NOTE FOR STPAM’s TWO DAY SEMINAR ON MODEL GST LAW

TCS, TDS AND COMPOSITION SCHEME:

By CA Kiran G Garkar

Model GST Law as made available by Empowered Committee of State Finance Ministers on 14/06/2016 has detailed provisions for TDS. TCS and Composition scheme.

Overall the entire act is very loosely worded. Many a time it is to be understood in a particular way because service tax law (as on today) has those provisions, interpretations or FAQs published by CBEC state so.

None the less, it surely gives glimpse into GST concept that is likely to change face of Indian taxation and Indian market. To understand expected fall outs, procedural aspects, detailed study of proposed provisions is essential. We all are gearing up for actual roll out of GST in near future. Some of the points discussed or issues raised may settle down, once the final version of Act is legislated.

Tax Collected at Source:

Under MVAT Act, concept of TCS is routed through section 31A. At present it is applicable to anyperson, local bodies, authorities or agencies under Central or State Govt. (i) who auction rights for excavation of sand and(ii) who award quarrying lease/permit in respect of minor minerals. The position under proposed GST law is altogether different.

The important part of the Model GST law is section 43C, which is thenew tax collection at source (TCS) modelthat has been introduced for the e-commerce sector.

The Model draft GST law takes significant steps in framing a law relating to the taxation of e-commerce in India. E-commerce, as an emerging sector, was constantly being mired in indirect tax litigation in many States and was also being subject to taxes and compliance requirements imposed almost whimsically by States to generate tax revenue from transactions originating and concluding in their territories. In such a situation, most e-retailers were looking forward to the forthcoming GST law to bring clarity into such levies. They also anticipated a mature non-adversarial law which would break down compliance barriers and usher in a uniform tax regime for their sector.

The draft law makes all types of purchases made online subject to a uniform tax rate. This is in line with the aim of the GST to be a uniform tax fabric for the entire country in respect to major indirect taxes. A separate chapter titled "Electronic Commerce" has been incorporated into the draft law, which also introduces key definitions to certain aspects of the industry which were, till now, vague and were consigned to interpretations from both the imposing authority and the taxpayer. Terms like "aggregator", "e-commerce", "address of delivery", "time of supply of goods", "electronic cash/credit ledger", "e-commerce operator", which are essential facets of the electronic trade and commerce industry have now been defined under the law.

This TCS model essentially proposes to tax goods and services in online transactions at the first point of transaction. This means any payment made to a supplier would be subject to a TCS at the notified rate. This immediatelyincreases the compliance burdenon the e-commerce companies as they have to keep track of each and every supplier using their platform. Further, cash flow woes will increase significantly on suppliers (especially small suppliers) as they may have to take a refund route in cases where they are not able to offset their taxes.

It is pertinent to note that the concept of aggregator has been restricted to those cases wherealong with the web based software a communication device also exists between theaggregator and service providers for communication and thus, this tends to exclude a lot manyaggregators and applies only to selected few like private metered cabs working.

(i) Supply by an aggregator:

  • As per section 3(4) of the Central Goods and Service Tax Act, 2016, the supply of anybranded service by an aggregator under a brand name or trade name owned by himshall be deemed to be a supply of the said service by the said aggregator.
  • “Brand name or trade name” and “Branded Services” is an important concept of beingan aggregator. Thus, it is a very wide definition covering almost all kinds of words,symbols etc. providing a distinct identity to an operator.
  • The term “aggregator” is defined under section 43B(1) of the Goods and Service TaxAct, 2016 which means a person, who owns and manages an electronic platform, andby means of the application and a communication device, enables a potential customerto connect with the persons providing service of a particular kind under the brand nameor trade name of the said aggregator;

(ii) Liability to get registered in case of an aggregator

  • Clause 5 of Schedule III provides that an aggregator, who supplies services under hisbrand name or his trade name, is liable to get registered irrespective of the thresholdlimit specified in the schedule as Rs. Nine Lakh. Further, entry 9 of clause 5 providesthat every electronic commerce operator is also liable to get registered irrespective ofthe threshold.
  • This provision introduces the concept of TCS on e-commerce operators. The ecommerceoperators would be required to collect by way of tax:

On amounts credited to the supplier’s account; or

At the time of payment by way of cash; or

by any other modeon occurrence of the earliest of the events.

Section 43C has been made applicable to ‘electronic commerce operator’. Section 43B (e) defines ‘electronic commerce operator’ as it shall include every person who, directly or indirectly, owns, operates or manages an electronic platform that is engaged in facilitating the supply of any goods and/or services or in providing any information or any other services incidental to or in connection there with but shall not include persons engaged in supply of such goods and /or services on their own behalf.

FAQ 2 makes it clear that M/s Titan supplying watches and jewels through its own web-site would not be considered as an e-commerce operator for the purposes of this provision. Similarly Amazon and Flipkart will not be treated as e-commerce operators in relation to those supplies which they make on their own account(popularly called inventory model).

Section 43C starts with a non-obstante (notwithstanding) clause.Irrespective of the understanding between thesupplier of goods and / or services and the ecommerceoperator in their agreements, the followingwould be applicable:

(i) E-commerce operator shall collect an amountat a rate to be notified from the supplier ofgoods;

(ii) Would be applicable in respect of goods and /or services supplied through the website /portal of the e-commerce operator.

(iii) Amount shall be collectible at the earliest ofthe following:

(a) time of credit of any amount to the account of the supplier of goods and / orservices; or

(b) time of payment of any amount in cash; or

(c) by any other mode

(iv) The rate of tax to be collected at source would be as notified by the Central / StateGovernment (on the recommendation of the Council)

This provision overrides anything contrary in the Act and it also overrides the contract /MOU or agreement between parties. The amount so collected should be remitted by thee-commerce operator to the Government.

Compliances for the e-commerce operator

Upon collection of the amount indicated supra, the following compliances are required to beadhered to, by the e-commerce operator;

(i) Should be paid to the credit of the appropriate Government within 10 days from the endof the month in which the collection is made;

(ii) Shall furnish a statement of such outward supplies of goods and / or services,

electronically, giving the details of the amounts collected during the calendar month.

Such statement should be filed within 10 days from the end of the month in which thecollection was made; [Form GSTR-8 has been prescribed under Draft GST rules for Returns]

(iii) Statement should contain details of amounts collected, supplier-wise in respect of allsupplies effected through the website / url of the e-commerce operator during thecalendar month.

Tax credit for the concerned supplier

The amount so remitted by the e-commerce operator would be treated as if it is tax paid by theconcerned supplier. The concerned supplier would be eligible to claim credit of the same inthe electronic cash ledger [as defined in Section 2(40)].

Verification of the statement filed by the e-commerce operator:

As a process, the details of the supplies furnished by the e-commerce operator would becompared with the corresponding outward supplies reflected by the concerned supplier in hisvalid monthly return, for the month or any of the preceding months.

If the details of the outward supplies filed by the concerned supplier do not match with thedetails filed by the e-commerce operator, the discrepancy shall be communicated to both, thee-commerce operator and the concerned supplier within a prescribed period.

After the communication, if the discrepancy is not rectified by the supplier, the same shall beadded to the output liability of the concerned supplier in the month succeeding the month inwhich the discrepancy was communicated. This concerned supplier will be liable to pay thisamount and interest, as applicable would also be payable for any delays from the date the taxbecomes due.

Additional powers to the tax office

Any officer not below the rank of a Joint Commissioner may issue a notice to the e-commerceoperator: For furnishing such details as may be specified in the notice relating to:

(a) Supplies of goods and / or services effected through such operator;

(b) Stock of goods held by the suppliers making supplies at the godowns or warehousesmanaged by such operators and which are declared as additional places of business ofthe concerned supplier

Every such operator to whom the notice is issued should comply with the same and furnish thedetails within 5 working days from the date of service of such notice.

Any operator who does not comply with the notice shall be levied with penalty of up to Rs.25,000.

Major fallout of the proposed TCS regime will be the burden on all e-commerce platforms to file detailed information on all supplies made from the platform as a rigorous disclosure regime is proposed to be notified. While this does ensure that all supplies are tracked and taxed, and does away with state entry forms etc, the TCS system practically means that every e-commerce operator (and not the supplier) is now legally responsible to deposit the tax deducted from every supplier to the government. In today's scenario, where IT systems are sluggish and often non-responsive, accounting for every single transaction done by each and every supplier on the platform might be a herculean task.

Tax Deducted at Source:

Section 37 provides for deduction of tax at source in certain circumstances.

The Section specifically lists out the Deductors who are mandated by the Central Governmentor the State Government to deduct tax at source, the rate of tax deduction and the procedurefor remittance of the tax deducted. The amount of tax deducted is reflected in the ElectronicCash Ledger of the Deductee.

Detailed Analysis:

The TDS provision is common for CGST and SGST Act. Both enactments empower theCentral Government /State Government, as the case may be, to make it mandatory for thefollowing persons to deduct tax at source from payments made or credited to the suppliers oftaxable goods and / or services.

  1. Central Government department orEstablishment.
  2. State Government department orEstablishment.
  3. Local Authority.
  4. Central Government Agencies and State Government Agencies.
  5. Persons or category of persons notifiedby the Central /State Government onrecommendation of the Council.

1. The above ‘persons’ are referred to as Deductors.

2. The Deductors have to deduct tax at the rate of 1% from the payment made or creditedto the supplier of taxable goods and / or services, notified by the Central Government orState Government on the recommendations of the Council. Deduction is required wherethe total value of supply under a contract exceeds INR 10 lakhs Value of supply and itshall exclude the tax indicated in the invoice.

3. The amount deducted shall be paid to the credit of the Central Government or the StateGovernment treasury as the case may be, within ten days after the end of the month inwhich such deduction is made. Manner of such payment may be prescribed.

For instance if the tax deduction is made between the 1stand 31stofJune, theremittance into the treasury has to be made on or before July 10th i.e. within ten daysafter the end of the month.

TDS return form has been prescribed as GSTR 7.

4. The Deductor has to furnish a TDS certificate to the Deductee mentioning in it thefollowing:

(a) contract value, (b) rate of deduction, (c) Amount deducted, (d) Amount paid to the appropriate Government and (e) Any other particulars as may be prescribed

5. This certificate has to be furnished within five days of remittance into the State orCentral Treasury as the case may be.If draft return rules are perused, one finds that format of TDS certificate has been given as GST7A. It mentions that this certificate has been generated on the basis of information furnished in return by TDs deductee. Thus certificate would be made available electronically.

6. Certificate not furnished by the Deductor:- If the Deductor does not furnish thecertificate of deduction-cum- remittance within five days of the remittance, the Deductorhas to pay a late fee of INR 100 per day from the 6th day until the day he furnishes thecertificate. The maximum late fee is prescribed as INR 5000.

7. Non-remittance by the Deductor: If the Deductor does not remit the amount deducted asTDS, he is liable to pay penal interest under Section 36 in addition to the amount of taxdeducted.

8. The amount of tax deducted reflected in Electronic Cash Ledger of Deductee in thereturn filed by Deductor shall be claimed as credit.

This provision enables the Government to cross-check whether the amount deducted bythe Deductor is correct and that there is no mis-match between the amount reflected inthe Electronic Cash Ledger as reflected in the return filed by Deductor.

9. Refund on excess collection: The Deductor or the Deductee can claim refund of excessdeduction or erroneous deduction. The provisions of section 38 relating to refundswould apply in such cases. However, if the amount deducted has been credited to theElectronic Cash Ledger of the Deductee, the Deductor cannot claim refund (onlyDeductee can claim).

The circumstances in which, and the mechanism by which, the Deductor can claimrefund of excess deduction or erroneous deduction are not clear at present and we will have to wait for final rules to roll down.

Comparative study:Provisions for deduction of tax at source exist in the MVAT law and are applicable on payments made to works contractors.

MVAT Act / Model GST Law
Applicability / Applicable only to workscontractors. / Applicable to suppliers notified by State Governmentor the Central Government on recommendations ofcouncil.
Rates / Two different standard rates: 2 % for RD & 4/5 % for URD / One standard rate viz. 1%
Deductor / every notified workscontractee/ awarder ofcontract / (a) to (e) as stated supra.
Onus & Refund / If certificate of deduction alone is furnished by the Deductor, burden on the works contractorto prove deduction of tax atsource. Refund provisions and Credit provisions not clear. / No such burden is cast on the Deductee. More onus is on the Deductor. Refund provisions clear. Credit can also be claimed
from the amount reflected in the Electronic Cash Ledger.

Composition Scheme:

Under MVAT act, we have witnessed composition schemes as per nature of activity of dealer such as reseller, restaurants& caterer, bakery, second hand car dealers etc. Even it existed for works contractor or mandap decorators. Those schemes were tailor-made looking into aspects of the specific trade and need of the concession. They off course came with a condition of restricted or no set off.

Under Model GST law, there seems to be a uniform scheme of composition.

There would always be a segment of taxpayers who would find it difficult to completely fulfill the compliance requirement of tax laws, may be due to their small size or nature of their operations. From the tax collector view point also, the cost of collecting tax from such tax payers is far more in percentage terms than the tax collected from them. But this argument cannot be used to exempt them from payment of tax. To meet this dual objective of simplicity for tax collector and tax payer, a scheme called Composition Scheme is offered to taxpayer, by which the taxpayers are given the option to pay an amount calculated on some parameter in lieu of tax calculated based on complex calculations expected by that law.

In the proposedGSTlaw also the composition scheme offered to certain set of taxpayersis contained in Section 8 of ModelGSTlaw.

This provision deals with the composition scheme for payment of tax by eligible taxablepersons, subject to certain conditions. The procedures and the documentation would becontained in the Rules, to be prescribed.

I] Composition scheme is an option:

Tax payment under this scheme is an option available to the registered taxable person. Thisscheme would be applicable only to taxable person whose supplies are restricted to aparticular State. In other words, a person effecting inter-State supplies cannot opt for thisscheme.