GST which is a tax on goods & services, is expected to be rolled out from April 01, 2017. It subsumes 17 different Indirect Taxes, both at Central and State level. Basic Custom Duty on import of goods shall continue. However, there will be a levy of IGST in lieu of extant Countervailing Duty (CVD) and Special Additional Duty of Customs (SAD). There will be 3 components of GST, Central GST, State GST and IGST. While both Central & State GST will be levied on all supplies of goods and services within a State, IGST will be levied on interstate supply of goods and services and import as above.
In GST regime there will be complete pass through of all components of GST as above, right from the manufacture stage to the point of last mile sale. However, in the current Indirect tax regime, there are many stranded taxes on Inputs, Input Services and Capital goods, which are not creditable against the output tax. Some of the examples are given below:
1. Service Tax incurred for clearance of products manufactured upto the place of removal,is allowed to be credited against the Excise Duty on finished goods. However, the same is stranded, i.e. no credit is available in case products in question are purchased from others on trading account.
2. Octroi / Cess / Entry Tax on entry of goods from one local area to another local area in a state are not creditable to output tax.
3. 2% CST on inter-state purchase of goods by manufacturers / traders is not available for credit against VAT
4. In some States, VAT / Sales Tax on fuels and office equipment / capital goods is either not available for credit or restricted for credit against Output VAT.
5. Service tax on rent on immovable property, i.e. lease rent or rent on commercial premises is not available for credit against Output VAT/CST to traders.
6. Where the products are purchased from traders, Excise duty is merged into the price and only applicable VAT/CST is levied thereon. Since GST replaces both Excise Duty as well as VAT, Excise duty element included in price needs to be ascertained and deducted from the price, so as to make GST payment to the suppliers.
7. Irrecoverable taxes, like Turnover tax or Additional Sales tax not recoverable from buyers is also a stranded tax in the current tax regime.
Presently,in case of Contracts/POs issued by PSUs generally,a statutory variation clause in the General Terms & Conditions of the Tender is included. It allows variation in the rates of the taxes quoted and any new tax enacted after the date of opening of tender. However, the variation in taxes are restricted to only output taxes. There is no mechanism to evaluate the tender based on Input Taxes or apply the statutory valuation clause to Input Taxes, on the premise that the Input Taxes which are allowed to be credited against Output Taxes are not forming part of the base price and the taxes which are stranded being not creditable against Output price are forming part of the base price quoted by the Suppliers / Contractors.
Therefore, in respect of all Purchase Orders which are going beyond the date on which GST is implemented, Owner Company is bound to pay new tax, i.e. GST, without Suppliers / Contractors passing on the benefits of Input tax available to them in GST regime. There could also be the possibility of paying taxes twice, i.e. Excise duty included in the price and the new GST rate which also subsumes Excise duty. The same is applicable to tenders being floated now and execution of the job / supply falling in the period after the date of implementation of the GST.
View above, it is suggested that in case of tenders being floated , or if already floated it is either at pre-bid stage or before price bid opening date, following additional details should be asked in the price-bid and should form part of financial evaluation of tender :
A. Bidder to quote all taxes on Inputs / Input Services and Capital goods for which no credit is available against Output taxes and is included in the base price with following details :
1. Type of tax, i.e. Octroi, Entry Tax, Cess, Service Tax, etc.
2. Rate of tax
3. Base value on which tax is calculated.
4. Tax amount included in the base price.
B. In case of Bidder not being a manufacturer or first stage / second stage dealer and not giving any Cenvat Invoice under Central Excise Act, the amount of Excise duty included in the base price.
Wherever Purchase Orders are already placed on successful bidders and the execution of the job / supply will go beyond the date of GST implementation, it is suggested that all Purchase Orders above the threshold limit should be reviewed and negotiated / rationalized with the Supplier / Contractor only from the stand point view of any stranded taxes included in the base price.