FROM MAGAZINE: Decoding GST for transportation & freight sector

BY Our Correspondent16 Sep 2016 9:53 PM GMT

GST has been labelled as ‘one tax one nation’ thereby meaning that India becomes one market. This would result in businesses to re-look at their supply chain, warehousing and depots. GST presents an opportunity for industry players to consolidate their warehouses and set up larger facilities, which will bring in supply chain efficiencies.

Anita Rastogi

The implementation of Goods and Service Tax (GST) will be the biggest indirect tax reform the country will undergo. Over the past year, the government has indicated its commitment to bring in GST. This is evident from the constitutional amendment bill being passed at both the houses of parliament. Now 50% of the states have to ratify this GST constitutional amendment bill – Assam has already done it and government has indicated that within a month the others will also ratify. The draft Model GST law was put in public domain in June 2016 for comments.On the IT infrastructure, it is understood that Central Board of Excise and Customs (CBEC), GST Network and states IT back end will be ready by Nov 2016. India finally seems to be on the cusp of implementing this much-awaited tax regime.

In the light of the above developments, the freight industry would now need to analyse the provisions of the draft law in detail and its impact on their business. This is essential to ensure that timely representations are made to the government, as well as to identify key implementation requirements as part of the preparations for transition from the existing Indirect Tax regime to the GST regime.

The indirect tax regime in India is not only complex (with multiple taxes applicable on a business) but also widely seen to be inefficient and opaque. One of the features of the current system is that taxes are non-creditable either due to restrictions in the law or because there is no fungibility between central and state levies. Furthermore, as a result of multiple applicable levies, a tax payer engaged in the manufacture of goods, sale of goods and provision of services has to comply with payment, reporting and audit requirements under different tax authorities.

Transport and logistics sector will gain from removal of multiplicity of taxes and availment of additional credits. The GST input tax credit will be available across the value chain and prevent tax cascading. The logistic services providers will be able to offset their GST liability not only against the credit received on any services consumed, but also on purchase of goods and capital assets. This will favourably impact the cost structure and hence on profitability of the industry to some extent.

It is understood that currently trucks lie idle for 30 per cent to 40 per cent of the time during their delivery schedule due to trade barriers such as entry taxes, local body taxes, octroi (which will get subsumed under GST). As per World Bank estimation Indian corporates can save upto 30-40 per cent of logistic costs incurred due to stoppages at various tolls and check posts (filing of entry permits, compliances under Entry Tax laws and local levies will be done away with). It is also anticipated that under GST regime, logistic time will substantially reduce due to phasing out the border check posts. Clearly there would be improved efficiencies due to reduction of trade barriers.

However, the fine print as per the Model GST law does not provide any clarity on the removal of check posts related compliances and it is recommended that representations should be made in this regard so that final law is suitably amended enabling optimisation of delivery schedules, lowering operational costs, and consequently enabling competitive pricing.

As per the Model GST law there is yet another critical area where clarity is needed. It relates to taxability of international freight. The place of supply provisions for transportation of goods has been defined as the location of the recipient, if the recipient is a registered person. If the recipient is un-registered, the place of supply is where the goods are handed over for transportation. Under the present regime, for transportation of goods by vessel, services provided for the outbound movement of goods i.e. exports, have been zero rated, whereas services provided for the inbound movement of goods i.e. imports, are subject to Service Tax. Further, for transportation of goods by air, the services provided, whether for outbound or inbound movement of goods, are exempt from Service Tax.

Under the Model GST Law, it appears that international freight (by air or sea) will be subject to GST, so long as the recipient is located in India. Though zero rated supplies have been defined in the law, the same has not been applied to international freight. It is pertinent that a representation should be made to zero rate international freight under GST, to keep the taxation of freight in line with global practices, with the objective of facilitating international trade.

Additionally, representation should also be made that ancillary services used for the export of goods be afforded the same treatment as international freight, i.e., zero rated. This will be in accordance with international practices adopted in Canada, Singapore, the UK and the EU, for the treatment of services ancillary to freight.

Currently, transportation services enjoy the benefit of abatement which is also expected under GST regime. However, there is no clarity on taxation of petroleum products which are major inputs for this sector Though Union Finance Minister said petroleum products will be zero rated products and would be brought under GST after approval of GST Council. Yet, it is pertinent that this sector obtains clarity well before the GST is implemented.

GST is expected to play a transformative role in the way our economy functions. It will add buoyancy to our economy by developing a common Indian market and reducing the cascading effect on the cost of goods and services. To capitalise on opportunities that the GST regime offers, the industry must engage in discussions with the government with the help of Trade associations, Chambers and Consultants.