Whenever there is a change in the existing system of taxing goods and services or introduction of a new tax in the nature of indirect taxes, there arises a need of designing appropriate provisions for its smooth transition. These transitional provisions play an important role in the successful implementation of the new system. Almost all countries, all over the world, have passed through such a situation. The Indian taxation system has also undergone various reforms in the past and the biggest reform in the field of indirect taxes is nearly ready for introduction.
We have discussed, in the past few months, on how successfully the system of VAT (GST) has been implemented worldwide, and, we have also discussed some important aspects of GST law and procedures of some of the leading countries. While our discussion will continue till our Government finalises an appropriate draft of Indian GST law, let us consider some basic issues concerning transition from existing multiple taxation system to one single law (called GST) to be operative all over India. In comparision to other countries, the law makers in India will have to devote little more efforts in designing the transitional provisions. The basic reason for that, is present, we have several laws taxing various transactions at certain stages of procurement, production and supplies, and, some of these laws are governed by the Central Government and some by the States. There are various methods under which these taxes are being levied and collected at present, while some have the features of VAT or partial VAT , the others are still continuing with the old system of sales tax (For example: Central Sales Tax). Another area of concern is ‘dual GST’, which will have two major components CGST and SGST, and, in addition thereto IGST. As the proposed ‘dual GST’ is likely to subsume all these taxes like Excise Duty, Service Tax, State VAT , Central Sales Tax, etc., it is necessary to understand the complexities of transactions and taxation thereof, particularly during transition.
Although, the government has already issued certain draft procedures like procedure for registration, returns, payment of tax and refunds, all these draft reports need a complete overhaul so as to achieve the desired results. Any new tax law has important ingredients like point of taxation, valuation, the subject matter of tax, place of supply and the transitional provisions, etc. It is equally important that smooth flow of input credit (i.e. excise duty on inputs and capital of goods, sales tax or VAT , Central Sales Tax, service tax) is allowed to be transmitted conveniently and without hassles into the new law. In absence of any guidelines from the authorities, the probable scenarios of the transitional provisions are stated by referring to GST Acts of several countries. The purpose of this article is to provoke thoughts on the subject.
The potential concerns that arise in smooth transition may be listed as follows:
Registration and obligations of the assessees
Goods in stock (including lying with agents and job workers)
Goods in transit or consignments pending approval of customer
Goods return and/or subsequent revision in price
Branch transfers
Inter-state transactions
Sale in Transit
Carry forward and transfer of input tax credits
Pending Refunds
Point of taxation for overlapping transactions
Exempt goods and services in current regime, which are no longer exempt in GST and vice versa
Treatment of unutilised credit
Continuing supplies and works contract
Dealers governed by composition schemes
Dealers enjoying incentive schemes
There may be many other areas of potential concerns that are required to be addressed during the transition period. Some of the issues, concerning above points, are discussed in brief herein below:
Registration and obligations of the assessees
Transitional provisions should ensure that the existing registered dealers/assessees continue with their registration or get registration under GST law automatically without any hassles. Such transition should be paperless to the maximum extent possible and within pre-fixed time line. The registration number should be such that the constitution of the assessee, the nature of business in which he is engaged into, location of the assessee including principal place of business, branches and other premises, contact details, jurisdiction of the assessing officer can be tracked easily. The registration number as linked to PAN should also facilitate with smooth transfer of information between different tax authorities such as Customs, Income Tax, registrar of documents, etc.
The registration details with various departments, at present, should be updated in advance with necessary information as may be required for issuing new registration numbers. The entire procedure for granting new numbers should be online and uniform for all the States all over India. It may be necessary to ascertain, in advance, from existing dealers that whether they would like to continue with their registration and whether in one State only or all the States or in some of the selected States. The registration numbers need to be granted accordingly at the option of existing registered dealers/assessees, without any hassles.
Goods in stock including lying with agents and goods in transit or consignments pending approval of customer
In respect of stock on hand in pre-GST regime, the sale taking place in post GST regime (called as ‘supply of goods and services’) will be subject to GST on sale value in case of domestic transactions. In case of exports of goods and services, place of supply rules will be formulated. These rules will cover inter-state supplies also. The enabling rules will be required to be framed for levy of GST to the assessee’s own depot in another state and supply made thereafter. In case when the goods sold prior to the appointed day1 are returned subsequently, the rules are required to be framed for refund of payment of sales tax2 /VAT / CST paid in the pre-GST regime.
In case of goods lying at agent’s premises, whether the agent sales goods to a customer on behalf of the principal or return them back to the principal, both the cases may have to be treated as taxable supply in GST regime. A suitable declaration of such stock and its valuation on the appointed day from the agent as certified by the principal may be required for this purpose.
Point of Taxation Rules prescribing time of supply will be required to be framed for sale contracted in pre- GST regime but actual sale takes place in post-GST regime. Such rules may be different for ascertained and appropriated goods for supply and the goods which are under process of manufacture and the unascertained goods. Pre-GST regime of sales tax/VAT may apply if the payment is received in that period though actual supply may take place in post-GST regime. In case of part payment, sale may be recognized for the purpose of payment of sales tax/VAT to the extent payment is received.
Goods in transit may be subjected to sales tax/VAT even if such goods are received by the customer after the appointed day as the supplier would have charged sales tax/VAT at the time of supply under pre-GST regime, being in origin based tax system. It is possible that the goods involved in overlapping transactions, would cross check posts after implementation of GST and may be lacking in documentation requirement under GST. In such a situation reasonable time, may be allowed to complete the documentation and retain the taxability under pre- GST regime.
In case of sale on approval basis, GST may be charged if the customers approve such sale after the appointed day. Detailed rules/guidelines may be required to be framed in this regards.
Those contracts which are inclusive of taxes in pre-GST regime may be required to be bifurcated in taxable value and tax element separately under post-GST regime. The stock, work in progress etc., may be stated in these terms on the appointed day for smooth transition of credits.
In case of services, the existing Point of Taxation Rules may have to be reframed with necessary changes as may be required.
Branch transfers
In pre-GST regime the branch transfers are not taxable. Inter-state branch transfers, post-GST regime, may be liable for GST. The dealers may be required to give a declaration of stock lying at branch along with the component of tax thereon. For this purpose, the dealer’s warehouse or depot will also constitute a branch.
Carry forward and transfer of input credits
The transitional issue of input credit may arise in following circumstance when the goods purchased and lying in stock, which are sold post-GST including the tax exempt goods in post-GST regime upon removal of exemption.
Goods purchased from registered dealers and those remain in stock in trade on appointed day and sold in post-GST regime can further be classified into the goods with invoices showing the sales tax/VAT element separately and the invoices not showing sales tax/VAT so separately but are inclusive of such levies. In case of invoices inclusive of tax, some formula needs to be prescribed to find out the tax element in it. On the basis of some estimation like some percentage basis or as may be appropriate. Malaysia has adopted a general rule of element of 10% of taxes included in purchases for carry forward the tax element in post-GST regime or issue of refund in pre-GST regime if the assessee does not have authentic evidence.
But, what about excise duty involved in the goods lying in stock on the appointed day? There may be situations where the element of excise duty is visible on the ‘Tax Invoice’ and there may also be purchases lying in stock for which ‘tax invoices’ have been issued by resellers, thus excise duty is not shown separately, but included in the sale price (purchase price).
Goods purchased from unregistered dealers on which purchase tax is paid under the State law, the same may have to be allowed to carry forward in the GST regime under transitional provisions. The dealer may be allowed to carry forward only such input tax credit which is supported by adequate disclosure in the returns. In case of services, which have suffered reverse charge payment of service tax, the same should also be allowed to carry forward in post- GST regime.
Goods lying at branch or with agents, or with customers on approval basis, or in transit with invoices showing VAT /sales tax element separately or not which is inclusive of taxes. Credit of such tax or duty should be allowed to carry forward.
Refunds should be allowed in respect of goods or services lying in stock which was subject to tax in pre- GST regime but exempt in post – GST regime. Proper safeguards may have to be introduced to element goods/ services that have not suffered tax or duty due to purchases during basic or other exception periods.
Credit on semi-finished (under process) goods may be allowed on the basis of appropriate mechanism.
Credit in respect of capital goods – the assessee may be allowed to carry forward tax paid in pre-GST regime in relation to eligible capital goods lying in stock as having availed the credit including the deferred credit. In case of partial allowance of credit in the pre GST regime, the balance should be allowed to carry forward in post-GST regime.
No artificial restrictions may be imposed for the claim of input tax credit. No apportionment of input tax credit should be done when it can be attributed wholly to taxable supplies.
Credits forgone due to artificial restrictions should be allowed to be brought back. This should apply even for assessees hitherto paying under composition tax schemes under various laws.
Point of Taxation to avoid overlapping transactions
Different indirect tax laws in the country have different point of taxation. For example, in case of excise duty, the point of taxation is the time of removal from the place of removal of goods; In case of sales tax/VAT laws, the point of taxation is issuance of invoice and in case of service tax there is a separate mechanism called point of taxation. The GST law may have different rules for point of taxation which would determine the tax liability on supply of goods and services. The same set of rules should avoid double taxation on overlapping transactions under pre-GST regime and under post-GST regime. The instances of such overlapping transactions are given in the “Discussion Paper on Key Transitional Issues in Proposed GST Regime” issued by ICAI, and enumerated as follows:
i) Invoice is billed under pre-GST but the goods or services are supplied and consideration for the said supply made in the GST regime.
ii) Goods or services are supplied in the pre-GST regime but invoice for supply and consideration for supply made in the GST regime.
iii) Advance received during the pre-GST regime but invoice and supply made during the GST regime.
iv) Invoice and payment against the said invoice is received prior to GST regime but supply of goods or services is made in the GST regime. v) Invoice and supply of goods or services is made during the pre-GST regime but payment for the said supply is made in the GST regime.
vi) Payment is received in advance and supply of goods or services is made prior to GST regime but invoice for the said supply is made during the GST regime.
Sale of goods
In case of sale of goods, where the goods has already suffered levy of sales tax/VAT and is supplied in post-GST regime, it should be the differential rate of tax, i.e. rate of tax in GST less sales tax/VAT only be payable. In other words, the credit of sales tax/VAT paid should be allowed under the GST regime.
Provision of service
There may be situation where provision of service fall in both the pre and post GST regime. Presently, the conditions for levy of service tax are; a) provision of service, b) issue of invoices and c) payment of consideration. In GST regime only first two conditions are recommended. They should,
i) Where the service is completed in pre-GST regime and its invoice is also issued before implementation of GST, in such case, POT for the service would lie in pre-GST regime.
ii) In case a service is completed in post-GST regime or the invoice issued in case of service completed in pre- GST regime is issued in post-GST regime, the POT for the service would lie in GST regime.
iii) In case of continuing transactions like long term lease, license to use, hire purchase agreements, the agreements entered in pre-GST regime should be liable to GST from the appointed day for services provided from that day. In case full amount is paid in the pre-GST regime, the same should not be liable for GST for the remaining period of the transaction.
iv) In case of a contract of continuous supply of service made in pre-GST period but the same is cancelled subsequently, service tax paid for the terminated period may be refunded subject to the conditions as may be prescribed.
The above propositions will take care of the situation where a given service is taxable both in pre-GST as well as in the GST regime. In case where the given service is not taxable in pre-GST regime but has become taxable in GST regime or vice-versa, the criteria to determine the POT should be the date of ‘completion of service’.
Manufacture of goods
In case of a manufacturer of dutiable goods in pre-GST regime and removal thereof in GST regime, the point of taxation should be under GST regime.
Works Contract or other continuing transactions
Presently, under service tax, date of completion determines the point of taxation. However, in case of services continuing for a longer period of time like works contract, determination of date of completion of service may be done based on a criteria similar to the one in the Point of Taxation Rules, 2011, under the Service Tax Law in relation to ‘continuous supply of service’.
At the entry point of GST, from the current sales tax / VAT , it would be appropriate that value of the work done does not enter into GST regime and dual levy is avoided. The periodical RA bills issued and approved by the customer may be regarded as sufficient evidence. Similarly, there should be smooth transition of input credits of any tax, duty etc., lying in stocks or in unfinished works.
In case, any project (for e.g. infrastructure projects) are zero rated in GST regime the credits embodied in the stocks or work in progress should be refunded after putting in place adequate safeguard mechanism.
Real Estate transaction related to under construction properties
In case of under construction units, GST may be payable either on commercial properties or on residential properties or on both, the credit of input service tax, inputs and capital goods embodied in stocks or work in progress should be allowed in post-GST regime. Credit of tax paid on works contract service should be allowed when building is used for commercial/industrial purposes.
Exceptional scenarios
The law should also provide adequate provisions to deal with exceptional transactions like,
The transaction is under composition scheme under Pre-GST but not so under GST regime or vice versa.
Where property in goods has been transferred with option to return them within prescribed time frame given in pre-GST regime but are subsequently returned in post-GST regime; or
Where possession of goods has been transferred to job-worker to return within prescribed time frame given in pre-GST regime and are subsequently returned in post-GST regime; or
Where service provided in pre-GST regime is subsequently declared deficient in post-GST regime; etc.
Exempt goods and services in current regime, no longer so in GST and vice versa
Goods in stocks which has suffered input tax or services which has suffered input service tax should be allowed to be set off against GST payable on final output.
Ineligible credits (including that of CST inputs), on account of earlier exempt regime be allowed to be brought back in post-GST regime when they become taxable.
In long term contracts, sufficient time should be given to change the tender/contractual terms wherever necessary (e.g. in Malaysian GST, the existing contracts can be reviewed up to the first opportunity for such renewal or within the time limit of 5 years and till such review or expiry of time limit, such contracts are made zero rated). In case the contracts are not reviewable, GST may become cost to enterprise.
Treatment of unutilised credit in case the goods exempt in post-GST regime
Refund should be granted for unutilised credit provided the goods and services have suffered taxes before the appointed day. The assessee may be given option to carry forward the unutilised credit and set off against the tax payable under GST.
Conclusion
Success of GST depends largely on smooth transition of taxes and duties from pre-GST to post-GST regime. India has a complex system of taxes. There are various types of indirect taxes prevailing in the system with levies and exemptions that too vary State to State. Transitional provisions should be fair to the assessees and also it needs to be ensured that the prices do not escalate for the consumers. The best example is Malaysia which has joined band wagon of GST very recently, i.e. from 1st April 2015, after deliberating for more than 10 years. The country has introduced one of the fairest system of transition including allowance of refunds for taxes paid in pre-GST regime if levy becomes exempt later. Some other countries have also enacted appropriate provisions for smooth transition and allowance of hassle free credits in the new regime. Australia and New Zealand have separate transition Act. Singapore also has elaborate procedure and it has been ensured that smooth flow of credit is not artificially hampered. Elaborate procedure for allowance of refund is also formed whenever the supply is exempt in GST regime. It is expected that India will adopt a fair transitory process from existing levies to implementation of GST so that the businesses do not suffer and the interest of consumers is not affected by heavy terminal tax.
