FAQs based on draft GST legislation

As, the goods and services tax (GST), inches closer to the finishing line here are a set of ‘frequently asked questions’ based on the draft legislation made public on Tuesday.

What will the GST exemption threshold of Rs 10 lakh (barring northeastern states) mean in terms of revenue collection?

The lower exemption threshold may not mean higher revenue. According to estimates, about 80 per cent of tax revenue comes from the top 20 per cent dealers or enterprises. The Centre pressed for a higher threshold of Rs 25 lakh annual turnover, but ceded to states’ demands of a lower one at Rs 10 lakh. According to government data collected two years ago, while units lying between Rs 10 lakh and Rs 25 lakh annual gross revenue comprised 60 per cent of total dealers, they contributed to just two per cent of average national tax revenue. In fact, Chief Economic Adviser Arvind Subramanian batted for an even higher threshold at Rs 40 lakh in his GST report to ensure compliance and minimise the burden on small taxpayers. Currently small-scale industries with annual turnover up to Rs 1.5 crore are exempted from central excise duty, while that for Value Added Tax (VAT) and service tax stands at Rs 10 lakh.

Who benefits from the composition tax rate of one per cent for up to Rs 50 lakh?

Small service providers with gross annual turnover ranging between Rs 10 lakh and Rs 50 lakh will benefit from the compounded tax rate, as no such tax scheme is available for service tax currently, provided they do not claim input tax credit. In contrast, composition rate is provided by certain states in case of VAT up to Rs 40 lakh in some states.

Will GST be extended on freebies or discounted items too?

It remains unclear whether freebies provided by companies as sales strategy will attract GST. It will likely become clear in the rules, which are yet to be formed. However, experts say full tax will be deducted for freebies or discounted items, as it will become difficult to ascertain whether the item was actually free or not and may be misused.

What assessment and scrutiny powers will the states and Centre have?

States have been given all administrative powers to carry out assessment, scrutiny and passing of orders for entities and traders with an annual turnover of Rs 1.5 crore. However, beyond that, both the Centre and state will have administrative control. This will mean almost all service tax cases barring those of big entities will go to states.

What are the concerns related to integrated goods and services tax (IGST)?

IGST will be imposed on import as well as inter-state supplies of goods and services. The big concern among companies relate to IGST being applicable over inter-state stock transfers between branches of the same legal entity. While one can claim and offset, cash flow will be a concern for entities since they will have to pay tax  on self-supply, irrespective of whether the good was sold or not. Valuation of the stock is another grey area, for which rules like the transfer pricing norms will need to be released. Experts argue that domestic transfer pricing rules could become very complicated for the industry. transfer pricing rules could become  very complicated for the industry.