Jaya Krishna Kapoor

The Government of India with the 101th Constitutional amendment has brought a pathbreaking tax reform, Goods and Service Tax (GST), which has simplified the erstwhile indirect tax regime which was mired into multi layered taxes levied by both Centre and State Government and is a cure for all ills of existing indirect tax regime.

GST as the name suggests, is levied on the supply of goods and services by one party to another subject to certain conditions. Every supplier of goods and/ or services is required to obtain registration in the State/UT from where he    makes the taxable supply. It may be noted, that a person is required to get registered under GST if his aggregate turnover exceeds ` 20 lakh during a FY.

The law makers, in order to provide relief to small businesses making intra-State supplies, introduced a simpler method of paying taxes and accounting thereof, known as Composition Levy. The provision related to composition levy is governed by Section 10 of the CGST Act, 2017 (“Act”). The said section provides for an option to the ‘Registered person’ whose ‘aggregate turnover’ during preceding FY does not exceed Rs 1.5 crore however, in case of North-Eastern states and Himachal Pradesh, the limit is now Rs 75 lac. Turnover of all businesses with same PAN has to be added up to calculate turnover for the purpose of composition scheme. Only Manufacturers of goods, Dealers, and Restaurants (not serving alcohol) can opt for composition scheme. Further, the benefit of composition scheme will be available only when all the registered entities under a single Permanent Account Number opts for such scheme. Central Government by way of Notification has prescribed rates in respect of the composition scheme:-

  • Manufacturer: 1% (0.5%both CGST and SGST)
  • Service provided by Restaurants as specified under paragraph 6(b) of Schedule II, (other than alcoholic liquor for human consumption) are leviable at the rate of 5%(2.5% each for CGST and SGST)

The registered person opting for composition levy shall pay tax under sub-section (3) or subsection (4) of section 9 on inward supply of goods or services or both. This restriction constrains numerous small suppliers/vendors from availing benefit of composition scheme.

The Composition scheme can be availed by the following categories of registered persons:

  • Person not engaged in the supply of service other than supplies referred to in clause (b) of paragraph 6 of Schedule II
  • Person not engaged in making any supply of goods which are not leviable to tax under GST Laws.
  • Person not engaged in making any inter-state outward supplies of goods.
  • The registered person not engaged in making any supply of goods through an electronic commerce operator and the taxable person should not be a manufacturer of such goods as may be notified by the Government on the recommendations of the Council

The person registered under composition scheme is neither permitted to collect any tax from the recipient of supplies made by him nor can he avail any credit of input tax paid. Any registered person who has availed  input tax credit and also opts to pay tax under Composition Scheme, then, such person shall be required to pay an amount equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option. However, if after such payment any balance of input tax credit is left lying in his electronic credit ledger, such balance shall lapse. It should be noted that in this case aggregate turnover shall not be leviable to composition rate only turnover of taxable supplies shall be leviable to composition levy.

The conditions and restrictions for composition levy as provided are as follows: (i) The person should neither be a casual taxable person nor a non-resident taxable person (ii) The goods held in stock on the appointed day had not been purchased in the course of inter-State trade or commerce or imported from a place outside India or received from his branch situated outside the State or from his agent or principal outside the State, (iii) the goods held in stock by him have not been purchased from an unregistered person and where purchased, he pays the tax under reverse charge basis in compliance of sub-section (4) of section 9 of the Act

There are various Scenarios under which a taxpayer can opt for the scheme by filing the requisite forms on the GSTN common portal. Further, the persons paying tax under composition scheme are required to pay tax on quarterly basis and also required to file a quarterly return in FORM GSTR-4 by the 18th of the month following the end of the quarter instead of any statement of outward or inward supplies. Registered person opting for composition levy have to file Annual Return in FORM GSTR-9A.

In relation to the invoice to be issued by the composition dealer, it may be highlighted that a registered person opting for composition scheme shall not issue a tax invoice. He shall issue a BILL OF SUPPLY containing various details as prescribed under the law and the person shall mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him.

In my opinion, the benefit of the Composition scheme shall be forwarded towards the small businesses also, which undertake interstate sale, inorder to provide relief such traders who are facing the wreath of the cumbersome process and the compliance cost thereof only due to the interstate supplies even though they fall well within the ambit of the criteria prescribed in the law for the purpose of composition scheme.

Anti Profiteering Law

Our country being highly price sensitive market, necessarily requires checking whether implementation of new taxation regime will lead to inflationary conditions or vice versa. It may be noted that the major cause of this inflation is that the effective rate of tax at the consumer level gets changed immediately at the time of implementation, whereas industry takes time to pass on benefits accruing to it to the consumer level because of many reasons such as unawareness about benefits available, lack of clarity on interpretational issues etc. At times it may be intentional in monopolistic market whereby industry wants to increase its profit by maintaining its selling price and pocketing whole of the benefits. It is evident form that if the prices of the products are not adjusted for the benefits accrued to the supplier, the consumers are going to pay higher price for goods and services and situation will lead to inflationary conditions.

The GST law contains a unique provision on anti-profiteering measure as a deterrent for trade and industry to enjoy unjust enrichment in terms of profit arising out of implementation of Goods and Services Tax in India. That is the anti-profiteering measure would obligate businesses to pass on the cost benefit arising out of GST implementation to their customers.

The legal provisions for Anti Profiteering are contained in Sec. 171 of the CGST Act which clearly prescribes that any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. Further the Central Government shall examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a price reduction The first part Sec. 171(1) casts responsibility to pass on benefit of GST to recipient for following two aspects:

a. For any rate reduction in new tax regime:.

b. For any benefit of Input tax Credit:

It is evident that adequate reduction in prices is essential for success of biggest indirect tax reform of the country. Accordingly, it is need of the hour that industry suomoto reduces prices of goods and services. However, if it doesn’t do so, then legal provisions are there in place to take care of such situations. Further, sec. 140 of CGST Act allows taking credit of eligible duties in respect of inputs held in Stock and inputs contained in semi-finished or finished goods held in stock, for certain classes of registered persons where such credit was not reflected in returns of respective law. By allowing carry forward of such credit to the registered person the government has ensured that such stock, when supplied in GST regime, will not suffer double burden of taxes and relevant benefit are passed to the registered person.

Keeping in view the possibility that there may be instances where the retail sale price of a pre-packaged commodity is required to be changed, Ministry for Consumer Affairs, Food & Public Distribution has vide Circular allowed the manufacturers or packers or importers of prepackaged commodities to declare the change retail sale price (MRP) on the unsold stock manufactured/ packed/ imported prior to 1st July, 2017 after inclusion of the increased amount of tax due to GST if any, in addition to the existing retail sale price, for three months w.e.f. 1st July 2017 to 30th September, 2017 which should not be done mechanically but after factoring in and taking into consideration extra availability of input tax credit under GST (including deemed credit available to traders under proviso to subsection (3) of section 140 of the CGST Act,2017).. Declaration of the changed retail sale price (MRP) shall be made by way of stamping or putting sticker or online printing, as the case may be. It is also clarified that ‘for reducing the MRP, a sticker with the revised lower MRP may be affixed and the same shall not cover the MRP declaration made by the manufacturer or the packer, as the case may be, on the label of the package’. Further, since the roll out of the tax regime, the National Anti-profiteering Authority has pronounced its judgments on this issue. Accordingly, one such case was Kumar Gandharv vs. KRBL Ltd., reported in 2018 (5) TMI 760 – National Anti-Profiteering Authority wherein an application was filed before the National Anti-Profiteering Authority on the grounds that the benefit of reduced rate of tax was not passed on to the consumers of ‘India Gate Basmati Rice’ since, there is an increase in MRP on the advent of GST which may have led to increase in the margin of the Respondent. The application was examined by the Standing Committee and it was observed that the GST tax rate applicable is 5% which was 0% in pre-GST regime. The input tax credit was available to the Respondent in the range of 2.69% to 3% as a percentage of value of taxable supplies and post implementation of GST the purchase price of paddy is also increased. Upon such observations, the Authority dismissed the application on the grounds that the increase in MRP of the product is attributable to the increase in rate of tax and increase in purchase price of paddy and is not on account of non-passing of the GST benefit to the consumers.

The law makers although have to a great extent tried to advance the benefit, however  practically it is very difficult to establish one to one correlation between ITC on inward supplies and Tax payable on outward supplies. So ultimately it comes on margins or prices of supply. How the margins and prices are to be checked is a subjective matter. Further apart from benefits in terms of better credit chain, the business organizations will have to incur huge cost for implementation of GST on account of installation of new IT systems, restructuring of operations, Compliances cost etc and in such a case there are various queries that arise which include that whether, these organisation can set off its gains in terms of better credit flow with its increased cost, before passing of the same to consumer. Further, it may be noted that prices and margins are not solely dependent on taxes. Rather they are only a component of price like any other components. Price determination of any product depends on nature of product and various internal as well as external factors. If prices or margins are being freezed, on account of Anti Profiteering Measures, then it may lead to disastrous situation in many industries.

From consumers’ point of view Anti Profiteering Provision is necessarily required to be there so as to ensure deserving benefit is passed on to them. At the same time, looking at the issues and challenges before industry and the efforts involved in reworking of cost sheet and re-fixing of prices, detailed rules, covering all aspects including computation mechanism, documents to be maintained etc, should be prescribed so that no discretionary power is left in hands of any authority which in turn can cause harassment of the tax payer.

ISSUES IN VALUATION UNDER GST

Currently, GST will be charged on the ‘transaction value’.“Transaction value” has been explained as the price actually paid or payable for the supply of goods and/or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Further, the Rules for determination of value of supply are prescribed under Rule 27 to 35 under CGST Rules, 2017 which provide in detail the method of valuation under various scenarios.

However, there are some practical issues that arise in the course of valuation and some of them are discussed as follows:

(i) GST is payable when the developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter).

On valuation part on such type of transactions no clear calculations has not been provided from the government.

(ii) The job worker has to issue an invoice for the value of his services i.e. for job work charges. As per section 15(2)(b) of the CGST Act, any amount that the supplier is liable to pay in relation to the supply but which has been incurred by the recipient will form part of the valuation for that supply, if it has not been included in the price for such supply. Accordingly, value of any moulds and dies, tools etc. provided by the principal to the job worker may not be included in the value of the supply of job work services by the job worker. The clarification regarding factoring of the value of moulds and dies and tools etc.in the value of job work charges is debatable and is likely to be challenged by the industry

Accordingly, despite all the efforts made by the government to be prepared in the most efficient manner for the frictionless implementation of GST, some issues still arise during the course which the GST Council tries to resolve.

Accordingly, with each passing day, it is expected that GST will result greater simplification, tax compliance, and bring buoyancy to the Government Revenue.

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