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27 Feb 2018

2017- The Year of Major Tax Reforms

From a tax perspective, 2017 was eventful for India. It witnessed application of GAAR (General Anti Avoidance Rules) from April 1, 2017, shifting of the indexation base year from 1981 to 2001[1] for the purpose of capital gains taxation, reduction in corporate tax rate to 25 % for companies having a turnover less than INR 50 Crores among various other tax reforms.

The one sector mostly nourished was the Real Estate Sector; the benefit of Long-Term Capital Gains got reduced to a holding period of 24 months from the previous requirement of 36 months, and taxable event for levy of Capital Gains got shifted from date of execution of Joint Developments Agreements to the Year of grant of a certificate of completion[2].

However, the one most talked about change to India’s tax framework was the implementation of the Goods and Services Tax (GST) effective from July 1,  2017[3]. The GST has fundamentally altered indirect taxation in India by seeking to simplify the plethora of existing taxes and levies and significantly reducing the scope for inter-state cost arbitrage resulting from differential indirect tax structures and rates. Consequently, attempts have been made in this write-up to highlight the pre- and post-GST environments so that even lay readers can appreciate the significance of the GST regime to Indian industry.

PRE-GST PERIOD

Under the former Indirect tax regime, both the Central government and individual State governments levied Taxes and Duties on Import, Manufacture, Sale and provision of Service. While the Central government collected Central Excise Duty on Manufacture and Service Tax on the provision of Service, individual States collected VAT, Central Sales Tax, Luxury Tax, Entry Tax, Octroi, Entertainment and Amusement Tax etc.

In the absence of credits for input taxes paid to the Central or State governments, the earlier system forced a cascading effect, right from the event of Manufacture to Sale of Goods, resulting in higher prices for the consumer. Inter-state variations in tax rates also meant that consumers could purchase goods from a neighbouring State at a lower price. Also, many consumers bought products without tax invoices”. Both these practices caused losses to the exchequer.

As the consumers preferred interstate purchases due to lower tax rates, it resulted in long queues on check posts around the State borders hampering the free movement of goods thus leading to delay in delivery and corruption. 

POST-GST PERIOD

The GST regime was envisaged as an elegant option to eliminate the cascading effect of taxes on the production of goods and provision of Service. The GST has replaced the former Indirect Tax regime in the country, subsuming within it seven Central and six State Taxes[4]. The new laws include new dimensions to Levy, Collection and Assessment.

  • Introduction to GST

GST is a unified form of tax levied at different stages from manufacture up to the final consumption. A seamless transfer of input tax credit is inbuilt in the new tax regime to incentivise tax compliance by taxpayers[5]. A concept of ‘Supply’ has substituted the event of ‘Manufacture’/provision of Service’[6]. Registration, Time of Supply, Valuation of Goods and Services, levy of tax on E-commerce operators, Job Workers and the procedure of Assessments and Audits have all been restructured to meet the objective of “One Nation-One Tax”. The Taxes subsumed by GST relate to import/manufacture/production of goods and provision of service. At the time of promulgation, the supply of alcohol for human consumption, petroleum crude, petrol, high-speed diesel, natural gas, aviation turbine fuel, purchase of real estate and transmission of electricity are all outside the scope of GST[7]. But it is possible that over time, some of the above items may move under the GST regime.

The GST regime prescribes levy of tax by way of Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST) on the intra-state supply of goods and IGST, i.e. Integrated Goods and Services Tax on inter-state supply[8]. It further prescribes Union Territory Goods and Services Tax, i.e. UTGST on a supply made in Union Territories[9].

  • The structure of the GST Law

As the triggering event for levy of GST is a taxable supply, the GST law categorically defines what constitutes a taxable supply along with activities which are neither supply of goods nor supply of services and deemed supplies. The law is clear on liability towards GST registration subject to turnover limits and cases of mandatory registration. For standardisation of procedures, the GST Law prescribes a total of 30 uniform formats/ forms with stipulating strict timelines for completion of stages of Registration and filing of Returns.

National Academy of Customs, Indirect Taxes, & Narcotics (NACIN), the apex training institution under the Central Board of Excise & Customs (CBEC) has now and then, from the day of the new law coming enforce, has clarified through FAQs, application, implementation and execution of the said law.

The FAQs are explicitly clear on Registration, Meaning of and forms of Supply, Time of Supply, Reverse Charge Mechanism, Tax Invoices, Accounts and Records in GST, Credit and Debit Notes, Electronic Cash/Credit Ledgers and Liability Registers. They provide a reasonable understanding of Electronic Way Bill, Returns and Refund, TDS, TCS and Advance Ruling mechanisms[10]

  • Issues in Implementation of GST

A robust technology backbone was vital for the implementation of GST. An online portal called GSTN has been deployed to simplify procedures for registration, e-way bill, returns, refunds, tax payments, etc. All filings towards registration, returns, payment of taxes, input tax credit, the filing of refund claims, etc. are made through this automated platform.

GSTN was expected to reduce the need for interaction between GST assessees and tax authorities through self-service and automation. Unfortunately, due to technical glitches and connectivity issues, there have been many complaints about the portal not being available on a 24×7 basis. In fact, E-Way was deferred because of performance issues of GSTN portal. It means that in the first eight months since moving to the GST regime, a primary goal is not met. The poor performance of the GSTN portal has also given rise to litigation.

Till date, the GST Council, the group of state members along with the Union Finance Minister has conveyed around 25 meeting making recommendations on the structure of taxes, cesses and surcharges levied under GST. The GST law is structure to collect GST @5%, 12%, 18% and 28% respectively. During these meetings of the GST Council, various attempts have been made to rationalise the GST Rates. Reduction in rates is suggested for goods like used motor vehicles, vehicles for public transport, drinking water, household LPG and commonly consumed FMCG products. Checks and balances by way of Anti-Profiteering, E-Way Bill is discussed and drawn to finality. From a tax-practitioners’ perspective, GST is a tax model addressing the litigious elements of the former tax regime.

Though effective implementation GST is said to be sailing in the boat of uncertainty, with constant and frequent reforms in the new law is likely to meet the goal of One-Nation, One Tax.

[1] Section 55 of the Income-Tax Act, 1961

[2] Section 45 of the Income-Tax Act, 1961

[3] Notification No. 01/2017-Central Tax and Integrated Tax, dt. 19-06-2017 and Notification No. 1/2017-Union Territory Tax, dt. 21-06-2017

[4]FAQ on GST by National Academy of Customs, Indirect Taxes, & Narcotics (NACIN)

[5] Section 16 of CGST Act, 2017 & Section 18 of IGST Act, 2017

[6] Section 7 of CGST Act, 2017

[7] Definition of Goods and Service Tax under Article 366(12A) of the Constitution and Schedule III to the CGST Act, 2017

[8] Section 9 of CGST & KGST Act, 2017 and Section 5 of IGST Act, 2017

[9] Section 7 of UTGST Act, 2017

[10] FAQ on GST by National Academy of Customs, Indirect Taxes, & Narcotics (NACIN)

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