GST News Alert - Highlights of the GST Bills | EY INDIA

1. 28 March 2017 EY – GST News Alert Highlights of the GST Bills, 2017 introduced in Lok Sabha Executive summary This News Alert provides highlights of the Goods and Services Tax (GST) Bills, 2017 introduced in the Lok Sabha on 27 March 2017. This Alert provides an insightful coverage of news related to GST and recent developments that are likely to impact trade. It will act as a summary to keep you on top of the latest GST news. For more information, please contact your EY advisor. The Union Finance Minister, Mr. Arun J aitley, tabled four GST Bills in the ongoing Budget session of the Parliament. The Bills introduced in the Lok Sabha include Central GST (CGST), Integrated GST (IGST), Union Territory GST (UTGST) and the Bill for Compensation to States. The Bills were earlier cleared by the GST Council, followed by Union Cabinet approval. According to media report, the GST Bills, although introduced as Money Bills, shall be taken up for discussion in both the houses of the Parliament before their passage in the current session. The Business Advisory Committee of Lok Sabha will meet to decide on the duration of discussion on the Bills, which is likely to commence on 29 March 2017. The revised draft of the Model GST law, which was released in the public domain in November 2016, has been split into CGST, SGST and UTGST Bills apart from IGST Bill. The draft of the Model GST Law underwent further changes before being introduced in the Parliament. Some of the significant changes are contained in the definitions, levy of tax, input tax credit, transitional provisions, zero rated supply etc. The list of exemption, classification of goods and services, and machinery provisions including valuation and other rules are yet to be notified. Subsequent to the passage of Central GST Bills in the Parliament, states will take up State GST Bills for clearance in the respective state legislative assemblies.

2. GST update ► The term “drawback” has been defined and is same as under the current Drawback Rules. ► The Union Finance Minister, Mr. Arun J aitley, tabled four Central Goods and Services Tax (GST) Bills, 2017 in the ongoing Budget session of Parliament. The bills introduced in Lok Sabha include Central GST (CGST), Integrated GST (IGST), Union Territory GST (UTGST) and the Bill for Compensation to States. ► The definition of the term “government” has been restricted to mean only the Central Government under CGST. ► Installations, structures and vessels in the continental shelf of India and EEZ of India for the purpose of prospecting, extraction or production and supply of mineral oil and natural gas have been removed from the definition of “India.” ► The Bills were earlier cleared by the GST Council, followed by Union Cabinet approval. According to media report, the GST Bills, although introduced as Money Bills, shall be taken up for discussion in both the houses of the Parliament before their passage in the current session. The Business Advisory Committee of the Lok Sabha will decide on the duration of discussion on the Bills, which is likely to commence on 29 March 2017. ► “State” has been defined to include Union Territories with legislature, i.e., Delhi and Puducherry. ► “Union Territory” means: (a) Andaman and Nicobar Islands (b) Lakshadweep (c) Dadra and Nagar Haveli (d) Daman and Diu (e) Chandigarh (f) Other territory ► The revised draft of the Model GST Law, which was released in the public domain in November 2016, has been split into CGST, SGST and UTGST Bills apart from IGST Bill. The draft of the Model GST Law underwent further changes before being introduced in the Parliament. ► The term “voucher” referred to in the time of supply has been defined as under: “Voucher means an instrument where there is an obligation to accept it as a consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identities of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument.” The changes contained in the definitions, levy of tax, input tax credit, transitional provisions, zero rated supply and other provisions are highlighted below. ► Key changes in CGST Bill, 2017 ► CGST Law shall apply to the whole of India except the State of J ammu and Kashmir. ► In a bid to remove ambiguity, the definition of works contract has been amended. It appears that only contracts related to immovable property are to be considered as works contract. Definitions ► Definition of “Agriculturist” has been amended to cover an individual or any Hindu Undivided Family cultivating land either through own labor or hired labor under individual or family supervision. Earlier, “agriculturist” referred “any person” cultivating land. ► Apart from the aforesaid definitions, there are several other new definitions, which include appellate authority, authorised representative, competent authority, family, manufacture and registered person. ► The proviso dealing with “deposit” under the definition of “consideration” has been amended to exclude the words “whether refundable or not” for the treatment of “deposit” given in the course of supply.

3. Supply Composition levy ► As per Schedule I (dealing with supply made without consideration) read with section 7, gifts not exceeding INR50,000 in value in a financial year by an employer to an employee (considered as related parties) shall not be treated as supply of goods or services. ► The Government may by notification increase the threshold limit for composite dealers from INR50 lakh to INR1 crore on the recommendation of the Council. ► Tax rates for composite dealers are prescribed as follows: ► Schedule III (dealing with activities not treated as goods or services) has undergone the following changes: ► For manufacturers — 1% of turnover in state or turnover in Union Territory, ► In case of composite supply involving food (restaurant services etc.) — 2.5% of turnover ► In case of other suppliers — 0.5% of turnover Actionable claims other than lottery, betting and gambling shall not be treated as supply of goods or services. ► Earlier, services by foreign diplomatic mission located in India were neither treated as goods nor services. However, this entry has now been deleted. ► Time of supply ► Time of supply of services shall be the earliest of the following: ► When invoice is issued within the prescribed period — date of issue of invoice or date of receipt of payment, whichever is earlier Constructed building (where entire consideration is received after issuance of completion certificate) and sale of land are not to be treated as supply of goods or services. ► ► When invoice is not issued within the prescribed period — date of provision of service or date of receipt of payment, whichever is earlier ► CGST is applicable on intra-state supplies goods or services except on supply of alcoholic liquor for human consumption. ► In cases not covered above — date on which the recipient shows the receipt of services in the books of account. ► The CGST rate cap has been increased from 14% to 20% . ► Time of supply in case of addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which supplier receives such addition in value. ► Central tax (i.e., CGST) will be levied on supply of petroleum crude, high-speed diesel (HSD), petrol, natural gas and aviation turbine fuel (ATF) from such date as may be notified by the Government on recommendation of the Council. Input tax credit ► A registered person procuring taxable goods or services from an unregistered person will be required to pay tax under reverse charge basis. This amendment is likely to have a massive impact on the compliance complexity for taxpayers as also on the competitiveness of unregistered entities. ► Where the recipient fails to make payment to the supplier of goods/services within 180 days (this was earlier 3 months and only for services) from the date of issue of invoice, an amount equal to input tax credit (ITC) availed by the recipient shall be added to his output tax liability, along with interest. ► The recipient shall be entitled to re-avail the ITC on subsequent payment to

4. supplier. There is no provision for claiming back the interest. ► There is no need to issue a tax invoice/bill of supply if the value of supply is less than INR200, subject to prescribed conditions. Earlier, the said limit was INR100 in case of bill of supply. ► In addition to taxable supplies on which reverse charge is applicable, the value of exempt supply also includes transaction in securities, sale of land and constructed building for non-eligibility of ITC. ► If a receipt voucher has been issued on receipt of advance payment for goods or services but subsequently no supply is made, the supplier is required to issue a refund voucher against such advance payment. The said provision would adversely impact credit availment. ► In case of a banking company or financial institution, including a non-banking financial institution, the restriction of 50% of ITC shall not apply in case of supplies made between different registered units within the same legal entity. ► A person liable to pay tax under reverse charge has to issue a payment voucher at the time of making payment to the supplier. ► In case of rent a cab, life insurance and health insurance services, ITC can be availed in case the person makes an outward taxable supply of the same category of goods or services. Accounts and records ► Transporter, irrespective of whether he is registered or not, is required to maintain records of consignor, consignee and other relevant details of goods as prescribed. ► ITC will not be available on goods and services procured locally by non-resident taxable person. ► Books of account and records shall be required to be retained for 72 months from the due date of furnishing of annual return instead of 60 months as per earlier draft. ► Plant and machinery for the purpose of ITC now excludes telecommunication towers and pipelines laid outside the factory premises. Consequentially, the provisions allowing credit on telecom towers and pipelines over a period of three years have been deleted. Returns ► Furnishing details of outward supplies will not be allowed from days 11 to 15 of the month succeeding the relevant tax period. Registration ► While furnishing the details of inward supplies, details of imported goods on which IGST is payable under section 3 of the Customs Tariff Act, 1975 are also to be furnished. ► Provisions earlier contained in Schedule V have been merged with the provisions of Registration under Chapter VI. ► A person who makes a supply from the territorial waters of India shall obtain registration in the coastal state or Union Territory where the nearest point of the appropriate base line is located. ► Return for a tax period will not be allowed to be furnished if return for any previous tax period is not furnished. Payments Tax invoice ► Union Territory GST (UT tax) shall be first utilized toward the payment of UT tax and remaining amount may be utilized toward the payment of IGST (integrated tax). ► Specific categories of services in respect of which tax invoice may not be issued shall be notified by the Government on the recommendation of the Council. This is in addition to any other document being treated as tax invoice. ► Central tax cannot be utilized toward the payment of UT tax.

5. ► However, if a refund claim arising from an order passed by the adjudicating authority or the Appellate Authority/Tribunal or court, which has attained finality, is not paid within 60 days from date of receipt of application, the rate of interest is capped at 9% . ► Interest rate for delayed payment of tax is capped at 18% . ► Rate of interest in case of undue or excess claim of input tax credit or undue or excess reduction in output tax liability is capped at 24% . Transitional provisions TDS ► Additional conditions are prescribed for carry forward of CENVAT credit as follows: ► The limit relating to applicability of TDS has been reduced from INR500,000 to INR250,000. ► The person should have furnished returns for a period of 6 consecutive months immediately preceding the appointed date. ► TDS provisions will not be applicable if the location of supplier and place of supply is in a state or UT that is different from the state or UT in which recipient is registered. ► Credit should not relate to goods covered under any exemption notification. TCS ► For transition of credit in respect of goods held in stock, the condition of passing the benefit of such credit in the form of reduced prices to the recipient has been removed. This condition has been made applicable only in case of person other than the manufacturer or supplier of services (i.e., a trader of goods) who is availing credit without the possession of an invoice evidencing payment of duty. ► E-commerce operators liable to collect tax at source are required to furnish an annual statement containing details of outward supplies effected through them prior to 31 December following the end of the financial year. Refund ► The Government, on the recommendation of the Council, may notify supplies pertaining to inverted duty structure where the refund of unutilized ITC will not be available. ► The earlier provision specifying the 6 months validity of provisional registration certificate has been removed. Key changes in IGST Bill, 2017 ► Suppliers availing duty drawback of the Central tax cannot claim refund of ITC. ► IGST law shall extend to the whole of India except the State of J ammu and Kashmir. ► The limit for claiming refund without documentary evidence is reduced from INR500,000 to INR200,000. ► IGST rate cap has been increased from 28% to 40% . Further, IGST shall not be levied on alcoholic liquor on human consumption. ► Refund of tax paid on all zero rated supplies or on inputs or input services used in making zero rated supplies will be paid to the applicant and not credited to the fund. Earlier, this provision was available only for exports and not all zero rated supplies. ► IGST shall be levied on supply of petroleum crude, HSD, petrol, natural gas and ATF from a date to be notified based on recommendation of the Council. ► IGST shall be payable by the registered recipient of goods or services under the reverse charge mechanism on taxable ► The rate of interest in case of refunds in specified cases is capped at 6% .

6. purchases made from the unregistered supplier. Daman and Diu, Chandigarh and other territory. ► Supply of goods/services shall be treated as supply in the course of inter-state trade, where the location of the supplier and the place of supply are in: ► Provisions of CGST in so far as they relate to supply, composition levy, composite and mixed supply, time and value of supply, ITC, transitional provisions relating to interest and penalty, and administrative and other provisions also apply to UTGST. ► Two different states ► Two different Union Territories ► A state and a Union Territory ► Transitional provisions are in line with the provisions of the revised draft model GST law as pertaining to SGST. ► As per Explanation 1 to section 8(2) of IGST law, an establishment in a state or Union Territory and any other establishment being a business vertical registered within that the state or Union Territory shall be treated as establishments of distinct persons. Key changes in Bill for Compensation to States ► The base year revenue of states will include any cess or surcharge or fee levied by states. ► Where the location of the supplier is in the territorial waters or the place of supply is in territorial waters, then the location of such supplier/place of supply shall be deemed to be in the coastal state or Union Territory where the nearest point of the appropriate baseline is located. ► States will receive provisional compensation bi-monthly instead of quarterly from the Center for loss of revenue from GST implementation. ► After the end of 5 years from the implementation of GST, the residual amount lying in the compensation fund will be shared equally between the Center and states. ► There are no significant changes made in provisions relating to place of supply of goods and services. ► Registered supplier to SEZ unit/developer (such supplies being treated as zero rated supplies) shall be eligible to claim refund under the following two options: ► The maximum rates of cess on certain goods like pan masala, tobacco and tobacco products, coal, aerated waters, motor cars have been specified in the Bill. Cess rate for any other supplies that may be notified is capped at 15% . ► Upfront exemption of IGST on supplies under bond or Letter of Undertaking and claiming refund of unutilized ITC, or ► Pay IGST on supplies and claim refund of the tax paid ► No cess will be levied on supplies made by taxable person opting for composition scheme. ► The above options were available only to the exporter and has now been extended to supplies to SEZ unit/developer. Way forward ► The list of exemption, classification of goods and service, and machinery provisions including valuation and other rules are yet to be notified. UTGST Bill, 2017 ► Union Territory GST law has been newly introduced. ► Subsequent to the passage of Central GST Bills in the Parliament, states will take up State GST Bills for clearance in the respective state legislative assemblies. ► It shall extend to the Union territories of the Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli,

7. ► As per the office order issued by the Central Board of Excise and Customs, the Government has set up 10 working groups to iron out sectoral issues faced by trade and industry to ensure smooth transition to GST. Sectors include banking, telecom, IT/ITES, financial, textile, oil and gas, gems and jewelry, transport and logistics, and MSMEs. Comments The tabling of the bills in the Parliament is an important milestone in the process of implementation of GST. The GST bills address several issues arising from the revised draft of the Model GST Law released in November 2016, as highlighted by the industry. However, it cannot be denied that the GST framework continues to be fairly complex and the Government would need to mitigate genuine concerns of the industry. Therefore, a continuous, sympathetic and transparent engagement with trade and industry is imperative. There are several additional challenges that the taxpayer would need to handle, the key ones being tax treatment on transactions related to the state of J ammu and Kashmir, and compliances in relation to identification of procurements from unregistered persons. The proposed implementation date of 1 J uly 2017 now appears to be achievable and it is important that businesses get ready to embrace GST.

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