Under the indirect tax regime, all imports of goods are subject to import duty (ie, basic customs duty, countervailing duty and special additional duty). The central government levies and collects these taxes. Indian states have no power to tax import transactions, as these transactions are outside their territorial jurisdiction. On the other hand, in line with the Constitution, exports of goods are zero-rated; thus, export taxes and duties are not levied on goods. The states can impose value-added tax (VAT) on purchases of goods intended for export or used as inputs in the manufacture of goods to be exported; however, in line with Article 286 of the Constitution, they cannot levy VAT on exports of goods.
The 122nd Constitution Bill 2014 seeks to amend the Constitution by inserting Article 269A, which levies goods and services tax (GST) on all supplies of goods and services made during interstate trade and commerce (for further details, please see "Constitution and scheme of GST"). The bill further proposes to treat supplies of goods and services imported into India as supplies of goods and services occurring in the course of interstate trade and commerce. Parliament will have the power to formulate rules for determining the place of supply of goods and services. Thus, imports will be subject to interstate GST under the GST model of taxation. Under the proposed GST regime, the multiplicity of levies that exist will remain, in a manner of speaking. For example, customs value duty (levied in lieu of excise duty) and special additional duty (levied in lieu of VAT) will be absorbed into interstate GST.
The following duties will not be subsumed and will continue to be levied:
- basic customs duty;
- anti-dumping duty; and
- safeguard duties.
However, it is expected that the additional 1% tax proposed for interestate supplies of goods will not apply to the import of goods. Therefore, duties and taxes on imports will likely rise. Import-dependent industries (eg, jewellery (gold), tyre (rubber), paper, copper inputs-based manufacturers and generally all businesses with inverted duty structures) will likely be affected by the increased levy of duties and taxes on imports. Subject to the credit mechanism, businesses will be unable to offset the increased taxes; thus, this will become a concern for them.
It is still unclear whether importers will have to deal with two valuation systems for levy of basic customs duty and interstate GST separately or whether the valuation mechanisms will be aligned for customs and GST purposes, to ensure uniformity between imports and domestic (particularly interstate) transactions.
In line with the principle of destination-based consumption tax, it is expected that the export of goods will not be taxed, in letter or spirit. Exporters grapple with various schemes and procedures (eg, drawbacks, rebates, refunds and offsets) in order to recoup taxes and duties paid on inputs of goods and services used for the export of goods. Most commentators expect the proposed GST regime to address this problem by simplifying and consolidating the mechanics for recouping taxes and duties paid upstream.
Section 5(3) of the Central Sales Tax Act 1956 deems the sale of goods that precedes the sale for export as a sale occurring in the course of export; therefore, state VAT is not imposed. The GST regime will stop the levy of CST, taxing only penultimate sales. Consequently, suitable mechanisms for exporters to recoup paid taxes and duties must be formulated. Businesses will have to realign their practices with the new tax system and closely monitor new tax costs.
Services received from outside India are liable to service tax (levied and collected by the central government) under the reverse charge mechanism, depending on the situs of the supply of services and in accordance with the Place of Provisions of Services Rules 2012. The same principle is applied in order to treat services as exports, thereby avoiding the levy of service tax.
Under the GST system of taxation, the import of services will be taxed under the concept of reverse charge. The tax rates for such services will rise sharply, given that these transactions will be liable to interstate GST (consisting of both central GST and state GST).
Ideally, the reverse charge provisions will be triggered after reaching a set threshold. It is hoped that foreign service providers will have an option to register and discharge this tax, instead of the importer reverse charging it, similarly to the provisions for non-resident dealers under state VAT laws.
The destination-based consumption principle of taxation is internationally recognised as the gold standard for determining the taxability of a service transaction. There is a great onus on the government to formulate well-rounded and comprehensive place of supply rules for levying GST and to ensure that transactions neither escape taxation in both countries nor face a levy by both, given that there is no system of international tax credit.
Service providers have long been burdened by the imposition of 4% special additional duty on their imports of goods. Over time, certain models for optimising this tax have evolved. Under the GST regime, this levy will be subsumed into interstate GST for import transactions and can be offset; thus, taxes on the import of goods will likely be reduced.
Importers of both goods (capital goods and inputs) and services will likely encounter cash-flow constraints under the new regime, owing to the increased rate of interstate GST on imports compared to the existing system of taxation. Companies must ensure minimum leakage of credit on import transactions, so as not to let taxes affect the business they do in India.
For further information on this topic please contact Rohan Shah or Ranjeet Mahtani at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (firstname.lastname@example.org or email@example.com).
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