Interview: Capital block, slow refunds, ambiguities in law among major GST hiccups, says tax expert

Three months after the launch of India’s biggest indirect tax reform – the Goods and Services Tax, which subsumes all Central and state levies – “teething troubles” continue to affect businesses. The implementation of the new tax system has left much to be desired: technical snags in the portal of the Goods and Services Tax Network have delayed the filing of tax returns, forcing the government to push back multiple deadlines to allow more people to file their returns.

Exporters, for instance, have been hit hard with Rs 65,000 crores in working capital locked up with the government in the form of pending refunds, which they are not expected to receive before December. This, despite the government’s claims of GST collections averaging Rs 90,000 crores a month for July and August.

The troubles do not end there. Experts suggest there are other factors that are more pressing and convoluted and require a rethink by the Goods and Services Tax Council, which frames laws for the new indirect tax regime. Scroll.in spoke with Harpreet Singh, partner, indirect tax, at KPMG, a tax and advisory services firm, to understand some of the major concerns around the Goods and Services Tax.

Edited excerpts from the interview:

What are the major challenges companies are facing after the rollout of the Goods and Services Tax?
A major challenge after the rollout of the Goods and Services Tax appears to be the functioning of the Goods and Services Tax portal, which is causing businesses a lot of difficulties in filing their Goods and Services Tax returns and fulfilling compliance requirements.

Companies are also facing problems keeping track of frequent rate changes by the government and incorporating these in their internal systems in a timely manner.

Another problem area is the working capital block exporters are facing as they are required to pay Goods and Services Tax first and thereafter seek refunds. According to industry estimates, over Rs 1.8 lakh crores belonging to exporters will be stuck with the government because of the Goods and Services Tax every year.

Are these challenges limited to the functioning of the Goods and Services Tax portal or are there underlying factors that remain unresolved?
While the functioning of the Goods and Services Tax portal remains a major challenge, there are other ambiguities that need to be addressed.

For example, similar to the blocking of exporters’ working capital, taxpayers foresee a working capital impact in general as eligibility for Goods and Services Tax input credit (a tax deduction companies are allowed based on the taxes they have paid while buying inputs to provide goods and services) depends on the vendor’s compliance, and the initial two-month period provided under the law to get a mismatch rectified may not be sufficient.

Frequent notifications on changes in law, last-minute postponements in deadlines for filing returns, government tweets that hold contrary positions are some of the other problems.

What do you mean by an initial period of two months to rectify the input tax mismatch, and how does it impact businesses?
This means the law gives you a two-month window to rectify any input tax credit mismatch. Say I buy two manufacturing inputs from you costing Rs 100 each with a Goods and Services Tax rate of 18%, thus making my input tax outgo Rs 36 (18x2). Now, if you as the supplier report only one item in your return, the government will give me two months to get the same rectified from you and claim the full tax credit of Rs 36 instead of Rs 18.

While this is simple for dealers who have few vendors (suppliers), it is difficult for large businesses who procure goods from lakhs of suppliers in India to manage this as their suppliers may not be able to make the changes in their returns in just two months. Hence, industry is asking for more time to rectify returns in case of such mismatches. This period could range from three months to four months. It also does not help that the process of filing returns or correcting them on the portal has been beset with technical problems.

You also spoke about ambiguity in the law about certain issues that are troubling companies. Could you elaborate on these?
There is a lack of clarity on input tax credit on input services related to immovable property, which makes it difficult for companies to fully utilise the credit and is thus resulting in credit being blocked.

For example, when employees travel on business, the expenses they incur on hotel stay are available as a deduction to the company only if the company is registered in the state where the hotel is located. If it is not registered in that state, the credit gets lost.

To elaborate, when employees on a business trip stay at a hotel, dine in its restaurants and organise business meetings, they are charged a central Goods and Services Tax and a state Goods and Services Tax by the hotel under the state laws of the place where the service was availed. This is because the law provides for the levy of central Goods and Services Tax and state Goods and Services Tax if the place of supply and that of the supplier is in the same state. In case of the hotel, both are located in the same state and hence, hotels will invariably always raise a local invoice charging a central Goods and Services Tax and a state Goods and Services Tax.

However, the company will not be able to claim the credit because it is not registered in that state.

For the company to claim the credit, it would have to get a Goods and Services Tax registration in all states where its employees travel, irrespective of whether it has a branch or office in those states. Thus, in this manner, there is a restriction in the seamless flow of Goods and Services Tax credit, which is rightfully due to the assessee.

But what stops a company from seeking registration in all states if it wants to claim input credit on the expenses of its employees?
The problem is that each registration increases the compliance burden on a company. For each registration, you have to file three returns a month, which means 36 returns a year per state. And there are three annual compliances, so 39 compliances per state. It is very difficult for small businesses that do not have enough manpower to file so many returns.

Are there other ambiguous factors under the Goods and Services Tax law that are causing hardships to companies?
Yes, there are many such factors that are not fully explained in the laws, making it difficult for companies to comply with the law. One is the lack of clarity on the treatment of value added tax [an indirect tax collected in the erstwhile regime by each seller] benefits under state incentive schemes.

Earlier, states provided benefits by waiving off the value added tax for companies for a certain period of time. Gujarat, Punjab and Maharashtra invited investments through such schemes. Maharashtra had a Package Scheme of Incentives under which a company could sign an agreement with the government and get an exemption from charging value added tax.

These were the promises made by governments to companies. But the Goods and Services Tax laws do not talk about these benefits, so no one is sure what will happen to these promises. Two months have lapsed since the Goods and Services Tax was implemented but there is no clarity on these benefits.

There is also some confusion for those earning rental income, right? Could you explain this to us in simple terms?
If you are a landlord with property in five states and you have an overall rental income of more than Rs 20 lakhs, which is a small amount, then there is confusion over whether you have to register yourself in all five states to file returns or if you can raise the Goods and Services Tax invoice from your home state.

What is the situation around companies trying to migrate to the new regime and filing their transition forms or TRAN returns?
A lot of businesses have already paid taxes on old stock, which has now moved to the Goods and Services Tax regime but they would like to claim tax credit on them. To help businesses do that, the Centre has come up with a form called TRAN-1 to be filed with the government.

However, at present, there is no Goods and Services Tax TRAN-1 offline utility [in Microsoft Excel format] available, which is posing practical difficulties for businesses with a long list of line items [items of stock registered separately in a company’s accounts], which are required to be manually punched in. We are hoping the government releases an offline utility soon to reduce manual intervention and increase efficiency in the filing of returns.

Right now, only about 30% of businesses under the Goods and Services Tax regime have been able to file their TRAN-1 returns.

How has the government been responding to the troubles voiced and faced by businesses?
The government appears to be shortlisting and deliberating on key problems faced by businesses during meetings of the Goods and Services Tax Council.

It is also issuing clarifications periodically to address problems faced by businesses. For instance, the government has clarified on the matter of double taxation on high-sea sales or imports. It has stated that these will attract Integrated Goods and Services Tax only once, at the hands of the last importer on the final price of the item.

(High-sea sales are transactions where a merchant buys goods from a seller outside the country and does not take delivery of the goods but has them delivered to the final customer. For example, a company based in Delhi imports television sets from Japan that are delivered to a company in Kolkata.)

Considering that businesses are facing multiple problems with the Goods and Services Tax, it is necessary for the government to be proactive in discussing and resolving these issues.

Do you see these problems being resolved by the GST Council’s promised deadline of October?
One can only wait and watch as to how the system’s capabilities are developed in order to facilitate timely and hassle-free Goods and Services Tax compliances. Numerous representations have been filed on compliance and other issues faced by industry and it is hoped that these would be resolved promptly. It would also be interesting to note how the mechanism for seamless input tax credit matching works out for businesses as well as the government in the near future.

Are there any long-term issues with the Goods and Services Tax that could impact the government’s revenues?
Under the Goods and Services Tax law, the government must grant 90% of refunds to exporters within seven days of their filing a claim. At present, there are many refund claims awaiting clearance from the government and hence, it needs to be seen how this issue is tackled without it having an impact on the cash flow of exporters as well as the government treasury.

Are there ways in which individuals can also be affected by the teething problems of the Goods and Services Tax?
The Goods and Services Tax is primarily a tax on business transactions and is unlikely to have a direct impact on the common man. However, in case businesses continue to face working capital problems due to input credit blocks arising out of the input tax credit matching mechanism, they may be prompted to increase prices, which would ultimately be borne by the end consumer. Such a practice may, however, be checked by the anti-profiteering mechanism applicable under the Goods and Services Tax law.