In the first concrete step towards implementing the much awaited Goods and Services Tax (“GST”) regime, the Model GST Law was released on June 14, 2016 (“Model”), even as the Government strives to pass the enabling Constitutional Amendments. Under the Model, Central/State GST shall be leviable on all intra-state supplies of goods and/or services and Integrated GST shall be leviable on all inter-state supplies of goods and/or services.
- A new Taxable Event:
As the GST regime is meant to subsume existing indirect taxes, concepts such as manufacture, provision of service, sale of goods, etc. shall be replaced by a single taxable event: supply of goods and/or services. The term “supply” has been defined to include all forms of supply of goods and/or services made or agreed to be made for a consideration by a person in the course or furtherance of business, importation of service, and supplies made or agreed to be made without consideration such as permanent transfer of business assets, etc. Interestingly, the definition also deems the supply of any branded service by an aggregator under a brand name owned by him to be a supply by the aggregator. This all pervasive definition of “supply” has to be complemented by seamless availability of input tax credit, which has been largely addressed by the Model.
However, note that the supply of goods by a registered person to a job-worker shall not be treated as supply of goods. A negative list has also been prescribed for transactions (e.g. transactions by Government, etc.) on which GST shall not apply.
- Old Wine, New Bottle: Place of Supply, Point of Taxation and Valuation
GST is proposed to be a destination-based consumption tax. This is a shift from the present regime of origin-based taxation. Thus, the place of supply would be paramount in determining where the supply has been consumed and the nature of a transaction as an inter-state supply or intra-state supply. Significantly, concepts such as place of supply, point of taxation and valuation are familiar concepts which have in the past formed the backbone of service tax and excise law, and will now also form part of GST.
Generally, the place of supply services/goods shall be the location of the recipient of the services or location of the goods at the time of delivery with exceptions carved out for performance based services, event based services, movement of goods by third party, installation of goods, etc.
The principles determining point of taxation and valuation remain largely the same as under the existing indirect tax regime, i.e. point of taxation is determined according to date of removal of goods, receipt of services or date of invoice, etc. and value is determined on the basis of the transaction value where the buyer and seller are not related and price is the sole consideration and according to the rules included in the Model, where parties are related or price is not the sole consideration.
- Key Takeaways
Some significant additional highlights are as follows:
- Threshold for registration has been specified as minimum annual turnover of INR 0.9 million (INR 0.4 million for North Eastern businesses) and threshold beyond which tax is payable is specified as minimum annual turnover of INR 1 million (INR 0.5 million for North Eastern businesses).
- Credit chain is set to be largely seamless, with the exception that input tax credit of Central GST cannot be used as set-off for payment of State GST and vice versa.
- Composition levy introduced for tax payers, subject to fulfilment of procedural conditions as may be specified.
- Subject to certain conditions, specified departments such as local authorities, government agencies, etc. will be liable to deduct tax at source at the rate of 1% on specified supplies.
- E-commerce operators shall be liable to collect tax at source at the time of credit or at the time of payment whichever is earlier.
- Special procedure for job-work processing without payment of duty, in line with current excise regime.
- The threshold for initiating prosecution has been lowered to INR 2.5 million from the existing threshold of INR 20 million under service tax law.
- The Model eliminates the concept of multiple returns and subsumes them into single monthly return followed by an annual return. Specific returns for input service distributor and persons required to deduct or collect tax at source has also been specified.
- Every taxable person would be assigned a GST compliance rating score based on its record of compliance. This would put pressure on suppliers to comply and would lead to transparency in doing business.
- The Model provides clarity on transitional issues such as how credit from the present regimes are to be carried forward, availability of underlying credit for non-tax payers in the current regime, etc.
- Litigation disputes and refund claims under the current regime shall be disposed off in accordance with the provisions applicable under the current regime.
The Model has provided a much needed glimpse into what the GST regime holds for business. The Model indicates how the GST regime would work and also signals that the Government is ready to roll out GST on aggressive timelines. However, regardless of the bullish attitude of the Government regarding implementation of this reform, the political logjam needs to be cleared at a constitutional level in the Upper House of Parliament before the ball is set rolling for the GST regime to kick in.
 For intra-state supplies of goods, a registered taxable person, whose aggregate annual turnover does not exceed INR 5 million, may pay, in lieu of the tax payable by him, an amount at the rate of 1% (or any other rate that may be prescribed) of the turnover during that year.