The first discussion paper released on 10 November by the empowered committee of state finance ministers of India on the proposed goods and services tax (GST) is noteworthy since it articulates the underlying conceptual basis on which GST would operate in India.

Illustration: Jayachandran/ Mint

The proposed model is based on fiscal federalism, which contemplates a dual GST structure, one levied by the Union government and the other levied by the states, thus conferring concurrent jurisdiction on both Centre and states to tax goods and services alike.

Now that the discussion paper has released the proposed GST framework to the public, all stakeholders should take the initiative to provide their feedback to the government and partner in evolving principles on taxability under the proposed regime. This article outlines potential issues that may arise in relation to the proposed GST regime.

The current regime of indirect taxes treats goods and services separately. However, in reality, many businesses have “composite supplies", which entail supply of both goods and services. The expectation from GST was that it would render the dichotomy between goods and services irrelevant in the context of composite supplies.

However, the discussion paper suggests that the GST regime could have different rates of tax for goods and for services, and that the goods and services dichotomy could continue. The tax mechanism and the rate applicable on such composite supplies then become critical. It is likely that each type of composite supply may either be deemed to be supply of goods or supply of services under the proposed GST.

The deeming provision of a particular composite supply as goods or services could be based on the essential character of such supply. In addition, the view prevalent in the specific industry with respect to such supplies could also be duly considered.

Another approach could be to evolve a mechanism based on the principle followed under European Union (EU) VAT laws, where typically a single rate of tax applies to the entire transaction at the rate applicable to the principal supply. In such situations the principle followed under EU VAT laws is similar to the “dominant intention test" evolved by Indian courts. Essential features of the transaction, for instance, terms and scope of the contract, may be used for inferring the dominant intention of the parties to determine whether the principal supply entails supply of goods or supply of services. However, experience shows this approach is susceptible to disputes.

Another aspect critical to businesses is inter-state stock transfer (that is, transfer of their stock between their own branches or offices across states, without involving sale to the consumer), which is currently not taxed.

Any move to tax stock transfers would, therefore, be closely watched by businesses. The discussion paper indicates that no decision has been taken on taxability of stock transfers. Some of the challenges for businesses if these transactions are taxed include cash outflow at the time of stock transfer, timing of utilization of credit by the branch, valuation of such transactions, accounting treatment and the corresponding compliances. However, there could be positive fallouts, such as seamless flow of tax credit (unlike some existing state VAT laws where inter-state stock transfers suffer retention of credits).

Job work is another area, which is relevant from the manufacturing sector perspective. Currently, job workers are exempt from payment of excise duty under a specific exemption notification. It is pertinent to mention that GST aims at discontinuing exemptions since they interrupt the seamless flow of credits, leading to cascading of taxes. This could make job work transactions more tax efficient since the job worker would be able to utilize input tax credits. However, the treatment of supplies from principal to the job worker made on free-of-cost basis could be an area of concern.

Considering the complexity and relevance of the aforesaid transactions, the government, in consultation with businesses, should evolve mechanisms to address these situations under the new regime.

The proposed GST regime is expected to be successful in removing the distortions in the form of exemptions. The sentiment that emerges from the discussion paper is the government’s sincere efforts to make GST see the light of day. All efforts are being made to implement GST sooner rather than later. The first discussion paper enunciates the broad objectives that GST has set out to achieve. This window of time between the release of the discussion paper and the finalizing of the regime also provides an opportunity to businesses to participate and prepare before GST hits them.

This column is contributed by Aditya Singh Chandel and Ashish Singh of AZB & Partners, Advocates & Solicitors.Send your comments to