Gap in GST law may foster more shell companies, branch closures

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The implementation of the goods and service Tax (GST) on July 1 is likely to pose another challenge for enforcement authorities on the compliance front, due to a deficiency in the law mandating companies to transfer goods to their branches outside their home states, in order to pay interstate GST (IGST).

However, if the same company sell goods to customers on approval basis outside its home state, then the company gets a six-month window to pay IGST.

Surendra Mehta, secretary, the Indian Bullion and Jewellers Association (IBJA) says, “This provision will lead to branch closures and encourage the mushrooming of shell companies at branch locations, to defer GST payment.”

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Indian enterprises and their advisors have been always looking for ways to find loopholes and other ways to reduce, defer or avoid tax payments. Jewellery, textile and other industries where the tax burden is likely to be higher than the rates currently prevailing or those that aren’t paying tax currently but will come under the GST net are the kind where historically unorganised trade and grey market have always persisted.

The difference in the tax implications on transfer to branches outside the home state and sale outside state on approval bases could cause compliance issues.

Rahul Mehta, Chairman, Indian Clothing Manufacturers Association said, “Indian evil genius usually prevails over government policies and regulations. However, under GST, a single trail found in a chain will be noticed and hence, it will not be easy to skip tax sleuths’ eyes.”

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