Fuelling GST reforms

Updated on: Jan 11, 2022
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Bringing petro products under GST’s ambit

Considering the sheer volume of business transactions, matching of outward supplies by a supplier and the Input Tax Credit (ITC) claimed by the recipient is a daunting task. The government’s attempts to usher in a seamless system remains elusive.

The latest change is making recipients eligible to claim ITC only if their suppliers file their monthly returns (GSTR-1) by the due date. In other words, recipients will get ITC only for those invoices the detail of which have been communicated to them through GSTR-2B. Further, there is already a requirement that suppliers should pay the taxes in order to make the recipients eligible for ITC, but the latter do not have any means to ensure compliance by the former.

New business practices should evolve whereby the recipients should come forward to pay their suppliers the GST charged by the suppliers, immediately, without availing themselves of any credit period for the same, so that the suppliers can pay their tax liabilities within the due date and file their returns. The recipients may avail themselves of the credit period only for the basic value of the supplies.

Like the provisions available in the MSME Act, mandating payment to MSME suppliers within a shorter time frame, a mandatory requirement of recipients paying their suppliers, the GST component, within 15th of the succeeding month may also be introduced. This will enable the suppliers discharge their GST liabilities on time and file their returns, so that their recipients can avail themselves of ITC without any hassles.

Karnataka HC ruling

Some goods that earn huge tax revenues for governments are often left out of tax reform measures. . The high decibel political rhetoric over bringing petrol and diesel into GST is often overshadowed by the economic reality. Liquor is another species that has escaped the GST quagmire.

Tobacco products are unique where phrases like “subsuming of taxes”, “one nation, one tax” etc. are defiantly breached and both legacy taxes as well as GST are being levied on them simultaneously. This was challenged before the Karnataka High Court on various grounds, significant among them being, once GST is levied on an item under Article 246 A of the Constitution, no further taxes can be levied on it under Article 246 too, which falls foul of the Constitutional mandate behind the introduction of GST.

But the Court held that two levies can co-exist, if the legislative scheme decides so. In other words, the power to levy GST on supplies does not denude the government of its power to levy excise duties or any other surcharge (National Calamity Contingent Duty, in this case), subject to the legislative fields under the Seventh Schedule of the Constitution. Thus, the simultaneous levy of excise duties as well as GST on tobacco products has been upheld by the Karnataka High Court.

On petroleum products, currently, the excise duty levied by the Union Government and VAT levied by the State governments together is much higher than the maximum rate of GST, which is capped at 40 per cent, and that is the reason why petroleum products are kept outside the GST ambit. From time immemorial, the taxes paid on petroleum products are not allowed the benefit of input tax credit, leading to cascading effect of taxes, too.

Taking a cue from the decision of the Karnataka High Court, the government can think of simultaneously levying GST on petroleum products at a small percentage (with corresponding reduction in the excise duty and VAT rates to maintain the price at the same level) and also allow ITC of such small quantum of GST levied, across the board. This will pave the way for a slow and smooth transition of petroleum products before they are seamlessly absorbed in the GST mainstream, over a period.

The writer is a Chennai-based advocate and senior partner in Swamy Associates

Published on January 11, 2022

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