Tax Experts react to 28th GST Council meeting announcements of July 21

The success of GST seems to be closely linked to the perception of ease in compliance. The new formats and business process approved by the GST council are therefore keenly awaited. The new eligibility criteria of credit being dependent upon correct and timely uploading by suppliers is bound to create some ripples but the option in law to upload invoices by the recipient if the vendor does not upload it has been retained. More importantly it is going to require the systems to be reconfigured to deal with the change.

Other critical factor in success of GST is minimal exemptions. This salutary principle seems to be diluted with growing list of exemptions. While most of the exemptions make a case for themselves, there are some that may require reconsideration if only for the complications that they introduce. Take for example the threshold for exemption of services provided by old age homes or non-profit organisations. If the purpose is to exempt services of this nature it make little sense to introduce a condition of threshold of membership fees or charges. Closer reading of notification would be warranted to see if the part of the membership fees or charges up to the threshold level will be exempted from GST or whether the exemption would apply only if the whole amount of fee or charges is below the threshold. However such restriction are best avoided as they tend to promote disputes. 

Another exemption which should have been better suited as a change in law is the exemption given to services supplied by a branch or a liaison office. Exempting such services do not make them zero rated and will warrant a reversal of credit. Instead had the specific condition in export of services of not being supplied to a related person been done away with, such of those establishments that satisfy other conditions for export of services would have benefited.  

The Central Board of Indirect Taxes and Customs had come up with 46 draft amendments to the GST law and had invited comments. It appears that all of these amendments have been recommended by the GST Council. In a move that was aimed to increased transparency in law making process, the comments posted on the suggested website were visible to anyone who accessed the website. Many of those comments were highlighting genuine difficulties and deficiencies in some of the amendments. Hopefully these have been considered in amendment to GST law and the transparency initiative will be reciprocated with increased confidence of stakeholders.

A very fruitful meeting of GST Council wherein various decisions were taken to ease the GST burden (on account of higher rate and complicated compliance) for a vast spectrum of taxpayers and society at large.

Some key changes include the simplification of the GST return, restricting reverse charge only for specified goods for notified classes of persons, allowing issuance of consolidated credit/debit note for multiple invoices, excluding sales of goods before customs clearance from GST, enhancement in the Input tax credit framework, introduction of a ceiling on pre-deposit for preferring an appeal at appellate forum, change in place of supply for job work; etc.

The rationalisation of GST rates, especially the reduction in GST rate from 28% to 18% for consumer durable and home appliances, will cheer many households. The industry will need to align their prices considering the anti-profiteering provisions. Overall, the proposed changes indicate the government’s priority to ease the GST compliance process and create a feel good factor before the next year’s general election and upcoming state elections.

In a very important GST Council meeting held on 21 July 2018, the Council giving in to expectations of commoners/ industries, took several steps towards further simplification of tax rate structure, GST laws and compliance processes.

The proposal of quarterly GST returns (with monthly tax payment) for businesses having turnover up to INR 5 crore is a favorable and bold move. This is a great push to MSMEs to align themselves with GST mandates. However, it remains to be seen how customers of such taxpayers would claim input credit who may be filing returns on a monthly basis.

Policy makers are now realizing that simplicity is a great virtue. Given constant negativity surrounding complexity of compliance procedures, simplified forms which require lesser details to be reported have been introduced. This should help businesses on channelizing their efforts on routine operations of the company, instead of focusing on regular monthly compliances.

Rate reduction from 28% to 18% on various white goods including refrigerator, washing machines, small television (about 27 inch), vacuum cleaner, juicer, etc. should help to boost consumption of these widely used products, with the festive mood set to kick-in soon. Reduction of tax rate on paints and varnishes to 18% should help in reducing the construction related cost. Sanitary napkins have been fully exempted from tax, which were currently being taxed at 12%, after a lot of criticism from the common people. The intention of the Government has clearly been to make the common man happy. Further, this reduction indicates that 28% rate bracket may be on its way out and should be limited to very few sin and luxury product, as was initially proposed by the government, which is proficient from policy standpoint.

The hospitality industry have reasons to cheer with GST rate to be applied on actual tariff charged from customers and not on the basis of declared/ published tariffs, which should help to boost tourism further. This should result in simpler system configuration for hotels and also help in removing confusion among customers.

The decision of allowing refund of accumulated input tax credit to fabric manufacturers with prospective effect i​s​ of huge relief to the textile industry and should encourage further formalistion of the sector through higher compliance. The government should also re-look at the inve​r​ted duty problem in railway sector where output is taxed at 5% with restriction on refund of accumulated credit.​

​Exemption from GST on project and branch offices providing services to their foreign companies should bring major relief particularly to banking, insurance and ITeS sectors, amongst others. However, it remains to be seen if such exemption would be done retrospectively from July 1, 2017 or only from the date of notification, which is yet to be issued.

While various amendment to GST law as was proposed by the Government earlier this month, has been approved by the Council, the fine print of same will need to be analyzed in detail. It would be interesting to see which provisions are given retrospective effect and which are given effect prospectively.

Overall the Council meeting has had a positive outcome. It is however important to note that revenue in the coming months might deteriorate as a result of such reforms which will further make the authorities vigilant. Industries will now have to be mindful of the anti-profiteering provisions given the government should expect benefit of these rate reduction being passed on to consumers immediately.

From a common man view point, they may look forward to celebrate rakhi in a newly painted house, while having an ice-cream and watching movie on a small TV, with multiple gift options ranging from footwear to washing machines.

The decisions taken at the 28^th Meeting of the GST Council held on 21 July, 2018 reflect the pragmatism of the Finance Ministers and all Governments as also the confidence that GST is settling down.

The two key trends at this meeting were rate rationalization and simplification both, addressing challenges faced by common people e.g. rakhi and deities are exempted ( Rakhi  and other festivals  are round the corner) and also, small businesses.

Taken on board is the consistent feedback that high tax rates on items of regular and daily use and those which are for private consumption ought to be rationalized else, there will be leakages in revenue, both income tax and GST. Rate rationalization for large number of such items will improve compliance.

New simplified return filing system and few other changes like dropping of reverse charge mechanism for purchases from unregistered persons, input tax credits, will go a long way in reducing time and cost of compliance.  Amendment return is much needed relief and will facilitate unblocking of funds and concerns about penalty and interest for genuine errors which the tax payer notices and wishes to correct.

Other issues for medium scale businesses are expected to be addressed in a fortnight or so. Larger businesses will have to wait with greater patience for resolution of challenges faced by them.

Recalling the GST day celebrations earlier this month (on 1 July 2018), where Shri Arun Jaitley in his speech suggested that GST tax slabs rationalisation could be expected as projections predict an increase of 1.5% in indirect tax collections from Non-oil category; and Council’s continued efforts in setting a GST system that will enable collections, curb tax evasions and thus, increase the tax net. In the same event - Shri Piyush Goyal mentioned that GST is a Game changer for small businesses and in the coming monsoon session, the Government is proposing to bring an amendment to extend the composition threshold limit to Rs. 1.5 crores turnover. Little did we know that the suggestions in these speeches would see light of the day in time span of 20 days.

- The small scale entrepreneur/ business man was showered with optional quarterly returns (for turnover upto 5 crores), increase in threshold limit (to Rs 1.5 crs) for composition scheme, and consolidated credit notes – thus, confirming the fact that GST will indeed be a Game Changer for this section of the trade.

- The consumer saw major rate relaxation on sanitary napkins, domestic appliances, footwear, accommodation, etc.

- And in line with the Government’s commitment to double farmer’s income by the year 2022 – agriculture sector also received incentives and rate rationalisation.

- Amidst balancing this agenda for ‘aam-aadmi’, the GST Council also drove the initiatives of ease of doing business and e-governance by sanctioning amendments - such as extension of exemption on ocean freight upto 30 Sept 2019, exemption to LO / BO / POs of foreign entities providing services to such foreign entities (subject to place of supply being outside India), removing requirement of reversal of ITC on high-seas sales, and simplified return formats – which has brought much awaited joy to large industry participants.

The 28th GST Council deserves due accolades as it addressed the concerns of three different participant groups i.e. consumers, small scale business and large industry participants with stark different demands in just 5 press releases and few hours of discussions.

The 28th GST Council meeting was quite positive with some very significant rate rationalisations; specific ones being GST exemption for sanitary napkins, deities of stone, marble, wood, rakhis without precious items, a 10% rate reduction for paints, varnishes, various domestic appliances like washing machines, TVs of small sizes, refrigerators, scent sprays and a 13% rate reduction for footwear priced between INR 500 and INR 1000; this would bring lot of cheer to both end customers and industry players. Quarterly GST return filing for taxpayers having turnover up to 5 cr would significantly ease the compliances for this segment. Also simplified GST return format Sahaj and Sugam and deferral of reverse charge mechanism till September 2019 is a great relief in compliances. Big relief for hotels as GST rate of 28% would not apply if the actual tariff value is less than 7,500 even though the published tariff may be more than 7,500; this will also ease the IT systems for hotel players. Reduction in GST rate of ethanol for use by oil companies to 5% is again welcome as major petroleum products are outside GST and this would help reduce their cost.

In addition to the pruning of the GST rates on goods, the Government has as well rationalized rates for some services and clarified rates for some of them.  Some important ones being reduced rate of GST from 18 to 5% on e-books for which print version is available, exemption for services by Indian head office/ branch office to their branch office/ head office outside India if the place of supply is outside India. Also, the Government has rationalized that supply of food to companies on contractual basis would attract a levy of 5% as canteen services vis-a-vis the ambiguity of these being leviable to 18%. This is quite welcome for the service industry as it clears the ambiguities in these areas and would put an end to unnecessary litigation.

This meeting of GST Council, the first one after completion of 1^st year of GST, has been special for multiple reasons. The meeting took place with high hopes of setting right the GST legal framework ignited by proposed amendments in the GST law issued few weeks back for public comments. The results of the meeting have indeed been laudable, the rate rationalisation being the most prominent one. The Council also approved significant amendments to the GST law with significant simplification in the return filing process. My take on these three sets of proposals is as under:

(a) GST rate rationalisation: The Council has curtailed the 28 percent slab to only 35 items (which was 226 on July 1, 2017) thereby reduced the rate of tax on multiple goods and services. The annual impact of these rate changes is expected to be Rs.12,500 Crore and yet marginal considering the overall GST revenues. The tax burden has been reduced for wide range of sectors like consumer durables, footwear, building materials, textiles, sugar, specific motor vehicles, handicrafts, hospitality, agriculture, food processing, education, logistics etc. These reductions will go a long way in making GST good and simple by reducing the tax burden for end consumer and increasing tax compliance due to less incentive for tax evasion.

(b) Amendments in GST law: Significant amendments have been made in GST law to make the law simpler and minimize the cascading effect on taxpayers. This clearly reflects that the Government is responding well to the concerns raised by industry. These changes include taking out high-seas sale, bonded warehouse sale and merchanting sale out of the purview of GST, broadening criteria for export of specified services, increase in the threshold of composition scheme to Rs.1.5 Crores, permitting multiple registrations of taxpayer within same State, allowing issuance of single debit / credit note for multiple invoices etc. The tax cost has been reduced for businesses by allowing credit on specific motor vehicles, employee related services etc. and clarifying rate of tax on canteen services to 5%.

(c) Simplified compliances: The proposal of having a quarterly return for taxpayers having turnover less than Rs.5 Crores (constituting more than 90% in numbers) will go a long way in reducing the compliance burden in general. The details of concept of ‘upload-lock-pay’ for matching of invoices is yet to be spelt out and let us hope that the same will be simple to implement.

Overall, the Council’s meeting has been positive and reiterates the Government’s undeterred commitment to streamline the GST regime.

Continuing with its rationalisation measures, the GST Council has proposed amendments both on the rate front as well as proposed to introduce certain amendments/ exemptions that are logical or important as a trade facilitation measure. 

Rates have been reduced for certain items in the 28% bracket (seems those which are not seen as luxury goods such as paints, refrigerators, heaters, washing machines, television below 68cms etc.). Some rate rationalisation has been done in other brackets as well. This is in line with the statement issued by the Government on improving revenue collections and possibility of rate reduction.

On the law front, the amendments are directed towards areas which were being litigated or there were adverse advance ruling order with unintended consequences or the provisions were leading to untoward consequences. The key changes include (a) exempting services provided by the India establishment to its establishment outside India (considered as a distinct person) is a big relief, though this may entail a reversal of credit; (b) for accommodation services, GST is to be now paid on transaction value as opposed to the declared tariff resulting in the reduction of GST cost as in most situations hotel rooms don’t get sold at declared tariff; (c) the entry relating to composite supply of food and drinks  has been rationalised, an outcome of the recent advance rulings which have resulted in supplies to institutions at contractual basis being taxed @18% as outdoor catering. The term outdoor supply is likely to be defined to restrict its scope to functions that are event based and occasional in nature; (d) the new category of multi-modal transportation liable to GST @12% will reduce litigation for logistics service providers who were rendering composite services involving sea, road, rail etc, however there is a risk that the authorities may try and bundle contracts which are otherwise contracts for rendering independent services and liable at a lower rate of GST (5% albeit with no credit). It will also be relevant to see as to how the term 'multi-modal transport' gets defined.

On the trade facilitation front, the exemption on outward transportation by sea and air has been extended until 30th September 2019, as a measure of relief to the exporters. It may be noted that such services were not liable even pre-GST and rather than extending it till September 2019, should be exempted without any sunset clause. RCM has been introduced for services provided by individual DSA's. Though communicated as a trade facilitation measure, this is likely to increase cost for banks/NBFC's to the extent of amounts paid to individual DSA's who were below the threshold limit and not charging GST, considering that banks/NBFC's are entitled to take only 50% credit. Again it will be relevant to see if the proposed notification defines a DSA. Optional Quarterly returns (Sahaj and Sugam) for taxpayers whose turnover is below 5 crores does provide relief to small tax payers, however, will result in delay in taking credits for a B2B recipient once new return mechanism is introduced. Considering that GST is to be in any event paid monthly some may not avail the benefit owing to possible withholding of payments/GST amount by customers till the filing of returns. The Government should consider introducing optional filing of GSTR-2 by the recipient to avoid cash flow issues arising out of non-filing or delay in filing of return by suppliers. Approval of the new simplified return format and process (UPLOAD-LOCK-PAY), allowing filing of the amendment return and payment of GST on such returns, creating of tax payer profile are other important proposed amendments in the direction of simplification. 

The proposed changes in the Act (circulated for comments by the Government earlier) are also likely to be introduced in the current session of the parliament, enabling the Government to introduce all the proposed amendments.

Quarterly return filing for assesses under a turnover upto 5 Crore will give respite to nearly 93% tax payers. Separate returns for composite dealers, B2B and B2C businesses will significantly encourage better tax compliance and help businesses focus on day to day operations. Composite dealers providing services were not able to get benefit for their services resulting in hardships for these dealers. The benefit of composition scheme will now be extended to services amounting to 10% of their turnover or upto Rs. 5 Lakhs. Pursuant to writ petitions filed, government had deferred implementation of reverse charge payment on procurement from unregistered dealers till September 2019. While the liability is not completely done away with, government has extended it till 30 September 2019. In the meanwhile, GSTN will try to figure out a seamless and efficient way to implement it. Addressing request of many businesses, multiple registration in the same State will be allowed. Cancellation of registration is simplified. GST number will be suspended immediately on the date of filing application for cancellation. To encourage and simplify e-way bill compliance, RFID tags will be linked to GSTN network. In view of multiple writ petitions being filed against wrongful detention of trucks and levy of hefty penalty on account of clerical errors, issuance of a standard operating procedures has been proposed by the GST Council. This will help reduce unnecessary litigation. Final migration window has been extended till 31 August 2018 and late fee will be waived. However similar extension should have been extended to carrying forward of transition credits too. It will be interesting to read the fine prints of clarification issued with respect to export of banking and IT service providers as export of services from one branch to another branch was initially proposed to be unfairly taxed under GST. All eyes will now be on the next GST council meeting of August 2018, where the council is expected to deliberate discuss to promote entrepreneurship in MSME sector and discuss their issues

The 28^th GST Council meeting came up with several significant rate related decisions, even going beyond its agenda for the day – the most newsworthy of which were the rate cuts with a keen eye on those goods and services which have a touch-point in the day to day lives of the Indian middle class. For example, rates have been reduced to 18% for consumer goods like refrigerators, TVs (up to 27 inches) vacuum cleaners, water heaters, hair dryers etc which were originally bracketed as ‘luxury goods’ and kept at the 28% slab – even though, neither rates of any of these items were part of the GST Council meeting agenda nor were the rates of these items analysed by the Fitment Committee for change.

Once these changes get notified on 27^th July 2018, only 35 items will remain in the 28% rate slab as opposed to 226 items on July 1, 2017 – these 35 items include Air Conditioners, Dish-Washers, Video recorders, automobiles and most surprisingly, cement! Given that the Government deemed fit to reduce rates on vacuum cleaners and hair dryers going beyond the agenda, one would have expected that cement, which is a core input for the construction sector (a massive employment generating sector), would also benefit from rate reduction – the construction sector would fervently hope (and may represent before the Government) that the benefit of rate reduction is extended to cement too in the next GST Council meeting on 4^th August. Having said the foregoing, I must however add that, directionally, the Government is headed in the right track – 28% rate slab should indeed be restricted only to super luxury and ‘sin’ goods.

Other rate related changes/clarifications by the 28^th GST Council meeting would be of some benefit for the textile industry, artisans, marble/stone industry, farmers etc; a long-pending demand for GST exemption for sanitary pads have been acceded to and this would go a long way to improve feminine hygiene and health in India. These rate changes are indeed praiseworthy.

Needless to point out, many of the above changes will lead to another round of anti-profiteering complaints and investigations – while the anti-profiteering provisions under the CGST Act and Rules are of doubtful Constitutional validity, unless consumer goods companies decide to file a writ against the same, they would do well to use the time till 27^th July to plan how best to pass on the benefits of these rate reductions.

Moving on, the GST Council also approved the 46 amendments to the GST laws – My comments apropos the most important and beneficial of these amendments were already published by Taxsutra when the proposed amendments were made public and I won’t repeat them here in the interests of brevity. The only thing I would reiterate is the hope that the beneficial/clarificatory amendments are made retrospective so that tax authorities do not get to come up with tax demands for the pre-amendment period and thus add to the maze of tax litigation.

However, not all the amendments are beneficial and in this regard, the following two points are worth highlighting:

(i) Amendments to ensure that the amount of pre-deposit payable for filing of appeal before the Appellate Authority and the Appellate Tribunal would be capped at Rs. 25 Crores and Rs. 50 Crores, respectively

This is a significant jump from the pre-GST cap of Rs 10 Crores and is likely to face challenge through writ petitions as being ‘arbitrary, extortionate, disproportionate, a colourable device effectively nullifying the right of assessees to file appeal etc’

(ii) Amendments to transitional provisions to disallow transition to GST of the credit of cesses like EC/SHEC/KKC etc

It appears from the grapevine that this amendment would be retrospective in nature and would thus lead to massive demands across the country since many assessees have transitioned such credit to GST and several of them would have utilized the same also. This amendment too is likely to face challenges in various High Courts through writ petitions on the ground of taking away vested rights of the assessees. Irrespective of the fate of such challenges, at a macro-level, it would be immensely dis-appointing if this government too resorts to retrospective amendments to bolster their interpretation of tax laws. One hopes that the spectre of ‘tax-terrorism’ would not raise its ugly head again and this amendment would not be given the force of ‘law’.