Till date we have been sending various articles and writeups about what the law states. However with this writeup we wish to inform you the possible pitfalls which you would need to take care of from 1st of July, 2017.
1 Avoidance of dual control
A taxable person should be under one authority-either centre or state. Thus, principle of taxable persons having multi-state businesses, they may be assessed by state Government authorities in some States and by Central Government authorities in some other states. Thus persons having multi-state businesses (including telecom, insurance) and those predominantly will lead to different authorities taking different view on same transaction. Ideally, taxable in export and import field should be under control of central Government. Industries and businesses restricted to one State should be under control of state Government. This will ensure avoidance of conflicting views by tax authorities on same issue.
This will create problems for consultants also. some of their clients may be under state Government Control while others may be under Central Government control. Thus, they will have to deal with two authorities or have separate partners dealing with different authorities.
2 System is master-not human being
In GST, system is master. Law will be what system decides. There is not likely to be much human touch in many aspects of GST. This is particularly in case of input tax credit where human will be helpless against system. Example - mismatches, adjustment of payments on FIFO basis. Huge amount of data uploading and date crunching required. If system fails, whole mechanism of input tax credit fails.
3 CGST/SGST paid when IGST was payable and vice versa
Interpretation of provisions of place of supply and fixed establishment are critical in determining whether IGST is payable or SGST/CGST are payable.
A taxable person who has paid CGST/SGST (in SGST Act) on a transaction considered by him to be an intra-state supply, but which is subsequently held to be an inter-state supply, shall be granted refund of CGST /SGST (in SGST Act). This means that he will have to pay IGST and then claim refund of SGST/CGST paid. There is Parallel provision in IGST Law also. Really, there should be adjustment between State and Centre, instead of asking taxable person to pay IGST (or CGST and SGST) and then claim refund of SGST and CGST paid (or IGST paid, as applicable). Even assuming there are some difficulties in adjusting SGST with IGST and vice versa there should be no difficulty in adjusting CGST and IGST as both are paid to Central Government only. Further, If the receiver had availed input tax then such refund will not be admissable.
4 Conflict between Center and State
State Government Authorities from where goods or services are supplied will try to interpret place of supply rules in favour of provision of payment of SGST and CGST in their state. On the other hand, state government authority where goods and services are received will try to interpret the provision such that either IGST should have been paid or SGST of their state should have been paid. This will create conflicts as divergent views are possible. Only solace is Appelleate Tribunal common for SGST, UTGST and CGST.
5 Valuation provisions copied from excise and service tax law
Some concepts of valuation provisions have been copied from present service tax and excise laws. Concepts in these provisions like related person and Price is sole consideration are not really unworkable in GST regime where transaction value is the basic criteria. Such artificial additions will result in disallowances of legitimate input tax credit, as that tax has been paid by some other person. Really provision relating to related buyer should be retained only when the related buyer is ultimate consumer and is not eligible for input tax credit.
'Value' for GST would include interest or late fee or penalty for delayed payment of any consideration for any supply. This would create havoc.
6 Artificial disallowances of input tax credit
Provision for disallowing input tax credit on rent-a-cab service makes no sense, as in many cases, this service is used for legitimate business purposes. Some services like food and beverages and beauty treatment are legitimate business expenses for some kinds of businesses. In those cases, these should be allowable.
Input tax credit of legitimate expenditure like telecom towers and pipelines outside the factory is being denied.
7 Payment of GST on advances received
Receiving advance from customers is common. However, GST is proposed to be payable when advance is received, even if supply of goods and services is to be made at a later stage. This will throw the business out of gear. Input Tax credit will not be available when GST is paid on advance received. Interestingly, if you term the amount as 'adjustable deposit in a separate account (and not in individual debtor's account), GST is not payable, though Company Law issues are likely to arise.
8 Reversal of input tax credit if payment not made to supplier within 180 days
The SGST law has a provision that if payment of bill and tax thereon is not made within 180 days, input tax credit is required to be reversed. The purpose seems to be to avoid bogus invoices. However, since tax has been received by Government, there is no loss to Government revenue. It is not clear why Government is acting as recovery agent for supplier. In construction industry, retention of 5%/10% amount for one or two years is common. Some deductions from invoices are common in business. In such cases, reversal of ITC would be required.
9 GST on fringe benefits to employees
Employer and employee have been defined as related person's. Hence fringe benefits provided to employees will be subject to GST. It will be similar to fringe benefit tax, which will lead to significant litigation and tax out go.
As per SGST law, gifts upto Rs 50,000 to employees may be exempted. However, reversal of input tax credit will be required.
10 Post supply discounts and price reductions after supply not eligible for deduction from value
Giving trade discounts and Price reduction during negotiations after supply is very common in business. However, if such post supply discounts were not anticipated at the time of supply, it is not allowed to be deducted from value. This provision completely ignores business realiy as post supply negotiations and price reductions are common in business.
11 Intimation for sending goods
Section 143 (1) of CGST Act requires that inputs under intimation. Job work is very common in every industry. It is impractical to give intimation to government for every movement. This is against concept of ease of doing business'. Let us hope that this impractical provision is dropped. In any case, intimation by email should be sufficient.
12 Reverse charge if supply received from unregistered person
There is a provision for payment of GST under reverse charge if procurement is from unregistered person. This will create tremendous accounting and record keeping challenges as such reverse charge would apply even to small purchases and petty services. It will increase compliance costs.
13 Liability of GST on commission agent earning foreign exchange for India
As per provision of section 10(8)(b) of IGST Law a commission agent in India providing service to principal outside India and earning foreign exchange for India is made liable to pay GST, while principal in India paying commission in foreign exchange to a foreign commission agent is not required to pay GST. This is indeed an ironical situation.
14 Tendency of traders to reduce inventory on 1-7-2017
There will be attempt by all dealers to reduce inventory as on 30-6-2017 to minimise problems of carry forward of input tax credit of excise duty, CVD and State Vat paid on stock lying with him on 1-7-2017. If this happens all over India, we can imagine its cumulative effect. There will be lull in economy at least during transition period, similar to demonetization in November, 2016.
CONCLUSION
The coming GST is not an ideal GST. However, considering the present political situation and limitations, this is the best that could be achieved. GST is not an eight lane super national highway as was originally envisaged. It is a typical indian road with encroachments, potholes and diversions. Be ready for a ride with your seat belt tightened !