Potential impact of model GST law

The model goods and services tax (GST) law released for stakeholder consultations is an important milestone in our GST journey. For the first time, industry received an insight into what the GST framework will be like.

It’s important to underline that this is a draft law which is a work in progress and still has miles to cover before it addresses all issues under the new regime. What is, however, critical is for industry to engage early with the government to collaboratively ensure that the final GST law is robust and meets the objective of delivering an efficient tax regime that provides certainty and ease of compliance.

Let’s now discuss the potential impact on industry based on the draft law.

At the outset, GST will see a transition from the maximum retail price (MRP) regime prevalent under the existing excise law to a transaction value concept with attendant valuation rules. This will turn the clock back and have an impact across sectors such as retail, consumer electronics, FMCG, pharma, etc., where currently the MRP regime exists.

Transaction value will have its challenges. The law as envisaged does not address specific rate scenarios, exposes potential inclusion of other taxes, cess and duties outside GST within the base, inclusion of potential subsidies linked to products, etc.

Further, with self-supplies without consideration likely to get taxed under GST, transactions such as stock transfers within the same legal entity, both intra-state and inter-state, will attract GST which, in turn, will have valuation challenges without any specific captive consumption guidelines.

Treatment of trade incentives and discounts is another critical issue, as these would be available as adjustments only if they are on invoice or are known in advance of a transaction and are relatable to such transactions. Industries across sectors have various types of incentives linked to festivals, year-end clearance, turnover, etc., which need to be examined closely.

These are some issues which may have solutions as the final law emerges but are definitely points for engagement. The levy of appropriate GST on intra-company transactions will also have a working capital impact across sectors, at least for the first cycle of transactions.

The services sector, which currently deals with just central service tax, will now have to contend with multiple states where they have business operations requiring registration plus the centre, unless the government finds alternative solutions. This will impact key sectors such as financial services, telecom, etc., from a compliance perspective and has been a point of intense engagement by these sectors.

One of the prime objectives of GST is to remove cascading, so it’s important to understand the credit mechanism as envisaged. What we see is the continuing restrictive definition of input and input services from the legacy framework, though the definition of input credits appears to be wide. So the jury is out on this and will require some clarification. What is welcome is the proposed mechanism of input service distributor, which allows credits to be passed within a company.

Another critical area is the transition provisions that allow taxes and duties paid in the existing regime that are either lying as eligible credits or embedded in finished goods to be transitioned as credit for payment of GST in the new regime. This is literally cash for industry, and hence very important for industry to comprehend the provisions for discussions.

The draft law envisages that credit that was eligible under existing laws (service tax, excise and VAT) and also eligible under the proposed GST regime will only be carried forward for transition. So industry has to closely watch the eligible credits reported at the year-end, besides trying to minimize the embedded taxes/duties in finished goods, especially those not available as credit today.

For example, a product in stock at a dealer’s premises post-GST rollout embedded with excise duty and central sales tax in case of interstate sale may not be creditable for the dealer when he further sells the product in the GST regime.

The law envisages a new tax collection concept at source for e-commerce marketplaces, besides mandatory registration for vendors in such marketplaces without any threshold. It’s important to see how this plays out for this emerging but critical channel from an ease-of-doing-business perspective.

The law is still silent on critical aspects such as the treatment of area-based and state incentives, which are very important issues for several sectors. States such as Himachal Pradesh and Uttarakhand have large investments based on such incentives and would like early clarity on the transition to the GST regime—would these be transitioned to a refund mechanism for avoiding GST chain breakage and in what form?

Similarly, large investments have been made in specified states based on their industrial policies. What would be the status of these under GST, considering there will be no central sales tax kitty going forward for states versus collection of SGST (state GST) on services? These are significant issues which will need clarity sooner than later for industry to plan from a GST-implementation perspective.

The author is national leader, indirect tax, EY.