A sub-committee of the Empowered Committee of State Finance Ministers has released a model law for the goods and services tax (GST) and the integrated goods and services tax. This model law would form the basis for the central government to levy and administer central GST and for states to levy and administer state GST.
Perfecting the model law is just one of many challenges facing the central government, which is striving to have the GST constitutional amendment bill passed by the parliament. Other challenges are finalizing a revenue neutral rate and building IT infrastructure that is robust enough to support the new tax system.
The model law appears to be a creation of umpteen minds with different expertise and domain knowledge resulting in a hotchpotch of varied provisions. It seems to be a case of “too many cooks spoiling the broth”.
The cluttered state of the model law released ahead of the pending amendment of the constitution deserves a sincere review if it is to be legislated by the parliament and states and become the basis for India’s ambitious game changing tax reforms of GST.
The model law lacks conceptual clarity and is replete with lacunae. To point out a few blunders, the terms “composite supply” and “declared services” have been defined, but neither of these has been used in the provisions other than the definition clause, effectively rendering these definitions useless.
Notably, the term “input” has not been defined, while “capital goods” has been defined to include all forms of plant, machinery and equipment. Another gap can be found in the definition of “goods”, which does not exclude “securities”, unlike in the present value-added tax (VAT)/sales tax laws. This will have unnerving import for many, in a various ways.
The term “zero rated supply” covers “export” transactions within its folds but no clarity is provided as to whether the supplies to export oriented and special economic zone units would also qualify as “zero rated supply”. This is a crucial omission, given the “Make in India” initiative of the government.
The term “related person” has been defined to cover persons who are associated in the business of one another in that one is the “sole agent”, “sole distributor” or “sole concessionaire”. While the definition appears to be sourced from prevailing customs valuation rules, its coverage is sought to be widened. This will lead to greater focus on such transactions, at an unknown cost to the exchequer.
Similarly, the term “associated enterprises” is defined with reference to the income tax legislation. However, there is no clarity as to why this term has been independently defined when the law does not refer to it and when a definition for related person has been incorporated.
The model law has retained the “transaction value” based approach to valuation, but introduced the concept of “market value” as a comparative parameter to monitor valuation and as a potent tool in the hands of authorities to validate/reject the transaction value.
The valuation norms proposed allow for deduction of discounts from the transaction value, provided that the discount is specified on the face of the invoice. That is to say, discounts and supply-related incentives will not be eligible for deductions if not recorded on the invoice. Industry will have to plan discounts/incentives around this condition.
The credit system envisaged under the law provides for a detailed negative list, enumerating the transactions where credit of the duties/taxes paid is not available to buyers of goods/services. Such restriction on credit admissibility appears to emerge from the present regime and will lead to cascading effect, much against the philosophy of GST/VAT. The expectation of complete credit without cascading has therefore taken a backseat.
A new aspect of the credit mechanism is regular verification (by the relevant officer) of input tax credit claimed by the buyer vis-à-vis the tax paid by the supplier. This practice appears to have been borrowed from some current VAT laws and the income tax legislation. This implies that admissibility of credit at the hands of the purchaser will be subject to sufficient compliance by the supplier. This approach is indicative of diluting the “self assessment” mechanism and will create a compliance burden and unavoidable hardship for assessees.
To conclude, the model law appears to be a first working draft and is not the final word on the GST model law. That said, fixing the model law to accommodate the expectations of all stakeholders is going to be an uphill task and will pose a major challenge, similar to that surrounding the constitutional amendment bill.
Ranjeet Mahtani is an associate partner, Rajat Chhabra is a senior associate and Ketan Tadsare is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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