service'

'Services' means anything other than goods [Article 366(26A) of Constitution of India inserted w.e.f. 16-9- 2016].

Definition of 'service' is risky. As it is presently worded, it can cover even immovable property. However, sale of land and fully constructed and completed buildings have been excluded from purview of GST.

The definition of 'service' is so broad that practically ,there is no limit for imposing any tax by Union or State Governments.

1.3-2 Dual GST for supply of goods and services within State

There will be dual GST - State GST (SGST) and Central GST (CGST) on supply of goods and services within the State [Article 246A of Constitution of India inserted w.e.f. 16-9-2016].

Territorial waters (i.e. 12 nautical miles inside the sea) will be part of State so far as GST is concerned.

SGST will also apply in Union Territories having legislature. These are - Delhi and Puducherry.

Both CGST and SGST will be on supply of goods and services within the State.

1.3-3 Union Territory Goods and Service Tax (UTGST)

In case of Union Territories which do not have legislature, UTGST (Union Territory Goods and Services Tax
will be payable. These are as follows [section 2(8) of UTGST Act and section 2(114) of CGST Act—
(a) the Andaman and Nicobar Islands;
(b) Lakshadweep;
(c) Dadra and Nagar Haveli;
(d) Daman and Diu;
(e) Chandigarh; and
(f) other territory.

For the purposes of CGST Act and UTGST Act, each of the territories specified in sub-clauses (a) to (f) shall be considered to be a separate Union territory.

Delhi and Puducherry have their own legislatures and they will pass their own SGST Act.

'Other Territory' - "Other territory" includes territories other than those comprising in a State and those referred to in sub-clauses (a) to (e) of section 2(114) - section 2(81) of CGST Act.

This will cover Exclusive Economic Zone (except territorial waters). Thus, 'other territory' means area inside sea between 12 nautical miles to 200 nautical miles inside the sea.

UTGST will apply for supply of goods and services within that area.

'Other Territory' will not cover Jammu and Kashmir and CGST Act and IGST Act have not been extended to J&K [see section 1(2) of IGST Act and section 1(2) of CGST Act].
 

1.3-4 IGST for interstate transactions
In case of Inter State supply of goods and services, there will be integrated GST (IGST) imposed by Government of India [Article 269A(1) of Constitution of India inserted w.e.f. 16-9-2016].

Equivalent IGST (CVD) will also be imposed on imports [Explanation to Article 269A(1) of Constitution of India]

The IGST Rate is double the CGST rate.

IGST and CGST rates will be same allover India and will not vary from State to State. Otherwise there will be utter chaos.

Revenue from IGST will be apportioned among Union and States by Parliament on basis of recommendation of Goods and Service Tax Council [Article 269A(2) and Article 270(1A) of Constitution of India inserted w.e.f. 16-9-2016].

This apportionment will be required as input tax credit of IGST can be used for SGST and vice versa.

Since IGST will be on 'supply of goods or services', IGST will be payable on inter-state stock transfers, branch transfers etc.

However, CGST, SGST, UTGST or IGST will not be payable if goods are sent for job work outside the factory.

1.3-4A GST is consumption based tax based on Vat principle
GST is consumption based tax, i.e. tax will be payable in the State in which goods and services are finally consumed. GST will be based on Vat system of a lowing input tax credit for payment of tax on output supply.

The States from which goods are supplied will not get any tax as goods are consumed in another State.

In case of inter-state supplies, IGST will be payable. Input Tax Credit of IGST paid in one State will be available to receiver of goods or services in another State.

1.3-5 Input Tax Credit
Allowability of input tax credit for payment of output tax is one of the key features of GST. This will avoid cascading effect of taxes.

IGST will ensure seamless movement of goods across the country (except J&K) as taxes will move along with goods.

1.3-6 Finance Cost will increase
Since IGST will be payable on inter-state branch transfers and stock transfers, finance will be blocked and interest burden of dealers having inter-state transactions will increase considerably.

1.3-7 Central Excise duty on petroleum and tobacco products
Central Excise duty will continue on petroleum products and tobacco products [Entry 84 of List I (Union List) of Seventh Schedule to Constitution of India as amended w.e.f. 16-9-2016].
Tobacco products will be subject to excise duty plus GST.

1.3-8 Sales tax on petroleum products and alcoholic liquor within State
States will have powers to impose sales tax on sale within the State on petroleum products and alcoholic liquor for human consumption [Entry 54 of List II (State List) of Seventh Schedule to Constitution of India as amended w.e.f. 16-9-2016].

Thus, petroleum products will be presently out of GST.

Petroleum Products means petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.

Petroleum products will be brought in GST network at a later stage on recommendation of GST Council - section 5(2) of IGST Act.

1.3-9 Tax on entertainment only by Municipalities, panchayat, regional council and district council
Municipality, Panchayat, Regional Council and District Council will have powers to impose tax on entertainment and amusement [Entry 62 of List II (State List) of Seventh Schedule to Constitution of India as amended w.e.f. 16-9-2016]

District Councils for administration of Tribal Areas in States of Assam, Meghalaya, Tripura and Mizoram will have powers to impose entertainment tax [paragraph 8(3)(d) of Sixth Schedule to Constitution of India inserted w.e.f. 16-9-2016].

1.4 Expected rates of GST
The IGST and CGST Acts do not indicate GST rate structure.

As per section 9 of CGST Act, rate of CGST will be as notified by Central/State Government. The rate shall not exceed 20%. Same provision will be in SGST Act of each State.

Thus, total GST rate for intra-state supplies will not exceed 40% [20% CGST and 20% SGST].

As per section 5 of IGST Act, rate of IGST will be as notified by Central Government. The rate shall not exceed 40%.

Most probably, the GST rates will be notified based on HSN Code. Customs Tariff Act will be taken as base.

GST rates will be contained in notification giving references to HSN code as per Customs Tariff Act.

GST rates on supply of services will be determined by GST. In a l probabilities, the present classification of services in Finance Act, 1994 [service tax law] is likely to continue.

The GST Council has decided and has agreed upon various slabs of rates. The slabs fixed are 5%, 12%, 18% and 28%.

In my view, the average slabs may be around fo lowing average rates -
 

CGST and IGST rates will be common alloverIndia. However, SGST rates will be decided by each State and will vary from State to State.

No concept of 'declared goods' - Concept of 'declared goods' will be abolished under GST.

1.4-1 GST rates in other Countries
In Europe, the EU VAT system is regulated by various European Union (EU) Directives. The most important is Sixth VAT directive.

GST was introduced in Singapore in April, 1994. Initia ly, the rate was 3%. GST rate is 7% (average rate) in Singapore w.e.f. 1-7-2007.

GST rate in Japan is 5%.

In New Zealand, GST was introduced in October, 1986. The rate w.e.f. October 2010 is 15% (average rate).

National average rate is some other countries is as follows - (a) Austria - 20% (b) Jordan - 16% (c) Australia - 10% (d) Malaysia - 6% (e) Canada - 5%.

1.5 Transitional provisions

Sections 139 to 142 of CGST Act provide for transitional provisions for shifting from existing tax system to GST.

Existing registered persons will be given provisional registration under GST. Once they submit required details, the registration will be final. The procedure for granting provisional GST registration numbers has already commenced.

Unavailed Cenvat credit and Vat credit will be a lowed to be carried forward.

Even excise duty and Vat paid on stock will be a lowed to be carried forward, if the goods were earlier exempt but have become taxable under GST.

If there is price revision, supplementary invoice, debit note or credit note can be issued under GST Act.

1.5-1 Transitory provisions relating to stock with traders on 'appointed day' (hopefully 1-7-2017)
The dealers (traders) are not liable to pay excise duty at present. If they are not eligible to get input tax credit of excise duty paid by them on stock with them on 30-6-2017, they would try to reduce their inventory as on 30-6-2017.

This would have been more so in case of second or third stage buyers, as they would not be in possession of excise invoice (for credit of central excised duty paid on inputs) or tax invoice (for credit of State Vat paid on goods in stock with them).

Similarly service providers who were not registered with State Vat would have stock of goods as on 30-6-2017, on which they will be liable to pay GST after 1-7-2017. They also would have tried to reduce their stock as on 30-6-2017.

Now, section 140 of CGST Act (para lel provision would be in SGST Act) is quite clear that such dealers can avail input tax credit in respect of goods in stock with them as on 1-7-2017 on which Vat and/or excise duty has been paid and for which they have duty paying documents, which are less than 12 months old i.e.  invoices issued on or after 1-7-2016 will be eligible for input tax credit.

There is provision for 'deemed credit' even where the trader or dealer does not have excise duty paying document or Vat paying document.
Even then, there is likely to be tendency to reduce inventory by dealers on 1-7-2017.

1.6 GST Compensation Cess on goods and services
Section 8 of Goods and Services Tax (Compensation to the States) Act, 2017 [GST Cess Act for short] makes provision for levy of GST Compensation Cess on supplies of goods and services. This cess will be in
addition to GST payable. The ceiling on GST Compensation cess is 15% though higher cess is leviable on pan masala and tobacco products.

Thus, a l what is achieved by GST can be lost through such cess. Only solace is that this cess can be levied by Central Government. Further, such cess will be only on luxury or SIN goods, though lega ly, such cess can be imposed on a l goods and services.

Let us hope that it will not be imposed on other goods and services. If such cess is imposed on a l goods and
services, the basic purpose of GST will be defeated.

1.7 Abolition of other duties and taxes
Present central excise duty (except of petroleum products), service tax, duties of excise on medical and toilet
preparations will be subsumed in CGST [Of course, SGST will also be payable].
State Vat, Central Sales Tax, octroi, Entry Tax, Entertainment Tax, Luxury Tax, Tax on lotteries, betting and
gambling will be subsumed in SGST [Of course, CGST will also be payable].

CVD and Special CVD on imported goods will be at rate equal to IGST. Input tax credit of this duty will be
available.
Basic customs duty on imports will continue. Stamp duties and motor vehicle taxes will also continue.
1.7-1 Definition of 'deemed sale' to continue
Interestingly, Article 366(29A) which defines 'deemed sale of goods' is being retained (may be to avoid
disputes and litigation).
This definition covers transactions of works contract, sale of food article in restaurants, transfer of right to use
goods (operating lease), financial lease and hire purchase etc.
There seems no reason to continue this definition as these transactions will get covered under GST. It seems
the provision is retained to be on safe side.
Interestingly, some activities which have been defined as deemed sale of goods have been defined as 'services'
in para 5 of Schedule II of IGST Act.
There is no legal bar in adopting definition in GST Law, which is different from definition contained in the
Constitution of India, so long as the levy is within the limits of Constitution of India. However, such differences
can be source of confusion and litigation.
1.7-2 Taxation powers of District Council
District Councils for administration of Tribal Areas in States of Assam, Meghalaya, Tripura and Mizoram will
have powers to imposed entertainment tax [paragraph 8(3)(d) of Sixth Schedule to Constitution of India
inserted w.e.f. 16-9-2016].
1.7-3 Present Area Based exemptions
In case of present Area Based exemptions (J&K, Himachal Pradesh, North East States), transitory provisions
will be made.
If this is not done, the advantage of these exemptions will be limited as they will be outside GST input tax
credit network. Thus, such exemptions will be useful only where goods are sold to ultimate consumer or
customer who is not in GST network.
1.8 Goods and Service Taxes Council
A 'Goods and Service Taxes Council' [GST Council] will be constituted [Article 279A(1) of Constitution of
India inserted w.e.f. 16-9-2016].
The Union Finance Minister will be Chairperson of the GST Council. Fo lowing will be its members - (a)
Union Minister of State for revenue or Finance (b) Minister of Finance or any other Minister nominated by
each State.
Vice Chairperson of GST Council will be elected by GST Council from amongst its members.
The GST Council is mainly a recommendatory body on various issues relating to GST.
GST Council will have statutory powers of recommendation only in fo lowing situations—
(a) When petroleum products should be brought in the GST net
(b) Apportionment of revenue of IGST and CGST among Union and States
(c) Compensation to States for loss of revenue for period upto five years.
IGST Act, CGST Act, SGST Act and GST (Compensation to States) Act also specify various aspects (like
rate of GST, exemptions etc.), which can be decided by Central/State Government on recommendation of
GST Council.

Decision in GST Council will be taken with at least 75% of weighted average voting in favour of the decision.
Union Government will have 33.33% voting power and States will have 66.67% voting power.
Thus, practically , Union Government has veto powers. Any decision in GST Council cannot be taken
without consent of Union Government.
Provision of decision with 75% voting means a few States cannot be adamant and block any decision by GST
Council. This is a good and sensible provision.
The calculations, as indicated in Statement of Objects and Reasons to the Constitution (One Hundred and
First) Amendment Act, 2016 are as follows —
WT = WC+WS
WS = (WST/SP) x SF
WT - Total weighted votes of a l members in favour of a proposal.
WC - Weighted votes of Union. WC = 33.33% if Union is in favour of proposal. If Union is not in
favour of proposal, WC = 0.
WS - Weighted weights of States in favour of proposal.
SP - Number of States present and voting.
WST - Weighed votes of a l States present i.e. 66.67%.
SF - Number of States voting in favour of proposal.
1.8-1 Binding nature of recommendations of GST Council
The recommendations of GST Council have some force but are not lega ly binding on State/Central
Government.
One interesting is issue is whether Central or State Government can unilatera ly grant or withdraw exemption
or change rate of GST without any recommendation of GST Council.
1.8-2 Resolution of disputes among Union and States
The Goods and Services Tax Council shall establish a mechanism to adjudicate any dispute arising out of the
recommendations of the Council or implementation thereof - (a) between the Government of India and one or
more States; or between the Government of India and any State or States on one side and one or more other
States on the other side; or (c) between two or more States - Article 279A(11) of Constitution of India
[inserted w.e.f. 16-9-2016].
1.8-3 Powers of GST Council
As per Article 279A(4) of Constitution of India (inserted w.e.f. 16-9-2016), the Goods and Services Tax
Council shall make recommendations to the Union and the States on—
(a) 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;
(b) the goods and services that may be subjected to, or exempted from the goods and services tax;
(c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax
levied on supplies in the course of Inter-State trade or commerce under article 269A and the
principles that govern the place of supply;
(d) the threshold limit of turnover below which goods and services may be exempted from goods and
services tax;
(e) the rates including floor rates with bands of goods and services tax;

(f) any special rate or rates for a specified period, to raise additional resources during any natural
calamity or disaster;
(g) 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
(h) any other matter relating to the goods and services tax, as the Council may decide.
1.9 Information Technology Network
Robust information technology network is vital for administration of GST to ensure proper compliance and
avoid misuse of input tax credit.
A Technology Advisory Group for Unique Projects (TAGUP) was set up in 2010 under Mr. Nandan
Nilekani. The group submitted its report in January, 2011.
A Goods and Service Tax Network (GSTN) has been constituted as Special Purpose Vehicle (SPV) in
August 2012. NSDL will provide service to this GSTN.
Goods and Services Tax Network (GSTN) has been incorporated as a section 8 company (non-profit
company - now section 25 company) on 28-3-2013.
National Information Utilities (NIU) will be constituted in private sector for public service. This NIU will make
available essential infrastructure for GSTN.
Tax Information Exchange System (TINXSYS) has been developed. It will be transferred to GSTN.
1.9-1 Huge data processing required
Implementation of GST is going to be a huge task for Government as we l as business
Administration of GST will be predominantly based on Information Technology. Almost a l procedures relating
to registration, payment of GST, record of input tax credit and periodic returns will be done electronica ly.
There is contro ling role of IT in administration and management of GST
It is estimated that there will be 70 to 80 Lakhs taxpayers, 260 to 300 Crores B2B invoice data per month,
More than 120,000 tax officials of State and Central Government will access GSTN Network on front end.
Invoice-wise matching of input tax credit will be done. Such matching on such a mass scale has nowhere else
been tried in the world.
1.9-2 GST Suvidha Providers
To enable taxable persons to comply with requirements of GST, 34 companies have been given permission to
act as 'GST Suvidha Providers'.
GST Suvidha providers are expected to bring scalability and easy access to GSTN. 34 Entities have been
approved as Suvidha Providers.
Technica ly, it seems taxable person has option to access GST portal directly. However, practically , it
seems they will have to access GSNT through GST Suvidha Providers only.
Suvidha Providers will enable a middle tier of entrepreneurs who can develop innovative services and solutions
for a variety of taxpayers
GST Suvidha Providers will enable Enable 1000+ sma l tax accounting Software providers to access GSTN
through them.
Suvidha Providers will act as an isolation layer for GST System. They will enable optimal, 24x7 use of GST
Portal a l round.

1.10 Central Clearing Agency to adjust IGST credit
As per IGST Act, CGST Act, UTGST Act and SGST Act, the input tax credit of IGST paid on inter-state
transactions is expected to be available for subsequent supply of goods and services in fo lowing sequence -
(a) IGST (b) CST (c) SGST/UTGST (if balance left).
If IGST is utilized for payment of SGST/UTGST, the amount will be credited to that State Government/Union
Territory, as the State Government/Union Territory will get less revenue to that extent.
Input tax credit of IGST, CGST, UTGST and SGST can be utilised (in that sequence) for payment of IGST.
If SGST/UTGST is utilized for payment of IGST, the corresponding amount will be debited to the concerned
State Government/Union Territory. The reason is that actual IGST paid to Union Government will be less to
that extent.
The debit and credit transactions will be carried out with help of dedicated national computer based network
by Central Clearing Agency.
1.11 Compromised GST
The GST system as being introduced is result of deliberations of committee of representatives from 29 States.
Each State has its own views and peculiarities. Hence, having uniform nationwide GST is very difficult and
some compromises/adjustments are inevitable. This had happened while introducing State VAT also.
It is rightly said that 'A camel is a horse designed by Committee'. As the story goes, a committee was formed
to design a horse. As usual, each committee member had his own ideas, whims and fancies, due to which
some adjustments and compromise were inevitable. The result was that fina ly, the design that came out was of
a camel!
1.12 IGST, concept of 'supply' instead of 'sale' and reduction of distinction between goods and
services are game changers
IGST is a novel idea in the GST structure.
Indeed concept of IGST, changing tax incidence on 'supply' instead of on 'sale' and elimination of distinction
between goods and services are key concepts in GST.
These will completely alter the present tax scenario.
Advantage of IGST is that taxes will move along with goods and services, eliminating need for obtaining refund
of taxes in case of inter-state transactions.
Inter-state movement of goods will be smooth and hassle free.
Distinction between goods and services will be considerably reduced, except in cases relating to place of
supply and time of supply. This will considerably reduce present ambiguities and litigation.
1.12-1 Taxes will move with goods
The major problem in present system of sales tax is that goods move from one State to other, but taxes remain
within the State. For example, if goods on which State Vat is paid at 15% are sold inter-state against C form,
CST rate is 2%.
Similar 'retention' is there if goods are stock transferred to another State.
The assessee then has to claim refund of this excess input credit of local Vat. In almost a l States, there are
tremendous delays in getting the refunds. Most of the States are practically insolvent and have no money
to pay off these refund claims.
Besides, there is tremendous harassment, corruption and delays in getting the refunds. Huge funds of assessees are blocked for years.
In IGST, the question of refund will be only in case of physical export of goods or supplies to SEZ,
international bidding etc. In other cases, assessee will pay IGST in one State and its input tax credit will be
available to customer in other State.
The inter-state adjustment will be made by Central Clearing Agency. Assessee is not concerned with that
adjustment at a l.
1.12-2 Distribution network will be simpler
At present, if an assessee wants to do business in multi-States, he has to maintain stocks in each State and
movement of goods from one State to another means further blockage of funds, besides corruption and
harassment.
Under IGST, a dealer can establish hub and spoke approach for distribution of his final products. He can
maintain depots at few strategic locations in country and from those locations, he can distribute goods to
nearby States. This will be very cost effective distribution network for assessee.
It is true that 1% Additional tax on supply of goods (ATSG) in inter-state will impose the additional burden.
However, if such tax is levied only once at the originating State, the impact of this additional tax will be limited.
1.12-3 Ways of doing business will change
Whole procurement policies and distribution policies will have to be restructured and re-oriented to get
maximum benefit from the new GST tax structure.
Accounting policies will have to adapt to suit GST requirements.
It is projected that GDP of India will improve by 1% to 2% by introduction of GST.
An individual taxable person (termed as assessee in earlier laws) is more concerned about his costs. These will
surely reduce under GST, which will improve his bottom line. Organisation will be more efficient and lean.
1.13 No 'ease of doing business' in GST
Though overa l GST provisions, as developed, are good, there are some bad and ugly provision. Some of
these are discussed below. As time passes, more and more problem areas will be noticed.
1.13-1 Avoidance of dual control
A taxable person should be under one authority - either Centre or State. Thus, principle of avoiding dual
control is laudable.
However, how bifurcation of taxable persons will be made between State and Centre is not clear.
It seems such bifurcation will be done on random basis. If so, this will lead to chaos. In case of taxable
persons having multi-state businesses, they may be assessed by State Government authorities in some States
and by Central Government authorities in some other States. This will lead to different authorities taking
different view on same transaction. Idea ly, taxable persons having multi-state businesses (including telecom,
insurance) and those predominantly in export and import field should be under control of Central Government.
Industries and businesses restricted to one State should be under control of State Government. This will ensure
avoidance of conflicting views by tax authorities on same issue.
This will create problems for consultants also. Some of their clients may be under State Government Control
while others may be under Central Government control. Thus, they will have to deal with two authorities or
have separate partners dealing with different authorities.
1.13-2 Valuation provisions copied from excise and service tax law Some concepts of Valuation provisions have been copied from present service tax and excise law. Concepts
in these provisions like 'related person' and 'price is sole consideration' are not in tune with concept of GST at
a l. Such valuation provisions will increase litigation and are rea ly unworkable in GST regime where
transaction value is the basic criteria. Such artificial additions will result in disa lowances of legitimate input tax
credit, as that tax has been paid by some other person.
Rea ly provision relating to related buyer should be retained only when the related buyer is ultimate consumer
and is not eligible for input tax credit.
'Value' for GST would include interest or late fee or penalty for delayed payment of any consideration for any
supply. This would create havoc.
1.13-3 Artificial disallowances of input tax credit
Provision for disa lowing input tax credit on rent-a-cab service makes no sense, as in many cases, this service
is used for legitimate business purposes. Some services like food and beverages and beauty treatment are
legitimate business expenses for some kinds of businesses. In those cases, these should be a lowable.
Input tax credit of legitimate expenditure like telecom towers and pipelines outside the factory is being denied.
Services relating to construction of office building or factory building are not eligible. Does it mean that we
should work in open and building is waste of money?
1.13-4 Payment of GST on advances received
Receiving advance from customers is common. However, GST is proposed to be payable when advance is
received, even if supply of goods and services is to be made at a later stage. This will throw the business out of
gear and compliance costs will increase, since when advance is received, receipt voucher is required to be
issued for payment of tax. This has to be adjusted later. Input Tax Credit will not be available when GST is
paid on advance received.
Interestingly, if the amount is termed as 'adjustable deposit' in a separate account (and not in individual
debtor's account), GST is not payable, though Company Law issues are likely to arise.
1.13-5 Reversal of input tax credit if payment not made to supplier within 180 days
If payment of Bill and tax thereon is not made within 180 days, input tax credit is required to be reversed -
second proviso to section 16(3)(d) of CGST Act.
The purpose seems to be to avoid bogus invoices. However, since tax has been received by Government,
there is no loss to Government revenue.
It is not clear why Government is acting as recovery agent for supplier.
In construction industry, retention of 5%/10% amount for one or two years is common. Some deductions from
invoices are common in business. In such cases, reversal of ITC will be required.
1.13-6 GST on fringe benefits to employees
Employer and employee have been defined as 'related persons'. Hence, fringe benefits provided to employees
will be subject to GST. It will be similar to fringe benefit tax, which will lead to tremendous litigation and heavy
compliance costs.
Gifts upto Rs 50,000 to employees may be exempted. However, reversal of input tax credit will be required.
1.13-7 Post supply discounts and price reductions after supply not eligible for deduction from value
Giving trade discounts and price reductions during negotiations after supply of goods and services is very
common in business. However, if such post supply discounts were not anticipated at the time of supply, it is not a lowed to be deducted from value. This provision completely ignores business reality as post supply
negotiations and price reductions are common in business.
Further, if payment is not made to supplier within 180 days, input tax credit has to be reversed with interest
though Government has received fu l amount of service tax. This is double whammy.
1.13-8 Intimation for sending goods for job work
Section 143(1) of CGST Act requires that inputs or capital goods can be sent to a job worker under
intimation.
It seems details of a l job work challans have to be uploaded. This will increase compliance costs.
1.13-9 Reverse charge if supply received from unregistered person
There is provision of payment of GST under reverse charge if procurement is from unregistered person. This
will create tremendous accounting and record keeping cha lenges as such reverse charge would apply even to
sma l purchases and petty services. It will increase compliance costs tremendously as taxable person is
required to classify of these supplies and prepare invoices.
1.13-10 Composition Scheme only if all purchases within State and from registered persons
Composition scheme is available to sma l taxable persons if a l their purchases are from registered persons
within the State. Otherwise, they have to pay GST on purchases. This condition is practically impossible to
be complied with.
Further, limit of Rs 50 lakhs is meagre as compliance costs are very high in GST.
1.13-11 System is master - not human being
In GST, system is master. Law will be what system decides.
There is not likely to be much human touch in many aspects of GST.
This is particularly in case of input tax credit where human will be helpless against system. Examples -
mismatches, adjustment of payments on FIFO basis
Huge amount of data uploading and date crunching required
If system fails, whole mechanism of input tax credit fails.
Huge amount of data uploading and data crunching is required. If system fails, whole mechanism of input tax
credit and adjustment of taxes fails.
Many taxable persons do not have capability to deal with the IT cha lenges under GST. Even infrastructure
required for compliance is insufficient outside major cities and towns.
1.13-12 CGST/SGST paid when IGST was payable and vice versa
Interpretation of provisions of 'place of supply' and 'fixed establishment' are critical in determining whether
IGST is payable or SGST/CGST are payable.
A taxable person who has paid CGST/SGST (in SGST Act) on a transaction considered by him to be an
intra-state supply, but which is subsequently held to be an inter-state supply, shall be granted refund of
CGST/SGST (in SGST Act). This means that he will have to pay IGST and then claim refund of SGST/CGST
paid. There is Para lel provision in IGST Law also.
Rea ly, there should be adjustment between State and Centre, instead of asking taxable person to pay ISGT
(or CGST and SGST) and then claim refund of SGST and CGST paid (or IGST paid, as applicable). Even
assuming there are some difficulties in adjusting SGST with IGST and vice versa, there should be no difficulty
in adjusting CGST and IGST as both are paid to Central Government only.

If the receiver had availed input tax credit, refund will not be admissible.
1.13-13 Conflict of interest between Centre and State
State Government Authorities from where goods or services are supplied will try to interpret place of supply
rules in favour of provision of payment of SGST and CGST in their State. On the other hand, State
Government authorities where goods and services are received will try to interpret the provision such that
either IGST should have been paid or SGST of their State should have been paid.
This will create conflicts as divergent views are possible. Only solace is that Appe late Tribunal is common for
SGST, UTGST and CGST.
1.13-14 Liability of GST on commission agent earning foreign exchange for India
As per provision of section 10(8)(b) of IGST Law a commission agent in India providing service to Principal
outside India and earning foreign exchange for India is made liable to pay GST, while Principal in India paying
commission in foreign exchange to foreign commission agent is not required to pay GST. This is indeed an
ironical situation.
1.13-15 Tendency of traders to reduce inventory on 1-7-2017
There will be attempt by a l dealers to reduce inventory as on 30-6-2017 to minimise problems of carry
forward of input tax credit of excise duty, CVD and State Vat paid on stock lying with him on 1-7-2017.
If this happens alloverIndia, we can imagine its cumulative effect. There will be lu l in economy at least during
transition period, similar to demonetization [note bandi] in November, 2016.
1.14 Conclusion
The coming GST is not an ideal GST. However, considering the present political situation and limitations, this
is the best that could be achieved.
GST is not an eight lane super national highway as was origina ly envisaged. It is a typical Indian road with
encroachments, potholes and diversions.
However, the road is motorable and surely better than existing situation. The GST as planned will surely be
much better than the present provisions.
IGST, concept of 'supply' and elimination of distinction between goods are services are the game changers. It
will help in developing a national market and considerably reduce the cascading effect of taxes.
The way of doing business will drastica ly change on introduction of GST.
It is projected that GDP of India will improve by 1% to 2% by introduction of GST. In any case, distribution
costs and procurement costs of every assessee will certainly be lower in GST.
Let us hope and pray that GST will be 'Good and Sensible Tax' and will be introduced w.e.f. 1-7-2017 as
planned.