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This is not surprising.
There is a general reluctance in giving cash refunds to taxpayers in most
countries. India is not an exception, and huge refund claims are lying with
service tax, Customs and state VAT authorities, some for a number of years.
Though this is an
important reason for India to consider a GST grouping system, this is not the
only one. This could help in managing cash flows of taxpayers and tax
administration work for the government. This concept exists in many countries,
including New Zealand, Singapore, the UK, Germany and many other European
countries.
Simply put, this means
that a group of separate legal entities can be considered, usually at an option
of the taxpayer, as a single entity for GST purposes. Generally, these entities
are closely bound to one another by financial, economic and organisational
links.
The entities constituting
a group need not charge GST on supply of goods or services to one another. Also,
supplies made by third party to any of the group entities is considered as
supply to the group. The concept essentially gives precedence to economic
substance over legal form of entities concerned.
For taxpayers, this
typically results into direct as well as indirect benefits. Direct benefits
could have some revenue impact and there are ways to restrict that, if the
government chooses to do so.
Let’s consider an example
of a bank — which is not subject to GST on its services — that wants to
outsource its data processing work to a group entity. Typically, in such
situations, GST charged by the group entity would become a cost for the bank, in
absence of an output GST liability. However, if the group entity is part of the
same GST group, no GST would be charged by this entity from the bank. This would
obviously reduce the overall tax cost of the transaction.
The indirect benefits
mainly arise due to lower cost of financing GST and compliances. There is
usually a time gap of 2-3 months between when an entity pays GST to the vendor
and realises the same from the customers. In a GST group, input GST paid by one
entity can be used as a set-off against the GST liability of another entity
within the group.
This is particularly
relevant in cases where one entity is in a refund situation, whereas the other
entity needs to pay GST to the government. Practical difficulties in getting
cash refund from the government is a major pain point from many businesses,
which can largely be addressed by group registration, at least for large
corporations with multiple entities.
GST grouping would also
reduce the cost of compliance as the group would file one GST return and get
audited/assessed as a single entity. The group would require lesser manpower to
manage tax compliances and touch-points with tax authorities would reduce
significantly.
From the government’s
perspective, GST group could also be useful, if effective and adequate
safeguards can be applied for potential misuse of the system. In most countries,
the group members have joint and severe liability in case of default by a
member.
Grouping may help in
preventing abusive practices such as artificial splitting of entities into
smaller businesses, whose turnover is less than the prescribed threshold for
application of GST.
This also enables the tax
authorities to operate more efficiently as they have to process fewer returns
and deal with lesser number of files. Centralisation of audit and assessment
would provide an opportunity to the tax authorities to gain better insights of
business of all the group members and perform more indepth audit procedures.
In the Indian context,
the group system can apply for both central GST (CGST) as well as state GST (SGST).
Allowing the input SGST of one state against the output SGST of another may not
be possible, which can be further thought through.
There are other issues
also that would need careful analysis, such as criteria to be adopted for
entities to form a group, whether to make grouping compulsory or optional, use
of anti-abuse provisions to protect the revenue, etc. The experience in other
countries could be a useful reference point on most of these aspects.
Last but not the least,
the revenue impact of this system needs to be looked at. Even if there is some
negative revenue impact for the government in the short run, this proposition
needs to be examined with reference to the potential long-term benefits that
would accrue to the taxpayers as well as the government.
Source: http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETD/2010/05/13&PageLabel=13&EntityId=Ar01300&ViewMode=HTML&GZ=T |
