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India Inc. is seeing many new pieces of regulatory and legislative measures having the power to impact the economy in a big way. Goods and Services Tax, Insolvency and Bankruptcy Code and most recently The Finance Bill 2017. Lex Witness gets you the latest on some of the most significant reforms that have far reaching consequences to our economy.
Naushad Forbes, Confederation of Indian Industries (CII) president, announced at a press conference on April 3 that the impact of demonetisation was almost over and the market has started to revive with modest growth. “Recovery from demonetisation is almost over. We are pretty well back (on track). Industry players have informed us of modest growth in March,” Forbes said.
This is quite welcoming news even as the matter related to the legality of demonitisation is pending before the Supreme Court which has refrained any other court from hearing any petition related to it. On December 16 2016 the Court said, “We further direct that if any other writ petitions/proceedings are pending in any High Court, further hearing of those matters shall also remain stayed in terms of this order. We further direct that no other Court shall entertain, hear or decide any Writ Petition/proceedings on the issue or in relation to or arising from the decision of the Government of India to demonetize the old notes of ` 500 and ` 1000, as the entire issue in relation thereto is pending consideration before this Court in the present proceedings.”
The demonitisation had its impact. Forbes has informed that the consumption fell by as much as 30 per cent in November, and in December, it was down by 10-15 per cent. But during January, according to Forbes, it was more or less the same as that of the same period last year.
In 2015, the World Bank had predicted that the Indian economy was going to be the world’s fastest growing economy by 2017, overtaking the Chinese economy. Even the international investment bank, Goldman Sachs, had predicted that India’s growth rate will surpass China’s a year earlier than the World Bank forecast.
“We further direct that no other Court shall entertain, hear or decide any Writ Petition/proceedings on the issue or in relation to or arising from the decision of the Government of India to demonetize the old notes of ` 500 and ` 1000, as the entire issue in relation thereto is pending consideration before this Court in the present proceedings.” Hon’ble Supreme Court of India
The Indian economy saw a lot of measures aimed at controlling, cleaning and sprucing up. Some helped; some were not as effective as desired. Recently, India saw the emergence of a new power at the helms in 2014 and it was expected that some new measures would be taken to meet the expectations of the electorate. So, apart from the need and the requirement of the economy, the political expediency did see many new measures, the demonitisation being one of them.
However, today, as the Forbes said at the press conference, India is at a very good point of economy. “It is projected to be one of the 10 best economies in the next 25 years. The consumption is very high. It is 60 per cent of its GDP growth. Because of this, the economic growth is resilient.”
Reserve Bank of India, talking about the expected spurt in demand and investments has also noted in its recently-published monetary policy report that significant improvement in transmission of past policy rate reductions into banks’ lending rates post demonitisation should help encourage both consumption and investment demand of healthy corporations. It has also highlighted that the various proposals in the Union Budget should stimulate capital expenditure, rural demand, and social and physical infrastructure, all of which will invigorate economic activity.
“The imminent materialisation of structural reforms in the form of rollout of GST, the institution of the Insolvency and Bankruptcy Code, and the abolition of the Foreign Investment Promotion Board will boost investor confidence and bring in efficiency gains,” the RBI document said. However, the economy has gone through the impact of all new legislation and control. India is today the most legislated country in the world. Let’s look at two significant new legislation which have a large bearing on the economy
“The imminent materialisation of structural reforms in the form of rollout of GST, the institution of the Insolvency and Bankruptcy Code, and the abolition of the Foreign Investment Promotion Board will boost investor confidence and bring in efficiency gains,” The Reserve Bank of India
The Goods and Services Tax (GST), considered the single biggest reform since independence, required a constitution amendment to bring about. And when the 122nd Constitution Amendment Bill was passed in the both Houses of Parliament in August last year, it was the arrival of a new dispensation of indirect taxation in India. The bill was further ratified by 15 States and received assent of the President in September, 2016 and enacted as Constitution (122nd Amendment) Act, 2016 in September 2016.
A destination-based tax applicable at various stages of production and services and their distribution, GST subsumes various indirect taxes such as excise duty, octroi, surcharges, local taxes, entertainment tax, sales tax, etc. From the consumer point of view, the biggest advantage is the expected 25-30% reduction in the overall tax burden on goods. Alcoholic liquor for human consumption is exempt from GST. Initially petroleum crude, high speed diesel, petrol, natural gas and aviation turbine fuel (ATF) will also be out of the GST.
Under GST regime, taxes would be levied both by the state and the central governments on supply of goods and services. Both the Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
The PTI on March 6 reported that GST progress so far has instilled confidence in the investors and pushed Sensex, Nifty to two-year high as the Goods and Services Tax Council (GSTC), (notified with effect from 12 September, 2016) approved the final draft of central GST (C-GST) and integrated GST (I-GST).
The GST Council which has the Finance Minister as the chairman has met on many occasions and has taken many decisions which are discussed.
There would be four tax rates namely 5%, 12%, 18% and 28%. Besides, some goods and services would be under the list of exempt items. The Council has asked the Committee of officers to fit various goods and services in these four slabs keeping in view the present incidence of tax.
The threshold exemption limit would be ` 20 lac. For special category States enumerated in article 279A of the Constitution, threshold exemption limit has been fixed at ` 10 lac.
The five laws namely CGST Law, UTGST Law, IGST Law, SGST Law and GST Compensation Law have been recommended.
A compounding option (i.e. to pay tax at a flat rate without credits) would be available to small taxpayers (including to specified category of manufacturers and service providers) having an annual turnover of up to Rs. 50 lac. The GST Council had also decided that there will be a 5% composite rate for restaurants with a turnover of Rs 50 lakh, which is 2.5% each for CGST and SGST. For traders, the composite rate will be 0.5% each under CGST and SGST
Every person who makes supply of goods and services and whose turnover exceeds Rs 20 lakh has to register in every state in which he conducts business. The turnover threshold is Rs 10 lakh for special category states. A person may have multiple registrations.
A GST Compensation cess may be levied on the supply of certain goods and services, as recommended by the GST Council. The receipts from the cess will be deposited in a GST Compensation Fund. The receipts from the cess will be used for providing compensation to states for loss of revenue due to the implementation of GST. The cess will be capped at: (i) 135% for pan masala, (ii) Rs 400 per tonne for coal, (iii) Rs 4,170 + 290% per 1,000 sticks of tobacco, and (iv) 15% for all other goods and services including motor cars and aerated water.
Every taxpayer while paying taxes on outputs may take input tax credit for taxes paid earlier by the supplier on inputs.
“A destination based tax applicable at various stages of production and services and their distribution, GST subsumes various indirect taxes such as excise duty, octroi, surcharges, local taxes, entertainment tax, sales tax, etc. From the consumer point of view, the biggest advantage is the expected 25-30% reduction in the overall tax burden on goods.”
However, this will not be applicable on supplies related to: (i) motor vehicles when used for personal consumption, (ii) supply of food, health services, etc. unless they are further used to make a supply. The liability to pay GST in relation to supply of goods and services will arise on the date of: (i) issue of invoice, (ii) receipt of payment, whichever is earlier. Every taxpayer should self-assess and file tax returns on a monthly basis by submitting: (i) details of supplies provided, (ii) details of supplies received, and (iii) payment of tax. In addition to the monthly returns, an annual return should be filed by each taxpayer.
For offences such as mis-reporting of: (i) goods and services supplied, (ii) details furnished in invoices, a person may be fined, imprisoned, or both. Such orders can be appealed at the National Appellate Tribunal, whose order can be further challenged at the High Court.
The central government may, by law, setup an authority to examine if reduction in tax rate has resulted in commensurate reduction in prices of goods and services. The Authority may impose a penalty if prices have not been reduced.
In the current session of the Parliament, Central GST (CGST), Integrated GST (IGST), Union Territory GST (UTGST) and the Bill for Compensation to States have been passed. During the debate on the Bills, Jaitley informed the Houses that those evading taxes up to Rs 5 crore could be arrested, but the offence would be bailable. For more than Rs 5 crore, the arrest would be unbailable. The Finance Mister also said that since all registrations and filing would be electronic, the taxpayers would not face any problem. There is going to be a significant increase in the number of filings by the business houses in order to comply with the rules.
“Goods and Services Tax Network (GSTN) has been set up by the Government as a private company under erstwhile Section 25 of the Companies Act, 1956. GSTN would provide three front end services, namely registration, payment and return to taxpayers.”
The Parliament also passed the Taxation Laws (Amendment) Bill, 2017 that amends the Customs Act, 1962, the Customs Tariff Act, 1975, the Central Excise Act, 1944, the Finance Act, 2001 and the Finance Act, 2005 in order to ensure continuance levy of excise on petroleum products and abolition of cess on some other items after the introduction of the GST. After the rollout of the GST, central excise duty on goods other than crude oil, petrol, diesel, ATF and natural gas, service tax on taxable services and VAT on sale or purchase of goods will be subsumed in the new indirect tax regime. The Taxation Laws (Amendment) Bill has introduced ‘warehouse’ in the definition of customs area to ensure that an importer is not asked to pay Integrated Goods and Services Tax (IGST) at the time of removal of goods from a customs station to a warehouse.
Goods and Services Tax Network (GSTN) has been set up by the Government as a private company under erstwhile Section 25 of the Companies Act, 1956. GSTN would provide three front end services, namely registration, payment and return to taxpayers. Besides providing these services to the taxpayers, GSTN would be developing back-end IT modules for 25 States who have opted for the same. The Centre and the states have 24.5 per cent equity each in GSTN, while the rest is with banks and other financial institutions.
GST is going to impact the economy in a big way. According to business analysts, after an initial, transitory increase in inflation, there will be growth. In the long term, lower tax and logistic costs, productivity gains and higher investments under the GST will reduce inflation. According to Morgan Stanley the overall impact of better allocation of resources, improving efficiency of domestic production and exports is likely to improve overall growth. As per estimates from the National Council of Applied Economic Research (NCAER), growth could increase by 0.9% to 1.7%.
GST will result in ease of starting a business and reduction in tax burden. The burden of tax will reduce both for the manufacturer and the consumer, as the manufacturer will get the benefit of input tax credits and the consumer will have to pay only the tax charged by the last dealer or the retailer in the supply chain.
“Though much improved since liberalization began in 1991, but unfortunately India's current regulatory structure, continues to be plagued by problems such as overlapping jurisdiction, unintended market distortion, and poor enforcement, these problems create uncertainty in the minds of investors and act as hindrance to long term economic growth of the country. Roles regulatory bodies like the Reserve Bank of India, the Telecom. Regulatory Authority and the Competition Commission in industry specific mergers and acquisitions give rise to uncertainty and conflict. The government urgently needs to take concrete steps to change this dichotomy so as to facilitate ease of doing business in India.”
President Pranab Mukherjee has given his assent to the Finance Bill 2017 to give effect to much discussed and debated provisions with far reaching consequences to the economy.
Both these set of reforms/statutes have far reaching consequences. The Finance Bill, 2017 is one of the most controversial pieces of legislation that have been passed in Parliament in the recent days. The government took the Money Bill route to pass the legislations. The bill had the proposals to amend 40 existing Acts. The Finance Minister, however, has said, “It is much ado about nothing that you say 40 laws are being amended. What is the amendment? The amendments are incidental to the Acts. In fact these amendments relates to minor changes in the original Acts.” The members in the Parliament opposed the introduction of the Finance Bill 2017 as the amendments in the Bill did not fall under the purview of taxation. The Finance bill 2017 has given the central government power over the appointments, tenure, removal, and reappointment of chairpersons and members of several tribunals. Thus the independent functioning of these tribunals is going to be comprised as they will be exposed to abuse by the government. Interestingly, the Supreme Court in 2014, while ruling on the National Tax Tribunal case, has said that tribunals have powers similar to those of High Courts. The Indian economy is going to see a lot of changes in the coming months. The compliance of GST would require making fundamental changes business is done. So, the impact of both the GST and the Finance Bill 2017 will really be visible to the economy in the months to come.
The LW Bureau is a seasoned mix of legal correspondents, authors and analysts who bring together a very well researched set of articles for your mighty readership. These articles are not necessarily the views of the Bureau itself but prove to be thought provoking and lead to discussions amongst all of us. Have an interesting read through.
Lex Witness Bureau
Lex Witness Bureau
For over 10 years, since its inception in 2009 as a monthly, Lex Witness has become India’s most credible platform for the legal luminaries to opine, comment and share their views. more...
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