GST – A threat or a boost to business?

Ritika Sharma

GST will have a significant impact on diverse businesses and/or transactions. In this article, an attempt has been made to cover the potential GST impact on some corporate transactions including Business    Transfer, Merger and Acquisition, Joint Venture, Transaction pertaining to Securities and Joint Development Agreements. The views expressed by the author herein is limited to routine transactions and is only preliminary. It is therefore advisable that businesses exhibit preparedness and vigilance before undertaking any transaction, so that the GST impact is fruitful and positive.

Background

The implementation of Goods and Services Tax (GST) to subsume the various central and state taxes in India, lately has led to creation of a tax efficient and organized economy. Moreover, GST will mitigate the cascading effect or double taxation in a major way and pave the way for a common national market. Furthermore, it will also facilitate easy administration of taxes because of the transparent nature of the legislation.

Business transfers

We know that business transfers can take place either by a share sale or an asset sale. An asset sale can further take place through either a slump sale or an itemised sale.

The transfer of the whole or a unit of business division was neither taxable under VAT and nor is taxable under GST. This is because the sale of whole business or a unit or an undertaking of a business cannot be equated to sale of moveable goods. Additionally, a notification has also been issued in this respect which exempts services by way of transfer of a going concern, either as whole or a part thereof[1].

Conversely, in case of an itemised sale where the assets (more particularly goods) are being transferred, GST shall be applicable. The rationale is that individual assets being transferred in an asset sale are covered within the ambit of the definition of goods and the specific values of such goods can be determined accordingly.

Transaction in securities   

Notably, ‘securities’ do not fall within the definition of either goods or services and have a distinct definition under GST. Securities have been ascribed the same meaning as provided under Section 2(h) (i) of the Securities Contracts (Regulation) Act, 1956. Any transaction in securities have been explicitly excluded from being taxed either as goods or as services under GST and consequently GST shall not be applicable on transactions namely buy back of shares and share swap.  Having said that, any bank charges, commission, brokerage etc. which may accompany a transaction in securities will be taxable under GST because while such bank charges, brokerage, commission etc. may facilitate the transaction in securities, the exclusion under GST is limited to securities and not to any other supplies made in relation to such securities.

Barter transactions

Under VAT, barter transactions involving exchange of goods were not taxable whereas barter transactions involving exchange of services were taxable. Now with GST, all barter transactions whether involving exchange of goods or services or both are taxable and therefore every transaction of exchange needs to be examined closely.

Illustration:

B exchanges his old cell phone at a store XYZ for a new cell phone.

The important question to be addressed here is the valuation of the barter transaction. It needs to be ascertained whether the taxable amount in the transactions should be the value of the new cell phone or old cell phone.

Liability in case of Merger and Acquisition

In all routine transactions of merger and acquisition, there is no major impact of GST. This is because in routine transactions there is no output tax liability attracted and therefore business shall be able to utilize their input tax credit in the usual manner. Here, based on the concept of the dual GST model, a single entity is split into distinct persons depending upon the number of states in which the entity has its businesses. Therefore, in such a transaction the decision relating to the choice and structure of the transaction whether as a slump sale, amalgamation or an itemised sale becomes critical.

Immoveable Properties

Immoveable properties are excluded from the ambit of goods as defined under GST.

However, the definition of service being inclusive in nature, allows inclusion of immoveable properties as well. Notably however, the sale of land and building (other than under construction flats or units) have been excluded from taxability under GST.

Joint Development Agreements

In a Joint Development Agreement entered between a landowner and a developer there is an exchange of services between a landowner and a developer and vice-versa (JDA). In a JDA the landowner and developer jointly agree to develop the land owned by the landowner into a complex or an agreed number of flats. It is to be noted that for the services provided by the developer to the landowner, the landowner would not make any monetary payment to the developer but only grant development rights concomitant to the land. The developer would then be entitled to develop a complex or an agreed number of flats on such land and be entitled to sell his proportionate undivided share of land, retaining the proceeds from such sale. Thus, JDA is merely a compound version of a simple barter transaction. It is therefore important to ascertain the value which is to be assumed and adopted by the developer in relation to the services provided by the developer to the landowner in accordance with the JDA.

Another important aspect in case of a JDA is to ascertain the point of supply (or the incidence of taxation). This aspect remains a legal quandary – whether the point of supply is where the development rights are received by the developer from the landowner or where the JDA is executed.

Joint Ventures

A joint venture is a business undertaken by two or more persons engaged in a single defined project. The necessary elements of a joint venture[2] includes presence of (a) an express or implied agreement; (b) a common purpose intended to be carried out; (c) shared profits and losses; and (d) each member’s equal voice in controlling the project.

The pivotal question that needs to be addressed at the very outset itself is whether an arrangement, constitutes an “association of persons” or not. To answer this, the concept of association of persons needs to be understood in the light of various judicial pronouncements, and consequently apply the tests laid down in such judicial pronouncements to the case at hand.

Basis these judicial pronouncements[3], a joint venture is where (i) two or more persons get together to form an association, (ii) there is a voluntary combination, (iii) the persons associate for a common purpose or action, with an object to produce profit or gain, (iv) there is a combination in joint enterprise i.e. the persons undertake collective efforts to earn income, (v) there is some scheme of joint or common management i.e. the work being carried out is managed in a joint or collective manner.

Thus, from a taxability perspective, we note that, where (i) a joint venture entity (unincorporated) qualifies as an ‘association of persons’, the joint venture entity shall be treated distinct from its members and consequently any transaction between the joint venture entity and its members shall be taxable under GST; and (ii) a joint venture entity (unincorporated) does not qualify as an ‘association of persons’, the transaction shall be treated as a self-supply and shall not be taxable under GST.

Assessing the way forward

With this paradigm shift in the taxation sphere in India, there will be a far-reaching impact on almost all business operations in the nation. Whilst there are numerous aspects which are yet to be cryptanalyzed, the most regular transactions or businesses will certainly be impacted by GST in some or the other way. Therefore, it is imperative that we attempt to understand how GST can impact the relevant industry or sector, prior to undertaking any transaction(s) pertaining to the same.

[1]  Notification no. 12/2017 dated June 28, 2017, Central Tax (Rate).
[2]  Garner, Ryan. A; Editor-in-chief; Black’s Law Dictionary, West publishing company, 1999, seventh edition, p. 843
[3]  G. Murugesan & Bros v. CIT [1973] 88 ITR 432 (SC); Smt. Jaswant Kaur Sehgal v. CIT [2004] 271 ITR 475 (Gauhati High Court); CIT v Shiv Sagar Estates (AOP) [1993] 201 ITR 953; Linde AG, Linde Engineering Division and Anr. v. DDIT (2014) 361 ITR 1 (Delhi)

 

 

GST : ONE India ONE MARKET

gstAnukriti Ladrecha
Introduction
The introduction of unified gods and services tax (GST) across the nation is the most important indirect tax reform since independence. It has taken almost 16 years from the date of inception of idea, formation of task force, to passage in Parliament. It represents a Herculean, nationwide, multi-party consensus- building exercise which is finally bearing fruits, officially known as The Constitution (One Hundred and twenty second Amendment) Bill, 2014, proposes a national Value added Tax to be implemented in India from 1 April 2017
There are few steps that lie ahead following the Rajya Sabha’s nod to the Constitution Amendment Bill.
Changes made to the bill in Rajya Sabha will have to be approved again by the Lok Sabha (either in a special session, or the winter session).
The Bill needs to be ratified by a majority of the states (15/29). Following this, it will be sent to the President.
After Presidential assent, a GST Council compromising representatives from the states and centre will be set up.
The council will help codify central GST and State GST laws which would be passed by Parliament and State assemblies.
GST Network, the IT backbone of GST, to facilitate online registration, tax payment and return filing would be introduced.
GST Network will create an online portal. The portal will begin migrating data on existing taxpayers under the current VAT/excise/service tax regimes.
All businesses will be given a GST identification number, a 15- digit code comprising their State code and 10 characters PAN.
The GST Network has already validated the PAN of 58 lakhs businesses from the tax department.
Government is already enabling “master trainers”, who would train accountants, lawyers and tax officers on the new system

GST will replace State taxes, Value Added Tax, Central Excise Duty, including additional excise duties, excise duty under medicinal and toilet preparations (Excise Duties) Act, 1955.
Octroi and Entry Tax, Service tax.
Purchase Tax, Additional Customs Duty
Taxes on lottery, betting and gambling, Central Sales Tax levied by the Centre and collected by the States.
State cesses and surcharges Central surcharges and cesses relating to supply of goods and services.
Luxury Tax, Special Additional and Duty of Customs.
Entertainment tax, other than the tax levied by the local bodies.

Major benefits of GST
It addresses a serious impediment to our competitiveness. Without the GST, there are multiple points of taxation and multiple jurisdictions. We also have an imperfect system of offsetting credits on taxes paid on inputs, leading to higher costs. Further there is cascading of taxes- that is tax on tax. Interstate commerce has been hampered due to dead weight burden on Central sales tax and entry tax, which have no offsets. All this will go once the GST is in place. It will enhance the ease of doing business, and make our producers more competitive against imports.

GST will increase the resources available for poverty alleviation and development
Indirectly: tax base will rise
Directly: the resources of poorest state: U.P., Bihar, M.P., who happens to be large consumers, will increase substantially.

The adoption of the GST is an iconic example of what PM Narendra Modi has called “cooperative federalism”. It represents a national consensus; an outcome of grand bargain stuck together by 29 States and 7 Union Territories with the Central Government. The States agreed to give up their right to impose sales tax on goods (VAT), and the centre gave up its right to impose excise and service tax. In exchange they will each get a share of unified GST collected nationally. The anticipated additional gains in efficiency, competitiveness and overall tax collections are what drove this bargain.

GST will facilitate ‘Make in India’ by making one India.
Curently:
CST on interstate sales of Goods
Numerous intra state taxes
Extensive nature of countervailing duty exemptions that favours import over domestic production.

Once the GST is in its place, it means a unified un-fragmented national market for goods and services, accessible to the smallest entrepreneur. Companies need not maintain stocks depots to avoid paying interstate taxes. This will free up some capital. All this will add to demand, and also efficiency. The National Council for Applied Economic Research and others have estimated that national GDP growth can go up by one percentage point on a sustained basis.

GST would improve even substantially tax Governance in 2 ways:
The first relates to the self- policing incentives inherent to a value added tax. To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in value added/ tax chain.
The second relates to the dual monitoring structure of the GST, one by State and one by Centre.

Because the structure of claiming input tax credit is linked to having proof of taxes paid at an earlier stage in the value chain, this creates interlocking incentives for compliance between vendor and customer. No more questions from a vendor “would you like that with receipt or without receipt?” because of this inherent incentive, the total taxes paid, and hence collected, may go up significantly. This provides buoyancy to the GST. In fact a significant part of the black economy will enter the tax-paid economy.

Boost to investment have been documented in the report on the Revenue Neutral Rate that was submitted in December last year

The fewest flaws at inception
First is the question of uniform GST rates. An early report of finance minister from 2003 mentioned a rate of 12% but over the years this rate drifted higher and now is 18%. The empowered committee of finance minister uses a concept called “Revenue Neutral Rate”. It is that uniform rate which when applied will leave all states with the same revenue as before. So no state should lose out by signing up to the GST. But this approach is faulty, since unless we try it for a year or more we won’t be able to gauge the buoyancy of the GST. In trying to assuage the fears of the states, the calculation of the RNR has been loaded by every possible existing rate. This has caused the RNR to steadily escalate upward. But approach is to keep the GST rate low initially and promise to fully reimburse loosing state by the end of the year.

The report urged, GST be comprehensive, in its coverage, that exemptions from the GST be limited to a few commodities that catered to clear social benefits and that most commodities be taxed at the standard rate.
Another issue is that GST is an indirect tax, by its nature, indirect tax is regressive because they affect the poor more than the rich. India’s ratio of indirect to direct tax collection is 65:35, which is exactly the opposite of the norm in most developed countries. India’s ratio of direct tax to GDP is one of the lowest in the world and is badly needs to expand the direct tax net. Unless s rate cap I adopted, the GST rate could easily drift higher further hurting India’s income inequality.

It is far better to start and allow the process of endogenous change to unfold over time than to wait Gogot-like for the best time and best design before it is introduced.

Tax litigation is another issue. Approximately Rs 1.5 lakh crore is stuck in litigation related to Central excise and service taxes. On the other hand the State level VAT is administered in a way that empowers tax officials to dispose of cases quickly. Disputes involving Central taxes go through an appeal and tribunal processes and a drag on years. It is important that GST approach leans towards the more efficient State-level model
GST-type taxes in large, federal system are either overly centralized, depriving the sub-federal levels of fiscal autonomy. (Australia, Germany, Austria.) Where there is dual structure they are either administered independently creating too many differences in tax bases and rates that weaken compliance and make inter-state transactions difficult to tax.( Brazil, Russia, Argentina). Where administered with a modicum of coordination which minimizes these disadvantages ( Canada and India), but does not do away with.

The major problem comes in implementing the GST is the governance within the GST Council. It is de facto council of states, along with representatives from the Union Finance Ministry. It seems that one state will get on vote irrespective of its size. This seems unfair. An economically larger states, contributing a bigger chunk of the GST Pie, should have a greater say similarly the special needs of smaller states should also be headed
The Indian GST will be a leap forward in creating a much clearer dual VAT which would minimize the disadvantages of completely independent and central system

Exceptions in the form of permissible additional excise taxes on special good ( Petroleum and Tobacco) for centre, a petroleum and alcohol for states will provide the requisite fiscal autonomy to states.
Finally the issue of State’s autonomy. India will be uniquely large democracy that adopts a nationwide GST with virtually no taxing powers to state. In a situation where state want to undertake special spending programmes to respond to State specific situation, such as disaster?
In 1982, the CM of Tamil Naidu upgraded a midday meal scheme which his opponents criticized as being an empty promise and fiscally reckless. In response he raised taxes on goods (not possible in GST regime) and made the programme so successful that it is praised to this day. Similarly in the drought crises year of 1972, the Maharashtra government imposed a profession tax on city dwellers (not possible under GST) to fund an innovative programme called the rural “ Employment Guarantee Scheme”, which 3 decades later was acknowledged nationally as the inspiration behind the National Rural Employment Guarantee Act. The GST regime should remain sympathetic to this issue of state’s fiscal autonomy. The local bodies are not even discussed
The GST is obviously not a panacea for all ills of India’s economy it is nevertheless a revolutionary and long pending reform. It promises economic growth and jobs, better efficiency and ease of doing business, and higher tax collection.