Tax on supply of goods will not offer input credit

Industry worried it could lead to supply chain inefficiencies

A piecemeal offered in the constitutional amendment bill on Goods and Services Tax (GST) in the form of an additional one per cent tax on inter-state supply of goods has left the industry worried.

"An additional tax on supply of goods, not exceeding one per cent. in the course of inter-State trade or commerce shall be levied and collected by the Government of India for a period of two years or such other period as the Goods and Services Tax Council may recommend," says the Bill, tabled in the Lok Sabha in the winter session.

The proceeds from the tax are proposed go to states where the supply originates.

The tax is a way to woo states such as Gujarat and Maharashtra which are miffed at destination-based GST, saying it would work against manufacturing states. 

The market players intone that the purpose of a national GST is defeated by this provision as this will lead to continuation of supply chain inefficiencies.

The additional tax will remain non-creditable against the GST and will constitute additional revenues to producing states, over and above the GST in the destination states.

“This is going to be a bombshell for the industry and will have a negative impact on the common market of India. Moreover, it will be a blow to domestic manufacturers. Rather than promoting “Make in India”, it may become a tomb stone for manufacturers in India,” said a market player.

According to sources, the industry is planning to send a formal representation to the government against this provision. The industry is also seeking that they should be made a part of discussion on framing the regulations for GST and that the centre should engage in dialogue with the industry.

Another market player states that the proposal would require serious restructuring of their business and supply chain. The supply chain that is already marred with serious deficiencies is set to become more complex to structure.

“The 1 per cent additional tax would be an issue as this is an origin based tax, non-creditable contrary to how GST functions. The efficiency of supply chain would be compromised; more so when there is multiple movements. This really needs to be thought through before implementation,” said Prartik Jain, Partner, KPMG.

Some experts’ tout this is as a necessary evil.

"It is a concession and restricted for the first two years. Considering it is the last allowance while still a dampener it is worthwhile as it gives the industry a GST that it wants. However, if it is one of the many concessions that may come, then it is a cause of concern," said Vivek Mishra, leader Indirect Tax, PWC.

Another concern clouding the industry’s mind is whether it is a temporary measure.

While the intent is to keep the tax restricted for two years to get the states on-board for GST, the concern stems from the way it is worded in the constitution amendment bill. As a provision the centre can extend the tax if required,” said another market player.

The industry is pegging this tax as a distortion and if the centre wants to adequately compensate the states for any loss in revenue then the GST rate should be kept high, they argue.