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Levy under the revised draft GST Laws
Ritesh Kanodia, Partner, Dhruva Advisors LLP
Sachin Sharma, Principal
The Government of India has issued the revised draft Central Goods and Services Tax Act, State Goods and Services Tax Act (cumulatively referred to as the ‘GST Act’) and the Integrated Goods and Services Tax Act (‘IGST Act’) making some noteworthy changes and addressing some evident lacunas which appeared under the erstwhile draft law.
Changes have been made to some of the definitions having a bearing on the taxability of supplies. The definition of ‘aggregate turnover’ has been amended to exclude ‘non-taxable’ supplies, which has a positive bearing on the determination of threshold limit and eligibility for the composition scheme. The definition of ‘consideration’ has been amended to exclude State and Central Government subsidies. There is an ongoing dispute as to whether such subsidies are subject to service tax.
The definition of ‘goods’ has been amended to exclude securities and to include actionable claims. Consequently, transactions involving securities will not be subject to GST, as they already attract stamp duty and STT. Under the previous draft law, actionable claims were classified as ‘services’, and hence there was no change in the levy per se. The definition of goods has been amended to include intangible property, which was previously excluded. It is expected that the Government will issue a specific list classifying intangibles as goods or services, in order to bring greater clarity. These amendments could have an impact qua the rates, as goods are subjected to tax under a four-tier rate structure, i.e. 5%, 12%, 18% and 28% + cess, whereas services are taxed at 18%.There could also be an impact on import transactions, as customs duty applies to transactions involving goods. However, the deeming fiction created under the draft GST Act may not apply to the Customs law, resulting in double taxation e.g.
...on software, license fees etc.
The definitions of ‘Electronic commerce’ (‘E-commerce’) and ‘Electronic commerce operators’ has been introduced. The Government can specify categories of services on which the E-commerce operators will be subject to GST. In such cases, even though the E-commerce operator does have an office in India, they will be liable for tax either registering by themselves in India or through a representative in India. In other cases, there is an obligation to collect tax at source on the net value of taxable supplies.
The scope of ‘services’ has been expanded to include transactions in money relating to the use of money or its conversion by cash or by any other mode, from one form to another, but does not include money and securities. Intangible property and actionable claims have been excluded from the definition, however, Schedule II specifically covers temporary transfers or permitting the use or enjoyment of any intellectual property rights, as a service.
A new definition of ‘Zero-rated supplies’ has been introduced, covering exports and supplies to SEZ. Consequently, while exports and supplies to SEZs are not subject to GST, credits are available, which can also be claimed as refunds. Alternatively, the supplier can pay the IGST and the SEZ can claim the refund.
The definition of a ‘works contract’ has been aligned to the existing law under Service tax, with the consequence that the activities of completion, maintenance and alteration would constitute a ‘works contract’. However, the definition has been restricted to such activities as relate to immovable property only.
Amendments have been proposed to the Schedules forming part of the GST Act. Clause (b)of Section 3, dealing with meaning and scope of supply, covered ‘importation of services, whether or not for consideration and whether or not in the course or furtherance of business’. This has been amended to provide that only importation of services for a consideration will be subject to GST.
...However, importation of services by a taxable person from a related person or from any of his establishments of the taxable person outside India will be subject to GST even if there is no consideration, per an amendment made under Schedule I, which deals with the taxability of the supply of services even if made without consideration. Schedule I has further been amended:
- To tax permanent transfers/disposals of business assets only where input tax credit has been availed on such assets.
- To cover the supply of goods or services between related persons, or distinct persons, with a consequential impact that stock transfer of goods or provision of services between related parties or distinct persons, i.e. an establishment of a person in a State/India and any of his other establishments outside that of State/India [as defined under the Integrated Goods and Service Tax Act (IGST Act)], will be subject to GST, even if no consideration is paid. It is not yet known how such services will be valued under the revised valuation rules, which have not yet been issued. A positive impact of this amendment is that the distribution of free samples or the supply of free goods to third parties is no longer subject to GST. However, the credit would be required to be reversed, treating such supplies as non-taxable supplies.
- To tax the supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal, or by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. Following this amendment, the concept of a ‘consignment agent’ prevalent under most State VAT laws may no longer be relevant. The basis of this concept was that an agent could register for and pay VAT on behalf of the principal, in which case the principal was not required to be registered.
...
A new Schedule III has been introduced listing activities or transactions (as mentioned under the current definition of service and negative list) which shall be treated neither as a supply of goods nor as a supply of services,e.g. Services by an employee to employer, Services by any Court or Tribunal, Services by a foreign diplomatic mission located in India, functions by Members of Parliament, etc.
The concept of the determination of tax liability on composite or mixed supplies has been introduced:
- A composite supply comprised of two or more supplies, one of which is the principal supply, shall be treated as a supply of such principal supply. An example would be where goods are packed and transported with insurance - the supply of goods, packing materials, transport and insurance is a composite supply and the supply of goods is the principal supply.
- A mixed supply shall be treated as supply of that particular supply which attracts the highest rate of tax. An example would be a package consisting of canned foods, sweets etc. when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other.
The concept of bundled supplies is similar to that under the current service tax laws. There are numerous ongoing disputes on this aspect, in cases where there is a differentiation in rate of tax and services are split, which could also have been provided together in the ordinary course of business. Disputes also exists qua mixed supplies under the current excise laws. These are expected to continue if there are differential rates of GST.
The IGST Act has been amended to provide that the supply of goods and/or services:
(a) in the course of import into the territory of India till they cross the customs frontiers of India
(b) when the supplier is located in India and the place of supply is outside India
(c) to or by a SEZ developer or an SEZ unit
(d) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section, shall be deemed to be supply in the course of inter-State trade or commerce.
...Consequently, such supplies may be under the purview and control of the Central Government. Further, any taxability of such transactions shall be that of IGST. However, while IGST is a levy administered by the Central Government, it appears that there will be no centralized mechanism, and taxpayers will have to undertake compliance activities in each State. This could pose procedural challenges, for example for goods imported into one State and immediately transported to another State without stocking in the State of import. The IGST will be paid in the State of import. However, since there is no place of business in the importing State, would credit be available in the State of receipt. Currently, the transaction is shown as imports in the final recipient State in the VAT returns. Also, multiple refund claims may have to filed State-wise as opposed to single claim under centralized registration.
The term ‘crossing the customs frontiers of India’ is currently being litigated in the context of the levy of VAT on bond to bond sales/sales within SEZs. Under GST, the impact of these disputes may be tax neutral, except in terms of the broader fungibility of IGST credits.
The amendments made in the revised draft have been largely positive, though certain key points remain to be addressed, such as the valuation of goods and services in related party transactions and service transactions between distinct person qua services, the taxability of transfers of capital goods for captive use and the valuation thereof, administrative control, centralized registration for CGST etc. It is expected that some of these matters will be addressed through the introduction of the final GST and IGST Acts.
Comments
Aggregate turnover includes exempt supplies and exempt supplies include non taxable turnover
Aggregate turnover includes exempt supplies and exempt supplies include non taxable turnover