The Central Goods and Services Tax (GST) Bill, approved by the Lok Sabha on 30 March, is different when compared to the draft version, the Model GST Law, released months ago.
The key changes are – the exclusion of Jammu and Kashmir from the applicability of Goods and Services Tax (GST), a new definition for works contract, a change in the mechanism of reverse charge and input tax credit reversal.
In an interview with BloombergQuint, Badri Narayanan, partner at law firm Lakshmikumaran & Sridharan, explained the impact of these changes.
Exclusion of Jammu & Kashmir
The Central GST Bill says it will apply to the whole of India, except the state of Jammu and Kashmir. Narayanan said that he expects the exclusion to be temporary and that the state assembly will soon ratify the constitutional amendment to adopt GST. But he also pointed out that there might be some challenges in the interim period.
Badri Narayanan, Partner, Lakshmikumaran & Sridharan The supplies made from the rest of the country to Jammu and Kashmir will be exempt from the GST; in which case, we will again have the same problems regarding reversal of CENVAT credit or GST input tax credit to the extent of any supply to Jammu and Kashmir and those formulas are complicated.
On Friday, Haseeb Drabu, the finance minister of J&K, allayed fears when he said that “J&K is likely to take up GST by May”.
Badri, too, is optimistic. He added that since the J&K finance minister has been engaging with the GST Council, the hope is that the state will be ready for GST implementation with the rest of the country.
Works Contract: New Definition
The Central GST Bill has changed the definition of a ‘works contract’ – an agreement that involves supply of services and goods – to say that only contracts related to immovable property are to be considered as a works contract. The definition in the Model GST law included movable property as well.
Narayanan said that the benefit is that the GST will apply to a long-term works contract and that a portion of the supply on which taxes have been paid under the current indirect tax regime will not be taxed under the new law. He explained that presently, a works contract attracts Value Added Tax, service tax and there is a provision for abatement (tax reduction/benefit) for land.
Badri Narayanan, Partner, Lakshmikumaran & SridharanUnder the new definition, transaction in land will neither be goods or services, which means it needs to be excluded from the value of a works contract. For example, if I do a composite supply of work which includes the land – a development agreement or purchase of under-construction flat – the value of land has to be excluded. Calculating the land value is a complex issue; also, a works contract will have an abatement provision – the rates for both are expected in the rules.
The ‘Reverse Charge’ Change
The Central GST Bill states that a registered person procuring taxable goods or services from an unregistered person will be required to pay tax under a reverse charge basis
An unregistered entity is someone who makes a supply of goods or services exempt from GST, or someone who is below the registration threshold.
Narayanan explained that when an unregistered person makes a supply to a registered person who has an output tax liability the latter has to fulfill the compliance requirement on behalf of the former.
Badri Narayanan, Partner, Lakshmikumaran & Sridharan The registered person will now have to pay the tax, take the credit and discharge the output tax liability. So, it places the burden of compliance on the registered entity. For example, when he receives the invoice, he’ll have to check the nature of services, figure out the applicable rate, pay the tax on reverse charge, ensure he takes credit of it, fulfill the place of supply, time of supply and various other conditions.
This will lead to an increase in compliance costs for a registered entity making it less attractive to deal with an unregistered entity. And so, unregistered entities will be forced to take GST registration, he added.
Input Tax Credit 2.0
The Central GST Bill says where the recipient fails to make payment to the supplier of goods or services within 180 days from the date of issue of invoice, an amount equal to input tax credit availed by the recipient shall be added to his output tax liability, along with interest. Earlier the duration was 90 days and was only applicable to services.
In order to be able to avail credit for input goods or services received, one of the conditions is to pay the supplier, said Narayanan, adding that this is to ensure paper invoices are not filed.
Badri Narayanan, Partner, Lakshmikumaran & Sridharan Now the law allows you six months to be able to make a payment. So you can take credit immediately. But if you fail to pay the supplier in six months, you are required to reverse the credit and in addition pay an interest component. And if and when, after six months, you make the actual payment to the supplier, you’ll be eligible to take the credit of the amount you had originally availed but not the interest. So interest will become a cost in this entire thing.
This is a welcome step, he added, as it will ensure suppliers get paid.
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