Exchange offers on products such as televisions, mobile phones and refrigerators are likely to become less attractive under the new goods and services tax (GST) regime, in a potential setback to the consumer durables and electronics industry.

According to the draft rules on valuation released by the government, GST will be applicable on the price of the item, without taking into account the reduction in price on account of the exchange. At present, value-added tax (VAT) is payable only on the cash amount paid.

“Where a new phone is supplied for Rs20,000 along with the exchange of an old phone and if the price of the new phone without exchange is Rs24,000, the open market value of the new phone is Rs24,000," said an illustrative example in the valuation rules.

“This will impact the consumer durable and electronic industry, like TVs, mobile phones, where exchange schemes are common. Currently, VAT is payable only on cash component and not on the barter value of the transaction," said Pratik Jain, leader, indirect tax, at PricewaterhouseCoopers in India.

The government on Sunday released eight sets of rules including those on transition, input tax credit and valuations, to provide clarity to industry and help ready its systems in the transition to the GST regime with effect from 1 July. The industry can provide feedback on four of these sets of rules, which will be finalized in the next meeting of the GST council on 18-19 May.

With the laws also finalized, industry and traders can now move with certainty and change their supply chain and information technology systems to maximize the benefits from GST.

With this, the only remaining unknown will be what tax rates will apply to various goods and services.

Analysts welcomed the rules but said some issues still require clarification.

“The overall draft rules of valuation, transition and input tax credit are along expected lines; it has tried to address industry concerns but will require some clarifications and tweaks. This interim time for feedback is, therefore, welcome," said Harishanker Subramaniam, national leader, indirect tax, EY India.

The draft valuation rules have clarified that in case of inter-state stock transfers or services between two offices of the same company, the tax authorities will not challenge the value of the stock quoted by the company in case the credit is fully available. Further, it has clarified on the valuation of second-hand goods as well as on services such as airlines and insurance which currently enjoy lower service tax incidence.

According to the transition rules, the industry will be able to claim credit on the excise duty paid for a transaction where there is no invoice trail. This presumptive credit will be calculated as 40% of the central GST (CGST) rate.

“While rules for transition stock provide some clarity, deemed credit of only 40% of CGST liability might be lower than expected for many sectors including automobile, aerated beverages etc, which currently attract higher excise duty or would have a higher GST rate of 28%. There is a need for reconsideration of this percentage, at least for a few industry segments," Jain said.

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