Unprepared for GST

Now that the Parliamentary session that never was is over, it is time to take a non-political look at the much talked about Goods and Services Tax (GST). The Government is still issuing positive statements that GST will be a reality as they are planning a new strategy.

Many eyebrows will be raised if the Congress gives its nod to GST in the special session of Parliament that the Government is contemplating. Broadly, implementation of GST involves a Constitutional Amendment as a legal measure. While the Constitutional amendment has become a political drama that will inevitably end in some manner or the other, preparedness at the ground level seems to be virtually non-existent.

Recently, the Service Tax department issued a clarification through an advertisement that stated that the liability to pay service tax on service provided by mutual fund agents and distributors lies with mutual funds and asset management companies (AMCs), and not on agents and distributors.

The department went on to clarify that AMCs and mutual funds can claim credit against the service tax payment. The practical reality is that the Service tax department is very finicky in permitting Cenvat Credit for non-business activities.

It isn’t going to take long for someone to state that distribution of mutual funds is not the activity of an asset management company. One of the criticisms levelled against Service tax laws was that they were not applicable to lawyers though all other professionals come under its ambit. The negative list attempted to fix that problem by providing some exemptions for individuals.

Lawyers being lawyers, they filed a petition in the Bombay High Court stating that the imposition of the tax violated the right to equality and freedom to carry on a trade or profession. The relationship between a client and lawyer must not be seen as that of a service provider and a client, they argued. The Bombay High Court pooh-poohed this argument which forced the lawyers to knock on the doors of the Supreme Court. Though it did not rule on the merits of the levy, the SC recently granted a stay on it.

Similar situations exist in abundance in other indirect taxes. Sometime back, hospitals received a notice stating that every operation they conduct meets the definition of a works contract – the department obviously felt that every operation involves some sort of construction with the aid of men and materials.

All major e-commerce players in India were concerned when some State VAT offices decided to issue notices to the local warehouses from where the goods were dispatched to the customer -- the jury is still out on this, while the VAT laws in many States are silent.

As far as Central Excise is concerned, whether the Rules are called Modvat or Cenvat, the critical question of “what” is eligible for credit has never been answered clearly and is invariably a game of chance. While there can be no doubt about the benefits of a well-oiled GST regime, a lot of work needs to be done on the present indirect tax laws before we can think of a good GST law that will beneficially impact the cost of manufacturing products, selling goods and providing services.

The writer is a chartered accountant