Bridging The Gap To GST

The Goods and Services Tax has been in the process of implementation for about a year now. Although the government has reiterated its resolve to implement GST by April 1, 2017, there is scepticism about that particular rollout date after an unproductive winter session of Parliament. That GST will come in 2017 is not in question, due to the Constitution Amendment Bill passed in 2016, but the April timeline is debatable.

The first draft of the Model GST Law was placed in the public domain in June 2016, and a revised draft was released on November 25, 2016. Between these two versions, industry took on the onus of making representations that ran into more than 40,000 pages. These were duly considered by the government before it released the revised version of the Model GST Law.

How To Transition?

Foreseeing a major transition from current laws to GST, the Model GST Law has proposed 33 transitional provisions - running from Section 165 to Section 197. These transitional provisions will prove to be one of the key areas of implementation for GST as any unclear and ambiguous areas, which if left unattended, would only become a breeding ground for future litigation.

There are many issues organisations have to address during the tax transition phase. To address these, provisions have been prescribed to guide the people through the transition. The transitional provisions under Model GST Law briefly cover the following areas:

• Migrating current registrations into GST. (Section 166)
• Carrying forward input tax credit (claimed and unclaimed) as on transition date. (Section 167-168)
• Availability of input credit on input services/inputs/capital goods held in stock and during transit. (Section 169-172)
• Dealing with cases where goods are sent outside the business premises with/without payment of duty, which are returned post the transition date. (Section 173-177)
• Claiming refunds of current taxes before, during and after the transition phase. (Section 179-181)
• Dealing with issues relating price revisions, tax revisions due to appeal, etc. (Section 178, 184-187)
• Selecting time of supply around transition period. (Section 188-189)
• Distributing input tax credits for those holding Input service distribution and centralized registrations. (Section 190-191)
• Allowing input tax credit on goods/capital goods lying with agents. (Section 192-193)
• And others regarding composition scheme, tax deducted at source, branch transfers etc.

Loopholes Addressed

The transitional provisions under the revised Model GST Law holistically cover most issues that were identified. Provisions in the first draft released in July were considered litigious and open-ended by many tax consultants across India. Industry identified many gaps, which the revised law either corrects or provides for. Some of the major representations accepted in the current version of the Model GST Law are as follows:

• Claiming credit on stock in hand for first/second stage dealer and registered importer.
• Claiming input tax credit for goods/services in transit.
• Ascertaining time of supply during transition phase.
• Carrying forward ‘Entry Tax’ credit under SGST.
• Distributing input tax credit for those holding centralized registration, etc.

Unresolved Issues

The transitional provisions appear to have a wide coverage, but there are certain issues that remain unresolved, which the government may have overlooked. They are:

i. Provision for SAD Refunds /Credit for Traders

Section 169 (credit of eligible duties held in stock) of the revised Model GST Law prescribes that

“A registered taxable person, who was not liable to be registered under the earlier law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated 20.06.2012 or a first stage dealer or a second stage dealer or a registered importer.”

Section 169 however, is silent regarding the eligibility to carry forward input tax credit by ‘traders who are not registered importers’. These traders may have input tax credit of Special Additional Duty (SAD) u/s Section 3(5) of Customs Tariff Act, 1975 as on the transition date, which could be claimed as refund against output liability of VAT/CST.

Alternatively, the government could also opt for providing refund of SAD credit as on transition date through Section 179 (Pending refund claims to be disposed of under earlier law) of revised model GST Law. However, to enable such refunds, the government will have to simultaneously amend the pre-condition provided in SAD notification 102/2007-Customs by optionally providing for dispensing SAD refunds against ‘payment of GST liability’ along with provision for payment of sales tax and VAT liability.

ii. Right to file an appeal against rejected refund claims

Section 180 proposes “that where any claim for refund of CENVAT credit is fully or partially rejected, the amount so rejected shall lapse”. However, in the said section, there is no clarity regarding the right to file an appeal against such rejection of refund claims. The suppression of this right of the assessee could, in a sense, bring back the inspector raj. Once the refund has been rejected, a claimant would not be able to challenge assessing officers judgement on the refund.

iii. Eligibility to claim SHEC, EC, KKC, etc.

The transitional provisions do not provide any clarity regarding the manner of carrying forward credit of Education Cess (EC), Secondary Higher Education Cess (SHEC), Krishi Kalyan Cess (KKC), and Swachh Bharat Cess (SBC) under GST. At present, many organizations are in practice still carrying forward their SHEC and EC from one period to another, in anticipation of some clarification from Central Board of Excise and Customs (CBEC) in this regard. Now that GST promises a fresh start, one could expect a closure to this issue through the transitional provisions under GST.

‘Prescribed Procedures’

Although there are a few open issues in the transitional provisions, the government has made an earnest effort to seal transitional gaps as and when they identify any. It is expected that the government will further refine the Act and bridge the remaining gaps as well. The transitional provisions are majorly procedural in nature, one would expect to that the government comes out with the ‘prescribed procedures’ under these provisions as early as possible so that the industry can plan their transitions well in advance.

Pratik Shah and Jigar Doshi are indirect tax partners, and Ravi Soni is an Executive at consulting firm SKP Group. The authors often contribute to BloombergQuint.

The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.