Goods & Services Tax (GST) A Conceptual Startup

1. WELCOME Goods & Services Tax (GST)A Conceptual Startup Rakesh Garg, FCA

2. Progress Towards GST • 2004 : Dr. Kelkar Task Force recommended the need of a National GST • Jan. 2007: First GST study released by Dr. Shome. • 2007 : Consultation with stakeholders on GST Model. • 1st April 2007 : CST phase out started. • May 2007: Joint Working Groups appointed by Empowered Committee. • Nov. 2007: Joint Working Groups submitted reports.

3. Progress Towards GST • Feb. 2008 : F.M. Announced introduction of GST from 1 April 2010 in 2008-09 Budget Speech. • April 2008 : Empowered Committee (EC) finalised views on GST Structure. • July 2009: F.M. Announced Dual GST from 1 April 2010 in Budget Speech 2009-10. • Nov. 2009: Release of First Discussion Paper (FDP) – It is not a White Paper • Consultation on model of inter-State transactions, drafting of Legislations, RNR and other issues - In progress. • 1st April 2010 : Implementation of GST ?

4. Present Indirect Tax Structure • Two separate VAT systems operate simulta-neously at two levels, Centre and State, and tax paid under one is not available as set-off (input tax credit) against the other. • Tax on services is under separate legislation by Centre. • No comprehensive taxation of services at the State level; few services are taxed under separate enactments like electricity, entertainment, etc. • Imports in the country are not subjected to VAT. It is subject to customs duty, CVD and SAD.

5. State & Centre - Powers to Tax

6. What is GST • GST is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. • GST is levied at every stage of the production-distribution chain till retail level with applicable set-offs in respect of the tax remitted at previous stages. It is basically a tax on final consumption. • To put at a single place, GST may be defined as a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service.

7. Integration of Indirect Taxes of Centre and the States… • This system is basically designed to simplify current level indirect tax system. • It can integrates the union excise duties, customs duties, service tax and state VAT into a single levy, known as GST. • About 150 countries across the world have introduced GST or Federal VAT in one form or the other. The GST rate in various countries ranges from as low as 5 per cent in Taiwan to as high as 25 per cent in Denmark.

8. GST Rate - Globally

9. Why do we need GST today • In today's Indian economy, where service sector contributes over 55%, separate taxation of goods and services is neither viable nor desirable. • To strike a good balance between fiscal autonomy of the Centre and States. • Need for harmonization. • Value added in manufacture and sale of goods require inputs tax credit of both — goods and services and vice a versa, which is often not separable.

10. Seamless Credit for Goods and Services • It shall replace multiple taxes with a single tax operating at various levels of supply chain, thus, avoiding the cascading effect of multiple taxes. • Also, it shall cover all goods and services, unlike the present system, with a negative or exempted list. • It will also end the distortion in differential tax treatment of various goods and services. GST is going to be pinnacle of achieving an integration of excise duties, service tax, State Value Added Tax and other local taxes.

11. India to have - Dual GST • Three Models of GST: - • Central GST, • State GST, • Dual GST. • Budget Speech 2009-10: the Finance Minister Shri Pranab Mukherjee informed the House: - Para 85 : …………… The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively.

12. FIRST DISCUSSION PAPER On GST by Empowered Committee [Released on 10.11.2009]

13. Structure of GST in India-FDP • A Dual GST structure with defined functions and responsibilities of the Centre and the States. • The GST in India shall have two components: • One levied by the Centre (hereinafter referred to as CGST), and • the other levied by the States (hereinafter referred to as SGST).

14. Structure of GST in India-FDP • Multiple Statutes (one for CGST and SGST Statute for every State). • However, the basic features of law, such as, chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification, etc. will be uniform. • CGST and the SGST to be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

15. Structure of GST in India-FDP • CGST and SGST will be treated separately. • Taxes paid against the CGST will be allowed to be taken as ITC for the CGST and could be utilized only against the payment of CGST. • The same principle will be applicable for SGST. • A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. • Cross utilization of ITC between CGST and SGST will not be allowed except in inter-State supply of goods and services under the IGST model .

16. Taxes Likely To Be Subsumed In CGST Central Taxes/Duties – • YES: • Excise duty, • Additional Excise duty, CVD, SAD, • Service Tax, • Surcharge and cess. • NO: • Basic Customs Duty, • Specific Cess, • Excise duty on tobacco products.

17. Taxes Likely To Be Subsumed In SGST State Taxes/Duties – • YES: • State VAT, • Entertainment tax unless levied by local bodies, • Luxury tax, • Tax on Lottery, betting and gambling • Entry tax not in lieu of octroi, • Cess/Surcharge relating to supply of goods/services • NO: • Entertainment tax (local Bodies), • Entry tax for local bodies, • Electricity duty and cess, • Stamp Duty

18. Indian GST – No more CST • Favorable Impact: • Cost to be lowered by 2%; • No more declaration form like form C & F. • Against: • Might be a Tax on stock transfers; • Concessions to infra-structure projects and power sector for purchasing at concessional rate against Form C might go; • Sale in the course of import/High Seas sale; • Transit sale against form E-I; • No more Concessions against Form H / I / J.

19. Taxes/Activates Outside the Scope of Indian GST • Alcoholic Products • Petroleum products • Electricity – Impact on Power Sector • Stamp Duty – Impact on Real Estate Sector – Other than Works Contractors • Education Sector • Service Tax on Transport Sector - ? • Agriculture - ? Loss: Non-availability of Input Tax Credit of GST Tobacco products would be subject to GST with ITC (+) Excise Duty by Centre Subject to Sales Tax? Tax on Central Sale? Parallel Statutes?

20. Likely Rate (RNR) • NOT ANNOUNCED IN FDP • It is envisaged that the framework of dual GST would embody multiple rate of taxes for goods, but a single rate for services within a state. • There are indications that the rate could be in the range of 16-20 per cent. • Central GST – 10% to 12%; and State GST – 6% to 8%.

21. Indian GST – Rate Structure • Two-Rate structure: Lower and Standard Rate. • Precious metals and stones might be at low rate. • GST Exemption for some item. • Some Goods at lower rate (excludes Industrial inputs). • Certain Petroleum products likely to be outside the GST regime. • Liquor and narcotics might also be excluded from GST regime. • Single tax rate for services.

22. Indian GST – Rate Structure • Exempted products: - Food Grains, Bread, Salt, Milk, Vegetables, Meat, Fish – More are exempted items: Higher be RNR • Goods at lower rate: - Tea, Milk powder, Coffee beans, Toy, Beedi, Bicycles • Govt. aided public health and education likely to be exempted. • Multiple Rates : Interpretational Issues, which can be minimized by adopting HSN

23. How Indian GST will work within the State Tax Paid on Purchases Input CGST Input SGST I Tax Charged on Sales Output CGST Output SGST O Tax Payable to Govt. O – I To Centre O – I To State N No Cross set-off of CGST & SGST, Generally

24. Present vs. Future

25. Indian GST – Threshold Limits

26. Indian GST – Composition Scheme • There may be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. • The scheme will also allow option for GST registration for dealers with turnover below compounding cut-off. • However, activity / business wise composition scheme is recommended.

27. Indian GST – Registration • Multiple Registration - Separate registration under the CGST and every such State where the person has his place of business • Impact of Service Providers – Facility of centralized registration might go; and they might have to take registration in every such State where they have place of business • Maintain separate books of accounts at the place of registration • Cross credit of various SGST to Service providers ?

28. Indian GST – Payment of Tax and Administration • The taxpayer would submit periodical returns, in common format to both the CGST authority and to the concerned SGST authorities . • CGST and SGST will be paid to the accounts of the Centre and the States separately. • Account-heads for all services and goods would have indication whether it relates to CGST or SGST (with identification of the State to whom the tax is to be credited) .

29. Indian GST – Payment of Tax and Administration • Administration of the CGST to the Centre and of the SGST to the States would be given. • That is, the Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed. • Uniform procedure for collection of both CGST and SGST will be prescribed in the respective Legislation for CGST and SGST.

30. Indian GST – Refunds • Credit accumulation on account of refund of GST would be avoided except in the cases, such as, - • exports, • purchase of capital goods, • input tax at higher rate than output tax etc., • Refund/Adjustment will be allowed in time bound manner.

31. Indian GST – Other Features • 13 digit PAN based Common TIN registration - It will facilitate data exchange and taxpayer compliance . • TINXSYS to track transactions. • Functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States

32. Input Credit Mechanism • Input tax credit to be available for Central GST as well as State GST paid irrespective of the collecting agency. • However, indications are that Cross credit between Central GST and State GST will not be allowed. • Create a nationwide clearing house mechanism to facilitate transfer of Central and State GST and allow credit for tax paid.

33. Impact on International Trade • Importer of goods and services – GST to be paid under Reverse Charge Mechanism. At present, import of goods is subject to CVD and SAD; but no VAT is payable on import. Thus, GST will increase the investment in import, of course, subject to eligibility of ITC. Note: Basic Customs Duty not to be subsumed in GST • Exporter of goods are services – It shall continue to be zero rated and will be eligible to claim refund of input tax credit.

34. Inter-State Transactions Time when Inter-State Transaction take place • Sale of Tangible Goods : Might depend either upon movement of goods or location of parties. • Sale of Intangible Goods & Provision of Services : Might depend either upon location of parties or consumption of service. • Composite Transactions involving Goods & Services : Might be treated as provision of services.

35. Inter-State Transactions Supply of services or intangible property might generally be taxable in a jurisdiction depending upon one or more of the following factors: • Place of performance of the service, • Place of use or enjoyment of the service or intangible property, • Place of residence/location of the recipient, or • Place of residence/location of the supplier.

36. Inter-State Transactions Possible Place of Taxation • B2B Transactions : Place of destination can be the place where recipient is established or located. • B2C Transactions : • Supplies of a tangible/ physical nature (e.g., hotel accommodation, hair cuts & entertainment services) - Place of destination could be the place where the supplier is established or located, which is generally also the place where the service is performed.

37. Inter-State Transactions Possible Place of Taxation (contd…) • B2C Transactions (contd….): • For mobile supplies of an intangible nature (e.g., telecommunication and e-commerce services) or general insurance service - Place of supply could be the place of residence of the customer, or the place where services are used or enjoyed. • Special rules for specific supplies can be designed to yield best results. • Declaration Forms to be discontinued.

38. Inter-State Transactions Place of Payment of Tax - Models • Tax Payment by exporting dealer in his State to the account of receiving state, and Credit allowed to the buying dealer by receiving state on verification, • Tax Payment by importing dealer in his State on reverse charge method, • Demat Form C Model, • Reverse Charge Model with Demat C Form,

39. Inter-State Transactions Place of Payment of Tax – Models – contd.. • IGST Model: • Tax Payment by exporting dealer to the account of Centre as IGST after adjusting SGST & CGST. • Credit allowed to the buying dealer of IGST against IGST,CGST or SGST. • Settlement of IGST Account between receiving and exporting states by clearing agency. • Same principle for stock transfers.

40. Inter-State Transactions Pre-Requisites of all Models • Extensive Computerization and strong IT infrastructure, • E-filing of periodical returns, • E-payment of tax, • Common tax period, • National portal for access of information, and • National Agency.

41. Indian GST - IGST Model Between the States Exporting State Tax Paid on Purchases Input CGST (say 100) Input SGST (say 100) I Tax Charged on Central Sales Output IGST = CGST + SGST (Say) 220 = 110 + 110 O Tax Payable to Central Govt. B – input IGST – CGST – SGST 220 – 0 – 100 – 100 = 20 N Exporting State will pay to Centre Rs.100/- (SGST recd. on inputs)

42. Indian GST - IGST Model Between the States Importing State Tax Paid on Central Purchases Input IGST I Tax Charged on Local Sales Output CGST Output SGST O Tax Payable to Govt. Output CGST (O) Output SGST – IGST [O-I] N Centre will pay to Importing State amount of input IGST

43. Impact on Industry – Single Taxable Event • The “taxable event” will be the “supply of goods and services”. • Hence, the current taxable events such as ‘manufacture of goods’ for excise, ‘sale of goods’ for VAT and CST and ‘rendition of services’ will be irrelevant under GST Regime. • A transaction of supply of goods will attract both the CGST and SGST as applicable on goods. • Similarly a ‘supply of service’ will attract both the CGST and SGST as applicable on services.

44. Impact on Existing Exemptions • Exemptions can be classified into two parts: (a) Area Based Exemption, such as, North East, J&K etc. – These exemptions might continue till their current eligibility period. • Industrial Incentive Exemption – These exemptions might be converted into cash refund. • Any new exemption, remission, etc. or continuation of earlier exemption, remission, etc. would not be allowed.

45. Impact on Industry – In General • Change in concept and procedure. • Interpretation issues, such as whether a transaction is sale or service or composite transaction, e.g., works contract will get resolved. • Change in tax-rates – Impact on sale price. • Changed system of input tax credit. • Seamless credit to trade and industry throughout supply chain will improve competitiveness. • Common Tax Base will eliminate tax cascading. • CST phase-out will reduce supply chain cost. • Economy in production & efficiency in distribution.

46. Impact on Industry – In General • Simplified structure to reduce transaction cost • Stock transfer within the State or from one State to another – Whether to be treated as sale. • Situs issue, i.e., where particular transaction would be taxed, might resolve. • Upgradation of Software. • Training: A comprehensive training will be required to the staff members of the business community, both at senior and junior level.

47. Impact on Industry – Adverse on Some Sectors • Increased tax incidence on distributive trade and services due to dual GST. • Increased tax incidence on infrastructure due to possible cross GST non availability of tax credit. • Continuing electricity duty, entertainment tax & Cess will adversely affect some sectors due to double taxation. • To exclude stamp duty from GST, will not be in the interest of Real Estate Sector. • Impact on certain products due to rate increase.

48. Unanswered Questions in FDP • Rate structure • Levy of Purchase Tax on Foodgrain • Compensation to the States • Situs of inter-State transactions: B2B and B2C supply of goods and services • Input Tax Credit set-off – IGST / CGST / SGST • Time and basis of allowing input tax credit • Taxation on transfers of goods between two States • When & How transfer of services takes place • Multiple Threshold Limits

49. Challenges before the Govt. • Constitutional Amendments. • Enactment of Legislatures. • Integration of a large number of Central & State Taxes – multiplicity of taxes and tax rates. • Rationalisation of thresholds and exemption limits. • To decide whether GST would be multi point levy or levy at final consumptions. • Operating a seamless input credit system – So that there is no cascading. • Integrating the origin based tax with the destination based GST.

50. Challenges before the Govt… • Efficacy and integration of broad based computerizations across the Nation. • Standardisation of systems and procedures. • Treatment of existing exemptions in Central Excise, VAT, etc. • Treatment of chargeability of Alcohol, petroleum products which are likely to be out of the GST regime. • Various other issues like inter-State transfer of goods, cross border taxation of services, place of taxation, timing of taxations, etc.