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India’s GST Council to Review Compensation Bill Affordability

As India’s key Goods and Services Council meets again this weekend to resolve contentious issues of dual administrative control and state compensation of the GST tax, the latest issue up for debate is the government’s ability to meet the bill’s compensation requirements.

The bill requires the government to compensate states for lost tax revenue for a period of five years after GST implementation, but there is concern that due to the slowing economy, the government won’t be able to come up with the funds.

The council’s meeting, set for Dec. 2 and 3, is another push to finalize the the pan-India tax regime before it is sent for approval before parliament.

Tax practitioners remain skeptical that the GST Council will resolve the issues in time for the GST bill to pass during the winter session of parliament, especially amid continuing fallout from the demonetization of high value currency notes. And there’s increasing worry that the Indian economy can’t handle yet another disruption while the government grapples with a shocked economy and slowing GDP.

State Versus Tax Authorities

“We have tax authorities at the state level and tax authorities at the center level, both of whom want to perform audits on the assesses,” M.S. Mani, Mumbai-based partner at Deloitte, told Bloomberg BNA Nov. 29.

“The suggestion is that every assessee should be subject to control under one body, and the basis of who gets that control will be decided by the GST council this weekend.”

The latest draft of the model law had several changes, including anti-profiteering provisions, exclusion of financial instruments and inclusion of e-commerce. However, it doesn’t yet define tax rates for different commodities and services or the hotly debated issue of central versus state administrative power.

While the GST is expected to reduce the tax burden on most goods, the anti-profiteering provision will ensure that the benefit is passed down to consumers and not pocketed by producers of those goods and services.

“It’s an enabling provision that needs to be watched,” Mahesh Jaisingh, partner at BMR and Associates LLP, told Bloomberg BNA Dec. 1. “What the final rules are or what sort of penalties there will be are unclear.”

Financial Instruments

Financial instruments such as securities, stocks, shares and bonds were included in previous drafts of the GST bill, but were excluded in the most recent version, which practitioners say is “not surprising,” and will be subject to securities transaction tax.

“It is merely a financial instrument, not a good or service,” Mani said. “It is not subjected to a goods and services tax anywhere else in the world. They were rightfully excluded.”

E-Commerce Companies

The revised GST Model Law also suggests that e-commerce companies such as Inc. and Flipkart Online Services Pvt. are taxed under the marketplace model, meaning they won’t be taxed as buyer or seller, merely as a facilitator.

“The new law suggests e-commerce websites need not deduct 2 percent from the vendor of goods when they make payments to that vendor,” Mani said. “This will affect every company, it’s not restricted to any one sector because everyone is moving into the digital space.”

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