The interim Finance Minister, in his Interim Budget 2019 speech, praised the effective implementation and success of the Goods and Services Tax.

While noting that 2018–19 was the first full year of implementation of the Goods and Services Tax (“GST”) with numerous rate changes, the Finance Minister expressed that the bloom of GST would emerge only after the transition period is over. Despite the expectation that GST would fully stabilize by 2020–21, the Budget document adds a caveat that revenue collection would be “slightly muted.” A reality-check is, however, imperative to evaluate various elements that determine the conquest of all the past blemishes.

India witnessed historic constitutional amendment in 2016 after parliamentary debate for three years which translated into modular changes in the indirect tax system which was otherwise marked with inefficiencies and cascading taxes.

Recently, the much-awaited GST Appellate Tribunal arrangement was announced, among other developments. Though the stakeholders, including trade and industry, have had a bumpy ride since GST’s roll out in July 2017, it has eventually proved to be a dynamic and efficient tax reform in India.

2018 Round-up

The GST council, a constitutional decision-making body, implemented several tweaks as part of its efforts to rationalize the levy, while being sensitive to taxpayer experiences. The biggest winner was the rate rationalization attempt that aggressively fine-tuned the rate-structure, with the council significantly pruning the long list of items placed in the highest tax slab of 28 percent and bringing it down to less than 30 items.

A significant number of goods and services were also placed at lower rate slabs, another respite to consumers ultimately.

The central idea is to arrive at a “Revenue Neutral Rate” (“RNR”), keeping in mind its fiscal impact and burden on the common man. This should also facilitate simplification of the rate structure, with fewer slabs and likely convergence of 12 percent and 18 percent rate to a standard rate.

Another highlight of 2018 was the E-Way Bill system that paved the way to smooth movement of goods across the country, abolishing the existing state-border check-post system and creating a unified market system.

Though initial implementation suffered due to technical glitches, eventual progress has largely been a game changer. Further, responding to the rough compliance-related experience, the council approved simplified GST return formats and simpler filing options, anticipated to be rolled out from April 1, 2019.

Similarly, the refund mechanism also went through reorientation for seamless refunds where exporter grievances were largely addressed, though it is still a work in progress.

Tax buoyancy has not fulfilled Revenue expectations, with substantial rate cuts and relief to small taxpayers adding further pressure on the exchequer. This would result in stricter scrutiny, where Revenue is expected to leverage the wealth of data available with the administration to check tax evasion.

Imminent Supposition

Petroleum products are anticipated to be brought under GST, which, unlike the stamp duty, would not entail an amendment to the constitution. This would bring down the prices significantly, however, at a heavy loss for Revenue. Currently, both center and state levy excise and VAT respectively (with cesses) which result in exorbitant consumer prices.

32nd and 33rd GST Council Meetings—Key Takeaways

The GST council held its 32nd meeting on January 10, 2019, and its 33rd meeting on February 24, 2019. As usual, high on hopes with an eye on forthcoming national elections, expectations mainly curled around further lowering of rates and several procedural reliefs. Real estate, one of the largest contributors to the national GDP, was the focus point with major relief for the residential housing sector.

Starting April 1, 2019, GST on homes under construction would be at an effective rate of 5 percent without Input Tax Credit (“ITC”), whereas the affordable housing segment would enjoy an effective rate of 1 percent without ITC.

GST on under-construction properties is currently under 18 percent, with one-third abatement for land, resulting in an effective rate of 12 percent on the sale value. Land, which is subject to stamp duty, has been outside the purview of GST since the design stage. This disproportion is contrary to the spirit of GST. Since the power to levy stamp duty rests upon the states, it would be tough to subsume it into GST, given the fact that it also requires constitutional amendments.

Furthermore, the council decided to exempt intermediary tax on development rights (arising out of joint-development construction model) on those residential properties which suffer GST. This exemption would indeed ensure the benefit of reduced rate to the end-consumers. However, realignment of rates on major inputs is imperative for a wholesome benefit.

Currently, most construction-related inputs/input services are placed at an 18 percent slab and cement is still under 28 percent. Absence of ITC would result in cost escalation on the supply side, though the exemption from intermediary tax is an attempt to neutralize the variance. However, this may result in low effective benefit for the consumers. Stakeholders are now counting on a rate reduction on cement and other inputs, which would largely benefit home buyers and builder/developers.

Other Takeaways

Higher Exemption Threshold Limit for Supplier of Goods

Option for two threshold limits for exemption from registration is introduced (only for suppliers of goods) namely 4 million rupees ($56,282) and 2 million rupees, where most of the states have opted for a higher threshold. The threshold is determined based on aggregate turnover of the entity. Service providers continue to be under the 2 million rupees threshold limit.

Composition Scheme Simplified

The composition scheme is a simple and easy scheme under which small taxpayers can eliminate tedious formalities and pay GST at a composite rate on turnover.

  • Threshold limit of annual turnover in the preceding financial year (for goods) has been increased from 10 million rupees to 15 million rupees.
  • Yearly return: Taxpayers can now file annual returns (as against quarterly returns), with quarterly payment (with a simple declaration).
  • Service providers with a turnover of less than 5 million rupees are now made eligible to enrol for the composition scheme at a fixed rate of 6 percent of turnover.

Revenue Mobilization for Natural Calamities

Levy of cess was approved on supplies within the State of Kerala (intra-state) at a rate not exceeding 1 percent for a period not exceeding two years, though it is contrary to the idea of a uniform levy structure.

GST Amendment Acts 2018—Key Amendments and Implications

RCM on Supplies from Unregistered Suppliers Reconciled

Earlier, supplies to registered persons from unregistered persons mandated GST under the reverse charge mechanism ("RCM"), adding a significant compliance burden. Now, RCM can only be applied on a specified class of registered persons, receiving specified categories of goods or services. It is expected that the provision may revive reverse charge on works contract service, manpower supply, etc., received from unregistered persons.

GST Registration—Clarifications and Extensions

The former rule of One State–One Registration was superseded with the provision to have multiple registrations in the same state, without any requirement of being separate “business vertical.” Also, a Special Economic Zone ("SEZ") unit/developer is now required to get separately registered, distinct from the registration outside the SEZ.

High Sea Sales and In-bond Transactions

Uncertainty over the GST implications on high sea sales and the supplies made within customs bonded-warehouse was settled when these two transactions were placed in Schedule III of the Central Goods and Services Tax Act, identifying them as neither supply of goods nor supply of services. The confusion revolved around whether GST would be levied on such transactions separately, considering that GST is payable while filing the Bill of Entry. Further, if a person buys goods from a foreign entity and sells them to another foreign entity, without bringing the goods to India, there would be no levy of GST.

GST Tribunal and Central Appellate Authority for Advance Ruling

Union Cabinet, in January, approved the setting up of a national bench of the Goods and Services Tax Appellate Tribunal (“GSTAT”), an expected outcome in line with the decision of the 28th GST council meeting of July 2018.

It also approved the setting up of a centralized Appellate Authority for Advance Ruling (“AAAR”) to decide those issues where there are divergent rulings at the state level. The GSTAT National Bench is the first appellate tribunal under the GST regime, akin to the Central Excise and Service Tax Appellate Tribunal (“CESTAT”) adjudicating disputes under excise, service tax and customs until the arrival of GST. The National Bench will act as a second appellate authority to adjudicate on matters concerning “place of supply,” appeals against which would lie before the Supreme Court.

GSTAT is expected to settle the perils of inconsistency created by the rulings of various Authority of Advance Ruling (“AAR”), which have mostly fallen against the applicant assessees, primarily due to the composition of its members. Though an AAR ruling is binding only on the applicant and the jurisdictional officer, taxpayer experiences have been that the Revenue officials tend to draw inferences and apply such principles to other taxpayers.

Anti-Profiteering Dilemma

Businesses still await the formulation of standard guidelines for compliance with anti-profiteering provisions under the GST regime.

Even after more than 25 orders having been passed by the National Anti-Profiteering Authority (“NAA”), there continues to be inconsistency in its approach in dealing with the cases of alleged profiteering from GST rate cuts. Taking a recent example of Hindustan Unilever, it is evident that the NAA established profiteering solely based on comparable arithmetic data without delving into the nuances of the fundamental legal principles. This could be crippling on businesses.

Planning Points

  • Multiple registrations may increase efficiency in management; however, it may prove to be burdensome from a compliance point of view. Each registration would be identified as a “distinct person” under the law and, as such, transaction between distinct person becomes a “supply” for GST purposes. Businesses need to be mindful of multiple compliance in terms of return filing and account maintenance.
  • Though debate on the high sea sales transaction and in-bond supply have been settled, it is still unclear if it would settle the issues that persisted before such amendments. The trade may approach the authorities for clarity on this aspect as well.
  • Input credit cross-utilization has been rationalized, though businesses may face issues of increased cash outflow despite having enough credit under other heads. This would vary from case to case. It would be ideal to start monitoring such variability and strategize inter-state and intra-state supplies (inward and outward) to maintain a sound balance of credit, which otherwise would result in accumulation.
  • Universal application of RCM on supplies received from unregistered suppliers has been discarded; however, be aware of the notifications on specified supplies to avoid omissions.
  • Upcoming simplified GST return, and additional levies, require several software/accounting changes to be composed, which require immediate attention.
  • Though advance ruling is vital for tax certainty and reduced litigation, hasty decisions to approach the authority without proper examination of factual and legal propositions may lead to vulnerable consequences. Businesses should approach the AARs only in exceptional cases where there is a genuine indecision affecting the business.
  • Businesses need to be mindful (pursuant to a recent Revenue circular) that in case of a delayed GST return filing, liability to pay interest is not only on the outstanding tax liability but also on the ITC balance.

Mukesh Butani is Founder of BMR Legal and Joseph K. Antony is an Associate Lawyer at BMR Legal.

They may be contacted at mukesh.butani@bmrlegal.in and joseph.antony@bmrlegal.in.

The authors would like to thank Surabhi Suri, of BMR Legal, for her help in the compilation of this article.

Views expressed are personal.