Indirect tax reforms not to wait for GST

Without waiting any more for introduction of the much-debated Goods and Services Tax (GST), the Union finance ministry has decided to go ahead with indirect tax reforms, particularly those related to services. The ministry is planning to time the rollout of Place of Supply (PoS) rules with the negative list for services, to be put into force next year.

PoS rules would specify which state should get tax in case production and consumption of services are distributed among several states or jurisdictions. The place of supply is where consumption of service takes place. In the proposed rules, tax arising out of consumption within a jurisdiction should accrue there.

The ministry is in the advanced stages of finalising the draft rules and a discussion paper is likely to be put in the public domain by the end of this month or early next month. A final call will be taken after securing the finance minister’s nod for announcing a negative list in the Budget. Once approved, both negative list and PoS rules may come into effect from July 1 next year.

Two teams of the finance ministry, comprising a member of the Central Board of Excise & Customs, two joint secretaries and three directors, have just returned after studying the PoS rules and overall GST structure in New Zealand and Britain. This followed the September visit of the empowered committee of state finance ministers to Spain, France, Brussels and Luxembourg to study GST there.

WHY & WHAT
In the existing regime, the place of supply for services is not so relevant because these are only taxed by the central government and the place of taxation does not affect revenue receipts. Yet, the ministry believes having these rules early would prepare everyone for GST, under which the place of supply would directly affect a state’s revenue kitty.

However, the PoS rules even outside a GST framework will hold significance in case of cross-border service transactions, currently governed by rules on export and import for services. PoS will replace these rules, to align these with the negative list of services.

“Current export-import rules can’t work under the negative list, where services won’t be defined. We will withdraw those when PoS rules come...PoS is the logical progression, whether GST comes or not. Any VAT (value added tax) or GST system should stand on two legs. Time of Supply is one leg, which we introduced earlier this year, and PoS is another leg,” a finance ministry official told Business Standard.

The official said PoS would give help resolve many complicated issues such as supply of services to Jammu & Kashmir, which has a special status, and could otherwise be considered for exports; place of taxation in cases where multiple locations are used for a service; cases where a property is located abroad and services are provided by Indians; or services provided by a foreign telecommunications company to Indians.

Every country with GST or VAT has PoS rules. The Task Force of the 13th Finance Commission on GST had also given suggestions on PoS rules based on international tax practices, especially in the European Union. The PoS rules in New Zealand are very comprehensive.

The ministry will also change the Cenvat Credit Rules and Service Tax Rules for the negative list. Currently, the Centre has a positive list of services where a detailed description is provided for each taxable service and all other unspecified services are not liable to tax. In a negative list approach, barring the few services listed by the government, everything else will be taxed.

The proposed GST has already missed two deadlines and is set to cross the new timeframe of April 1, 2012. A constitution amendment bill to roll out GST is being currently debated by Parliament's standing committee on finance.