By S Sivakumar, LL.B., FCA, FCS MBA, ACSI, Advocate & R Vaidyanathan, M.Com., M.Phil, Consultant
A cursory reading of the model GST law could invariably bring out the imprint of the VAT law, as contrasted to the central excise/service tax law, in the model GST law. It seems clear that the States have had their way in the drafting of the model law, in as much as, most of the obnoxious provisions currently in the VAT law would seem to have found their way into the model GST law. It would seem that all the talk of a simplified GST law has been thrown to the winds and unless some serious introspection goes into the minds of the Government, this country would be doomed to live with a GST law that could discourage rather than encourage the concept of ‘Make In India’.
Be that as it may…… consider some of these draconian provisions.
Take a look at the definition of ‘supply’, which is the most important aspect of taxation under the GST law, as much as, the tax is leviable on the ‘supply’ of goods and/or services.
3. Meaning and scope of supply
(1) Supply includes
(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and
(c) a supply specified in Schedule I, made or agreed to be made without a consideration.
(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.
This is an inclusive definition. Not only that, the definition also includes the words ‘such as’, which would expand the scope of a definition, which is in any case, is already wide enough being an ‘inclusive’ definition. As students of central excise law, we know that, Section 2(f) of the Central Excise Act 1944, defines ‘manufacture’ in an inclusive matter and due to this, even after 70 years, we still have confusion as to what constitutes manufacture and we need the Apex Court to decide cases, on ‘manufacture’, even now. At least, insofar as the definition of ‘service’ under Section 65B(44) of the Finance Act, 1994, there is some clarity as the definition uses the words ‘means and includes’. In fact, the definition of ‘sale’ under the VAT law is much more clear. For instance, Section 2(29) of the Karnataka VAT Act, 2003 defines ‘sale’ to mean every transfer of the property in goods…
Now, look at the definition of ‘supply’ in the model GST law. By using an inclusive definition and the words ‘such as’, the GST regime could cover every transaction under the sun and we could have litigation for the next 70 years, on what constitutes ‘supply’. The billion dollar question is, is this kind of a very loose definition justified in a law that promises to usher in the ease of doing business? If the lawmaker is himself not sure as to what constitutes ‘supply’, what kind of a confusion and the consequent litigation that this loose definition could create in the years to come is left to the fertile imagination of the readers.
Taking this discussion forward…. take a look at the very important definition of the term ‘consideration’. In terms of Section 2(28) of the model law, we again have an inclusive definition. Of course, the term ‘consideration’ is not defined under the service tax, VAT and central excise laws. This fact cannot justify having a very wide definition that can haunt industry forever. While the Government’s eagerness to cover transactions involving exchange, barter, etc. is understandable one would expect a much tighter definition which can minimize litigation.
Look at the definition of ‘business’, which again, is an inclusive definition. Section 2(17) of the model law reads as under:
(17) “business” includes –
(a) any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any transaction in connection with or incidental or ancillary to (a) above;
(c) any transaction in the nature of (a) above, whether or not there is volume, frequency, continuity or regularity of such transaction;
(d) supply or acquisition of goods including capital assets and services in connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be;
(f) admission, for a consideration, of person s to any premises; and
(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
One is rather worried to see that even after substantially increasing the scope of the definition of ‘business’ [Section 2(6) of the Karnataka VAT Act, 2003 only has two clauses, under the definition of ‘Business’] by listing 7 clauses, the definition is still an inclusive one.
By the way, most of the definitions in the model law are ‘inclusive’ definitions, reflecting the lack of clarity on the part of the Babus who have drafted this model law. We don’t find many definitions that are exhaustive, indicating the lack of homework on the part of the Babus, despite that, the introduction of the GST regime has been in the cards for about 15 years now.
Taking this discussion further…. the provisions relating to input credit are most draconian, impractical and anti-Industry. In terms of Section 16 of the model law, input credit can be availed by the purchaser/service recipient, if and only if, the seller has paid the tax collected and also has filed the requisite return. This provision seems to have been completely driven by the States as we have not had a similar provision under the central indirect tax laws. It seems ironical that the buying dealer/service receiver should not only run his business effectively but also ensure that his suppliers/service providers are also complying with the provisions related to payment of tax, filing of returns, etc., for availing input tax credit. How could the Government seek to transfer its mandatory responsibility of ensuring compliance with the law, to the Industry itself? Why then do we require the tax bureaucracy if it cannot ensure compliance by the assessees? We shudder at the issues that could crop up in the case of large assessees, who might have to take responsibility for ensuring that, not only do they maintain their own records and file returns, they will also have to ensure that, their tens of thousands of vendors and service providers have also filed returns and made payments. Billions and billions of invoices would need to be checked by the GSTN and should there be any technical glitches, the whole system could get thrown out of gear, seriously affecting the very GST system. In our view, there is no need for rushing into this restriction at this point of time. This can always be attempted after the GST system has stabilized. We are informed that, even countries like China and Brazil, which had gone for this kind of a system of input tax credit have miserably failed and hence, it would seem that this system of allowing input credit on the basis of the payment of the output tax by the seller/service provider is very likely to fail in India, as well.
Besides this, the input credit system is likely to create a lot of issues for Industry especially given the fact that the restrictions that are currently applicable in the service tax regime are continuing under the model law, including the denial of credit in respect of construction of immovable property as well as, denial of credit in respect of commercial realty players. Where is the justification to deny credit to a manufacturer who is setting up a new factory, under the GST law and will this not result in increased cost of setting up business in India?
Under the model law, input credit attributable to personal usage (as contrasted to usage for business) is to be denied. Though the Government could come out with a formula, similar to the existing Rule 6(3) of the Cenvat Credit Rules, 2004, to deny credit on common inputs/input services, couldn’t have the GST model law followed the Income tax Act, 1961 insofar as what constitutes personal expenses? The requirement to apportion credit as attributable to personal usage could result in large scale litigation for Industry. Couldn’t the Government follow the provisions contained in the income tax law, under which, personal expenses (as contrasted to business expenses) are disallowed under Section 37(1) of the Income tax Act?
The model GST law has some highly obnoxious provisions related to pre-deposit, penalty, etc. It would seem that the Karnataka VAT Act has had a role to play, vis-à-vis the levy of mandatory penalty of 10% of the short payment of tax, under Section 66(2) of the model law. Under Section 66(1), of course, there is a mention of a mandatory penalty of 100% of the tax evaded/short paid in the case of evasion, wrong availment of credit, etc. It would seem that, once it is proved that there has been an evasion, etc., there is no discretion insofar as the levy of penalty of 100% is concerned. Compare these draconian penalty provisions in the model law with those in the Karnataka VAT law, wherein, a mandatory penalty of only 10% is levied, irrespective of whether the case involves ‘mens rea’.
Talking of pre-deposit… under Section 79(6) of the model law, a pre-deposit of 10% of the disputed amount would need to be effected for filing the appeal. Since 100% penalty is expected to be routinely confirmed under the GST regime, the pre-deposit would actually amount to 20% of the tax, as contrasted to the present dispensation, wherein, 10%/7.5% of only the tax or penalty is to be pre-deposited depending on whether the order appealed against has been passed by the Commissioner or the Appellate Commissioner.
The imprint of the States is very clearly seen, in terms of the revisionary powers granted to Commissioners under Section 80 of the model law. As far as we can see, this section would seem to have been directly taken out of the VAT law. Based on our experience of handling VAT law in Karnataka for over three decades now, we can submit that, the revisional powers have been largely misused by the senior officers of the Commercial Taxes Department and one can expect the same situation, under the GST law.
Provisions related to advance ruling contained in Sections 94 to 105 of the model law may not make much sense, as it seems that the Commissioner under Section 80 could have the powers to revise the advance rulings, as is the case under the Karnataka VAT Act now.
Under the GST model law, assessees rendering services in multiple states would need to take CGST registration in each of these states, as the concept of ‘centralized registration’ that is currently available under the service tax law, is not applicable under GST. The Government should seriously think of allowing services providers having operations in multiple States to have a centralized registration, vis-à-vis CGST. Further, it would seem that the CGST input tax credit that is available on one State cannot be transferred to another State.
The current concept of agency under the VAT law is proposed to be replaced with a draconian concept under the GST law, wherein, under Section 2(2A), where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply. This could create situations that would be impossible to handle, as in such cases, the commission agent would get treated as a full-fledged ‘supplier’ under law, whereas, under business conditions, a commission agent would not buy goods or procure services on his own account. Under the model law, the commission agent is likely to get converted into a ‘principal’ which would go against the fundamental concepts of business law. It also seems that a C & F agent would also be treated as a full ‘supplier’ under the model law, which goes completely against the business understanding.
The transitional provisions are draconian and impractical, to say the least. More on this, later, perhaps, by way of another article.
Talking of the Realty Sector…. It would seem that this industry would suffer the most, under the GST regime, inasmuch as, the composition scheme that is currently followed by all States in one form or another, is not finding its place under the model law. For example, Developers pay a composition tax of 1% in Maharashtra while they pay, 4% on the construction value in Karnataka and are entitled to exemption in respect of the sub-contract turnover. Under Section 8 of the model law, the composition scheme is restricted to players with an aggregate turnover of Rs 50 lakhs or less and consequently, this scheme, as envisaged under the model law, with its other restrictions, would largely be inapplicable to Realty Developers. I would wonder as to how Developers in Maharashtra, Karnataka and other States would be able to charge and collect GST at rates of around 18% from their flat buyers, under the GST regime. Since in any case, the players opting for the composition scheme are not allowed to make inter-state purchases, the Government would do well to find some alternate scheme for Developers and Builders, comparable to the existing composition scheme, as otherwise, the Realty Sector could crumble under the impact of the higher GST rates.
Apart from the Realty Sector, we feel that the services sector would also get impacted in a big way, under the GST regime. The leading software and services exporters would have to knock at the doors of the State Governments also, for refund of the SGST, in addition to seeking refund of the CGST from the Central Government. Moreover, the services sector, which has happily been outside the ambit of the VAT law (and consequently, the harassment from the VAT Department) would now have to face the challenges of the State GST machinery. Good luck to the services sector.
As another example of the imprint of the VAT law, in the model GST law, we have Section 123 which squarely lays the responsibility of proving the genuineness of the input tax credit on the claimant. Perhaps, under the GST law, large companies will need to police the activities of their suppliers and service providers to ensure the authenticity of the relevant documents, supplies, etc.
The provisions contained in the model GST Valuation (Determination of the Value of Supply of Goods and Services), 2016 are equally confusing, to say the least. In terms of Rule 3(5) of these rules, where goods are transferred from (a) one place of business to another place of the same business or the principal to an agent or from an agent to the principal, whether or not situated in the same State, the value of such supply shall be the transaction value.One fails to understand as to how, inter branch transfers of goods can be valued at the transactional value? Moreover, it seems that the confusion related to levy of tax on reimbursements would continue to haunt the Industry under the GST regime as well.
The provisions related to arrest contained in Section 62 of the model law look very vague and obnoxious. Under this Section, the Commissioner can order arrest even in cases when he has a reason to believe that there is a failure to supply any information that the supplier is required to provide to the Department in terms of Section 73(1)(k) of the model Act. Even an attempt to commit any of the offences specified in Section 73(1) could result in an arrest. Needless to say…. these are draconian and anti-Industry provisions which can be misused and Industry would be well advised to protest against these provisions. On a lighter vein… one of the co-authors of this article, being a Consultant, is extremely worried about the implications arising out of Section 73(1)(l) read with Section 63 of the model law, in terms of which, even a person who ‘abets’ any of the offences mentioned therein, can be arrested.
We can go on and on and on…a cursory reading of the model law could lead one to conclude that, the same has been drafted with no concerns for the Industry, service providers, trade and professionals.
The model GST law falls very short of expectations. If this is the law that is expected to ensure ease of doing business, God save the Indian Industry. In our strong view, the entire GST law needs to be re-written with the sole aim of facilitating the concept of ease of doing business. Making cosmetic changes to the model law would not do, in our view.
The model law which is a combination of the negative aspects of the current indirect tax laws, nay, an improvement upon these negative aspects, is a cruel joke on Industry. While there are some positive aspects like availability of credit on inter-state purchases, removal of multiple taxes on the same transaction, etc., we feel that the negative aspects of the GST model law far outweigh the positive aspects.
While we do not suspect the good intentions of the PM and the FM, the model law, in its current form would seem to be the result of the drafting by the babus and especially, the babus from the States, whose main intention would seem to have the footprint of the bureaucracy in the GST regime. Unless the law is completely re-written in an Industry friendly manner, the country is likely to suffer the consequences for the next 50 to 70 years. It also seems that the Industry, the main stakeholder under the GST law, has been kept outside of the drafting of the law.
Fortunately, we are now having stalwarts like Mr P Chidambaram in the Rajya Sabha. In our view, the present Government should actively engage intellectuals like Mr Chidambaram in evolving a good GST law, especially given his proven expertise in tax matters as also the fact that it was he, who had made the first announcement of the impending GST regime in his Budget speech on 28-2-2006.
Unfortunately, it would seem that a lot of discussion is currently being centred on the GST rate, with the Congress apparently seeking a cap on the GST rate and a mention of this in the 122 nd Constitutional Amendment Bill. In our view…. the GST rate is not that important, as compared to having a good GST law in place. Considering the fact that the GST law would be a money bill which can be introduced with its passage in the Lok Sabha, all efforts should now be put in, to draft a good GST law. In case a good GST law cannot be introduced in 2017, it does not matter, as having waited for a long time, the country can as well wait for another year to have a good law in place.
Perhaps, some of the Rules might contain certain beneficial provisions. But, given the contours of the model law, we would wonder if the Rules could pleasantly surprise us.
The GST is expected to be an economic landmark. The model law, by expanding on the current negative provisions contained in the central excise, customs, service tax and State laws including VAT, would seem to proceed in a wrong direction and could, in fact, derail the economic reforms initiated by the current Government and could act as a major dampener for new investors.
We still have time – instead of a half-baked product, it would be prudent to create a GST law for which the Government would be admired rather than creating a law which sinks the already floundering Indian industry!