With the multiple goals of creating uniformity and simplicity while reducing administrative costs in the tax system, India’s goods and service tax is on track to be implemented on July 1.

The road to GST

2016: Indian Parliament and 29 State legislatures approve constitutional tax amendment.

March 16 2017: The GST Council, which has representation from the Central government and all 29 State governments, approves all GST related draft legislation.

March 29: The final GST Bills approved by the Lower House and were sent to the Upper House for discussion this week.

By April 10: GST working groups comprising representatives from 10 sectors to submit a report addressing sector specific issues.

July 1: Government hopes to implement GST.

Lawyers Asialaw spoke to in India hope the GST will help to reduce barriers in the supply chain and ease litigation in the tax system. At the same time, many details about how the new system will operate still have to be ironed out.

Motivations for the GST

Uniform law, rates and compliance procedures for the new tax are set to minimise the complications of having different taxes in the supply chain and geographical areas. A simplified tax structure can improve tax compliance and reduce administration costs.

Nihal Kothari

“The current multiple multilayered indirect taxes levied on goods and services in India by the Central and 29 State governments have created tax barriers and fragmented the Indian market,”  says Nihal Kothari, executive director at Khaitan & Co. “These multiple taxes have cascading effects on indigenous manufacturing and supply of goods and services. This complex tax structure with different laws and rules increase the cost of tax compliance and tax administration, and has increased litigation which leads to uncertainty until disputes are settled.”

“Unlike developed countries, India has had a strong focus on an indirect tax regime since the 1950s, but it needs to be made more efficient,” says Badri Narayanan, partner at Lakshmikumaran & Sridharan. “The GST has taken 10 years to develop due to the changes needed to the Constitution and the need to resolve the compensation issues between the Central government and the different States.”

Legal implications

The GST Council has set the four-tier GST structure at 5%, 12%, 18% and 28%. As there will be major change in the tax structure, the courts will need to interpret new concepts and terms. “The GST will have significant legal implications on India,” says Kothari. “The taxable event for levy of tax under GST will be “supply of goods or service”. Currently a different tax is levied on “manufacture of goods”, “sale of goods”, “provision of services” and “entry of goods in local area”. These concepts will become irrelevant under GST, except in the case of a few products which are exempted in the initial phase like petroleum products.”

A grey area that is apparent is the definition of the term “supply”. “The definition starts with the expression “includes” all forms of supply, which means its scope can be significantly expanded leading to different interpretation and consequent litigation,” says Kothari. This ambiguity could lead to different interpretations of the law by different states.

Other differences in interpretation may arise where GST, as is the case, will be payable on a stock transfer from one state to another by the same person or the provision of service by one business establishment to another of the same person in different states. “This may involve legal issues on valuation of goods or service when no monetary consideration is payable,” says Kothari.

The GST will have two components: a Central GST which will be levied by the Central government and a State GST which will levied by each state. “Although the tax base, classification of product or service or regulatory procedure and documentation are the same, in the case of inter-state transactions there could be tax disputes as to which state should get the state GST or its share in integrated GST especially electronically transmitted services,” says Kothari. “There could be legal issues in determining tax jurisdiction for certain transactions.” 

Badri Narayanan

“Businesses have been concerned about how to structure long term contracts and include clauses in existing contracts to safeguard against the GST,” says Narayanan. “Another issue is pricing and businesses want to better understand the impacts of the GST on their pricing structures. Finally, there has been a lot of discussion around the supply chain and how best to restructure retailer and distributor networks to get the most benefit. Consolidation and improvement in the supply chain can be expected.”

Controversial aspects

A number of controversial issues still surround the GST, including the anti-profiteering clause, credit for input tax and GST exclusions.

The GST law includes an anti-profiteering clause to ensure that the benefit of tax rate reduction under the GST is passed on to consumers. “While this provision is included with good intention, the drafting of this clause is quite vague and the authority which will examine this aspect is not specified in the law,” says Kothari. “It may lead to wide spread misuse as it can lead to the questioning of pricing policies of the tax payer. Moreover it can be applied perpetually in the future as there is no time limit.”

Credit for input tax will be allowed for a customer only if the vendor/supplier has paid tax on such supply, even if the customer has made payment to the vendor/supplier for goods or service. “The customer has no means to enforce tax payment by supplier, so the tax credit may be blocked or denied if the supplier does not pay tax under GST regime,” says Kothari.  

The cascading effect of taxes will still be present on items excluded from the GST. “Inputs for further manufacturing of goods such as petroleum crude, natural gas, electricity and telecommunications and IT services will continue to bear cascading effect of taxes,” says Kothari.

A number of issues on the GST still have to be worked through before the system can be implemented within the next few months. Once the system is in place, businesses will need to pay attention to how the GST legislations are interpreted and the implementing policies will need to be refined as businesses gradually adopt and adapt to the GST throughout the country.