The many niggling problems associated with the hurried deadline for implementing the goods and services tax (GST) are beginning to manifest themselves in ways that could add significantly to the costs of doing business in India. The glitches caused by the functioning of the e-way bill system and the delays in exporters receiving integrated GST (IGST) refunds are yet to be sorted out, even as several new issues are sending firms into a tizzy. The first is a somewhat strange ruling from the Authority of Advance Ruling (AAR) in Karnataka that the activities performed by a company’s head office — such as accounts, HR, IT and other administrative duties — will be treated as supply and the GST be imposed on the salary cost of employees working in the head office. Although the branch office is entitled to claim full input tax credit, the cost of compliance, not to forget the inevitable inconsistencies between company and tax authorities in valuing head office costs, is surely unnecessary when the head office and branch office form a single tax-paying entity.
The Karnataka authority has argued that the ruling follows the letter of the GST Act, which treats head office and branch offices as distinct legal entities, but this is principally to fit in with the destination-based nature of the GST. As tax experts have pointed out, it is inconsistent with the spirit of the law. A similar issue that flows from the nature of the GST has arisen with respect to ex-factory sales across states. A company in one state that decides to, say, source its products from a factory in another state could be liable to pay the IGST, which could raise compliance costs and headaches for manufacturers across the board for no good reason.
The classic problem that has afflicted Indian taxation systems from the start — that of inverted duty structures, in which duties on final goods are lower than input rates — appears to have afflicted the GST as well, and, in this case, may impact the National Democratic Alliance’s Make in India programme. Recently, multinational locomotive manufacturers such as GE, Alstom and Bombardier lobbied the government on this issue. Their contention is that the duty on locomotives is 5 per cent whereas duties on input range between 18 and 28 per cent. In a ruling in July, the GST Council had allowed refunds in cases where duty structures were inverted — in the case of the railways only such refunds are restricted. This means that the wagon makers will have to bear the cost of the extra input tax, a bizarre situation for a country that is hoping to attract more foreign direct investment in heavy engineering.