Loopholes In Model GST Law, List of all Loopholes in GST Law, The Model GST Law makes it clear that the proposed GST regime would have imperfections and anomalies to start with. In this article you may find all Loopholes in Model GST Law, check more details from below….

Loopholes In Model GST Law, List of all Loopholes in GST Law

1. According to Chapter 5, input tax credit on capital goods would not be available for most sectors including transportation, construction and infrastructure. In current system of dual VAT, while the central excise duties and state VAT applies to capital goods, input credits are essentially limited to manufacturing plant and equipment. The lack of input credit on capital goods effectively makes attendant goods and services dearer by atleast 12-14% which implies high, cascading costs across the board. Canada, having a similar excise duty regime before adopting GST, having provided seamless input credit on capital goods is beneficial the Country to the extent of 0.5% of GDP. And given that extent of tax cascading is higher in India, seamless input tax on capital goods would surely lead to benefits higher than 0.5% of GDP, assuming a capital output ratio of 4.

2. Besides, ‘sin’ goods like tobacco items, taxed by Centre and potable alcohol, taxed by States, would remain outside GST, as would petroleum products, till now, which are taxed by both centre and state. It does make sense to include petrogoods under GST with provision for additional top-up taxes. Also, the Central Sales Tax (CST) for inter-state sales, now at 2% needs to be reduced to 1%. Then, originating states need not be compensated for 2% CST for five years

3. The law predicates a move to the concept of transaction value for supply of goods and services with valuation provisions akin to existing customs and excise laws. This will be a departure from the current maximum retail price (MRP) regime for goods in several sectors and will need careful evaluation and implementation to avoid unnecessary disputes. Also, the compliance requirements for services sector, especially, telecom and financial services will be challenging as they will now have to deal with multiple registrations basis their presence in various states. A solution would be to carve out a regime with registration at their primary place of business and use the IGST mechanism for transfer of credits to relevant states.

4. The draft model doesn’t provide for any refund or credit on tax paid on returned goods, potentially imposing double taxation on sellers, i.e, tax paid on returned goods and again when replacements are provided. Online retailers may be worse off as in case of sellers selling goods through ecommerce platforms, the sellers will be at a disadvantage as compared to offline counterparts as GST on sales return may become an additional cost given the mismatch on account of tax collected at source and liability calculated by seller accounting for the goods returned. Accordingly, TCS will create more disputes and hence more litigation. Where currently excise and state VAT laws provide for tax adjustments on goods which are returned within a prescribed time limit, the industry has suggested a provision for refunds and adjustment of tax paid earlier to be incorporate in sales return through mechanism of credit notes raised by sellers on themselves but the govt is however, unable to provide a firm assurance on the matter as of now because the GST law is to be framed in consultation with states.

5. Tourism and hospitality industry is perhaps the only industry in India that not only creates foreign exchange here, but also retains about 98% of it. These are intangible services that can only be consumed within India and are a deemed exporter of services, so there needs to be an exception under Section 2(44) of the draft GST law for the sector as the section classifies export services as services that are consumed abroad. Also, in addition to the proposed VAT and luxury tax which currently have a set-off in draft law, there should be a GST set-off which subsumes interstate levies on transportation, state electricity cesses and liquor tax.


6. Since there would be minimal exemptions in GST, there is no clarity for handset manufacturers as to how the incentives to Make in India work in GST regime as it would be difficult to create a differential duty structure between imported goods and goods manufactured in India. The Govt. presently levies 12.5% countervailing duty on fully made phones imported into India and a similar rate of duty on batteries, chargers and handsets of mobile phones. The duty structure that will make it more expensive to import handsets than to produce them in Country should continue given that businesses have made substantial investments and that such schemes take time to achieve fruition.

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