Yesterday (3 December 2015), the Model GST Law submitted by one of the sub-Committees of the government to all the state Finance Ministers was made available on certain web portals1. With the draft law of the much-awaited tax reform now available (until now only the 122nd Constitutional Amendment Bill was available in the public domain), it is imperative that businesses understand key insertions in the law including the intention of the legislation along with the probable impact on their business operations.
In this update, we have summarised the key provisions that would potentially impact businesses:
Taxable event would be 'supply' under GST: Concepts with regard to taxable events learnt over the years such as manufacturing, sale, service, etc. would cease to exist under GST and all supplies would be subject to GST. As anticipated, the meaning of the term 'supply' is defined in the provisions and the same would include all forms of supply (goods/services) such as sale, transfer, barter, exchange, license, import of service, etc. Also, a few supplies without any consideration would be subject to GST.
Here, it would be worthwhile to note that non-taxability of the barter system under the current VAT regime has now been covered in the definition of supply to make it taxable. Valuation of the same would prove to be a challenge to the department as well as industry.
Place of supply – a conceptual change: Currently, most of the indirect taxes are 'origin-based taxes' and payable to the exchequer where the supplier/service provider is located. However, GST being a 'destination-based tax', it would be crucial to determine the place where goods/services are supplied/consumed.
With this intention, place of supply for goods and for services are separately defined in the law itself, wherein for goods the place of supply is the place where goods are delivered, and for services the place of supply is the place where the service recipient is located subject to exceptions. Also, specific provisions are inserted to determine the place of supply for telecommunication services, insurance services, banking and financial services, etc. Furthermore, recent ambiguity with regard to place of provision of service for "intermediary" and "online database access or retrieval service" under service tax provided by service providers to overseas entities, which is subject to service tax can qualify as export under GST since the place of supply would be based on the place where the recipient is located. However, the place of supply for the banking sector, which is currently based on the location of the service provider would shift to the location of the service receiver, which would lead to stringent KYC norms and increase state-level compliances for banks substantially.
Furthermore, the following issues would arise in determining the place of supply in case of intangibles, bill-to/ship-to model, sale in transit, e-transactions, etc. as the receiver could be located in one state and the actual goods/services might be consumed in another state.
Valuation mechanism under GST: Under the current regime, respective legislations have issued Valuation Rules to determine the value for the purpose of respective levies such as service tax, excise, customs, etc. Similarly under GST, Valuation Rules are framed to determine the value for levying GST. As per the Rules, GST would be payable on transaction value, which is the price actually paid or payable for the said supply of goods and/or services between unrelated parties. Also, there are a few inclusions in the transaction value such as free supplies by recipient to the supplier in connection with the supply, royalty/license fees payable as condition of supply, any taxes/duties charged under any statute other than GST, etc. It is worthwhile to note that any discounts given after supply is effected would also be subject to GST.
However, issues relating to valuation on supplies to self (i.e. branches/agents) would arise as in such cases GST is to be levied on transaction value and typically, an entity may not supply the goods/services on transaction value to its own branches/agents.
Time of supply of goods and services: Under the current regime, taxes are payable based on taxable events defined such as excise is payable on removal of manufactured goods, VAT is applicable on sale of goods, service tax is applicable when service is deemed to be provided as per the Point of Taxation Rules, 2011. Similarly under GST, the concept of Point of Taxation Rules, 2011 is extended and the concept of time of supply is mentioned in the provisions to determine the timing for payment of GST. Typically, the time of supply of goods would be removal of goods or receipt of payment or issuance of invoice or date on which the buyer shows receipt of goods – whichever is earlier; whereas the time of supply of services would be issuance of invoice or receipt of payment or date on which the recipient shows receipt of services – whichever is earlier.
It is worthwhile to note that parameters are prescribed to determine the 'time' of supply. Thus, determining the 'time' of supply and further maintaining reconciliation between the revenue as per financials and as per GST Law could pose a major challenge for businesses.
Input tax credits under GST: Under the current regime, there are restrictions in claiming credits, i.e. under service tax and excise – construction, staff welfare, car hire, etc. cannot be claimed as credit. Also, under VAT, there are reversals/reduction in credit on account of stock transfers outside the state, procurement of items ineligible for credit, etc. The principle of GST to have a seamless flow of credits may be violated as there are provisions that lay restrictions on the claim of credit – such as goods/services used for personal consumption cannot be claimed, goods/services used for construction of immovable property, etc. and would lead to a cascading effect of taxes.
Inter-state supply of goods to attract 1% additional tax: Under the current regime, inter-state sales attract CST, which is not available as credit to the buyer and considered as cost. Similarly under GST, the concept of an additional 1% tax over and above IGST would be levied for two years only in case of inter-state supply of goods, which would not be available as credit, leading to an increase in cost in the supply chain.
Furthermore, such additional tax would not be applicable to inter-state branch transfers as there will be no consideration in such a transaction. It is worthwhile to note that there was a hue and cry in the industry with regard to the levy of 1% additional tax on inter-state branch transfers as the same would lead to an increase in tax cost for businesses with multi-state presence and the same seems to be resolved by restricting levy only in case of transactions with consideration.
Rate of GST not specified in the law: The Model GST Law does not specify the rate of GST.
New concept of rating introduced: A relatively new concept of a compliance rating system is introduced. A rating score would be assigned to an assessee based on prescribed parameters. The rating would be updated at periodic intervals and intimated to the taxable persons and such rating scores could also be placed in the public domain.
As key provisions have elaborated on the modus operandi under GST, it is essential to analyse the impact of the provisions in light of the transactions undertaken by businesses. Considering the entire regime of indirect taxes is overhauled, the change would impact each and every business vertical:
- Purchase: In terms of selection of vendors, location of vendors for procurements, managing inventory, etc.
- Finance: In terms of analysis of the business model, impact on pricing of goods/services, working capital, capital budgeting, etc.
- Taxation: In terms of ascertaining the impact of the law on business transactions, managing compliances, prepare SOPs, etc.
- Information technology: To upgrade to IT systems, check the reports to be generated under GST regime, user trainings, etc.
- Supply chain: To manage logistics, lead time of customers, location planning, etc.
- Sales/Marketing: To design the strategy under GST
As the Model GST Law is out in the public domain, the date of implementation of GST may not be far and it is expected that once the Constitutional Amendment Bill is passed in the Rajya Sabha, the road map on GST from the government, including the process of transition would be announced. Hence, it is advisable to work towards analysing the impact of the law on your business operations on an immediate basis as ascertaining the impact, preparing price structures, revamping operations, etc. would be a time-consuming exercise.
Once a distant dream, GST could soon be a reality!
 Authenticity of the document cannot be verified since there is no official announcement from the Ministry of Finance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.