COAI committed to work with the government for a connected and digitally empowered India
GST reform is a discussion that gripped the national economic discourse several times during the last 10 years. COAI welcomed the passing of the GST Bill as this is a significant step towards simplified goods and service taxation, ease in compliance, achieving transparency and improving ease of doing business with the passage of the Constitutional Amendment Bill on GST by the Upper House.
Supporting the bill, Mr. Rajan S Mathews, Director General, COAI, said, “The passing of the GST Bill is a major turning point in India’s history driven by the visionary leadership of Prime Minister, Mr. Narendra Modi and Finance Minister, Mr. Arun Jaitley, to support the growth of businesses in the country. The industry welcomes and celebrates this iconic reform, while urging the government to ensure that the rate applied for the telecom services should be no more than the existing 15% to meet the government’s vision of a connected digital India and ensuring affordable services.
Mr. Rajan further added, “This paradigm shift in India’s indirect tax regime must play an enabling role in the growth of key sectors like telecommunications. There are certain aspects relevant for the telecom sector that need consideration by the policy makers while finalizing the GST legislation. We look forward to our continued engagement with the committee and working with them to make the implementation seamless, transformation meaningful and optimal.”
COAI has been actively engaging with various policy makers on all aspects that have a material impact on the telecom industry. These relate to a single pan-India registration for the telecom operators, lower and uniform rate of tax for telecom services, determination of tax liability under GST, determination of transaction value for tax, self-supply of services based on state-wise registrations and various components related to admissibility of input tax credits. The industry will continue to work with the government and provide regular inputs to the committee for a vibrant and healthy ecosystem.
Key concerns of the industry
Key concerns of the industry that need to be addressed under GST regime:
- Lower rate of tax and Uniform rate of tax for telecom services: Telecom service is an infrastructure service designated as an essential service under the Essential Services Maintenance Act, 1968 and is availed by masses. At present, service tax at the rate of 15 percent is payable on telecom services. Any further increase in the rate of tax under GST regime would have a direct impact on the increase in costs for the subscribers and would be crippling for the telecom industry as well. Telecom services should therefore, be taxed at merit rate of tax applicable in case of essential goods and services and not at rates being higher than present rate of 15 percent. Separately, given that States have the flexibility to determine the rate of tax in their respective State within a band, the rate of tax across States for telecom services could vary. If the GST rates vary across States for telecom services, due to non-alignment of Circle boundaries with geographical State/ UT boundaries, such difference in tax rates could result in non-compliance with certain regulatory guidelines, rise in consumer complaints due to impact of tax rate on pricing. The aforesaid challenges in case of differential rates of tax across States have the potential to even disrupt business itself. Therefore, it is imperative to have uniform rate of tax for telecom services across States/ UTs.
- Single pan-India registration: Model GST law envisages every service provider to obtain registration in each State/ UT from which it provides services. Telecom services are highly regulated and provided in a seamless manner across States/ UT to over a billion customers including B2B and B2C. Given the unique characteristics of the telecom sector, State-wise registrations may not be feasible for telecom sector to comply with. For pan-India service providers, state-wise registrations would result in humongous increase in compliance effort, tax uncertainty due to multiple assessments and audits and cascading impact of taxes on account of credit blockages in each state without yielding any incremental revenue for the government. It is, therefore, imperative that telecom operators should be allowed to obtain single pan-India registration and seamless transfer of credits across States be allowed.
- Concerns around determination of tax liability under GST:The place of supply rules and location of service provider are integral for determining the tax liability. The policy makers have crafted a specific place of supply rule for telecom services, which is step in the right direction and is well appreciated by the industry players. However, the present drafting of provisions pertaining to location of service provider and the place of supply rules for telecommunication services lead to certain amount of ambiguity leading into increased tax uncertainty and disputes. While the provisions are workable subject to certain clarity required in some cases, in some specific cases they are infeasible to comply with. Incrementally, the draft model GST law has prescribed the place of supply in respect of only certain telecom services and has not prescribed the same place of supply in respect of various other telecom services. Given that the location of service provider and the place of supply form an important aspect for determining tax liability, it is extremely critical for policy makers to address the same and make necessary changes in draft GST provisions.
- Valuation: The valuation prescribed under the model GST law is based on transaction value with certain artificial inclusions and deductions. Further, in case of supplies between ‘related persons,’ in certain cases, the value of supply is proposed to be determined as per GST Valuation Rules. GST is a value added tax, an indirect tax with tax being paid at each leg on value addition and therefore, having such inclusions and exclusions from transaction value is not required. Even the concept of related party transactions should be done away with since GST does not mandate such provisions (similar to present service tax provisions where there exist no valuation provisions for related party transactions). Instead, the transaction value (i.e. price actually paid or payable) should be adopted in all cases.
- Self-supply of services based on State-wise registrations should not be liable to GST:At present, from the provisions of the model GST law, it is not clear whether supplies from one State registration to another State registration of same legal entity would be liable to GST. In the event such supplies are made liable to GST, it would result in issues of valuation of such supplies. Given that areas covered under telecom Circle are not aligned with geographical State/ UT boundaries, there are 12 Circles which cover more than one State/ UT. Due to this, in case of such Multi-State Circles, there are certain supplies across States which are not recognized as supply from regulatory standpoint. Further, due to IT systems being aligned with Circles and not States/ UT, telecom operators do not have ability to identify provision of service across States in multi-State Circles. Further, there are 5 States/ UT which cover areas covered by more than one telecom Circle. For instance, certain areas of the State of Uttar Pradesh are part of Delhi-NCR Circle, UP (West) Circle and UP (East) Circle. Even in such cases, complexity would arise in case of self-supplies as one Circle can provide services to another Circle even though they cover the same State. Given the above, in our view, supply to self-based on State-wise registrations should not be liable to GST.
- Admissibility of input tax credits
(a) Removal of restrictions on admissibility of credit
Removal of cascading impact of taxes and rationalisation of credit is at the very heart of the GST framework. The industry, therefore, expects a much more liberal credit mechanism that allows credit of all goods and services used in relation to telecom business as compared to the relatively restrictive credit mechanism being considered under the model GST law.
(b) Input Service Distributor mechanism
Transfer of credits using input service distributor mechanism is a positive step for ensuring seamless transfer of credits, both within and across State boundaries. However, the scheme should also provide similar mechanism to transfer credits pertaining to inputs and capital goods used by the industry given that and procurement/ location of assets used to provide telecom service need not be geographically aligned with provision of telecom service.
(c) Transitional credit
Though the model GST law contains provisions allowing certain transitional credits, the draft law has restricted the credits to merely eligible credits under both present and GST regime. For all service providers, this would also mean that costs such as VAT, entry tax incurred on capital goods and inputs lying in stock immediately prior to implementation of GST would not be available as credit even though such goods continue to be used under GST regime. Not only is this provision detrimental to the interests of service providers but could have larger ramifications on even economic activity nearing the date of implementation of GST.
(d) Cascading impact of taxes due to certain exclusions from GST framework
– Non-levy of GST on petroleum products: Telecom sector is the second largest consumer of diesel, after railways. Continuation of Central Excise duties and State Sales taxes on petroleum products will result in massive cascading impact on the economy as also the telecom sector.
– Exclusion of real property and electricity duty from GST framework – If real property and electricity duty not subsumed, it would result in increase in overall tax cost and be an additional burden for the industry.
The telecom industry is hopeful that the policy makers will give due consideration to their concerns and make plausible amendments in the draft model GST law to address the same.
Comments from MAIT office bearers
The much awaited and talked about GST regime in India has finally attained a certain degree of tangibility with the release of the Model GST Law in June 2016 (‘GST Law’), even as the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 (the ‘GST Bill’) awaits approval from the Upper House of Parliament. Manufacturers’ Association of Information Technology (MAIT) appreciates the concerted efforts of the Government to bring all stakeholders on board and finalise India’s new GST Law, which appears to be comprehensive in its approach.
“The IT-Electronics industry at large welcomes the proposed move to the GST regime, as the same would herald in a new beginning in the indirect taxation landscape of modern India, paving the way for a simplified and homogenous tax structure for goods and services,” stated Mr Nitin Kunkolienker, VP, MAIT and Director-Corporate Affairs, Smartlink Network Systems.
GST being a destination-based tax would specifically reduce the tussle amongst the origin state and the destination state, often seen to be warring to appropriate the same tax transaction. GST would also put to rest the ambiguity surrounding the treatment of ‘intangibles’ such as software and the concept of dual levy of taxes per se. Further, with manufacture no longer being a taxable event, the concept of deemed manufacture and/or MRP valuation would be rendered redundant in the GST era, sparing businesses of the often long-drawn litigation process.
“Currently, states’ VAT laws warrant submission of myriad documentation, thereby impeding free movement of goods and Central Sales Tax Law also mandates issuance of diverse statutory forms to prove among other facts that the inter-state purchase of goods is for re-sale, and inter-state movement of goods is not a sale. The GST regime would assure a break-away from the rigours of maintenance of such voluminous documentation,” Mr Kunkolienker further opined.
Importantly, the cascading effect of taxes would be effectively addressed under the GST regime owing to seamless flow of credit, with traders, in particular, being eligible to avail credit of services such as in the case of Annual Maintenance Service Contracts (AMC contracts).
“With the Revenue Neutral Rate report pegging the ceiling rate of GST to be at 18%, the trader community for “general goods” stands to gain, and the effect on the Manufacturing sector appearing to be neutral. However, IT hardware sector is hopeful that ITA products are notified under the lower merit rate, which is expected to be 12%. Further, while for the Services sector 18% rate of GST is on the higher side, with enhanced pool of credit, one is hopeful that Services would gain by way of higher aggregate spending,” surmised Mr Mahesh Jaising, Tax Knowledge Partner of MAIT and Partner, BMR & Associates LLP.
While the GST Law ticks most of the important items, the industry at large, and specifically the IT-Electronics sector, eagerly anticipates and hopes the following issues shall be addressed:
- The benefits afforded under the Government’s flagship program ‘Make in India’ should continue to enjoy patronage under the GST regime as well, given that businesses have made substantial investments and also given that fruition of such schemes is realized over a period of time;
- Benefits under the SEZ scheme and Excise Duty free zones, currently prevalent, should continue under GST regime;
- Prescription of lower rate of GST on IT products (i.e. all ITA products) on the basis of the HSN classification across all states, and
- Simple rules that permit transfer of credit build up between offices/branches across India, particularly from marketing offices and from warehouses stocking parts for warranty/AMC supplies.
“In toto, the move of the Government to release the GST Law has ushered in new hope amongst industry players who have been awaiting the GST regime for the last few years. With the Monsoon Session of Parliament currently underway and with the Government having agreed to do away with one percent additional tax and fully compensate the States for losses in tax revenues for five years, MAIT is hopeful the Government would get the necessary support for passage of the GST Bill in the Upper House. This would herald in a new dawn in the history of India’s indirect taxation regime,” concluded Mr Anwar Shirpurwala, Executive Director, MAIT
Comments from other Industry Doyens on GST
The following are the comments made by different industry doyens on the recent path-breaking GST law.
Mr. Atul Jain, COO, Smart Electronics Business, LeEco India
Atul Jain, COO Smart Devices, said, “The implementation of a unified GST in India will be one of the most significant reforms introduced in recent times. We believe that it will bring in much needed transparency in the taxation norms and have an overall positive impact on the Indian economy. We at LeEco are still in a startup phase in India and therefore are very appreciative of the long term cost benefits that it will accrue to our Indian operations. It will certainly ease our cost burden of logistics and benefits of reduced taxation can be passed on to our end consumers.”
Mr. Narendra Bansal, CMD of Intex Technologies (India) Ltd
“Finally India gets united, which was living in a legacy of almost 30 different markets within the country. We were saddled with a plethora of diverse state-level taxes and levies of around 25-30% – or even higher in case of some sectors. GST will ensure that India finally emerges as one common market with an approximate tax rate of around 18%, with no double taxation and no cascading effect of multiple levies. Being a manufacturing entity, Intex Technologies stands to benefit from a uniform tax regime because this will boost operational efficiencies, increase cost savings and make products more competitive. This will help in a major way to simplify the way we do business and will boost government initiatives on ‘ease of doing business in India.’ The world will now recognize India’s potential and the government’s willingness to take bold steps to boost the economy. As 1.3 billion consumers across India benefit from lower prices, GST will spur higher consumption and increase the tax base through better compliance with the help of information technology enablement. In the long run, these factors will raise India’s GDP growth by 1 or 2 points, generating millions of new jobs and driving greater prosperity. I wish all the success to the Indian government for the biggest reform after Independence.”
Mr. Vikas Jain, MD, Ziox Mobiles
“The implementation of the GST will make the industry much more accountable and take away the inadvertent ad-hocism which exists by way of imports & intra-country mobilization. The one-time & singular tax window will allow for huge savings on time costs and other related activities which will go a long way in making the industry more focussed for consumer centric practises & pricings. While the tax rates are yet to be finalized, it is hoped that the under-discussion, 16-18% rate will make for better pricing mechanisms to make the industry more competitive and be more accessible for consumers.”
Mr. Atul Rai, Co-Founder & CEO, Staqu
“GST is overall good for economy as it will eliminate various complicated taxes between states and the centre. Being a technology company, I don’t think it will have any direct impact as most technology companies in India are B2B. The major outcome of GST will be based on how it is impacting the corresponding business partners of that technology company. In general, it may add an extra burden to those tech companies which are having their pan-India presence as they have to bifurcate services and bill the customer state-wise. From a startup’s point of view, I would say it will have a good cascading effect, as it will attract and encourage more investors from around the globe for Asia’s third largest economy with a clear and transparent tax regime.”
Mr. Alok Dubey, CFO, ACER
“The IT Industry has been actively engaging with the industry associations after the introduction of the model GST law. The discussions to understand business models and devise appropriate solutions have already begun. In many cases, the tax departments currently are solely catering to the needs of tax efficacy. With the introduction of the new law however, businesses will be motivated to remodel their financial infrastructure and bring more efficiency. Duties paid can now be claimed back/taken credit as opposed to the existing chain effect of taxes (CST, octroi/local body tax/central excise/service tax) levied upon previous ones. Such additional cost will now not get absorbed at each level. The tax cascading will be minimized. The law, giving enough incentive for companies to declare transaction in order to claim tax credits, will reduce overall tax evasion. Businesses will now only have to deal with State and Central GST Departments instead of a variety of state and central departments. This will hopefully bring down disputes, litigation and cost of compliance. Unless the final GST rate on each product category is known, the calculation of the pricing shall remain speculative. With GST, overall taxes on goods are likely to come down and make them cheaper. However, there may be some teething troubles as the new law comes into effect. In the long run, the lower tax burden could translate into lower prices on goods for consumers. The new law will motivate businesses to remodel their logistics and warehousing solutions. Currently, most organizations have put many major warehousing or logistics decisions on hold till they have clarity on GST law.”
Mr. K Ganesh, Serial Entrepreneur, Partner – GrowthStory
“The passage of the Goods and Services Tax (GST) Bill in the Rajya Sabha is a progressive measure as it can facilitate seamless movement of goods across inter-state borders enabling better efficiency and spurring growth of the (eCommerce) sector. However, like every regulation, it needs to be implemented correctly, and should not make lives of eCommerce players even more complicated by burdening them with more administrative hassles,” said K Ganesh, Serial Entrepreneur, Partner – GrowthStory and Promoter of sector leaders such as BigBasket, Bluestone, FreshMenu, Housejoy, Homelane, Portea, etc. “For the consumer, the price points of many products should come down or remain at the current levels (depending on the GST rates) as there will be free flow of credits since the total indirect tax cost embedded in the price (of products) is likely to decrease.”
Mr. Dhiraj Agarwal, Co-Founder, Campus Sutra
“From the point of e-commerce, there are two points in which we are awaiting clarity. First being mechanics of GST across each state as online orders are not location dependent. Secondly, as a fashion e-commerce player we are eagerly waiting to see whether apparel continues to be in the necessity category and hence attracts a lower GST than the standard rate.”
Mr. Rajeev Wadhwa, Group Chief Executive Officer and Chairman, Baron Aviation
“We need to see the impact of GST on services and trading businesses. Some of these businesses are very cost-sensitive and even 10% difference due to added price can result in negative growth for the industry. Charter trading is one such sector that is likely to be impacted by the GST bill, and not in a good way. BAOA needs to find ways to represent the industry and highlight its concerns to get some relief; otherwise we will have negative impact of this policy. We must also emphasis on positives – charter industry reflects the state of the economy, if inflation comes down and Indian businesses start performing better, it will bring in positive sentiment as a whole. Let us also check the impact on ground handling, airport charges and MRO to take holistic view of our industry.”