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A crucial piece of GST puzzle is still missing

With tax rates finally in place for most goods and services, it is now known what gets cheaper and which items get dearer in the goods and services tax (GST) era. However, there is a larger worry—uncertainty about the extent to which GST will impact the supply chain ecosystem and, eventually, customers still prevails.

The answer to this lies in the transition rules, which are yet to get a green signal.

Transition rules are critical because they deal with the process of shifting businesses from the existing tax system to a new one. Since taxation under GST would be entirely different from the current indirect tax regime, these rules aim to provide clarity on various issues, including tax treatment of goods on which tax has already been paid.

“Let’s take a scenario where goods on which excise duty has been paid are lying with the dealer on 30 June 2017. Draft transition rules suggest that if the duty paying document is available with dealer, he can take full credit of taxes paid on such goods. Typically, a dealer is not issued an excise invoice when he buys from a distributor. Now, in such a case, the draft norms allow a deeming credit of 40% excise duty paid on the product. This means that closing stock of the dealer when sold on 1 July onwards will have 60% excise duty loaded on it. If the prices of goods have to remain constant, then there will be a negative impact on dealers,” Anita Rastogi, partner-indirect tax, PwC India, said.

Given the apprehensions among dealers about the potential loss arising in the aforementioned situation, it was essential that these rules should have been announced this time, said tax experts, who are disappointed by the delay.

In a bid to minimize loss to dealers, Rastogi hopes the government either allows a larger deeming credit of 80%, which was done when the sales tax regime was changed to value added tax (VAT), or simplify the conditions to take full credit. The percentage at which deeming credit is fixed will also have a bearing on the margins of businesses.

Sharing a similar view, Suresh Rohira, partner, Grant Thornton India, said one reason why the government may have refrained from giving out final transition rules now could be to protect the consumer because de-stocking or hoarding may happen depending on whether a particular good gets transitory benefits or not. However, a timely clarity on transition would give the industry time to plan purchases.

Also, he said that industry is awaiting clarity on high-seas sales, i.e. whether exemption enjoyed currently on VAT would continue in the GST regime. “If there are many provisions relating to transition that the industry is not anticipating, then it would surely come as a negative,” he cautioned.

Apart from that, E-way bills rules, a key for the transport and logistics sector, are also yet to be decided. These rules deal with the registration of goods worth more than Rs50,000 when moved within the state or outside it. “As far as the delay in E-way bills rules is concerned, the debate prevails over whether these rules should be applicable for products which are not under the GST ambit such as alcohol and petrol,” said Abhishek Rastogi, partner, Khaitan and Co.

Meanwhile, rules relating to input credit, refund, invoice and registration, among others, have been finalized and provide much-needed clarity on many aspects of GST, said tax experts.

Since transition rules play a key role in procurement decision for the industry, with just the rates, the full impact of GST on manufacturing sector is difficult to gauge. The next GST meeting is scheduled on 3 June and expectations are that transition rules will be finalized then, failing which, both businesses and end-consumers are likely to be hit by severe disruption.

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