While the 122nd Constitutional Amendment Bill, which is the vital legislation to make the much awaited Goods and Services Tax a possibility, is still crawling through the corridors of the Upper House, the ministry of finance has recently released the Model GST Law as drafted by the empowered committee of State finance ministers.
It is well in tune with the basic dual GST structure with the States empowered to levy State GST (SGST) on supply of goods and services within the State, the Centre to levy central GST (CGST) on intra-State supplies of goods and services, with integrated GST (IGST) being imposed by the Centre on import as well as inter-State supplies of goods and services.
But the proposed Model GST Law doesn’t offer much solace. While treating construction activities in line with current “works contracts”, it has disappointed the crucial real estate sector by keeping the construction sector away from ITC (input tax credit) and being silent about the guidelines regarding valuation of land. If denial of ITC (goods such as cement and steel) means higher costs for the consumer, the non-integration of stamp duty into GST would only make it worse for him.
Another striking issue is the valuation of goods based on retail sale price (RSP). Today, most FMCG goods and commodities such as cement are valued based on their RSP for payment of central excise duty when they are cleared from the factory. In the proposed law, the levy of GST would be on value addition at each stage of business.
The Model GST Law has proposed a uniform basis for valuation of goods based on transaction value. Thus, the RSP-based levy would lose relevance under the GST regime. One of the key issues to keep in mind while finalising the valuation framework is the business dynamics of brand-owners who do contract manufacturing, toll manufacturing, and so on.
Factoring in discounts The other major concern would be to address the issues relating to the variety of discounts offered at each and every stage of the supply chain, and pre- and post-sale discounts, turnover discounts, performance discounts, etc. Further, the various incentives and commissions given and the treatment of promotional packs supplied free of cost or at a discounted price should also be factored in while arriving at the appropriate valuation mechanism.
With the RSP-based valuation being done away with under the GST regime, the valuation of imported goods currently assessed to countervailing duty (CVD) could be another important challenge.
Coming to the legal angle, the Model GST Law is a potential can-opener for the tin of litigation worms. The critical term “supply” is defined as “Supply includes…” instead of “Supply means…”, leaving the definition open to varying interpretations. This is similar to the definition of “manufacture” under the Central Excise Act. The term is defined as “manufacture includes….”, thus introducing an element of ambiguity. Despite landmark judgments from the apex court interpreting this ambiguous definition, till date litigation continues. .
Other potential contentious areas could be valuation, classification, capital goods and input tax credits. Even on procedural aspects such as registration and returns, the prescription is extremely cumbersome and highly regressive.
Further the Model GST Law also leaves many unanswered questions in key areas such as treatment of supplies to SEZ/STP, and transition of area-based and State incentives in the GST regime. Also at this stage no negative list has been prescribed. These issues require consensus and hopefully there will be clarity in the coming months.
Abuse of power One of our major concerns is the potential abuse of power. The penal provisions prescribed are somewhat draconian; it includes imprisonment. GST is a new law, rather a transformation for all stakeholders. For the GST to become a successful reform tool, first and foremost the mindset of those in charge of administering GSTat the national level or State should undergo a major metamorphosis. Slogans such as “ease of doing business” have remained slogans; on the ground, tax administrators at all levels are bogged down by revenue bias, target orientation, fear of audit and vigilance, a policing attitude and looking at the assessee as potential evader. Unless there is a fundamental psychological change backed by genuine support from the top, GST can never be what it is intended to be.
Tax collectors should realise that taxes will come in either because of or in spite of them. To quote the Prime Minister, 92 per cent of the tax revenue will flow to the government kitty, even if the tax departments are closed down.
The Bill may be passed by the Upper House in the coming monsoon session. Sooner or later, the States will ratify it. Either before or during the coming Budget, GST could well become law. But how well are we prepared to implement GST? That’s an entirely different story altogether.
The writers are advocates with Swamy Associates