Critical analysis of the GST Law

It has been more than 2 years since the GST legislation was introduced in India.  Over the period of two years numerous changes have been made to the law by issuance of various circulars/notifications. GST which was to be a “Good and Simple Tax” is becoming a complex piece of legislation consuming precious manhours in order to ensure compliance that has been thrust upon the taxpayers.

In my view, ten steps which the legislators should urgently consider making the law simple are –

  • One nation one tax

GST law was introduced by proclaiming it to be one nation one tax. This concept is a misnomer. The current legislation is far from being one nation one tax.  If it were then why should there be an embargo on adjusting input tax paid in one state with the output tax of another state. Therefore, there are as many taxes as there are number of States and UT’s, (37 to be precise), credit for which cannot be claimed by a taxpayer in another State. This artificial barrier must be removed in order to make business simple and cost effective.

Due to the dual structure of GST, businesses are forced to set up offices in other state to claim credit of the input tax paid.  This is then re-invoiced basis the cross-charge mechanism.  There is ongoing litigation just to decide whether the entity has to pay IGST or CGST & SGST.  The moot question here is that why should business not be allowed to freely carry on the activities without grappling with these location issues? If a Company has to litigate to know which tax it has to pay i.e. whether IGST or CGST & SGST then it is a failure of the law.

  • Multiple rates

One of the drawbacks of the GST law is the multiple rate system. This not only makes the law cumbersome but prone to litigation. Selling a product in loose quantity vis-a-vis in a packed condition or as part of a goodie bag attracts different rates of tax.  This distinction should stop.  The judiciary is already burdened with pending cases and multiplicity of rates will only add to further litigation.

  • Frequent changes

One of the basic principles of fiscal legislation is that the law should be simple for the taxpayers to understand and follow. Since 1stJuly, 2017, the time when GST was enacted, innumerable notifications and circulars have been issued under the GST law which in itself proves that the law as conceptualized is far from being simple. A complete overhaul of the law is required.

  • Complex returns

The whole scheme of the formats of the returns under GST law is based on the premise that all taxpayers are dishonest and therefore maximum information should be sought from the taxpayers in the return.  The annual return for 2017-18 which was supposed to be filed by December 2018 has seen multiple extensions.  Information is being sought in the return which was never indicated to the taxpayer under the law and therefore taxpayers are struggling to fill the format of the return and give the required data.  Precious manhours in the country have been lost which is very unfortunate as these manhours should be used in something which is far more productive and not merely wasted for reconciling data.

  • Matching concept

The GST law in its current form envisages a matching concept whereby output of one person has to be matched with the input of the other person.  This matching makes the law extremely complicated. Under the Income Tax law also, there is a matching concept i.e., a taxpayer is given credit of the tax deducted at source only if the TDS is reflected in his form 26AS.  This exercise is, however restricted to interest, rental and other contractual/service income. The main activity of purchase and sale of goods is outside the scope of TDS and therefore it is easy to match the 26AS to claim credit of TDS.  However, GST being applicable for almost all goods and services a taxpayer is supposed to reconcile the entire debit side of his/her statement of profit and loss with the output of multiple vendors with which he does business. This is a mammoth task which again uses precious manhours just to reconcile data. This brings me to the point raised earlier, that the Government presumes that all taxpayers are dishonest and that is why this requirement to reconcile the auto populated GST 2A with the input credit claimed.

  • Deeming fiction

Under the law there is a concept of place of supply which in-turn determines the tax that is supposed to be charged i.e. IGST or CGST/SGST.  For various types of situation, the law deems a ‘particular place’ to be the ‘place of supply’ for levying tax.  As a result of which tax is sought to be levied when in effect no tax ought to be paid. The case in point here is “intermediary services”. The intermediary renders services to a foreign principal and earns money in convertible foreign exchange yet he is liable to pay tax.  This is against the general rule wherein place of supply is deemed to be the place of the recipient. Such instances are forcing businesses to relocate abroad to remain cost-effective.

  • Seamless credit

One of the features of the GST law is the flow of seamless credit across the value-chain.  However, there are multiple situations artificially created in the law which deny the credit to the recipient of the goods/service even though the goods/services are utilized for the furtherance of business. One example which comes to mind is of the input credit of hotel accommodation expenses in a state where the taxpayer is not registered, though has business activity. Therefore, this restriction should be removed, and free flow of credit should be allowed.

  • Reverse charge

The concept of reverse charge for payments to unregistered dealers, which has temporarily been suspended should be deleted permanently. This only adds to the compliance burden as a registered person has to first raise a self-invoice, pay the tax and then claim input credit. This will force businesses to stop dealing with small vendors who will be then out of business.

  • High rates of tax

Higher the rates of tax, higher is the non-compliance.  India is already a highly taxed and compliance driven economy and the high rates in GST are hurting the economy far from doing any good. Many items are deemed to be a luxury and are being taxed at 28% whereas they are a necessity.

  • Other miscellaneous issues

Keeping certain products outside the GST law not only goes against the concept of seamless credit which is the backbone of the GST law but creates complications for the taxpayers. There are certain products which are still subject to VAT under the respective state laws as against GST. Further the law envisages a peculiar situation where a supplier of goods/service is liable to pay tax on the supply even though the customer does not pay, and the debt eventually goes “bad”. This is a double whammy for the taxpayers and needs to be addressed.

Conclusion

Simpler the law is, higher will be voluntary compliance. In its present form the GST law is complex and is not a simple tax as proclaimed by the Government. This will increase litigation and will use precious manhours for unproductive activities, which the country cannot afford to. If we have to realize the dream of our Hon’ble Prime Minister of making India a five trillion-dollar economy, then amongst other action points, an overhaul of the GST law should be on the top of the list.

 

 

New Skill Sets Required for E-Assessments

The Revenue Secretary inaugurated the National e-Assessment Centre recently. More than 58,000 notices have been issued to taxpayers under this scheme and the assessment for Financial year 2017-18in such cases shall be done as per the new e-assessment scheme. As this is a faceless tax assessment regime new skill sets are required by taxpayers/authorised representatives to negotiate this regime.

At this juncture, I am reminded of my principal under whom I completed my CA training. He used to always advocate that any document/letter/report prepared should speak for itself and there should be no need for the author of the document to explain its contents. If one keeps this thought at the back of one’s mind during the e-assessment proceedings, the chances of a favourable assessment order would increase manifold.

So how does one ensure that the document being uploaded speaks for itself? Following are the steps that should be taken in this regard:

  1. Structure of the response to be filed

The response being filed to the questionnaire must be properly structured. Point wise reply should be given to each question being asked. If the reply for any question is long, then it should be broken into small paragraphs and numbered. If for any question the reply is not ready, then against that point it should be stated that ‘Details are under preparation and will be submitted on the next date’.

It is important to note that in the next reply you must corelate all the questions of the questionnaire. For eg. if the questionnaire had 25 points and you answered point no. 1, 4, 6, 7, 8, 10, 12, 14, 19, 21, 22, 23, 24 and 25 in the first reply, you ought to mention against point number 2,3,5,9,11,13,15,16,17 &18 that details will be submitted in the next reply. In the next reply against point no. 1, 4, 6, 7, 8, 10, 12, 14, 19, 21, 22, 23, 24 and 25 mention ‘details furnished vide letter dated XXXX’

  1. Linking of documents being uploaded

Besides the main reply many a times there will be documents which would have to be uploaded say for eg. an agreement. While scanning that agreement, it should mention an Annexure number say ‘A’ and the main reply should give a reference to that Annexure. If there are multiple annexures, then Annexures should be serially numbered and there reference should be given in the main reply.

  1. Effective use of language

The reply should be drafted using simple language and should avoid unnecessary jargon.

  1. Use of diagrams, tables and flow charts

Use of diagrams, tables and flowchart is a very effective tool to making the person reading the document understand the issue on hand. If a question relates to a restructuring that was undertaken by the assessee, then it would be worthwhile incorporating a diagram explaining the restructuring which could then be followed by a text. If the question is regarding a computation, then a tabular presentation would work very well

  1. Conclusion paragraph

While replying to a show cause notice always incorporate a conclusion paragraph summarising the points raised by you rebutting the show cause notice.

  1. Read the reply again

This is the golden rule which is ignored. Before uploading the reply, you must read the full reply once and linking it with all the information being uploaded.

The scheme does permit an interaction with the authorities. However, such interaction is limited to video conferencing and that too is in certain circumstances only. Therefore, the documents uploaded assume a lot of importance.

 

Happy drafting!

Angel tax

The tax department in an overdrive mode has started questioning the valuations of start-up companies inasmuch as the premium received by such companies on issuance of shares is being questioned/challenged by the tax authorities.

It is not the first time that the tax department has targeted a particular class of tax payers.  A few years back when India was the leader in providing BPO services, the tax authorities started questioning the BPO’s and went all out to prove that these companies were not rendering IT enabled services.  Consequently, the deduction claimed by such companies was denied and huge tax liability was fastened on such companies.  What followed was litigation with no benefit to the exchequer. The Government eventually phased out the sections which provided exemption/ deduction to IT enabled services.

Similar is the case with start-up companies.  The tax authorities have started rejecting the valuation reports obtained by the start-up companies and stepping into the shoes of the valuer by determining the fair value of the shares.  Consequently, the difference between the value determined by the Assessing Officer and the value at which the shares have been issued is being subjected to tax in accordance with section 56(2)(viib) of the Income-tax Act, 1961.

The rules issued for the purposes of valuation provide that the valuation can be conducted either by the net asset value method or the discounted cashflow method. In a start-up company the application of the NAV method may not be possible as most of these companies are technology companies which cannot be valued on NAV basis.

At this juncture, one needs to appreciate the difference between price and value.  Value will always be different for different persons whereas price will always be the same for a similar product.  Therefore, the value of a start-up for an investor will vary and cannot be compared with the value determined by the Assessing officer.  Further, valuation is based on certain datapoints at a given point of time which may change at a later date.  Therefore, questioning the valuation of a start- up which is backed by a reasoned valuation report is not justified. Another argument against the action of the tax authorities is that the amount received is on capital account and therefore should not be taxed.

Consider a case where a start-up issues shares at Rs. 150/- per share and collects Rs. 140/- as premium.  The tax authorities subsequently challenge the valuation and determine the fair value  of the shares at Rs. 40/- per share as a result of which the excess premium of Rs. 110/- is subjected to tax.  An innovative tax officer will then take a plea that since Rs. 110/- per share was not towards issuance of capital and has been deemed as income, the cost of acquisition of the share in the hands of the investor should only be Rs. 40/- and not Rs. 150/- thereby taxing the difference once again as capital gain in the hands of the investor as and when the shares are sold by the investor.

I hope that the government takes necessary steps to resolve this issue and promote the start-up movement which is gaining momentum and is essential for the growth of the country.

 TeDiouS compliances under GST Law

The Government has notified 1st October 2018 as the date for implementation of provisions for deduction of tax at source (TDS) under the GST Law. The concept of TDS is an inherent part of direct tax collection mechanism wherein it aims to collect tax from the very source of income. Similarly, under the provisions of GST Law, the specified recipients of supplies (i.e., deductors) are required to deduct tax from the payment made or credited to the supplier of taxable goods and/ or services (i.e., deductee), where the total value of such supply, under a contract, exceeds rupees 2.50 lakh. TDS mechanism under the GST Law aims to collect tax at the time of payment. Also, it seeks to provide an additional trail of taxable supplies to the Government especially in case of B2C transactions to ensure disclosure of taxable supplies by suppliers so as to curb tax evasion. However, given the state of responsiveness of GST Portal and difficulties faced by the industry in adhering to existing compliances, practically, the implementation of TDS provisions now would only add to the compliance burden.

The TDS mechanism under GST may not prove to be very effective for certain reasons such as (i) TDS under GST would not significantly advance the flow of taxes to the Government as otherwise also the supplier is required to deposit tax by 20th of next month irrespective of the receipt of the consideration towards such supplies, (ii) the persons specified as deductors, except Public sector undertakings (PSUs) are mainly the final consumers, who are otherwise not liable for GST registration, for TDS compliances, such persons (final consumers) shall have to bear the burden of entire set of compliances like registration, determination and deduction of tax, depositing the same through e-payment, issue the necessary certificate & filing of returns, (iii) instances of non-compliances and mis-matches in TDS are likely to occur and (iv) there is no need of TDS mechanism in case of supplies to PSUs as the supplies shall be automatically verified while availment of input-tax credit thereon by the PSUs.

In view of the above, the difficulties posed by the TDS mechanism under the GST Law seems to outweigh the expected benefits. The Government should therefore, seriously reconsider the implementation of TDS provisions under the GST law.

 

GST Implementation: The Indian Experience

Goods and Services Tax (GST) marked its beginning on the midnight of July 1, 2017, with the sound of gong in the historic Central Hall of Parliament House, reminiscent of India’s tryst with destiny on the midnight of August 15, 1947, releasing Indian Economy from the web of multiple indirect taxes and bringing in the largest tax reform since independence.

The implementation of GST on completion of its first year seems to be largely effective and efficient from the standpoint of various stakeholders, (i) consumers, for whom GST unlike international experience, it has not shown any initial inflationary trend in India, (ii) for industry, the subsuming of multiple central and state levies into one GST along with seamless input-tax credit has been a boon and (iii) for Government, GST regime has resulted in significant increase in the tax base and tax collections thereof. Besides, the highs the GST bag contains some lows also viz. (i) business were saddled with compliance burden which was in stark contrast to ‘ease of doing business’ being propagated by the Government (ii) The number of amendments and tweaking in law by way of circulars, notifications, press release, clarifications, orders etc. have added to the complexity of GST Law (iii) carrying forward of legacy of interpretation and classification disputes which is further worsened by contrary advance rulings pronounced by Authority for Advance Rulings of various states.

In its present avatar GST is only a Good but not a Simple Tax. If the Government actually wants to make it into a Good and Simple Tax then it should look at making the law simpler in terms of the compliance burden and start trusting the tax payers.

DISCOUNT NOT EQUAL TO CAPITAL EXPENDITURE

Is discount equal to capital expenditure? My answer is a big NO.

DISCOUNT  ff CAPITAL EXPENDITURE

It was reported in the leading newspapers that Flipkart has recently lost an appeal wherein the income tax department has held that the heavy discounts offered by the e-marketing companies, which are at present classified as marketing expenditure are in the nature of capital expenditure. Flipkart along with other big e-commerce companies have been classifying such expenditure as marketing expenses and have been claiming it as a deduction from revenue, resulting in losses for tax purposes on a year on year basis.  The tax authorities have taken a view that discounts offered by Flipkart are in the nature of capital expenditure as the heavy discounts being offered is nothing but a brand building exercise which has an enduring benefit. On the other hand, Flipkart claims that discount offered by them is the cost to company and must be therefore deducted from the total revenue.

The moot question here is whether discounts being offered result in brand building and can discounts be characterised as capital expenditure which results in a benefit that is of an enduring nature. Discounts are given to achieve high volumes and thus directly hit the revenue for the period in which discount is given and depending upon the accounting treatment followed it could be accounted for as a separate line item of expenditure or netted off from revenue. The tax authorities cannot sit in the chair of the businessman to decide as to what price should a product be sold at. This principle is judicially very well settled, and it is unfortunate that the officers at the lower level do not follow the decisions of the higher courts.

When examining the question, whether expenditure is capital or revenue in nature, one has to be guided by commercial considerations and only when the advantage is in the capital field, the expenditure can be disallowed applying the enduring benefit test. If the advantage consists of merely facilitating trading operations or increasing profitability or enabling the management to conduct business more efficiently, while leaving the fixed capital untouched, the expenditure is still on revenue account. In the instant case the discounts given by Flipkart are unequivocally on the revenue account.

One also needs to bear in mind that the enduring benefit is not a conclusive test for holding an expenditure as capital expenditure. The Supreme court in the case of Empire Jute Co. limited had held that there can be an expenditure which gives enduring benefit, but the expenditure can still be classified as revenue expenditure. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable.

Thus, in my view the stand taken by the income tax department in Flipkart’s case is erroneous and based on a myopic view. On one hand the Government is trying to increase its position on index of ‘Ease of doing business’ and on the other hand the tax department is ensuring that the tax payer is harassed and drawn into needless litigation. It is very unlikely that the reasoning given by the tax department would stand the test of judicial scrutiny in higher courts.

 

Steps that the Government should take to make GST actually a Good and Simple Tax

It has been 4 months since the GST legislation was thrust upon the taxpayers. I use the word ‘thrust upon’ because the Government did not heed to the suggestions to make the law simple. The whole scheme of the Act and the associated compliances are based on the notion that all taxpayers are dishonest and therefore full control must be kept by the respective department. Numerous extensions have taken place in filing of all returns which has added to the confusion. No doubt the Government has issued many FAQ’s and held seminars but that was too little and too late. The damage has already been done. Across various states traders and service providers have started various methods to evade tax. This will continue to happen till the time the law is made simple and less complex for the taxpayers. As a concept GST is great but its implementation in India has caused the mess where we all find ourselves. This is what the Government needs to do:

  1. Reverse charge

Section 5(4) of the Integrated Goods and Services Tax(IGST) and section 9(4) of the Central Goods and Services Tax Act need to be deleted permanently. This only adds to the compliance burden. There is no revenue loss to the Government. A registered person has to first raise a self-invoice if he takes a supply from an unregistered person, pay the tax and then claim the input credit. Continuing with this will force businesses to buy from registered persons and make small shopkeepers redundant who are not liable to register because of the exemption linked to turnover.

  1. Multiplicity of Rates

Multiple rates add to the confusion. Selling a product in loose quantity attracts a different rate, if packed will attract a different rate. Why have these distinctions? It is but obvious that tax payers will find loopholes in drafting and try to fit the product in another rate than what the Government wishes it to be. The end result-more litigation. The judiciary is already burdened, and multiplicity of rates will further increase litigation.

  1. Multiple returns

The tax payer has to file 3 returns in a month. GSTR-1, GSTR-2 and GSTR-3 for outward, inward and payment of taxes for the month respectively. In GSTR-1, the tax payer is obliged to file invoice wise details of his outward supply. In GSTR-2, the taxpayer is supposed to match all his input as per his records with the outward supply details filed by his vendors/suppliers. This is the most complex part in the entire GST compliances. Every month the tax payer will reconcile all his inputs invoice by invoice and report to the same to the Government. Imagine the time, effort and money spent in doing this unproductive compliance.

The Government should keep it simple and ask the taxpayers to only file its outward supply details on a quarterly basis and trust the taxpayers in so far as claiming of input tax credit is concerned. There is no harm in learning the best practices from other countries where compliance has been made simple. Let the form GST 3B be made the only form to be filed on a quarterly basis.

  1. High rates of tax

Higher the rates, higher the incentive to evade tax. India is already a highly taxed and compliance driven economy and the high rates in GST will hurt the economy more than by doing any good. Taxing goods at 28% or 43% (including cess) is not the way going forward. Majority of the population buys cars only because the Government has miserably failed to provide effective public transport. Yes there are Metros to commute but given the population size is the Metro enough? The answer is an emphatic No.

  1. One Nation One Tax

This concept is a misnomer. The current legislation is far from one tax. If that were it, then why can’t the taxes paid in one State be adjusted the output of other States. Therefore, there are still 29 SGST’s and CGST’s credit for which cannot be claimed by a taxpayer in another State. The law should allow input credit in respect of tax paid anywhere in India and these artificial barriers should be removed. How the revenue collected has to be distributed is for the Government to decide. Why should the tax payer be made to suffer on this account. To claim credit again entities will be set up in different jurisdictions which will only increase litigation. Therefore the Government should permit set off of input credit of all states with the output tax of any State.

Good & Simple Tax-A Myth or Reality?

It has been two months since the Goods and Service Tax (GST) has been in operation. Termed as the biggest reform in Indirect Taxes, GST has been showcased by the Government as a Good and Simple Tax. No doubt, conceptually GST is the good tax. However, the implementation and the complexity in the Indian variant of GST as detailed below, does not make this law either good or simple. The GSTN portal has not been able to cope with the pressure of filing returns by business entities and dates for filing of returns have had to be extended multiple times.

1. Multiplicity of Rates

Multiplicity of rates goes against the concept of a good and simple tax. Five rates of tax, one special rate for Gold and cess for certain goods is going to result in classification disputes. This would increase the load on the already overburdened judiciary with unnecessary litigation. Across the world there is no country where five rates of GST / VAT are in effect. But as always, our Government believes in making laws which are complex and cumbersome. The rationale behind bucketing of goods and services under various rates was that the new rate would be in line with the aggregate rate of VAT & Excise being levied under the erstwhile law. While for some commodities this has been possible but for many goods and for services the rates of tax have increased thereby raising the cost for the ultimate consumer.

2. Dual GST

The very concept of a dual GST, wherein the supplier of goods and services has to determine whether he has to levy CGST, SGST or IGST goes against the basis of ‘One Nation One Tax’. The present form of GST is not ‘One Nation One Tax’. It is One Nation but 29 taxes, as each State has its own law and credit for tax paid in one State cannot be claimed as credit in the other State. If the intent were to keep the law simple then there should not have been Dual GST in the first place. The Supplier would deposit the GST collected and the allocation or bifurcation of tax between the Centre and States would be done at the level of the Government as opposed to what is being expected out of the taxpayers today. Also, the input CGST cannot be used to set off the output SGST and vice-versa.

3. Blockage of Credit

As long as any Goods or Service are used for the purpose of business, the entity paying for such Goods and Service should be permitted to claim input credit in respect of taxes paid on receipt of such goods or service. In various cases however, the Government has expressly denied allowance for the input credit. This goes against the concept of seamless credit which is fundamental to GST. Further, the Government has also clarified that CGST of one State cannot be set off as an input against the output liability of CGST of another State. While, there is no express prohibition in the Act, the view therefore taken by the Government on this matter is strange. As long as taxes have been paid anywhere in India by an entity that entity should be allowed to take credit of the taxes paid subject to the condition that the Goods and Services are used for the purpose of business.

4. Complex Returns

The law in its present form expects tax payers to file invoice wise details while filing the returns under GST which would then be matched at an invoice level against the inputs of that payer resulting in differences for the tax payer to sort out in a given period of time. Under the existing indirect tax laws there was no requirement of invoice wise matching of credits. This requirement is cumbersome and unnecessary. This is a mammoth task leading to huge compliance cost for companies. This is clear example of the Government not trusting its tax payers and trying to procedurally complicate the law instead of making it simple for the tax payers. The lower the tax rates, the simpler the compliance mechanism higher will be the compliance by the tax payers.

5. Blockage of working capital

Implementation of GST has resulted in huge blockage of working capital especially for start-up or small exporters where furnishing of bond or payment of tax is mandatory before exporting.

I sincerely hope that the Government considers all the above aspects and actually makes GST truly a good and simple tax in letter and spirt for the tax payers.

Composite Supply & Mixed Supply

As per section 2(27) of the CGST/SGST Act, “composite supply” means a supply made by a taxable person to a recipient comprising of two or more supplies of goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. To illustrate this consider purchase of a laptop. When you buy the laptop you get a bag alongwith the laptop. Therefore this becomes a composite supply wherein the supply of laptop is the principal supply and the bag is incidental to the principal supply.

On the other hand ‘mixed supply’ as per section 2(66) means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for single price where such supply does not constitute composite supply. For eg. A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drink and fruit juices when supplied for a single price, is mixed supply. Each of these items can be supplied separately and is not dependent on any other.

“Composite supply” and “mixed supply” are mutually exclusive concepts. The answers to the following questions would help to distinguish between the two types of supplies:

(a) Are the supplies involving supply of different types of goods or services which are made for a single price ‘naturally bundled’ and supplied in conjunction with each other in the ordinary course of business.
(b) Are different supplies provided as a package in a single contract
(c) What is the intention of the parties

Every composite supply presupposes an existence of principal supply and therefore, a composite supply shall be deemed to be a supply of that principal supply. The end use test should also be applied to see which part would be the predominant supply and which would be an ancillary supply. For example: In a contract involving supply of software and customisation thereof, if the intention of the parties was to acquire a customised software, and the basic software without such customisation is of no use to the customer, then such contract can be said to be a naturally bundled contract.

If a contract of supply falls under the category of a mixed supply then a mixed supply shall be deemed to be a supply of that particular supply which attracts higher rate of tax. In some cases involving composite supply of goods as well as services, it may be difficult to identify whether the principal supply is a supply of goods or supply of services, as in such cases both the elements may be equally predominant. In such cases, legislature by a deeming fiction has decided whether such supplies shall be treated as ‘supply of goods’ or ‘supply of services’. Such cases are enumerated in Schedule II of the CGST/SGST Acts.

Goods and Service Tax – A New Beginning

Considered to be the biggest tax reform in the Country, the implementation of Goods and Service Tax Law (GST) is now a reality. The date of its implementation though has been postponed but all contentious issues have been sorted out by the GST Council. There is a paradigm shift in the basis of taxation under GST. The taxation moves from collecting tax at the point of origin to a destination based consumption tax. GST is a dual tax i.e. Central GST/State GST (CGST/SGCT) and Integrated GST (IGST). The fundamental basis of levy of GST is ‘Supply’. If there is an intra State supply of goods and/or services then a CGST and SGST would be charged, whereas if there is an inter State supply of goods and/or services then IGST would be charged.

 

Section 2(57) of CGST/SGST Acts defines “intra-state supply of goods” to mean supply of goods in the course of intra-state trade or commerce in terms of Section 4(1) of IGST Act. Section 2(58) of CGST/SGST Act defines “intra-state supply of services” to mean supply of services in the course of intra-state trade or commerce in terms of Section 4(2) of IGST Act. Thus, what constitutes an intra-state trade or commerce is contained in Section 4, of the IGST Act.

 

Two factors namely (i) the location of the supplier and (ii) the place of supply will determine whether the supply is intra-state or interstate. If both are in the same State, then it will be intra-state supply. If both are in different States, then it will be an interstate supply. Supply, in the course of import into territory of India, shall be deemed to be an inter-state supply. Similarly supply of goods / services when the supplier is located in India and the place of supply is outside India (i.e. exports), shall be deemed to be an interstate supply. Besides, import and exports, supply of goods/service to or by a SEZ developer or a SEZ unit, shall also be deemed to be an inter-state supply.

 

 

As per section Section 3(1)(a) of the CGST/SGST Law, “Supply” includes all forms of supply of goods and services such as sale, transfer, barter, exchange, license, rental, lease or disposal, made or agreed to be made for a consideration, by a person, in the course or furtherance of business. The said section makes importation of service for a consideration a supply whether or not such importation is under ordinary course of business.

 

In the context of transaction involving goods, supply would mean alienation (temporary or otherwise) of goods by one person and possession/custody thereof by another person. In the context of service, it means carrying out an activity by one person and enjoyment of deliverables of such activities by other person. From the above, it would be clear that there has to be contract for ‘supply’ between ‘two distinct persons’, consensus-ad-idem as to the ‘identity of goods or services’ and ‘consideration’ identified with the supply. Further, the transaction should be in the course or furtherance of business or commerce. This fourth condition is to be examined from the perspective of the person making the supply. Hence, even if the person receiving a supply is not a business entity such supplies would still attract GST.

 

In the subsequent posts various aspects of Supply would be covered in greater detail.