Entities face issues such as difficulty in coding items in HSN codes, need for filing service tax returns for each state of operation and likely challenges in matching of invoices under the new indirect tax regime.

A month and a half into the roll-out of the goods and services tax (GST), businesses are grappling with a bevy of compliance-related problems — including issues related to classification of items in various tax slabs, return filing-linked compliance requirements and the multiplicity of tax rates. Whether plastic chairs will be classified as a plastic item and get bracketed in a lower tax bracket of up to 18 per cent or find itself clubbed in the 28 per cent tax slab for furniture. Similar is the case with the rate of tax incidence on quilts, which can be 12 per cent in the case of wholly made quilted textile materials, 18 per cent for cotton pillows, mattress and quilts or 28 per cent for quilts in the category of mattress supports.

Coding of goods under various HSN categories is a key challenge as similar goods, such as in the case of quilt, can attract multiple tax rates. While the government is making efforts at clarifying doubts through a series of notifications and Frequently Asked Questions (FAQs), multiplicity of tax rates and difficulties in classification of items under the HSN (Harmonised System Nomenclature) codes are among the challenges being faced by businesses in adapting to the new tax regime.

Giving example of taxation of plastic chairs, M S Mani, senior director, indirect tax, Deloitte Haskins & Sells said: “Plastic items are being taxed at 12 per cent or 18 per cent, while furniture items are taxed at 28 per cent under GST. There is no clarity whether plastic chairs will get classified as a plastic item and get classified in lower tax bracket or get bracketed in the 28 per cent tax slab of furniture.”

Alluding to the complexities of the GST, EY’s tax partner Satya Poddar said that HSN coding of items is a “nightmare” in the new indirect tax regime, as it does not have 5-6 tax rates but a total of “almost 1,100 tax rates”. “HSN coding is a nightmare. Even professionals like us, who eat GST for breakfast, lunch, dinner and even in the tea breaks, we discuss nothing but the GST, I don’t understand HSN coding even now,” he said.
“I’ll give you a very simple example…I was in a meeting with a retailer and he was asking us what is the tax HSN code for a quilt. In Rajasthan, they make quilt, handmade, they take a sheet of a fabric, and they put little bit of cotton in it and make a quilt out of it. Textile fabrics are taxable at 5 per cent, textile garments are taxable at 5 per cent, made up articles are also taxable at 5 per cent, but not always.

Now the question is that whether a quilt is a textiles fabric (taxable at 5 per cent) or an apparel (taxable at 5 per cent or 12 per cent)? They went through HSN coding and got an opinion from legal experts and nobody has been able to give a definitive answer. So we concluded two hours of discussion by saying that let’s go for advance ruling from the government. So this is the degree of complexity,” Poddar said while speaking at a discussion on GST organised by Pahle India Foundation last week.

Volume two of the Economic Survey, authored by Chief Economic Adviser Arvind Subramanian, has however brushed off the concerns raised regarding complexities under the GST regime. “Much of the commentary has suggested that the GST has a complicated tax structure, implicitly comparing the new system with an ideal GST tax structure while implying that the comparison is with the past. It is inaccurate to suggest that the GST is more complicated than the system it replaced, for two related reasons.”

“Previously, every good faced an excise tax levied by the Centre and a state VAT. There were at least 8-10 rates of excises and 3-4 rates of state VATs, the latter potentially different across states. So, a structure of multiple rates (as much as 10 times 4 times 29 states) has been reduced to a structure of 6 rates. More important, uniformity or the principle of “one good, one tax” all over India is now a reality. Previously, different states could impose different taxes on any given product and these could be different from that levied by the Centre,” the Survey said.

Tax experts said that even though the GST has succeeded in harmonising and digitising the tax system but much needs to be done to make its implementation simpler. Issuance of multiple notifications or clarifications tends to send a confusing signal to businesses, Mani said. “Businesses need clarity at the beginning of the month. A series of FAQs in the middle of the month is not conducive for businesses,” he added.

EY’s Tax Partner Abhishek Jain said that one of the primary issues bothering businesses at present is filing of GST returns and how to show transitional credit since the filing window for Form TRAN-1 is likely to open on August 21, while businesses are supposed to file GSTR-3B by August 20. “Opening credit as on June 30 will get reflected in the two forms of transitional credit of TRAN-1 and TRAN-2.

The opening credit then would have got credited automatically in the taxpayers’ profile on the portal. Since the link for filing TRAN-1 form has not yet opened, while GSTR-3B has to be filed by August 20, it may become an issue for taxpayers. Representations have been made to the government regarding the same,” Jain said.

The Economic Survey, however, has argued that requirements of return filings have gone down under GST as compared to the earlier taxation system, except in the case of service tax, wherein agents have to register in every state where they operate in and file returns in each of the states. “It is true that there will be additional documentation requirements on all those who are now part of the GST net. But the filing requirements will comprise filling one set of forms per month (not three as has been alleged because filling the first automatically fills the two others). This will not be an additional burden because similar, sometimes more onerous, requirements existed under the previous state VAT and central excise regimes,” it said.

In the discussions in the GST Council, attempts were made to preserve the simpler system for service tax returns, but “states were nearly unanimous in insisting for multiple registrations as a way to ensure that they receive their due share of revenues”, it added.

Tax experts expect the next hurdle after filing of GST returns would be matching of invoices, which will involve matching of the sales invoices submitted by a supplier against the corresponding purchase invoices submitted by a buyer. Tax experts said that every invoice that is uploaded has to be cross verified by the 15 digit number on it and each of the 15 digits has to be matched with the buyer claiming a credit, but issues may arise when the matching is done line by line, with almost ten different tax rates and each line requiring a separate HSN code.

Giving example of China, where only one step verification is required, Poddar said, “In China, they have a fully automated system but the three steps are reduced to one step and that gives you tremendous simplification vis-a-vis India. In China, any invoice that is issued, barring a business dealer, which will lead to an input tax credit claim by the buyer, all the B2B invoices are issued using a government application software for issuance of invoices. So once the invoice is issued using the government software, it automatically creates a validity check because information by the vendor is automatically mailed to the tax department and the tax department then automatically verify if somebody is claiming an input tax credit for a given input invoice. Then they know that if this invoice is issued by the software which is controlled and designed by the government, there is no need for confirmation. So if you have adopted the system, this would have eliminated the need for cross matching of invoices. Three steps would have been reduced into one.”