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First Real Glimpse Inside GST

Published on Fri, Nov 06,2015 | 22:24, Updated at Mon, Nov 09 at 23:31Source : CNBC-TV18 |   Watch Video :

The Constitutional Amendment Bill for GST has not yet received clear passage. The draft GST Bill is nowhere in sight either. But over the last month we did get the first glimpse of what India’s GST architecture will look like. This week on The Firm, Menaka Doshi of CNBC-TV18 is joined by GST expert & EY Partner Satya Poddar and two industry representatives - MV Narsimham of Dr Reddy’s and SM Kulkarni of Mahindra & Mahindra to talk about how the GST plan is shaping up and whether there’s a chance that India will make the April 2016 deadline?
 
Doshi: What do you make of the four business process papers that have finally been put out in public? This if I understand it correctly is the first time that the empowered committee is now consulting with the industry to get its feedback on what the main architecture of goods and services tax (GST) will look like, how important are these four discussion papers?
 
Poddar: These documents are very fundamental because the entire GST administration and compliance architecture depends upon these four documents which have been made public by the government. Obviously there is a lot of information in these documents which public is still trying to digest and the overall comment I can make is that while the GST design is not very clear, clean as reflected in the constitutional bill, so what was the GST designed and implemented, its success now depends very critically upon the four compliance procedures of which the documents have been released.
 
Doshi: Some of the tax consultants I was speaking to were saying, but this is just 20 percent of what the full GST architecture is going to look like so it is not very important, far more important is what the draft GST bill ought to look like and that is not yet in the public domain.
 
Kulkarni: I agree with you, the business decisions on certain areas, we can take only when the draft act and rules are available but the point is that the most important process is of compliance and that compliance has come up. Now in most of the states or centre, there is an e-compliance, returns, registration payments but now for the first time the government is opening out to the industry what is a correct plan for this compliance importantly registration returns, refund and so on. So this is a very positive move.
 
Doshi: Give us a comment on the import of these four discussion papers been put out in the public domain?
 
Narsimham: These reports are intend to bring certain efficiencies, which will lead to the ease of doing business and I also feel that align the objectives of Make In India. So certainly we have to gear up for the compliance requirements...
 
Doshi: I want to examine whether these reports do that. I am going to start first with the discussion paper on registration. What I picked up from all my conversations, the most interesting feature in this is that a company will have to register in every state that it has a business presence. What I want from you very quickly are the challenges that you see in the discussion paper put out?
 
Poddar: The most fundamental controversial part of the GST registration document is that it requires registration of a given entity in each state where they carry on business.
 
The moment they register in a given state, for all practical purposes that registration activity becomes classified as a separate legal entity. This basically fragments the accounting and compliance procedures for given legal entity to multiple states. This is worse than what we have today because today for the central taxes there is a single registration for a given legal entity. Now, that single administration will be decomposed into each of the states and there will be no opportunity for pooling of excess credits and excess taxes in two different registration numbers in the same legal entity, which is a very serious retrograde feature of these registration processes.
 
Kulkarni: I would like to add here. I am going through the process, I am involved in making of this. The states did not agree to that if there is a single registration even for central. So that is a final decision they had to make that each state will have to have separate registration numbers.
 
Doshi: Satya Poddar is pointing out that that is going to be a difficult for companies.
 
Kulkarni: Now we have to accept it because states and centre for the first time is coming together, some compromise here and there they have to make and states require these as their own revenue. So they have made this condition and finally they are accepted. So I think we have to go along with this now.
 
Poddar: The point I would like to make is that I understand the state's requirement but that is legacy thinking because they are used to physical control on the taxpayer. Under GST type tax, you don’t have to have a registration of each dealer in each state, all you need is that they should be able to monitor the compliance by given registered dealer regardless of where it is registered.
 
Narsimham: Here I would like to bring in one positive aspect. All the GST registrations are going to be linked with the PAN, I see this is a very welcome step as far as the registration process is concerned.
 
Doshi: Do you think that will help mitigate the fact that you will have to register in every state that you have a business process in as Satya Poddar has just pointed out?
 
Narsimham: No, that is going to lead as certain commercial processes.
 
Doshi: Besides the registration in every state, are there any other challenges that you see in that registration discussion paper that you would like to highlight for our viewers that companies will have to start gearing up for?
 
Poddar: Companies now have to segment their financial accounts statewise. So given legal entity whether it is Mahindra and Mahindra (M&M) or Dr Reddy's Laboratories (DRL), now they have to prepare their financial statements on the basis of each state where they are registered. That itself is a herculean task.
 
The GST registration or the return filing procedures required that there will be reconciliation of the taxes, sales and purchases in each state with the sales and purchases and all other expenses reported in the financial statements. More importantly, if you have a situation where you have excess credit in one state's registration number and excess taxes to pay in the second state, you cannot pool the two together. So this is going to give rise to a very significant mismatch of the positive and negative balances, which have put a cash flow burden because government would like to collect the positive taxes, which will not be offset by the negative balances available in the second registration number.
 
Doshi: What do you make either of what Satya Poddar has brought up or other concerns? For instance, while you say that accept statewise registration is fate accompli, you yourself have pointed out to me that in each case and each GST application form, you have about 70 fields that need to be filled and if you miss even one field the registration will be cancelled?
 
Kulkarni: If you have already VAT or service tax registered dealer in the state but you have to fill the form though you do not have to submit the physical documents but even if there is a one area -- there are 70 fields so there it will be cumbersome and then they may reject your application not in one state, in all states will reject it. Such type of condition should not be there, some important mandatory thing should be proper others you can revise afterwards. That option should be given.
 
Narsimham: I would like to bring one point here that as per the proposal rules, CENVAT credit cannot be taken if a purchase is made from the blocklisted vendour. As per my view, this is very improper when buyer made a purchase with a good faith CENVAT should be allowed.
 
Doshi: In the interest of time and since we cannot resolve any of these challenges here, I am going to move on to the next discussion paper, which is the one on payment. What would you highlight as the key things that need to change?
 
Poddar: The process we have designed is pretty robust and it is a standard system that is prevailing today. However, my understanding is that there is a friction going on taking place between the centre and the state. They have proposed today that all the payments will flow through this so called the Kuber system that Reserve Bank of India (RBI) maintains, the states are not agreeable I am told to the use of the Kuber system, they want a decentralised money tracking system, which is other than Kuber system. It should not have any impact on the taxpayers but it is still point of friction.
 
Doshi: You had a procedural issue here, which is the preparation of multiple chalans as you have pointed out for different states, you would rather have a single chalan for multiple states?
 
Narsimham: Here I would like to say that under the payment process, one good thing is that all the payments can be made through credit card, debit card, I feel this is a welcome step. Here I have two concerns, one is as per the existing indirect tax regime, all export incentives can be used for the duty payment whereas in the proposed rule, this portion is not there, a suitable amendment is required to use the export incentives schemes like MEIS and the second one is all GST reverse charge payments should be made through cash. I feel this should be allowed to adjust the input tax credit.
 
Kulkarni: One thing I wanted to add is that no mention of payment under protest in the draft because many payments we make under draft when we go for appeal for litigations. So that should also have some place. So officially it will be recorded that it is under protest, we are not paying voluntarily.
 
Doshi: Now let me come to the stickiest issue of refunds and I know that this is where a lot of the concerns are. You had a long list of concerns when it came to refunds especially with a disallowment of refunds automatically or in cases where there is an inventory build up, can you elaborate for us where you see some of the weaknesses in that discussion paper?
 
Poddar: The most crucial feature of a GST type tax which can make it an angel or a devil is availability of imput tax credits. Under GST type tax frequently input tax credit claims can be more than output taxes payable. In most modern jurisdictions, there is a prompt refund of any excess input tax credits. Take the example of Canada, Australia, New Zealand, within four weeks in fact in some cases in Canada, its within 14 days excess input tax credits are refunded and the refund is delayed beyond 14 days will get interest at the market rate of interest.
 
What has been proposed in India is continuation of the legacy system that the states have today. For example, under the state VAT today, there is no refund of tax on account of capital or inventory or any other purpose, only refunds that provide are for that spot. In the GST law, the same policies have been incorporated. There will be no refund of tax on account of inventory build up, no refund of tax on account of capital. Now a tax credit delayed because of lack of refund is effectively tax credit denied. If you deny the tax credit, it makes a benign tax system perhaps one of the best systems into one of the worst. If you think of the example of turnover tax (TOT), a turnover tax is a GST without any input tax credit. Worldwide countries have abolished the TOT. The last time any respectable TOT was introduced was 1954. In fact the VAT was introduced in 1954 to replace the TOT by the VAT. Under the system that has been designed, first of all, there will be no refund of input taxes if the inputs are going in to production of petroleum, electricity, real property or alcohol and spirits. In addition, is many other exemptions again any inputs acquired for making an exempt supply, no input tax credit is allowed. So the whole system is designed to protect the interest of the governments, continue the legacy system and they have forgotten the interest of the taxpayers.
 
Doshi: Do you feel that this portion is most debilitating?
 
Kulkarni: Yes very much because in the VAT regime or in the central government regime, we are finding it very difficult. Though there are electronic processes,  still the approvals, approvals are the most important factors where years together they don’t pay it. So if it has to be out of ten, if 8 are the regular ones, they should give some two or some specific they should hold approval but for eight they should okay it -- automatically refunds otherwise this system will not work.
 
Doshi: What happens if you are using an input that is exempted as Satya Poddar pointed out?
 
Kulkarni: That is again problem, all negative list items, petroleum, it is a cost to us.
 
Narsimham: Whatever points read by Satya Poddar and SM Kulkarni, I completely agree. Apart from that I would like to bring one more point, here submission of BRC. I feel that this is going to be very cumbersome. As far as existing excise goes, a refund application can be submitted to the excise authorities and refund can be obtained within a specific time period whereas as per the proposed rules, for every refund application, the BRC is a mandatory condition. So this will lead to the funds blockage and resulting into the higher working capital and additional interest cost burden on the assesses.  A suitable amendment should be brought in as far as this process is concerned or the existing rules can be continued without insisting the BRC.
 
Doshi: Let us move on to the last discussion paper which is on returns and ask you all very quickly to contribute what you think your key concerns are. On the returns front, do you have many issues here?
 
Kulkarni: Return funds, the important thing is that of the tax credit system which they have not come out clearly very elaborately so far because all this is connected with your IT support and if they come out with certain clarification or some issues with regard to taking the input tax credits under GST, it will be very useful because that will be the most critical part of it otherwise the things are okay that way.
 
Doshi: What are your thoughts on returns?
 
Narsimham: Here also there are several returns almost eight returns are prescribed. I feel a simplification is required here otherwise this will lead to the huge manual work and cumbersome processes.
 
Doshi: I am going to ask you for your thoughts on returns but what I am also going to do is to ask you to broaden that comment into how you assess this glimpse of GST architecture that we have finally been able to get and when you combine that with what you expect to see in the draft GST bill, what kind of GST will India be bringing about?
 
Poddar: As far as the tax returns are concerned, the most crucial feature of the tax return filing is that they are requiring pre-validation, almost cross verification of input tax credit invoices and this was a conscious decision taken by Nandan Nilekani that the biggest, the most critical feature of the foundation for the creation of this institution of GSTN is proper validation because all the frauds that take place abroad under GST type tax are based on false claims of input tax credit based on false invoices. The system relies upon cross verification between the buyer and the seller that a particular purchase invoice for which an input tax credit is being claimed is properly reported as the taxable sale by the vendor.
 
So this is a very good feature at the same time, it makes a system somewhat cumbersome and I am personally of the view that it is worthwhile to pay the price of a cumbersome system provided the complexity or the cumbersome nature is needed to protect the integrity and stability of the tax system overtime. The main problem is that they are designing such a cumbersome and robust system but they are not giving the benefit of that cumbersome system by giving prompt refunds of the tax to the taxpayers because only reason for doing cross verification of input invoices is so that the refunds can be processed very promptly because once the invoices are processed and verified, why should the refund be held back.
 
The second concept is that overall these are still in discussion documents and my understanding is that the centre is very sympathetic to the taxpayers but the states have been very adamant in essentially carrying over their legacy system. Most fundamental feature of a good tax administration in a modern jurisdiction is that you require control of information, reporting of the sales and purchases of the dealers and not physical controls on the dealers themselves.
 
Doshi: If I may conclude for you, you sound fairly unhappy if I may say so or dissatisfied with these four discussion papers. God forbid, we have a revenue neutral rate of more than 20 percent and a longer exempt or negative list and you are going to be fairly critical of this GST design?
 
Poddar: To be honest with you, I still look at these documents as a consultation documents and I am hoping that there is still an opportunity for improving these.
 
Kulkarni: I think after a long time, everybody is showing the positiveness. Government is also looking at it. So as an industry person, I want even if it is a VAT plus, not the complete GST, it should come because many of the problems will be solved.
 
Doshi: You don’t mind the logistical issues and all the other issues we have discussed today?
 
Kulkarni: All the processes we have seen over the years whether excise, VAT, they get improved upon but if you want to make the best thing at the first time, it will not happen.
 
Doshi: But if you had all this at the revenue neutral rate of 26.7 percent?
 
Kulkarni: Yes.
 
Doshi: You would be okay with it?
 
Kulkarni: Not 27, 24 is okay.
 
Doshi: That is what the empowered committee had suggested, the government has said that they will look at something sub 20?
 
Kulkarni: We will have some other debate on the rates.
 
Doshi: Is this effort going to be worth it, is GST going to be worth it if it comes in this design?
 
Narsimham: No. One point I would like to make is if the rate is beyond 20 percent. I feel that it is going to lead to the a lot of cash outflows for the companies and one more point I want to bring here that one percent additional tax on the stock transfers will lead to the additional impact on the assesses. As far as pharmaceutical industry is concerned, I would like to bring one -- today as far as the existing loss, there is inverted duty structure, a higher duty for the bulk drugs and formulations, this is leading to the accumulation of the CENVAT credits. So here either the rates have to be harmonised or a simple process to be brought into get the refund quickly.
 
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