In 47 days, one of India’s biggest indirect tax reforms, the Goods and Service Tax, will kick in. From Monday till July 1, in a special series, GST Countdown, BloombergQuint will speak with corporates, manufacturers, traders, service providers, and tax consultants to gauge their level of preparedness and the clarity that the government needs to provide to enable a smooth transition.
In the first interview of this series, Sachin Menon, the indirect tax head at KPMG India said India needs to work on ‘war-footing’ to be able to deliver on the July 1 implementation deadline.
Here are edited excerpts from that conversation.
You mentioned that looking at the level of readiness, government needs a magic wand to transition industry to GST; what is the reason for this pessimism?
The success of GST depends on the level of preparedness of both the government as well as industry. Many of the aspects of GST such as rates, exemptions, reverse charges and even some of the API (Application Program Interface) formats etc, required for the information technology system to capture the data and file returns is still pending. And therefore I believe that you need to work on war footing and address these issues for us to implement GST from July 1, 2017.
You said you are pulling all-nighters to get your clients GST ready. Give me a flavour of what’s going on?
Well, I think many in the industry perhaps didn’t believe that July 1 could be the deadline.
So they are still hoping that it might get pushed?
Yeah, pushed probably to September. And therefore decisions were delayed. So they have just got into arrangements to seek outside help – especially those in the service industry – in the last couple of months. For anybody to help transition to GST needs huge time and effort. So the pressure is piling up on industry and they are passing on the pressure to advisors. So people are working round the clock to meet those deadlines.
Help me understand where do you see the gaps in this lack of preparedness?
There are a lot of areas where people are looking for clarity. For example, the government, in the GST Law, introduced the concept of supply. And the supply between two distinct persons, which means service provided between branches and their head office without consideration, is taxable. You have to pay GST even on inter-unit transfers. Here what we are talking about is the value of supplies between the distinct persons. Distinct person is defined as the same legal entity having different registration in different states; so it is considered to be a distinct entity or a distinct person.
So any supply between distinct persons is subject to GST. Therefore, if I have a factory in Maharashtra and I manufacture the goods and transfer them from Maharashtra to Delhi to my stock point that is considered to be a taxable GST supply. Now that can be done easily perhaps in the case of goods. There guidelines are clear. What about services? Where goods are concerned, you’ll have identifiable goods, prices etc. whereas services are always different from the others; they cannot be homogeneous all the time. And at the same time it is also mandatory that you have to issue input service distributor (ISD) invoices of the credit accumulated at the head office that can be distributed through ISD mechanism to the location where there is a tax liability. Now the question is, if internal invoicing is to be done, then ISD is not required and vice versa. The language of ISD says that the taxpayer shall allocate the input credit attributable to different offices on the ratio of the turnover to the total turnover.
Now, how do you decide whether I should transfer the credit under ISD mechanism, transfer the credit through an internal billing, that is, I debit the input credit lying in one state, use that credit to pay the taxes, and thereby transfer it to the recipient state. So this is one of the things which everybody is asking because there isn’t an easy answer to it.
And how is it stopping your clients from moving to the GST system?
Because they have to configure this into the system. Unless and until there is certainty, it’s anybody’s guess which mechanism is to be adopted. Because if you are transferring the credit through ISD mechanism, there is no credit left out.
So you are saying that the IT systems need to account for this ?
So the logic of every transfer has to be clear.
Place of supply is another area. What happens when the service is provided in relation to immovable property. So whether the credit is available or not available, it is not in the restricted list of input credit.
But we are clear that credit for immovable properties is not available, right?
Yes, for property there is no credit. So if I am going and staying in a hotel, I am going on a business tour, and I have a hotel bill, because the performance at the place of supply is based on the place of the location of the immovable property, you will get a local bill. Local SGST, CGST Bill.
So you stay in Orchid, you get a local Maharashtra bill?
Invoice. And my office is in Delhi, I go back to Delhi. Since this is a local invoice, the credit will not be available in Delhi. It should either be an Integrated GST invoice, or a local Delhi invoice; only then will the credit be available. Therefore the credit for taxes paid on this bill for the stay is not available. Though it is explicitly not denied, the law has not given any express mechanism to avail that credit.