The GST is an indirect tax regime that replaces all the central and state taxes with a aim to do away with a highly complex tax regime involving multiple layers of taxation by the centre and the states. The author analyses the impact on Defence procurement —

The 101st Constitution Amendment Act that came into effect on 8th September 2016 clearing the decks for the biggest tax reform since India's independence in 1947. The subsequent mid-night joint session of the parliament on 30th June this year to usher in the Goods and Services Tax (GST) regime was historic for it was the first time that a mid-night session was held to welcome an impending change rather than to commemorate a past event like the Quit India movement or the 50th anniversary of the Independence Day. It was a grand finale to the 17 year long struggle characterised by strong pulls and pressures within India's disputatious legislative class.

The GST is an indirect tax regime that replaces all the central and state taxes, including Value Added Tax (VAT) and the Excise Duty, with a single tax with in a bid to do away with a highly complex tax regime involving multiple layers of taxation by the centre and the states. The earlier multiple taxation structure added to the overhead costs and impeded business. In contrast, GST is a destination-based tax structure applicable at uniform rates across the country to all goods other than alcoholic liquor for human consumption and five petroleum products.

There are three components of GST: Central GST (CGST), State GST (SGST)) and the Integrated GST (IGST). While the first two will be levied by the central and the state (or Union Territories) governments respectively, the IGST will be levied by the central government on inter-state supplies and apportioned between the centre and the state (or the Union Territory) where the goods and services are eventually supplied. With some exceptions and exemptions, which implies that some goods will not be taxed or subjected to lesser tax rates, all goods and services will be taxed the rate of 5, 12, 18 or 28 per cent. The entire GST regime, including the tax slabs and classification of goods and services under each slab, will be governed by the GST Council comprising the finance ministers of all states and headed by the union finance minister.

The initial enthusiasm with which the GST rollout was welcomed seems to have been blunted by the ubiquitous difficulties in its implementation and classification of goods and services which, in some cases, seem to have also increased the tax liability. Realising that keeping a large number of items in the highest tax slab could be counter-productive, the GST Council in its meeting of 10th November 2017 took out 178 of the 227 items in the highest 28 per cent tax slab and placed them in the lower tax slab of 18 per cent, although it entails revenue implication of approximately Rs 20,000 crore annually. There is already a speculation of the GST Council considering pruning of the list of goods and services in the 5 per cent and 12 cent tax slabs in its next meeting. This is a comparatively easier task, notwithstanding the loss of revenue that such an exercise may entail. What has emerged as a more challenging task in the past four months since GST rollout on 1st July 2017 is ironing out of the difficulties being faced in its implementation.

It is a measure of the magnitude of the problem that the Confederation of All India Traders (CAIT), which is a pan-India body of traders and Micro, Small and Medium Enterprises (MSMEs), has threatened to sue the IT companies for the glitches in the systems developed by them for online filing of the returns.  While the filing woes affect everyone affected by the GST regime, a number of sector-specific problems are adding to those woes. These problems warrant immediate attention of not just the Ministry of Finance and the GST Council but also of the administrative ministries concerned.

The Ministry of Defence is one of the biggest procurers of goods and services. It is not surprising that a large number of sector-specific doubts have cropped up as can be seen from the website of the Defence Accounts Department (DAD) which plays a direct or indirect role in every single paisa that is spent from the defence budget. The department has set up a GST Cell in the office of the Controller General of Defence Accounts (CGDA) to deal with the issues that have cropped up and to its credit the cell has been dealing with those issues with great alacrity, going to the extent of organising training programmes for its personnel in collaboration with the Regional Training Institutes of the National Academy of Customs, Excise & Narcotics (NACES) at Bengaluru, Kolkata, Mumbai, Kanpur and New Delhi. For the present, registration of the paying authorities and the manner of implementation in relation to the ongoing contracts seem to be two major areas of concern.

Registration of the Drawing and Disbursing Officer (DDOs)

As per Section 51 of the Central GST Act, 2017, tax is required to be deducted at the rate of one per cent each on account of CGST and SGST from the payment made or credited to the supplier of taxable goods and/or services,  where the total value of such supply under a contract exceeds Rs 25 lakh (excluding Central tax, State tax, Union territory tax, Integrated Tax and Cess indicated in the invoice), except where the location of the supplier and the place of supply is in a State or Union territory which is different from the State or the Union territory of registration of the recipient. In those cases where the supplier is not liable to pay the GST because of his/her aggregate business turnover being less than the taxable threshold, the GST is to be paid by the recipient on a reverse charge basis in terms of Section 9 (4) of the said Act. This implies that the paying authorities have to play the role of not just tax deductors but also tax collectors.

While various offices of the Defence Accounts located all over the country are the main paying  authorities, payment is also made by the units and formations of the Armed Forces in a large number of cases out of the Supply & Services and other types of imprest accounts and cash assignments. Some of them are located in far flung areas of the country but each one of them is required to register under the GST regime and obtain a unique GST Identification Number, or GSTIN. The process of registration of such authorities has commenced only on 4th October 2017. As there are a large number of paying authorities, or DDOs, that need to register, it may take a while before everyone obtains a GSTIN, which is why the government has decided to commence deduction/collection of tax at source only from 1st April 2018.

Ensuring no paying authority fails to register is the very first challenge, not least because some issues have already come up concerning the process of registration which requires the registering entity to disclose its address. For paying authorities located in sensitive areas, as also for those entities which are mobile units of the Armed Forces, this could create a problem. It is understood that the GST Cell of the Defence Accounts Department has suggested that in such cases the paying authorities should be permitted to use the address of the permanent formations under whose administrative jurisdiction the units that are mobile or located in sensitive areas happen to be functioning. Any delay in resolving this issue could impede the process of registration. Alongside the process of registration, the paying authorities will also need to modify the software they have been using for processing the bills and making payment to the suppliers. It is issues like these that will need to be ironed out to ensure that tax deduction/collection starts in the right earnest from 1st April next year.

Dealing with the impact of GST rates on concluded contracts

There are contracts which provide for reimbursement of taxes at actuals, while some other contracts are awarded based on fixed price which is inclusive of all taxes. The works contracts are often based on Schedule of Rates, which includes fixed rates of various standard items of works inclusive of taxes. All these contracts will be impacted by the GST. Where, for example, the existing contracts are based on fixed price, inclusive of taxes it would have been necessary to amend each contract to replace the nomenclature of various taxes mentioned in the contract with the new terms, irrespective of  whether or not the GST rates enhance the tax liability of the suppliers. To mitigate the hardship this could cause, the Ministry of Defence has decided that all such contracts would be deemed to have been automatically amended. It has also been decided that any change in the value of the contract due to change in the statutory levy of taxes would not require a de novo approval of the Competent Financial Authority (CFA). But issues remain.

One, in some cases the tax liability for the supplier may go up if the GST rate is higher than the tax payable on the same goods or services in the pre-GST era. It is not clear whether in such cases any relief is contemplated for the hapless supplier who is otherwise bound to supply the goods and services at the contracted price. Two, there is no provision in the GST Act for reimbursement by the buyer of taxes paid by the supplier which will make inoperative the provision in some existing contracts for such reimbursement based the actual. It is not clear whether the supplier will be able to claim refund of this amount from the tax authorities or will have to bear the taxes paid by him as these will no more be reimburseable/refundable even if the contract provides for such reimbursement.

Three, tax is to be deducted/collected at source by the DDOs based on the cost of supply, exclusive of tax paid by such supplier. In fixed-price, all-inclusive, contracts, the breakdown of the contracted price into the basic price of the goods and/or services and the tax payable on that will not be available in the contract. In each such case, therefore, the supplier will have to be asked to furnish the detailed breakdown, unless he/she gives it in the invoice on his/her own. Without this information it will not be possible to determine the amount of tax to be deducted/collected by the DDOs as the calculation will need to be based on the taxable element and not on the composite price.

Four, certain services were exempted, or on which Service Tax was charged at an abated rate of 6 percent, in the pre-GST era are now taxable. This category includes services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a road, bridge, tunnel, or terminal for use by the general public. Under the GST regime, the works contractor can claim the Input Tax Credit of the tax paid by him on all goods used by him (including capital goods) and reduce his/her liability to pay output tax. According to a 17th July 2017 note of the Department of Revenue, all such contracts will have to be renegotiated and, depending on the Input Tax Credit availability for the remaining part of the contract after calculating the new rate of tax, the new contract price may have to be re-fixed. This could have a huge impact on some works contract, especially those being managed by the Border Roads Organisation. As of now it is not clear how this will pan out.

Impact on defence budget

In April 2015, the Government of India decided to withdraw excise and customs duty exemptions available to the Defence Public Sector Undertakings and the Ordnance Factories ostensibly with a view to providing a level playing field to the private sector companies. Going by the fact that the public sector continues to dominate defence manufacturing in India it is difficult to say whether it actually helped the private sector but one thing is sure: it increased the tax burden on the defence budget without a commensurate increase in the budget outlay. This issue has resurfaced with the introduction of the GST regime which entails uncertainty about the extent of additional strain it might put on the defence budget. What adds another dimension to this uncertainty is the provision in the GST Act which prescribes heavy penalty for delay in crediting the tax deducted/collected at source. The paying authorities will need to gear up for meeting this challenge as well as the challenge of timely online filings of numerous reports and returns. For the present the moment of reckoning for the paying authorities of the Defence Accounts Department and the Armed Forces has stands deferred to 1st April 2018 but it is not too far away to brook any complacency.