It has been slightly over 20 months since the historic moment of July 1, 2017, when a gong in a special midnight joint parliamentary session signalled the launch of the goods and services tax
) across the country. Billed as the biggest tax reform since independence, the landmark tax reform, with its first of its kind ‘one nation-one tax’ approach, aimed at subsuming almost all indirect taxes at the Central and State levels.
But looking back at the tax reform’s journey, post some 600 days, the question remains if it has managed to achieve its intended purposes? Not wholly, it seems.
Consider this: The GST Council in its 32nd meeting, announced new registration criteria for businesses, doubling the sales threshold for GST registration to Rs 40 lakh, and allowing certain states of northeast and small states to keep threshold at Rs 10 lakhs as against Rs 20 lakhs for other states. While the news has been well received by India Inc, the pertinent fact that some states chose to stay out of the registration criteria for businesses, yet again exposed how the Centre-States’ differences can hurt GST’s uniform implementation across the country.
Different states, different rules
It is due to such bottlenecks that industry experts like Saurbh Agarwal, member, managing committee, Assocham, still call GST a ‘work in progress’. Calling the Government’s one-time exception granted to certain states ‘contrary’ to the essence of one nation, and one tax reform, Agarwal further highlights that since this increased exemption limit is applicable to only those who have businesses within a state, businesses that are doing inter-state trade are not covered under this relief. Subsequently, “this partial relief would prevent inter-state trade. In effect, this would prevent rationalisation of prices across the country”, cautions Agarwal.
Further, according to Harpreet Singh, Partner, Indirect Taxes, KPMG India, “Different thresholds for States with respect to the supply of goods is likely to distort the uniform tax regime and increase complexity. Cautioning that such an uneven practice may, in fact, incentivize small businessmen to indulge in unscrupulous trade practices (say, classifying inter-state supply as intra-state) for claiming registration exemption, Singh, thus remarks: “A uniform threshold across India is the best way forward as the same is in line with the founding principles of GST.”
If at all, the GST Council’s this decision is so factually irrational, then what could be the reason for the GST Council to consider it in the first place? Shedding light on this, Agarwal reasons, “Multiple thresholds may be justified currently on account that the states in India have not progressed equally on the economic front and hence the same rule across the country cannot be applied”.
Concurring with Agarwal’s views, Anil Bhardwaj, Secretary General of Federation of Indian Micro and Small & Medium Enterprises (FISME), says, “A typical trader in a hill state like Manipur would have far less turnover than the one in Delhi or Mumbai”. And, therefore, for the representative of the industry wide umbrella organisation, such a relaxation does make sense.
Going further, according to Bhardwaj, having different exemption limit does not in any way hamper the system since the mega tax framework currently has, in place many checks and balances that support its long-term growth across the country. “In the present dispensation of GST, irrespective of the exemption threshold in force in a state, most MSMEs have to register with GST because otherwise, they cannot enter into interstate trade. Secondly, most MSMEs being B2B suppliers have to register with GST as their buyers prefer to buy from GST-complaint suppliers to ward off trouble of reverse credit mechanism. Thirdly, MSMEs themselves now prefer GST registration to take credit of tax on their purchase,” contends Bhardwaj.
However, Sumit Dutt Majumder, Former Chairman, CBEC, has a different take on the issue. As per him, any such relaxation by the Government will eventually result in complicating the entire tax framework. Majumder, therefore, suggests that all the aforesaid small states should have only one threshold i.e. either the doubled amount of Rs 20 Lakh or the current level of Rs 10 Lakh, and small states need to come to a consensus on deciding the common threshold out of the two proposed – a scenario, that for now, looks out of sight.
AAR Rulings – adding more complications
Currently, the way different states follow cases of Advance Ruling Authorities (AAR), wherein for similar cases, different states have followed different rulings have emerged as a major issue, requiring urgent redressal by the policymakers.
“Industry is still confused on the menace created by AAR rulings, whereby divergent rulings are given on a single issue,” says Rajat Mohan, Partner, AMRG & Associates. Citing the recent example wherein, in one case of solar power plants, while Maharashtra AAR applied a rate of 18%, the Karnataka AAR applied 5% tax rate, he says, ” although everyone knew that GST is a new law and would be tweaked in future to improvise, however in last few months entire policy of GST ‘one nation, one tax’ has been changed to each one, decide for oneself.”
According to Mohan, recent changes made in GST has basically reduced the entire law into a charade and some of the policies like the Kerala cess, state-wise registration criteria and the separate threshold for goods and services would add to the pan-India complexities for businesses. “GSTN would also have sleepless nights in implementing this law with divergent taxation policies”, Mohan adds.
Echoing similar thoughts, Abhishek Jain, Partner EY, maintains, “Discretion to states for allowing different specifications under GST may debase the ‘One Nation, One Tax’ code of GST.” Asked if such relaxations not amount to defeating the very idea behind the so-called ‘one nation-one tax’ slogan’? “Jain adds, “Different thresholds for different states from a registration perspective, E-Way bill requirement, approval to Kerala for prescribing an additional levy, etc are some of the illustrations to the uniformity code of GST being diluted to an extent. While some of these may be crucial and vital, the Government should in general, allow discretion of the states only in exceptional scenarios, so that the standardization of this new tax regime is maintained.”
On the roadmap ahead, industry leaders opine that GST council needs to take charge and restart the work of aligning tax rules, so as to ensure that entire country signs and dances on the same tunes. “Government needs to recognise the age-old principle of unity of command and legally place all AAR’s and AAAR’s under a supreme court judge to ensure unity of orders”, says Mohan of AMRG Associates, while Majumder, the Ex CBEC Chairman, believes: “There should be one common advance ruling authority based at Delhi with benches at every zone, as is the position with the Customs Excise and Service Tax Tribunal (CESTAT). The decision of one such AAR should have application across the country.”
Where’s the ITC
The ability of a business to claim input tax credit (ITC) is one of the hallmark of GST, but increasingly we are seeing sectors being left out of the purview. For example, in the 33rd GST Council meeting held on 24th February, 2019, GST Council slashed the GST rates on residential housing, but denied developers from claiming ITC.
Currently, GST is levied at an effective rate of 12 percent (standard rate of 18 percent less a deduction of 1/3rd of value for land) on normal housing and effective rate of 8 percent (concessional rate of 12 percent less a deduction of 1/3rd of value for land) on affordable housing on payments made for under-construction property, where completion certificate has not been issued at the time of sale. Under this tax structure, builders were allowed to avail and utilize ITC for discharging the said GST liability. However, according to the new rules the GST rates on under-construction property as follows:
- Effective GST rate of 5% without ITC on residential properties outside affordable segment
- Effective GST of 1% without ITC on affordable housing properties
While this announcement of lower rate effective 01 April 2019 has lowered the rates substantially, one should not turn a blind eye to the complications with respect to the said amendment. Under this amendment, builders shall not be able to avail and utilize ITC while discharging GST at lower rates. For a developer and everyone else associated with the real estate sector, this breaks the entire chain of GST and goes against the very character of GST.
Due to withdrawal of ITC facility (i.e. blocking of credit chain), GST paid on inward supplies will form part of cost, resulting in increase in the cost of construction and reduced profitability for builders. Further, real estate developers may pass on this burden to the ultimate buyers in the form of increased sale price. For example, the GST rate on Cement is at 18% while on Elevator, it is 28%.
“The lower rates would lead to a revival of the demand for under construction apartments, which had tapered down as buyers were preferring ready apartments which did not attract any GST . Having certain categories which are not eligible for input tax credits is an aberration of the basic principles of a good GST, in addition to leading to issues of traceability of transactions and making the transactions opaque, “says MS Mani, Partner, Deloitte India.
Introduction of a lower rate structure with no ITC facility is not new under GST. In the past, such a scheme was introduced in hospitality sector, wherein GST restaurants were charged at a lower rate of 5% with no ITC. This has, however, not led to any benefits for consumers and only led to increased complexity.
“Lower slab with restriction on input tax credit is likely to lead to cost-benefit analysis of lower rate vis-à-vis loss of credit. Where the loss of credit is substantial and the builders are unwilling to bear the loss, the same may result in increase in base price. Facility to charge GST at lower rate with no input tax credit has been tried for specified restaurants in the past. Unfortunately, the said scheme did not achieve the intended results. Thus, it would be interesting to see whether the real-estate sector behaves differently and implementation of the said scheme, results in lower purchase cost in the hands of homebuyers,” says KPMG India’s, Singh.