Tax Experts react to 38th GST Council meeting announcements

In the backdrop of concerns on revenue collection, the GST Council, in its 38th meeting, took several decisions to monitor compliance with an aim to improve collection. The reduction in the eligible Input Tax Credit (ITC) from 20% of reported invoices to 10% of reported invoices will negatively impact the cash flow for taxpayers coupled with need for continuous reconciliation of invoices. This will be a significant setback for taxpayers as the industry is already grappling to implement the complex mechanism to track invoices which were not reported in the respective months.

As a one-time measure to encourage non-filer to file GSTR-1 return, the GST Council has recommended a waiver of late fee for the returns pertaining to July 2017 to November 2019 on the condition that the returns are filed by 10 January 2020. It is great opportunity for the defaulter to join the compliance band-wagon, else they may not be able to generate the e-way bills.

Also, as a rate rationalisation measure, the GST rate on lotteries have been pegged to a single GST rate of 28 per cent as against the differential GST rates of 12 per cent for state run lotteries and 28% for state authorised lotteries. This enhancement in the GST rate by 16 per cent on state run lotteries is expected to augment the depleting revenue collections. The noteworthy aspect is that for the first time in the history of GST Council, a decision has been taken by voting, indicating a clear departure from tradition and this could be a cause of concern to the concept of cooperative federalism.

In order to boost development of industries, the criteria for GST exemption on grant of long term lease of land for setting up industries have been extended to undertaking with government ownership upto 20 per cent instead of existing 50 per cent.

Industry will be relieved with yet another extension in the due date (to 31 January 2020) for filing GST annual return /reconciliation statement for financial year 17-18 which was necessitated due to non-availability of revised forms on the GST portal after certain relaxations were announced last month.

In a nut-shell, today’s GST council meeting focused on measures to improve and monitor compliance by expeditious implementation of e-invoice, new return system and effective administration to curb menace of fraudulent claim of ITC and other defaulters.

The businesses and consumers felt relieved, at least temporarily, that much talked about change in GST rates, in general, to augment revenues, was not taken up by the Council. But, the decision to allow only 10 % of the input tax credit reflected in GSTR 2A in respect of invoices or debit notes not appearing in GSTR 2A will lead to further blockage of cash flows and would impact businesses in these difficult times. One understands the concerns of the revenue authorities and, the issues could have been addressed by providing time frame which takes care of buyers from quarterly filers. Also, the eligibility ought to have been specified at a percentage of the amounts in respect of invoices/debit notes not appearing in GSTR 2A rather than at a percentage of the amounts in respect of invoices/debit notes appearing in GSTR 2A. The current methodology makes calculations quite cumbersome. Constitution of Zonal/State Level Grievance Redressal Committees appears to be on the same lines as current State Level Committees and, we do hope that these Committees will take up issues with open mind and send suggestions/recommendations to the Council/GSTN and they will provide quick responses. One of the first aspect that the Committees will need to take up relates to simplification of working relating to input tax credit restriction of 10 % and other aspects. One eagerly awaits the draft of the proposed amendments to the law and do hope that the same will be made available for comments well in time and that these will address several issues which affect the fundamental principles of value added tax which are causing uncertainties and legal challenges as also those that are currently arising in interpretation and application of the law.

It's good to see that the GST Council has refrained from making any significant changes in the tax rates and decided to build greater consensus on the issue. Increase in GST rate to 28% on lotteries is in line with the principle that rate should not depend on the status of the seller or the buyer. One would hope that the Council would not have to resort to voting frequently and this meeting was an exception. For success of GST, it is important that the Centre and States work together and take decisions with consensus as they have been doing till now.  

The issue of compensation to the States is becoming more complex and all the stakeholders will have to try to make it a self-sustainable model so that this compensation is not needed after 5 years as was contemplated earlier. One option for the Centre is to engage with the States to see if the percentage of 14% annual growth can be renegotiated to a lower rate with increase in period of compensation beyond 5 years.

However, with a first step towards augmenting tax revenue, the decision to restrict input tax credit to 10% (bringing it down from 20%) in respect of invoices/ debit notes not appearing in GSTR-2A is likely to adversely impact the working capital of businesses. This 20% rule has just been implemented and businesses are still settling in the new environment, where many issues are still not clear. Hence, this change could have been postponed, at least until the introduction of new GST return framework proposed from April 2020. This would have provided industry sometime to understand the nuances of new rules and engage with vendors to create a more compliant eco-system.

From a procedural and compliance standpoint, extension in due date of filing annual return and audit report for FY 2017-18 is a relief considering the recently announced change in their formats. 

“Curbing tax evasion was one of the key focal areas in this Council meeting. With only leeway of 10% going forward on credits of invoices not uploaded by vendors vis-à-vis the current 20%, businesses would need to ensure streamlining of processes for timely reconciliations, vendor follow-up’s, adequate indemnity, etc. to avoid/ reduce working capital costs on account of denial/ deferral of credit eligibility. With the new offline utility for filing of reconciliation statement 9C still being awaited, grace period of a month provides a pleasant breathing space for businesses. Blocking of E-Way Bill generation (which is likely to entail disruptions to most businesses) for non-filing of GSTR-1’s would induce businesses to ensure timely filing of returns and corresponding credits to customers. Waiver of late fee for all pending GSTR-1’s should encourage voluntary compliances by non-compliant businesses; with sunset of 10th January for waiver ensuring immediate compliance. Constitution of Grievance Redressal Committees with adequate representation of trade and industry should also help resolve ambiguities/ concerns on this new tax regime. There was also a general anticipation of rate hikes being considered by the Council to augment revenues. With no such recommendations, the industry was well relieved; especially with the current slowdown in the economy. Exemption for upfront amount paid for long term leases by entities having 20% or more ownership of Government should also help reduce GST costs for new set-up’s in India – in scenarios, where credit on such lease premium is not available. A single rate of GST

When the entire print and social media were speculating on increase in GST rates and restructuring of slabs, the GST Council was wise enough to leave the rates unchanged except for lottery and certain bags / sacks.  This reflects a healthy trend since GST rates were becoming complex with frequent changes in the rate of tax, Notifications; conditions; scope; etc. 

The 38th GST Council meeting held in New Delhi on December 18, 2019 chose to adopt a conservative approach vis-à-vis bringing structural changes in GST. Further, the approved legislative changes have not been made public and shall get introduced during the Union Budget 2020. The procedural changes are primarily therapeutic in nature with a hint of stricter compliances in the coming future to plug tax leaks and augment revenue. Taxpayers not filing their GSTR-1 for two tax periods shall not be able to generate their e-way bills. Simultaneously, in a major relief, there shall be a late fee waiver for taxpayers who file their pending GSTR-1 from July 2017 to November 2019 by January 10, 2020. One key proposal is to reduce the limit of eligible of input tax credit (for invoices not uploaded by suppliers) to the recipient from 20 percent to 10 percent of the eligible credit available in Form GSTR-2A. This primarily a compliance measure of ensuring invoice matching shall have a widespread implication, as businesses were already deferring credits owing to 20 percent cap. Finally, in yet another extension, the last date for annual returns of Financial Year 2017-18 has now been extended to January 31, 2019. This was expected as the new utility for Form 9 and 9C is yet to be introduced. From the rate change front, there have been no major changes contrary to wider expectations on this front. Thus, no ‘out-of-the-blue’ changes’ have been brought out by the GST Council this time around, which can be seen as a win-win situation for now, considering the current economic and socio-political landscape in the country.

When the entire print and social media were speculating on increase in GST rates and restructuring of slabs, the GST Council was wise enough to leave the rates unchanged except for lottery and certain bags / sacks.  This reflects a healthy trend since GST rates were becoming complex with frequent changes in the rate of tax, Notifications; conditions; scope; etc.

A day before the Council meeting, there were press reports to the effect that the GST collection targets had been set and the revenue officials were given the task of meeting these targets.  When the world is facing a downturn and the Indian Economy is going through its worst phase and the GDP numbers are down, one cannot expect GST numbers to grow.  Setting targets would only create pressure on the already stressed revenue officials and we would once again enter the road of high-pitched assessments, arbitrary demands and litigation.  When the industry is not seeing growth and domestic consumption is not growing, it is not correct to set high GST collection targets.  The solution lies in identifying new assessees; simplifying the procedures; de-linking tax payment and filing of returns; expanding the tax base.

In so far as the decision with reference to restriction to 10% of eligible credit instead of 20% is concerned the issue is largely academic since firstly GSTR-2A itself is not operational and is only a field of information as per the Government; secondly Rule 36(4) has no source of power since Section 43A is yet to come into force and thirdly when business is slowly finding its way in the economic down turn, denial of credits would only worsen the cash flow problem.

& Mr. Aditya Nadkarni

Amidst concerns over shortfall in GST revenue collections over the past few months, much was speculated in respect of GST Council overhauling the tax structure, rationalizing the rates, introducing measures to curb tax evasion and at the same time, encouraging compliances and improving return filing processes etc. Balancing the sentiments of various States, who have expressed concern over the compensation for loss of revenue from GST, vis-à-vis trade & industry at large, the GST Council during its 38th meeting announced certain measures which clearly spell out the objective it seeks to achieve in the next four months of this fiscal year, viz. Rs. 1.10 lakh crore monthly revenue collections.

In what could be stated as the first ‘amnesty scheme’ under GST regime, the Council has decided to waive off late fee for all taxpayers if they file their GSTR-1s pending from July 2017 to November 2019 by January 10, 2020. Such measure gives a window of opportunity to all the late filers to regularize their compliances, which in turn will help in claiming Input Tax Credit which hitherto could not be claimed in light of the recently introduced restriction on credit availment. But, with some ‘carrot’ there comes a ‘stick’ and that is precisely what the Council has recommended. It has decided to block the e-way bills for taxpayers who have not filed their Form GSTR-1 for two tax periods. This will ensure regular compliances by the trade, who largely deal in goods.

The Council’s decision to lower the restriction limit from 20% to 10% is a heavier blow for the businesses, where reconciling the purchase registers with GSTR-2As on monthly basis is already proving to be a bit unwieldly. 

A Standard Operating Procedure for tax officers in respect of action to be taken in cases of non-filing of Form GSTR-3B returns is the need of the hour and it is hoped that the administration will seek to initiate recovery proceedings against the defaulting suppliers rather than going after the recipients. Following the new trend, more amendments to GST law would be introduced in Budget 2020. We hope and expect that some of the disputable provisions like the definition of ‘intermediary’ etc. would be looked into.

A lot will be expected from the Grievance Redressal Committee that will include the GST officers, members of trade & industry and other stakeholders such as GST practitioners, GSTN etc. This could certainly mitigate most of the issues being faced by the businesses, through practical, logical and viable solutions.

The rate changes such as exemption to upfront amount payable for long term lease of industrial / financial infrastructure plots by entity having 20% or more ownership of Central / State Govt., come in light of the writ petitions filed before High Courts challenging the levy of 18% GST thereon and will benefit manufacturing, realty and hospitality companies.

The Council’s ‘vote’ to levy uniform GST at 28% on all lotteries will affect the State run lotteries and the business is likely to get hampered by such upward revision.

While the aforesaid announcements lay down the path for next four months, the next meeting will be crucial once all data relating to revenue augmentation measures is analysed and reviewed.

There was a wide speculation on rate enhancement in the GST Council meeting to address the issue of shortfall in revenues and non-payment of compensation to the States. There were arguments for and against. 

However instead the Council deliberated on measures on improving compliance and introducing measures which could achieve revenue augmentation. In terms of concrete actions, the steps taken include waiver of late fees if returns are filed before 10th January, restriction on taking credit to 10% of credits reported in 2A as opposed to 20% earlier and blocking of e-way bill if GSTR 1 is not filed. While some of these are welcome amendments, such as waiver of late fees which will motivate people to file returns before 10th and blocking of e-way bill if GSTR-1 is not filed, as this will ensure that returns get filed on time and leads to a reduction in credit mismatch issues faced by the customers, the 10% rule would create practical challenges of tracking and taking credits. It will also have to be seen as to how the challenge to Rule 36(4) before the Delhi High Court contending that Section 43B has not been notified and therefore the Rule is ultra-vires, plays out.

Needless to mention that GST 4.0 will see a lot of action on new returns, credit reconciliation, e-invoicing, mismatch notices etc. and a need for companies to re-look at technology and automation to address this.

“The GST Council met for the 38th time after a long gap of about 3 months. The GST Council should not, in ordinary course keep such a long gap between two meetings as many crucial decisions are held up. While the Industry was expecting the GST Council to take decisions on contentious issues such as taxability of intermediaries, inclusion of petroleum products within GST, none of them has been addressed in this meeting. Given the slowdown in economy, a reasonable rate hike was anticipated to cover up for the shortfall in expected revenues. It was a mature move on part of the GST council which did not to yield to temptation of hiking GST rates to meet the revenue deficit. The GST Council was divided for the first time and resultantly voted on tax rate for sale of lottery tickets. Till date the Council had been unanimous on all issues so far and that was commendable. Lottery tickets, in the nature of ‘actionable claims’, have been brought under the definition of ‘goods’ under GST. Earlier, multiple tax rates for state run lotteries and private run lotteries were creating confusion and disparity. Besides, Kerala was apprehensive that a uniform tax rate would encourage other State Lotteries to enter the Kerala market. Kerala heavily relies upon revenues from sale of lottery tickets for its social welfare programmes and close to a dozen States were opposing uniform tax rate. Polarisation of State and Centre on Compensation Cess is a cause of concern. Compensation to States arises out of a constitutional guarantee from the Centre to the States and a deviation from that is likely to result in Constitutional Challenges before the Apex Court. This also pegs us to ask the question what will happen after five years when the constitutional guarantee will lapse.

Constitution of Grievance Redressal Committees by including representatives of Trade and Industry as part of the committee is a welcome step. However, it is to be ensured that such committees become functional in true sense i.e timely address grievances of the trade and stakeholders and are not reduced to a mere formality.

Extension of due date of returns is not the right solution/ relief. Government should focus on making return system more robust and simpler.

It is better to bring a system to collect taxes from suppliers registered with the Department rather than continuing complicated matching provisions.

The discussions made in GST Council on encouraging voluntary compliance, expanding tax base, measures to improve return filing and tax collections and rate rationalization should be worked out and implemented by the Government in good spirit.

On expected lines GST rates of products were not increased, as the decision making process is still underway. Many states were apprehensive of the idea of rate increase and various industry bodies have also made a request to not change the rates. Also, frequent changes in the rate does not augur well for the business as it leads to changes in price labels, discount policies, ERP etc.

As regards the extension in statutory filing date of Annual Return and Audit or FY 2017-18, while generally extensions in date bring relief to dealers at large, but multiple extensions, as in the case of GST Audit, may not serve the intended purpose and may send the wrong signal.

Reduction in the limit from 20% to 10% for unreconciled credit, in my view, is another significant decision which is likely to negatively impact the working capital for many dealers. Since its inception in October, dealers are already struggling in reconciling the month on month credit. With the reduced limit from 20% to 10%, in order to save themselves from the hassle of doing reconciliations, it is likely that many multinationals may forego this unreconciled credit completely.”