Goods and Service Tax – “Improving Ease of Doing Business”

Long awaited Constitutional (122^nd) Amendment Bill has been passed by Rajya Sabha on August 3, 2016 and by Lok Sabha on August 8, 2016. The same has been ratified by more than 50% of the states in India as on Sep 04, 2016 and will be forwarded to President for his assent for amendment in constitution. GST Council will be formed accordingly to finalise the GST rates. GST Council is to be headed by Union Finance Minister and consists of State Finance Minister or their representatives. GST Bill will be introduced in the winter session of Parliament in Nov-Dec’2016 and after the passage of same, will be sent to President for his approval and subsequently will become GST Act.

Govt. of India is working very closely with all the stakeholders i.e. States Govt’s, Industry, Council, and Professional Bodies to factor in the proposals in the Model GST Law-2016 and to make the same implemented from F.Y. 2016-17.

Brief Introduction

GST was introduced by France during the year 1954 followed by New Zealand, Japan, Canada and is in existence in more than 150 countries at present. Some countries have Dual Model under GST, wherein separate Central and State GST Rates are there, while others have single Tax rate under GST.

GST is Destination based tax and have uniform rate for Tax for both Goods and Services across nation. GST is seen to be the biggest Tax Reform in India as will bring in Rationalisation of Tax structure besides increased compliances and lower Transaction cost.

Why GST : Goods and Service Tax is an Indirect Tax which will replace all the Central & State Taxes except the Basic Custom Duty and alcoholic liquors meant for human consumption. GST would not only bring in the Ease of Doing Business but also replacing the Multiple Taxes in Central / State Acts, Reduction in Transaction Costs, Reduction in Compliance Costs, Uniform Tax Structure i.e. One Tax Rate across nation, Digital Environment moving to paperless regime, etc.....

Cascading impact of taxes adds to the business inefficiency and Goods and Service Tax will do away with the same as the CGST/SGST/IGST would be calculated on common base.

GST Glance : Worldwide

Levy of Taxes under GST

Central Indirect Taxes i.e. Central Excise Duty, Countervailing Duty on Imports, Special Additional Duty, Service Tax, Surcharges & Cesses, will be subsumed into CGST (Central Goods and Service Tax).

State Taxes i.e. VAT, Entry Tax, Surcharges, Taxes on Lottery, Entertainment tax, Luxury Tax will be subsumed intoSGST (State Goods & Service Tax). Taxes collected by Local bodies shall be out of GST.

CGST and SGST shall be applicable in case of sales made with the state i.e. Intra-State Sale, whereas IGST (Integrated Goods and Service Tax) shall be levied in case of Inter-State Sales.

GST Council having Members from State (Finance Ministers or their Representatives) and Union Finance Minister shall finalise the SGST rates which is uniformly applicable throughout the nation.

Benefits to Stakeholders

GST would benefit all segments of society i.e. Consumers, Industries, Service Providers, Professionals, Central & State Governments.

Most of the goods as on date are subjected to levy of Central Excise Duty @ 12.50% and VAT @ 14.50% thus making the Total Tax Cost at 17% (slightly higher due to cascading impact of Taxes). In the GST regime, the GST Standard rates are expected to be around 20-22%, thus having positive impact on prices of goods. Reduction in tax cost will be ultimately passed on to the consumers.

Goods and Service Tax will take away the present set of exemptions which would give all the businesses level playing field in the competitive environment.

GST is going to be a major shift in moving to Digital environment as all the Tax Payments, CENVAT Ledgers, returns, Refunds will be processed online over internet. The same will also result in Reduction in Compliance cost as all the required will be available online similarly to Income Tax i.e. Form 26AS, Returns, Refunds.....

Impact of GST on Industry

Goods and Service Tax is not only the change in the Indirect Tax Structure but would be “ Business Transformation” as it would have impact on Accounting Systems, Supply Chain Systems, Information Technology Systems, Restructuring of Business Models for Direct Sale / Distributors sale / Warehouse transfer.

Warehouses are set up in various states to leverage out the benefits in terms of CST Cost, which would not be available in GST Regime as the Tax is to be paid on supply from Factory to Warehouse. The same not only adds to the Cash outflow, but would make Industries undertake financially feasibility of same in long run.

Logistics Cost too will come down due to change in sourcing pattern from Inter-State to Intra-State as Input Tax credit is available across the Supply Chain.

Business Associates would prefer to have sourcing from GST Vendors as the same would give them Tax Credit in GST as against sourcing from unregistered and exempted vendors, where the product cost will go up due to non-availability of Input Tax credit with them.

Industries needs to review and align their Corporate Strategies in respect of Expansions, New Projects, impact of GST on ongoing Business Transactions to have smooth flow of operations during migration from Present Tax Structure to GST Regime.

Supply Chain to review sourcing strategies as due to Uniform Taxation structure in GST regime, there would be shift in sourcing from inter-state to intra-state and vice-versa as CST (Central Sales Tax) would be done away with and Input Tax credit is eligible irrespective of Inter/Intra State Purchases.

Cost of Collection of Taxes for the Central / State Govt. will come down as the all the payments, returns, Input Tax Credit ledgers are maintained online over internet.

End of Tax Exemptions Era

Goods and Service Tax will have barely minimum goods and services under Tax Exemption and may cover only those which may pertain to Life saving drugs, agricultural produce.......

Area Based Exemptions will also put to an end in GST Regime and everyone will have level playing field in the market. This would also put an end and control over the tax leakages in the system thereby adding to the Growth in GDP. Tax compliances would increase leading to reduction in litigations. If exemptions continue, Govt. may bring in policy for levy of GST on supplies and may refund back tax collected or define % of refund on tax collected, so as to not to disturb the basic premise of GST.

Shift in Duty Payment under GST Regime from Manufacture Based Duty to Supply Based Duty

GST Regime would bring in shift from concept of “Manufacture” based Duty to “Supply” based duty. Major part on account of Litigations will come to an end as the concept of Manufacture will not of any relevance and the levy of duty in GST regime is supply based.

Further the Input Tax Credits would also have continuity in the entire Supply chain which would reduce the cost of majority of products. For e.g. In the Textile Chain, Cotton, Cotton yarn is subject to State Taxes i.e. VAT/CST, whereas the Fabric is “Tax Free” as is covered under “Items declared to be Goods of Special Importance”. Garments are again subject to VAT/CST but as their main raw material “Fabric”” is tax free, hence product cost becomes expensive by VAT element of 6.05% as on date (wherever Vat rate is 5.50% + Surcharge).

Withdrawal of exemptions of various products in GST regime would eventually lower down the cost of inputs for various products.

Added advantage in the GST is that even the wholesalers / distributors who are not eligible to avail the Input Tax Credit for Central Excise Duty would now be eligible under GST regime for Central Taxes such as CGST / IGST, which can be further set off against their output tax liability.

Registration under GST – (Section 19)

Separate Registration is required at present under Central (Excise, Service Tax) and State Acts (VAT, CST). In GST, single registration is required, which is common for both CGST/SGST. Registration No will consists of 15 digits, wherein first 2 digits represent State Code, next 10 digits represents PAN No. , next two Entity code of the Applicant and remaining left blank intentionally for future use.

Persons falling under Schedule III to Model GST Law are required to be registered under the GST Law. This includes Persons having Aggregate Turnover > ₹ 9 Lacs during F.Y and in case of North Eastern States, this limit is ₹ 4 Lacs p.a.

Persons making Inter-State Sales / Casual Taxable Persons / Persons paying Tax under Reverse Charge / Non-Resident Taxable persons / Persons deducting TDS / Input Service Distributor / Electronic Commerce Operator / Aggregator supplying services under his brand name have to apply for registration, irrespective of Threshold limit of Turnover.

Registration Application is to be filed online at GSTN (site under development), wherein person has to mention and attach all the required details. If the person is having businesses in 10 states, then he has to mention addresses of 10 states in same application. Application if complete in all respects will be approved online by concerned officer and User Name alongwith password is sent to applicant for further download of Certificate online.

Similar process is to be followed for seeking amendment / cancellation online.

Casual Taxable Person and Non Resident Taxable Person shall be given Registration for 90 days which may be further extended to 90 days. (These persons does not have fixed place of business in the state where they undertake assignment for short duration of time).

Casual Taxable Person and Non-Resident Person shall have to deposit the estimated Tax Liability at the time of seeking Registration under GST.

Input Tax Credit (Section 16)

In the current tax structure, CENVAT Credit is linked to inputs, input services, capital goods used in or in relation to the manufacture of Taxable final products, whereas in case of GST, Input Tax Credit is admissible on any supply of goods and / or services which are used or intended to be used in the course or furtherance of businessand includes tax payable under sub-section (3) of Section 7 i.e. Reverse charge.

Input Tax credit is admissible until and unless the goods / services are specifically exempted under the GST Rules / Act.

Input Tax Credit is to be availed within a period of 1 year from the date of issue of Tax Invoice relating to such supply of goods/services. Tax should have been paid into Government treasury or else the Tax credit would not be allowed. This is going to be very harsh provision on recipient goods as would be difficult to monitor. GST Committee at CBEC Level and GST Council should review and punish the defaulter and follow the provisions as covered in Section 87 of Finance Act.(Section 16(11)(c) of Model GST Law)

Input Tax Credit is available to the recipient of goods based upon the Matching Concept, wherein the tax credit availed by the recipient of goods shall be matched online with the tax amount paid by the supplier in respect of goods and services supplied by him. In the event of non-matching tax credit will be disallowed to the recipient of goods. (Matching Concept principle) in GST for Input Tax Credit is similar to Tax Credit (TDS) in Income Tax depicted in Form 26AS. Input Tax Credit is not admissible in various situations as specified under Section 16(9) of Model GST Law which includes mainly goods acquired in relation to construction of Immoveable property, goods under Composition levy, goods or services relating to food and beverages, outdoor catering, beauty treatment, life insurance, health insurance, travel benefits, leave / home travel concession, motor vehicles until they are into such business, goods and services consumed for personal consumption.....

Composition Levy of Tax-(Section 8)

Composition Levy of Tax shall be applicable in respect of registered person whose aggregate turnover in a financial year within the state does not exceed ₹ 50 Lacs. These persons are liable to pay Composition Levy on their turnover at the rate to be decided by the GST Council and the tax levy should not be reflected on the invoice. Furthermore, these persons are not eligible to avail any Input Tax credit against the Input/Input services / Capital Goods. Furthermore no Tax charged is to be shown on Invoice; rather the document to be issued shall be termed as “Bill of Supply” as per GSt provisions.

Returns under GST (Section 27)

Excise, Service Tax & Sales Tax returns are being submitted on various intervals as per specified dates under respective acts. In GST Regime following returns are to be submitted online at GSTIN site.

• Statement of Outward Supplies for to be submitted by 10^th of following Month.
• Statement of Inward supplies to be submitted by 15^th of following Month.
• Monthly Return to be submitted by 20^th of following Month. (Tax can be paid by such date)
• Annual Return to be submitted by 31^st December of next fiscal.
• Persons required for deducting TDS to file return by 10^th of the following month & further to issue TDs Certificates within next 5 days.

Refund under GST (Section 38)

Refund of Central / States Taxes at present is to be claimed from respective authorities and is not admissible in case of accumulated tax credit on account of inverted Tax structure.

Refund provisions have been made very simple and easy for an assessee to comply with. Refund is admissible under GST in the following situations:

• Excess Payment due to mistake.
• Refund of Carry forward of Input Tax Credit. (Due to Inverted Tax Structure)
• Export (Including Deemed Export).
• Refund on Year End Volume Discounts.
• Refund of Pre-Deposit in case of Appeal / Investigation.
• Refund for Tax Payment in respect of supplies to CSD canteens, Un Bodies, Para Military forces...

Refund is to be submitted online and the same shall be submitted within 2 years from the Relevant Date which is defined separately under the Act for each of category, wherever refund arises.

Refund can be withheld by the department if the taxable person has defaulted in furnishing of returns, defaulted in making of tax payment / interest / penalty which has not been by the Court / Appellate authorities.

Payment of Tax- (Section 35)

Tax payment can be made by Internet Banking/ Debit Cards / Credit Cards / RTGS / NEFT and will be credited to Electronic Cash Ledger. The amount of tax deposited may further be used for payment of IGST/CGST/SGST, Interest and Penalties.

Adjustment of Tax Credits:

• IGST credit shall be used first against IGST, then against CGST and finally against SGST.
• CGST credit shall be used first against CGST, then against IGST.
• SGST credit shall be used first against SGST, then against IGST.

There is no cross utilisation of Input Tax Credit between CGST and SGST and vice-versa.

Time and Value of Supply of Goods and Services- (Section 12)

Liability to pay CSGT/SGST arises at the time of Supply of Goods which shall be earliest of the following:

• Date on which goods are removed by supplier of required to be removed.
• Date on which the goods are made available to recipient of goods, if not required to be removed.
• Date on which supplier issues the Invoice.
• Date on which supplier receives the payment.
• Date on which recipient shows receipt of goods in the books of account.

In case of continuous supply of goods where successive account statements / payments are involved, the time of supply shall be the expiry of period to which successive statement of accounts / payment relate.

In case tax is liable to be paid under Reverse charge, then earliest of date of receipt of goods or date on which payment is made or date of receipt of Invoice or date of debit in the books of accounts.

Liability to pay CSGT/SGST arises at the time of Supply of Services which shall be earliest of the following:

• Date on Issue of Invoice or Date of Receipt of Payment whichever is earlier in case the Invoice is issued within prescribed period.
• Date of completion of provision of service or Date of Receipt of Payment if invoice is not issued within prescribed period.

In case of continuous supply of service “where payment is ascertainable” from contract, the date on which payment is liable to be made OR “where payment is not ascertainable” each time when the supplier receives the payment.

E-Commerce Transactions

Buying & Selling of Goods over internet platform for e.g. Flipkart, Amazon, etc has also been brought in GST Regime to control Tax Leakages in the system.

In GST, E-Commerce Operator has to collect an amount out of amount payable / paid at the time of credit of account to supplier or while making payment in cash or any other mode, TCS (Tax collection at source) at such Rate (To be defined by GST Council) and to be deposited by 10^th of following month into Government treasury.

Further E-Commerce operator to issue TCS form to the receiver of payment / supplier of goods.

IGST (Integrated Goods and Service Tax

Supply of Goods in the course of Inter-State Trade or Commerce is subject to levy of IGST. Supply in the course of Inter-State means the supplier and recipient of goods are situated in different states.

Place of Supply of Goods (Section 5)

• Shall be the Location of the Goods at time at which the movement of goods terminates for delivery to recipient.
• If the goods are delivered by supplier or any other person on direction of third person, then Place of Supply shall be the Location of such person.
• Where Goods are assembled at site, Location shall be the Place of Installation of such assembly.
• If the goods are supplied on board or conveyance i.e. vessel or aircraft, then place of supply shall be the location at which such goods are taken on board.

Place of Supply of Services (Section 6)

Wherever Services are rendered to Registered Person, then the Location of such person is considered as Place of supply of goods.

In case services are rendered to a person other than registered person, POS shall be the location of supplier but if the address of service recipient exists in the records of service provider, then the POS shall be the location of recipient, where the address on record exists.

Section 4 to 14 of the IGST Draft Law defines POPS for various services for the purpose of determining liability to pay IGST.

Transitional Provisions under GST

• Amount of CENVAT Credit forward in Return to be allowed as Input Tax Credit during transition from present regime to GST.
• Un-availed CENVAT Credit on Capital Goods not carried forward to be allowed as Input Tax Credit in certain situations. (for e.g. 50% CENVAT Credit on Capital goods to be availed in one F.Y. and 50% in net F.Y.
• During migration from present Tax Structure to GST Regime, CENVAT Credit admissible on Inputs held in Stock.
• During migration from present Tax Structure to GST Regime, CENVAT Credit admissible on Inputs held in Stock during switchover from Composition Scheme to Normal Tax Payment and Tax Credit Reversal / Payment in case of switch over from Normal Tax Structure to Composition Levy.
• Exempted Goods / Job-Work material can be returned to the place of business on or after the appointed day (No Tax Payable if goods returned within 6 months)
• Inputs removed for Job work can be returned on or after the appointed day (No Tax payable)
• Supplementary Invoices, Debit Notes / Credit Notes can be issued for change in price and Tax to be paid as per GST Rates.
• Pending Refund Claims as on the date of Implementation of GST to be processed under earlier law.
• Claim of CENVAT to be disposed off as per Law existing prior to GST Regime.
• Where any semi-finished goods are removed for Job Work & returned on or after appointed day, No Tax shall be payable if Goods after processing are returned within period of 6 months.
• Where any Finished goods are removed for processing not amounts to manufacture, No Tax shall be payable if Goods after processing are returned within period of 6 months.