India: Transitional Issues- What More Needs To Be Done V.S. Krishnan, Senior Advisor, Tax Policy Group, EY Business Standard

Last Updated: 12 September 2017
Article by Ernst & Young

As the country stands on the cusp of a transformational tax reform. The worry now centres on how smoothly trade and industry can carry over existing input credit into the new GST regime. Therefore, trade and industry is looking closely at transitional rules. This has important consequences on how quickly trade would like to draw down their inventories before the implementation date and also on decisions relating to the pricing pattern.

The transitional rules were recently approved by the GST Council in the meeting held on 3 June 2017.

The positive decision was that the input credit available to manufacturers and dealers without having to produce original duty paying documents has been raised from the proposed limit of 40 percent of the value of the goods to 60 percent for items baring GST duty rates of 18% or more. This provision would benefit industries with a long delivery supply chain extending to first stage dealers and second stage dealers stockist. This measure would largely allay the fears of the business community. Another area of worry relates to simplification of the refund procedure where the inverted duty structure prevails (GST rates on inputs and intermediaries are higher than on the final product). While the existing provisions provides for grant of 90 percent of the refund amount up fronts within seven days in respect to exports. The same facility has not been extended to the inverted duty structure. This needs to be done as this will reduce the interest burden on industries created by the higher working capital requirements imposed on them due to imposition of IGST levy on Inter-State supply.

The transitional rules approved in the third meeting also provide relief to high value commodities like Consumer durables, tractors and so on by allowing validation of duty claims through cross reference to product details embossed on engines, chassis and other equipments. All in all the amendments approved to the transitional rules would help trade and industry to effect a smooth transition. Another interesting announcement was that the remaining period of this financial year post 1 July of implementation would be treated as period of transition. This would suggest that Government would take a sympathetic view to procedural violation if the intent is honourable and the mistakes are unintended. Here again there is a clear demonstration of the pragmatic approach adopted by the government.

This announcement also ensures that the government would be prepared to make calibrated changes as the situation unfolds without taking a rigid view. The experience garnered by the government by the implementation of service tax from 1994 onwards also suggest that all contentious issues cannot be anticipated before the implementation of a new levy. Law has to always follow trade practice and not the other way around.

There are finally two institutional measures that the government should take to ensure a smooth transition

  • GST Secretariat's must be created in all the states where senior State and Central tax officials can come together in an institutional framework; this body can be registered under the Societies act much like the Empowered Committee of State Finance Ministers; this will allow the body to have a dedicated Secretariat and also provide a forum for trade and industry to raise non policy implementation issues at the level of the states.
  • Finally there is also n a need to create a Technical Secretariat both at the Centre and State which could provide instructions on assessment related matters which would be binding on the field officers; there is already an enabling provision in the GST law passed which allows this to ensure uniformity of practice all over the country; this would ensure the 'rule of law' and not the rule of thumb

In conclusion, the flexible and pragmatic approach shown by the government on various issues raised by trade and industry augurs well for the smooth implementation of the GST.

(The author is Senior Advisor, Tax Policy Group, EY)
(Views expressed here are personal)
(This column first appeared in the Business Standard)

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.

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