The entire nation is looking at the implementation of GST as a biggest tax reform in India since the liberalization in the Year 1991. GST aims at bringing uniformity in the way the Goods and Services will be taxed by way of a common levy of tax, for Goods as well as Services.With the concept introducing a unified tax regime, it is expected that cascading effect of taxes will be reduced and thereby reducing the cost of Goods and Services. By now, GST is known as “One Nation, One Tax” in its popular sense and entire India will be looked at as a single market place.
At present, there are different levy of taxes for Goods and Services respectively by different Governments. The legislations dealing with VAT, Excise and Service Tax are independent of each other and a transaction is often subject to both VAT and Service Tax or Service Tax and Excise due to the lack of clarity in the Taxing Statutes. In the existing tax regime, a lot of time and efforts are being spent in litigating whether a particular transaction is a transaction in Goods or Service due to a very simple fact Goods attract levy of VAT whereas Services attract levy of Service Tax and the Governments which levy VAT and Service Tax are different. It’s obvious thatevery Government will pursue for its share of revenue on a particular transaction and that a conservative tax payer would not wish to fight with both Governments and accepts the proposition of the levy of tax by the Centre as well as the State on the same transaction which adds to the cost of such transaction.
With GST being implemented, it is well known that a common levy of Tax on Goods and Services will be applicable. This is expectedat least to ensure that the dispute of whether it is Goods or Services will not exist anymore. It would become redundant to fight for classification of Goods V/s Services since despite the classification, a tax payer will still be paying GST only. However, the following factors under Model GST law still discriminates between Goods and Services and it becomes very important that a transaction is rightly classified as Goods or Service:
The Point of Taxation under Model GST law for Goods and Services are different. The time at which the liability to pay GST crystalizes in respect of Goods can be different to that of a Service. The impact of timing difference of Goods V/s Servicecan be understood from the below example:
Supply of Food as part of a Service is deemed to be a “Supply of Service” under the Model GST Law. At the same time, Supply of Goods by Unincorporated Association or Body of Individuals to its members is deemed as “Supply of Goods”. Under that circumstances, a Club (which can be said as Unincorporated Association) is providing food to its members and it is the last day of the month, say April. Due to the relationship with the members, let us assume that the club raises invoice for the food supplied, with a description that “charges for foods supplied on 30th April”, say after 15 days i.e in May. The club has wrongly classified the said transaction as “Supply of Service” going by the deeming fiction under Model GST law without the knowledge of the fact that any supply of goods by a club to its members will be deemed as “Supply of Goods”.
The event of removal of goods or making available the goods is the first event followed by raising of the invoice which is second event. Since the club is under presumption that is supply of service, it will consider the payment of GST on the above transaction for the month of May since the date of raising the invoice is May. Whereas, as per the Model GST law the above transaction is supply of goods and the event of removal of goods for supply or making available the goods in the month of April itself had crystalized the liability to pay GST. This implies that the club has delayed the payment of GST by one month which can have impact by way of interest and penalty exposure and can also have impact on the working capital requirements.
The Place of Supply takes paramount importance under GST regime since GST is destination based unlike origin based taxation under VAT or CST. The place of supply of Goods or Services determine whether CGST/SGST has to be charged or IGST has to be charged. The Model IGST Act has formulated principles to determine the place of supply of Goods and Services. The principles formulated for Goods and Services to determine the Place of Supply is not the same under Model IGST Act for obvious reasons. Accordingly, a wrong classification of a transaction can have an impact in terms of Place of Supply followed by the Tax which was applicable on the same.
For a better understanding, let us assume that A Ltd is big FMCG Companyin Bangalore and his also registered under GST Law. It also manages its transportation and logistics function through its own fleet of vehicles. One of the vehicles of A Ltd breaks down outside Karnataka on its way to Hyderabad for supply of goods. Assuming, A Ltd engages another company in Karnataka, say B Ltd to tackle this situation and B Ltd sends its engineers for inspection of the vehicle and also for repair if required along with spare parts. B Ltd has considered this transaction of repairing the vehicle as supply of goods and charged IGST since there was a movement of the goods from one State to another. However, this transaction of repair can be classified as “Works Contract” due to the very wide definition of “Works Contract”under the Model GST Law. Works Contract is deemed to be a Supply of Service as per the Model GST law and the place of supply of a Service, if service is provided to registered person is location of such person.
In the current case, location of A Ltd and B Ltd is within Karnataka and hence the transaction of repair was required to be charged under CGST & SGST Act and not as per IGST Act since the location of supplier and place of supply both are within the same states. This situation may lead to initiation of proceedings by the State Governments to recover the share of SGST in the said transaction along with interest and penalty exposures.
It is expected that GST law would have multiple tax rates unlike the existing Service Tax law due to the fact that different rates are prescribed for Goods of different importance. The goods of national importance and basic necessities might be exempt and the luxury goods can be taxed at higher rates.Accordingly, it is very important to understand whether a transaction is “Goods” or “Services” and the GST rate would also vary accordingly. It might be possible that due to a wrong classification, the GST paid on such transaction might be more than what was required and vice versa.
For a better understanding, let us assume that A Ltd, a registered person under GST law is in the business of leasing Computers without the transfer of title to the goods. It has been charging GST on said transaction as applicable in case of “Computers”. Under the VAT regime, Computers have history of lower tax rates between 4% to 5.5% and it can be reasonably expected that the same would continue in GST regime. As per the Model GST law, any transfer of right to use the goods without transfer of title is deemed as “Supply of Service” and it is expected that the tax rates in case of Supply of Service will be at RNR. In this situation, it can be understood that A Ltd has been charging lower rate of tax assuming it was a transaction in Supply of Goods rather than Supply of Service and hence A Ltd will be facing serious consequences by way of interest and penalty.
Above are few illustrative situations that may still lead to litigation as “Goods Vs Services” even under GST regimeand many more situations can be expected which can be of the same nature as described above. Hence it is of utmost importance to every tax payer to carefully structure their Indirect Tax function by proper inference of the GST Law. The views expressed in this article are personal and hence you may consult your tax advisor on the said matter before taking any decision.
Author is Practicing Chartered Accountant in Indirect Taxation and can be reached at firstname.lastname@example.org