Professionals who started their career in the Indirect tax space some 10-15 years back in Asia would have never thought the kind of adrenaline rush, anxiety and tremendous professional growth opportunities they will experience in the coming years.
Malaysia introduced comprehensive Goods and Services Tax (‘GST’) in 2015 and now India is on the cusp of transitioning into its biggest tax reform – the GST with effect from July 1, 2017. And not too far away, the six Gulf Cooperation Council (‘GCC’) countries are heading towards implementing the first and perhaps the biggest tax reform in the Gulf – introduction of Value Added Tax (‘VAT’).
Middle East and South-East Asia is indeed going through a transformational contour especially with regard to indirect taxes. The beauty of indirect tax (called VAT in some countries and GST in others) is the fact that it the principles to tax and reclaim credit of input tax remains the same whether it is applied in the EU or Australia or Asia.
India, for more than two decades has been following its entire indirect tax landscape on the concept of VAT, though the tax was fragmented for goods and services separately and administered at both, the Federal and the State level. However, the principle to tax the onward supplies and reclaim credit on input purchases remains the same, the only difference being that input taxes for goods cannot be claimed against against output tax on supply of services and vice versa.
Since India and the GCC are almost simultaneously implementing GST and VAT, it might be worthwhile to understand the similarities/ dis-similarities in the respective legislations. Though India has now finalized its law, the GCC member countries have signed a ‘Unified VAT Agreement for The Cooperation Council for the Arab States of the Gulf’ that outlines the broad contours of VAT and what each member country has to formulate as part of its VAT legislation.
This article tries to capture some of the provisions that are either similar or not similar but relevant and that can be borrowed from the Indian GST legislation.
1. Concept of Supply
The fundamental principle to levy tax in India as well as the GCC is ‘supply of goods and/or services’. Since almost all the countries in the world that have VAT/GST in place use the term ‘supply’, borrowing the same concept by India and the GCC seems to brings them on the same place of logic and relevance.
Supply has been defined to include all forms of transactions including sale, barter, exchange, disposal, lease, hire purchase etc of goods and services and even includes supplies made without consideration (subject to conditions).
However, there is a difference between the two i.e. the GCC VAT Treaty treats a transaction in goods/services without consideration ‘a supply’ even if it is between un-related entities. The Indian GST legislation however, only treats such transactions as supplies if done between two related entities.
2. Place of Supply Rules
The Place of Supply Rules (which determines the place at which such goods or services supplied are consumed to allocate the tax revenue to such state/country have been enunciated in detail in both the Indian GST as well as the GCC VAT. On a prima facie review, both appear to have similar provisions.
The place of supply of goods, both in Indian GST and GCC VAT is the place where the delivery of the goods terminate (in case goods are to be transported for delivery). This ultimately works on the principle of ‘state/country of consumption’ because India has to deal with movement of goods within different states and similarly, the GCC countries have to deal with the movement of goods intra-GCC.
Thus, the place of supply provision is exactly the same making the state/country eligible for tax revenue where the goods are actually delivered and consumed.
However, there are some special rules for determining the place of supply for intra-GCC supplies such as for supplies made to unregistered clients.
Goods – Bill-to Ship-to supplies
The Indian GST law provides that where the goods are delivered by the supplier to a third person on the request of the client, the place of supply shall be the place of the business of the client and not the place where are goods are delivered to the third person.
The GCC VAT law is silent on the identification of the place of supply in ‘bill-to ship-to’ transactions and the default rule should consequently apply, i.e., place where the delivery terminates shall be the place of supply.
The thumb rule to determine the place of supply for services in case of B2B supplies is the location of the service recipient and for B2C supplies is the address on record or where such address is not available the location of the service supplier.
Special rules to determine place of supply in case of transportation services, e-commerce services, installation services, hotel services, transport hiring services etc. are broadly similar in India and the GCC.
3. Valuation of Goods and Services
The concept of Fair Market value or Transaction value has been adopted by both the legislations that effectively means amount charged by the supplier at an arms length while transacting with an independent client.
Indian GST law uses the term ‘Open Market Value’ and the GCC VAT Treaty uses the term ‘Fair Market Value’ which prima facie means the consideration charged shall be subject to GST/VAT. Provisions relating to various inclusions such as costs, taxes (other than VAT/GST) and exclusions such as discounts, subsidies etc. are more or less similar in both the legislations.
4. Rates of Tax
The GCC VAT seems to have gone far ahead of the Indian GST when it comes to simplification and defining the rates of tax for goods and services. The GCC VAT seems to have complied with the global practice of VAT with a single rate of 5% on all supplies (except those exempted).
With the introduction of a single rate of tax, the complexities surrounding classification of goods as well as services and corresponding VAT rates applicable to such services and goods will not arise. The GCC VAT to that extent should potentially attract much lesser complexities and litigations typically surrounding the transactions.
The Indian GST law has finalized the GST rates for goods and services in its recently concluded meetings on May 19 providing a four-slab rate structure for both goods and services. With a multiple slab rate structure the Indian companies are bound to suffer with interpretational and rate issues leading to litigations at various levels.
5. Tax Group
The GCC VAT Treaty outlines the concept of ‘Tax Group’ that is quite similar to the concept of VAT grouping in the EU. This typically allows more than one company to be considered as a single VAT entity when all of them are residents of the Member state itself.
Through the concept of a Tax Group, different legal entities albeit under the same management are allowed to consolidate their tax payments and return filings thereby eliminating the need to have different registrations/ compliance structures for each entity.
The Indian GST law does not provide for a similar concept allowing different legal entities registration as a single Tax unit. However, branches and divisions of an entity can be registered under a single GST registration provided they are located in the same state.
6. Supplies to and from Free Trade Zones/ Special Economic Zones
The Indian GST legislation provides that supplies to units located in the Special Economic Zones (‘SEZ’) and other such tax free zones shall be zero-rated. This effectively means supplies shall not be taxed but the suppliers are allowed to reclaim the input taxes used in supplying such goods and services. However, each such SEZ unit needs to register under GST.
However, should any tax be charged on supplies to SEZ units, that amount shall be allowed as a refund. Supplies made from SEZ units in the country shall continue to be considered as ‘imports into India’ subject to customs duty and import GST.
The GCC VAT Treaty doesn’t provide any specific detail on supplies to Free Trade Zones but in all likelihood the supplies should be zero rated as per the principles of VAT accepted globally.
7. Can GCC pick up any provision from the Indian GST legislation
Since the GCC member countries have not yet finalised the law (though few of them as per media reports seem to have), it might not be a bad proposition to have a look at few of the provisions of the Indian GST legislation that may be of relevance to GCC. India has been practicing the concept of VAT for many decades and therefore, the GCC can learn from the Indian Government’s experience of implementing and managing indirect taxes for such a large country.
(a) Input tax deduction to be allowed only on payment of tax
The GST legislation mandates that input tax deduction shall only be allowed when the supplier of goods/services has actually deposited the tax with the Revenue. The onus to ensure such payment and thereby, being eligible for input tax deduction rests with the service recipient. This provision basically ensures that no wrongful availment of credit happens that used to be the case in the current tax regime.
(b) Most comprehensive and highly digitised GST compliance platform
The GST network (GSTN) that has been designed by the Government for companies to apply for registration, pay taxes, reclaim input taxes and file returns is perhaps one of the most comprehensive and digitised compliance platforms that has been implemented by any country. The system has been designed in a way to manage more than 3billion invoices per month.
All transactions shall have to be uploaded in the GSTN and any mis-match of reporting shall be communicated to the entities. For example, the amount of tax that was taken by the service recipient as input tax deduction but not paid/reported by the service provider will be shown as a mis-match between the reported figures and tax credit shall be disallowed automatically by the GSTN unless it is reconciled by the parties.
(c) Transactions with un-registered companies/ individuals
Any transaction by the registered entity with an un-registered entity/individual for receipt of goods/services shall be taxed under reverse charge. Meaning, the recipient will have to self issue an invoice, charge tax to itself and pay to the Revenue. The same shall then be allowed for input tax deduction.
This provision is to ensure that maximum number of entities conducting businesses but below the threshold limit also get GST registered. Otherwise, the registered entities may find it cumbersome to deal since the level of compliances shall increase multifold while dealing with un-registered entities.
Each country is now gearing up fast to make its companies ready for a transformation and its not too far when the entire world will work seamlessly on the principle of VAT.