Tax Experts react to 37th Council Meeting announcements on rate revisions and procedural simplification
Last Friday witnessed unprecedented revamp in the Indian direct taxation regime with reduction in corporate tax rate and other announcements made by Union Finance Minister, Nirmala Sitharaman just before the commencement of 37th GST Council meeting, which set the tone and agenda of this meeting. Amidst request for rate cut by various industries, GST Council meeting on September 20th in Goa was a crucial one with deliberations on tax moderation, keeping in mind the revenue position and the need to address the economic slowdown.
Plethora of changes as introduced by the Council including making Annual Returns optional for small taxpayers, postponement of the new return filing system, rationalization of rates on several goods/services would certainly fuel the economy and give it the necessary boost. The Government’s inclusive approach could also be observed from its decision of withdrawal of Circular No.105/24/2019-GST on treatment of Post Sales Discount and reduction of tax rates for hotels and outdoor catering.
Tax experts react on these decisions aimed primarily at rationalization of tax rates and procedural simplification.
In line with the bonanza announced under Income tax, the decisions taken by GST Council should also help in improving the market sentiments. As was rightly said by the Finance Minister, the decisions taken were primarily aimed at simplification of tax and rationalisation of tax rates.
Reduction in tax from the peak rate of 28% to 18% for hotels having tariff of more than INR 7500 and from 18% to 12% for hotels having tariff between below INR 7500 (but INR 2500 or more) should give a boost to the tourism industry. However, from a policy standpoint, it's better to not link the rate of tax with price points.
Reducing tax rate on outdoor catering services from 18% to 5% brings in parity in rates with restaurants.
Increase in GST rate from 5% to 12% on railway coaches, wagons and rolling stock is in line with the representations made by the industry to address the accumulated input tax credit situation.
The demand by automobile industry for rate reduction was not approved by the Council, probably on account of huge revenue impact. However, specified passenger transport vehicles designed for carrying 10 to 13 passengers shall now be liable to compensation cess of 1% (petrol vehicles)/ 3% (diesel vehicles), as compared to 15% earlier.
Relaxation in filing of annual return for taxpayers having turnover of less than INR 2 crores should ease the compliance burden on such small taxpayers, given that they were anyways not required to file audit report. It needs to be seen how much and how soon simplification in annual return and audit report required to be filed by other taxpayers is notified as this has been an ask of industry for long now.
Postponing the new GST return system to April 2020 (earlier proposed from October 2019) is a step in the right decision which would allow taxpayers and GSTN system adapt to the requirements of this change.
Imposition of restrictions on availment of input tax credit by the recipient in cases where details of outward supplies are not furnished by the suppliers in Form GSTR-1 reinforces the importance of undertaking robust vendor reconciliation exercise. However, it shall be interesting to see how this change is brought in the GST law.
The decision to withdraw the Circular issued earlier on post-sale discounts should provide a huge relief to the industry, particularly FMCG and Retail.
Overall, an eventful Council meets which paves the way for further simplification in GST over next year or so.
Quote - On simplification of Annual Returns
"The Council’s decision to make annual return (GSTR-9 and GSTR-9A) and audit report (GSTR-9C) optional for taxpayers with turnover up to INR 2 Cr, would certainly ease the compliance burden of small taxpayers. Further, assurance on further simplification of annual compliances should result in reduction of compliance costs, as undertaking multiple reconciliations was proving to be complex and time consuming.
Quote – On impact on FMCG Sector
Withdrawal of Circular on treatment of post sales discount has once again proved that the Government is nimble footed and willing to lend its ear to the industry (in this case FMCG sector). Some of the conclusions in the Circular, such as treating discounts with obligations as a service from dealers to manufacturers were puerile and bereft of logic and thus, had put the industry in a quandary.
Quote - On Relief to BPO/ IT/ ITeS Sector
“The GST Council has provided much needed respite to the services sector by announcing to look at the issue of ‘Intermediary services’ for Information technology enabled service (ITES)/ Back office support services.Certainty on tax position and more importantly speedy refund of taxes for service exports, may quench some of the concerns of the sector.
Quote – On Hotel Industry
“For a considerable time, different States have been expressing concern over high GST rate on hotel rooms and had accordingly demanded a reduction. The said move is likely to assuage the situation and provide thrust to India’s tourism industry.
“From some rate related issues to clarifications, the GST Council meeting yesterday took quite a number of decisions. Easing of annual return compliance for small businesses upto 2 Cr turnover was quite a relief for these businesses especially given that they were not required to get a GST audit done and most of them did not have comprehensive inward supply details as were required to be disclosed in the annual returns. Deferring of the implementation of new return formats as well is a prudent decision; with the added time giving businesses and Government the opportunity of executing required changes to business processes, system configurations and upgradation, etc.; Anti-evasion measures like restricting credits for recipients where suppliers have not filed outward supply returns makes it imperative for businesses to implement adequate checks for procuring only from GST compliant vendors; A concrete date for implementation of the proposal for single authority sanctioning refunds was long awaited by foreign exchange earners and this gives exporters hope for speedier processing of refunds; Rescinding of Circular prescribing the taxability of discounts provides the much needed relief for the FMCG and automotive industry in specific – this especially being at the nick of time, given the upcoming festive season; KPO’s/ BPO’s and other IT/ITeS players are eagerly awaiting the revised clarification on the nature and taxability of services provided by them, especially in light of the recent investigations/enquiries by revenue authorities on them; rate increase for another deleterious good, caffeinated drinks further reinforces this Government’s outlook to executing policy measures which deter consumption of sin goods; with limited rate rationalizations which were absolutely imperative, the Government seems to have well analysed the calibration of rate reductions on revenue; rate rationalization for hotels especially the premium segment should bolster demand for this sector; rate increase for rail related supplies provides the impending relief to this sector by addressing the accumulated credit concern to quite an extent”
Needless to say, this meeting achieved multiple milestones. Our comments on few important changes are as follows:
“Interestingly, the GST Council has decided to rescind recently issued Circulars on ‘post-sales discount’ and ‘intermediary services in relation to ITeS services’. Both these circulars had raised eye-brows in the industry as they contradicted the prevalent understanding in the industry. Especially, with the upcoming festive season, the rescission of circular on post sales discount should come as a big relief as it sought to tax the discounts provided by an original supplier to a dealer which enabled the dealer to offer a special reduced price to customers. It is relevant to note that the intent of government to tax or not to tax intermediaries or post sales discount is not clear even after such circulars are rescinded. Only litigation spelling out from these circulars will cease to exist.
The Council’s decision to make annual return optional for small businesses provides a big relief to these businesses as they may not have sufficient records to meet the comprehensive requirements of the annual return. The formation of committee for simplification of annual return and reconciliation statement/audit forms is an acknowledgement by the GST Council that the forms are indeed cumbersome and need simplification.
The postponement of the new return filing system scheduled to be implemented from October 2019 to the next financial year should provide businesses as well as the GST authorities sufficient time to make required arrangements to ensure a smooth transition to the new return filing process.
On the rate front, the rationalization of GST rates on hotel tariffs should give a much needed boost to the tourism sector. Despite several demands, there has been no relief for auto sector as the fitment committee had rejected a GST rate cut to overcome the slowdown being faced by the sector.”
The Direct Tax announcements just before the commencement of 37th GST Council meeting, set the tone and agenda of this meeting. The government made two things clear – one, as it had foregone revenues of Rs.1.5 Lakh crores on Direct Tax side, there was no fiscal room for further reduction in GST rates. Two, it is not leaving any stone unturned to address the deep economic slowdown haunting the Indian economy.
The significant reduction in Direct Tax rates, will surely increase the profitability of corporates and increase their price competitiveness (if they choose to reduce price of their output). However, it is doubtful whether such reduction will immediately stimulate the demand of goods & services on an immediate basis which is actually need of the hour.
On rates side, contrary to representations, the Council chose not to change the median rate of GST nor for specific sectors like automobiles, FMCG, real estate etc. The Council undertook few welcome corrections / rationalizations like reduction in rate of GST on railway parts and hotel services as well as exempting liquor license fee, warehousing for agricultural products etc. from GST.
On the law side, there are welcome changes like withdrawal of controversial Circulars on post-sale discounts & Intermediary, specific exemption to R&D services provided by pharmaceutical companies etc. Though R&D services were not taxable even earlier, this exemption will create disputes for pharmaceutical companies for the past and R&D services provided by non-pharmaceutical companies for the past as well as going forward. The proposed condition of restriction of ITC where the supplier has not filed GSTR-1, is regressive being not flowing from law and seems unwarranted particularly when the government is bringing new return system from April 2020.
Lastly, there are procedural relaxations like constitution of Committee for simplification of annual return and GST audit forms, exemption of small taxpayers from filing annual return, extension of date of applicability of new return formats to April 1, 2020, refund disbursal by single authority etc. The Council did not lay out time frame for simplifying formats of annual compliances, their applicability (prospectively for FY 2019-20 or past years as well) as well as extension of due date for undertaking annual compliances for FY 2018-19. The Council also did not issue any guidance on e-invoicing which was supposed to be rolled out from January 2020 on voluntary basis for large taxpayers.
“The writ court has been proved to be a useful weapon for businesses which are facing trauma on different counts. This GST council meet addresses important issues which are currently argued in different courts. While the circular on ‘intermediaries’ with respect to ‘on the own account’ is an important famous issue, the GST council has even addressed the other non-famous issues such as option of forward charge tax on authors. This certainly shows the commitment of the GST Council which has been working tirelessly on different issues to make this reform a success.”
The direct tax announcements made before the 37th GST council meeting have overshadowed the decisions made later in relation to indirect tax levy. However some of the significant announcements and the impact of such decisions in future are summarised as under:
1. Simplification of annual returns: A committee of officers is going to be appointed to simplify the annual return filing, which gives an indirect indication that the last date of filing is likely to be further extended again. Making the annual return filing optional for the small tax payers is a welcome move, though they could not show their magnanimity by doing away with it altogether for the FY 17-18 and 18-19 atleast for MSME sector.
2. Linking GSTR1 filing with ITC availment: This move will prove to be disastrous if implemented for the simple reason that how much of sales upload can be considered as sufficient for availment of ITC is always debatable. Fixing the yard stick will be contentious and needs amendment of the Act itself.
3. Extending the implementation of new return filing to the next financial year is a practical decision, but the time should be better utilised by releasing all APIs in time and involving in stakeholders consultation.
4. Fine tuning of tax rates: Hospitality sector should rejoice at the tax rates revised. But auto sector continues to bleed, though a marginal relief is given to a classnof passenger cars with seating capacity above 10 persons.
5. Clarifications issued: Rescinding the controversial circular on secondary discounts is laudable, but needs to be clarified in order to avoid litigation in future. Clarity given in respect of IT and R&D services need to worded properly. In pharma, destructive testing on reference samples provided is always a contentious subject and it is hoped that the same would be covered under effective enjoyment concept introduced.
6. Extending the levies in respect of export freight: The conditional exemption is now being extended to SEP, 2020. Instead this could have been exempted forever. Extending the date of levy does not augur well for certainty of policy.
7. Sunset clause for SEZs: In light the decisions made under direct taxes, it appears that there would be no further extension of the sunset clause under direct taxes for SEZ units beyond Mar, 2020. Hence business have to do their homework and have to structure their business plans accordingly.
8. Areas to be covered in future on priority: With active consultation with stake holders, relief should be announced for auto sector which is one of the major employment generating sectors in India. A clear road map should be drawn for charging stations, battery technology, generation of adequate electricity, scrapping of old vehicles etc. FTP changes should be announced after active consultation with stakeholders. SEZ laws should be made in sync with GST. ICE GATE, SE Online System, GSTN should be inter- linked for better administration of policies. This will help in smooth roll out of the proposed electronic invoicing system and abolition of electronic way bills in near future. Appellate mechanism under GST should be put in place to address appeals against controversial AAAR decisions.