GOODS AND SERVICES TAX (GST) SERVICE OFFERING

Goods and Services Tax The introduction of Goods and Service Tax (GST), a destination based consumption tax replacing several Central and State levies, heralds transformational change of the indirect tax landscape of the country.

The GST framework will subsume majority of the indirect taxes levied by Central and State Governments like Central Excise Duty, Service tax, State Value Added Tax, Central Sales Tax, Entry tax, Purchase tax, Entertainment tax, Luxury tax.

GST will have a business-wide impact on the entire value chain of operations like. procurement, manufacturing, sales and pricing, finance, information technology, supply chain, warehousing.

GST and Make in IndiaDesignated Depository Participants (‘DDPs’) are One of the key components to enable the success of the ‘Make in India’ campaign is to eliminate red tape and ambiguities in tax laws and procedures, thereby enhancing the ease of doing business.

GST will achieve the desired objective of creating a pan-India market for goods and services, eliminating the cascading effect of taxes and providing seamless credit across goods and services.

GST will in turn also seek to simplify the process of registrations and filing of returns by increased reliance on automation, thereby enhancing the ease of doing business in India.

Important milestonesGST will be the biggest tax reform the country has witnessed since independence and has the potential to increase the country’s GDP by one to two percentage points.

The discussion around the introduction of GST started as early as 2000. An Empowered Committee was set up with the objective of designing the GST blueprint and technological preparedness for its smooth roll-out with the consensus of all the stakeholders.

The Empowered Committee released its First Discussion Paper in late 2009, after consultations with the Central and State Governments. This discussion paper laid down the basic model of GST and so far, has been the focal point of discussion between the Centre and the States.

After several discussions amongst the stakeholders, the Constitution (122nd Amendment) Bill, 2014 (Constitution Amendment Bill) was finally tabled in the Parliament and has since been passed by both the houses of Parliament, receiving unanimous approval at Rajya Sabha. In continuation of the unanimity displayed in the Rajya Sabha

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debate, the majority of the States quickly consented and ratified the Bill. After receiving Presidential assent on 8 September 2016, the Bill became the Constitution (101st Amendment) Act, 2016 (Constitution Amendment Act).

The Government is keen on the early introduction of GST and has set itself an ambitious deadline of 1 April 2017.

GST architectureIndia will adopt the dual GST approach with taxes imposed by the Central Government and the State Government simultaneously, in the form of Central GST (CGST) and State GST (SGST) on the supply of goods, services or both. Integrated GST (IGST) will be levied on inter-state transactions.

In a welcome relief, the contentious levy of 1% additional tax on inter-state supplies of goods as a measure of compensation for the origin States against the possible loss of revenues, has been dropped.

GST will apply on supply of all goods and services, except the supply of alcoholic liquor for human consumption. Furthermore, petroleum crude, high-speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel will be brought within the ambit of GST at a later date as determined by the GST Council.

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Key features of the Constitution Amendment ActThe Constitution Amendment Act provides for the following:

• Concurrent powers to the Central and the State governments to make laws on the taxation of goods and services

• Exclusive powers to Centre to make laws for levy and collection of GST on inter-state trade or commerce

• Constitution of GST Council

The GST Council is an overarching body converging the interests of the Centre and State. It is empowered to make recommendations on:

• Central/state taxes to be subsumed, goods/services to be exempted, model GST laws, principles of levy and place of supply rules, threshold limits, tax rates, apportionment of IGST, special provision for certain States, etc

• Date of levy of GST on petroleum products, natural gas

• Special provision with respect to the states of Jammu and Kashmir, Sikkim, Himachal Pradesh, Uttarakhand, and the North Eastern states

• Compensation to states arising out of implementation of GST for a period of five years

• Establishing a dispute resolution mechanism to adjudicate any dispute between the Centre and the State(s) or two or more States

GST ratesThe determination of revenue neutral rate has occupied the centre stage of various discussions. The rates earlier proposed by the government for goods were zero (for exports), 1% (for precious metals), 12% (lower rate for basic importance goods) and 17-19% (standard rate) for goods and services.

The GST rate fixation is one of the most critical aspects that the GST Council will deliberate upon in its meeting to be held during the third week of October 2016. The decision is crucial as it appears that the States may seek a higher tax rate to avoid any revenue loss to them whereas, adoption of a reasonable tax rate would ensure that the introduction of GST does not become inflationary.

Thus, the onset of GST with moderation in existing tax rates would become one of the key parameters of successful implementation.

IT InfrastructureA Special Purpose Vehicle (SPV) called Goods and Service Tax Network (GSTN) (Network) has been created to provide IT infrastructure and service support for the implementation of GST. The GSTN will implement PAN-based registration, returns filing and payments processing for all States on a shared platform.

The SPV is owned by the Centre, States and few partner banks.

Recent Draft RulesConsidering the recent developments, it is evident that the Government is on a fast-track mode to implement GST with effect from the target date i.e. 1 April 2017. Recently, the Government published and finalised the Draft Rules relating to registration, invoice, payments, returns and refund.

Draft Registration RulesThe intent of the Draft Registration Rules is to completely automate the registration process and reduce the interface between the taxpayer and the authorities. However, by continuing the procedure for physical/site verification by the authorities [at their discretion] and extending the same to service providers, the interface may not be completely avoided.

There is a provision for separate registration of various business verticals within the same legal entity. One must carefully evaluate before opting for this, as it may entail implications for cross-vertical transactions, additional compliances, etc.

Draft Invoice RulesInvoices under the GST regime are required to be serially numbered. It is not clear whether the consecutive serial number would be a pre-defined format to be adopted by the businesses or will it be a series generated by the Common Portal.

Also, it is required to mention the place of supply and place of delivery separately. The supplier shall be required to maintain a GSTIN/Unique ID Number for every transaction.

Draft Payment RulesThe Draft Payment Rules provide for maintaining the following three registers on the Common Portal:

• Electronic Tax Liability Register;

• Electronic Credit Ledger; and

• Electronic Cash Ledger.

A unique identification number will be generated at the Common Portal for each debit or credit to the electronic cash or credit ledger.

The unique identification number relating to the discharge of any liability will be indicated in the corresponding entry in the electronic tax liability register.

Draft Return RulesThe Draft Return Rules provide for 27 different returns and statements to be submitted under different scenarios. Furthermore, it appears that the formats are exhaustive. The number of returns to be filed by a business would multiply with the number of States in which it operates.

The concept of matching the withholding tax deduction under the Income-tax with the amount claimed as payment of tax in the return of income has been introduced in GST as well. The major difference is that the volume of transactions would be significantly higher, as opposed to Income-tax where the withholding is for certain specified services.

Furthermore, the entire concept of credit matching is going to be very critical. In the event that the vendor does not pay taxes or does not record the transaction properly, and where it is not rectified within given time limit, businesses would lose input tax credit.

Draft Refund RulesThe refund applications would be required to be filed state-wise.

Currently, draft GST provisions are silent on the application of GST on supplies made to Special Economic Zones or deemed exports. Furthermore, the concept of deemed exports is presently covered only under the Foreign Trade Policy and only applies to central taxes. It is not clear whether the deemed export benefits would continue and would be extended to state taxes as well.

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Way forwardAs an organisation, it would be critical to lay down the road map for smooth implementation due to changes brought about by the introduction of GST after taking into account several areas of impact. Readiness and gearing up for the transition would encompass:

• Identifying the areas of impact and setting the framework for future phases

• Identifying and plotting the key changes required from a business and process standpoint

• Identifying policy issues and making representation before the concerned authorities

• Managing the implementation by providing requisite training across all business functions

• Plotting the business and process changes

• Re-considering product pricing

• Re-examining the supply chain management

• Upgrading IT systems

• Introducing new/modified operational strategies

• Revisiting long term contracts

• Training employees and preparing a standard operating manual to ensure adherence with compliances

How we can assistGST being the biggest and most significant tax reform in the fiscal history of India since independence, it is critical for businesses to plan and evaluate the impact of GST in a timely manner.

Despite GST being a tax reform, it would impact various business functions including finance, IT, supply chain, marketing. Since the impact of GST could be multi-fold, effective and seamless transition to GST regime would be a mammoth task.

In this major transformational process, we would assist clients in identifying, assessing, and plotting the impact of GST on their business operations. We would also assist clients in engaging with government for making necessary representations. In this regard, we would undertake these activities in the following manner:

Impact AnalysisWe would undertake fiscal impact of GST on business structure/functions and operations such as tax, pricing, supply chain.

• Change in tax rate: Identify the taxes to be subsumed in proposed GST legislation by Central/State Government and accordingly, identify tax cost post GST regime

• Availability of credits: Assess impact of change in credit scheme in different stages of procurement/supplies and receipt of services/provision of services and plotting the same in advance so as to restructure business operations, if required

• Classification:Examine classification of various categories of supplies in terms of whether deemed to be supply of goods or services

• Valuation: Analyze impact of GST on valuation of goods/services considering principles of transaction value, condition of sale, arm’s length pricing for related party transactions, goods sold at loss or at discounts, price fixation at a later date and provisional assessment

• Exemptions/concessions: Some of the exemptions/concessions available in the present indirect tax regime are likely to be withdrawn under GST regime. In view of the same, impact of change in tax cost needs to be analyzed in advance

• Special transactions: Impact on transactions of High Seas Sale, Sale in course of Import or In-transit sales, supplies to deemed export projects etc. under GST scenario would be required to be evaluated

• Pricing: Considering the change in rate of tax, credit scheme/credit flow and resulting change of net tax cost on supplies, the product price/fees for services are likely to be impacted and could undergo a change

• Impact on long term contracts: Analyze impact of GST on long term contracts and comment on possible avenues to mitigate the exposure

• Other business functions: Identify GST impact on other business functions like supply chain and warehousing considering the fact that seamless credits under GST regime could be available. Also, assess whether rejig of operations would be required

• Compliances: Identify new set of compliances to be undertaken and processes to be put in place to capture relevant data/information and become GST ready

• Identifying areas for representation/ advocacy: Basis the impact study, organizations should raise issues which could adversely impact them under GST regime. Considering the fact that the framing of GST legislation is underway, it is ideal that the issues are raised at this point in time We would assist organizations in:

— Identifying key issues/areas for representation

— Engaging into a dialogue with the policy makers/relevant officials

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Transition/implementation assistanceWe would undertake fiscal impact of GST on business structure/functions and operations such as tax, pricing, supply chain.

• Impact as per Final law: We would assist in finalizing the GST impact on various business functions/operations based on the final law/Act

• Changes in IT systems: Examine the data elements required for computation of output tax, tax credits and for compliances. Assistance in building test scenarios and validation of outputs. Assistance in regard to configuration of tax codes and other areas that may be required to be GST ready

• Vendor payment process: Review the current process and identify eligibility of credits under GST and revision in process required so as to capture credits on payment basis

• Modification in reports: Re-visit existing reports capturing stock movements, credit/liabilities report and identify new reports to be generated from GST perspective

• Liaise with IT team: Explaining the GST amendments to IT team for system changes/updations

• GO-LIVE assistance: Test run of the revised IT system basis the historical data for past period to ensure that the configured systems are in place

• Trainings: Conducting awareness sessions/training for all stakeholders

• Standard Operating Procedure’s Manual (SOP): Providing SOP for assistance in day to day functioning

Post GST assistance• Obtaining new/amendment in registration: Assist

clients in obtaining new/amending registrations under GST regime

• Assisting/handholding to ensure compliance by periodic review of:

— Financial records

— Input tax credit

— Computation of GST liability

— Returns

• Review of identified transactions: Review of identified transactions and treatments adopted from GST perspective and identify gaps, if any

• Regular advisory services: Provide comments from a GST perspective on queries raised from time to time.

Our CEO and Partners

• Chartered Accountant with over 30 years of experience • Recognized by his peer group as amongst the top tax advisors in India • Former Deputy CEO of KPMG in India • Former Chairman of KPMG’s tax practice • Former leader of the Tax and Regulatory practice of PwC• Former Deputy CEO of RSM & Co (which merged with PwC)

Dinesh KanabarCEOM: + 91 98200 20647 T: + 91 22 6108 1000E: dinesh.kanabar@dhruvaadvisors.com

• Law graduate and Chartered Accountant with over 16 years of experience• Formerly partner in ELP• Focus areas: Manufacturing, Infrastructure, IT & ITES, Media, Oil & Gas, Real estate,

Shipping, Pharma, Retail, FMCG, etc.

Ritesh KanodiaPartnerM: +91 99208 44072 T: + 91 22 6108 1041E: ritesh.kanodia@dhruvaadvisors.com

• Chartered Accountant with over 30 years of experience• Formerly Executive Director in KPMG• Focus areas: IT& ITes, Manufacturing, Retail, Engineering, Power, Construction, etc.

Srinath SAssociate PartnerM: +91 98450 30151 T: + 91 80 4660 2690 E: srinath.s@dhruvaadvisors.com

Niraj BagriPartnerM: +91 99675 87515 T: + 91 22 6108 1017E: niraj.bagri@dhruvaadvisors.com

• Chartered Accountant with over 15 years of experience• Formerly Director in KPMG• Focus areas: Manufacturing, Engineering, Power, Construction, Real Estate, Pharma,

IT & ITes, Offshore & Shipping, Aviation, Media and Entertainment, Financial Services, etc.

This information contained herein is in summary form and is therefore intended for general guidance only. This publication is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. This publication is not a substitute for detailed research and opinion. Before acting on any matters contained herein, reference should be made to subject matter experts and professional judgment needs to be exercised. Dhruva Advisors LLP will not accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.

Our Offi ces

www.dhruvaadvisors.com

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Dhruva Advisors LLP is a boutique tax and regulatory services organization, working with some of the largest multinational and Indian corporate groups.

We bring a unique blend of experience, having worked for the largest investors in India, advising on the largest transactions and on several of the largest litigation cases in the tax space. We work closely with regulators on policy issues and our clients on tax advocacy matters. We believe in thinking out of the box, handholding our clients in implementation and working to provide results.

Key differentiators:

• Strategic approach to complex problems

• In-depth, specialised and robust advice

• Strong track record of designing and implementing pioneering solutions

• Trailblazers in tax controversy management

• Close relationships with the government coupled with a long history of involvement in policy reform

• Technical depth and quality

Our team comprises of 19 Partners and over 175 people located in Mumbai, Ahmedabad, Bengaluru, Delhi and Singapore. The key industries the team advises include financial services, IT and IT-enabled services (ITES), real estate and infrastructure, telecommunications, oil and gas, pharmaceuticals, chemicals, consumer goods, power, as well as media and entertainment.

Dhruva Advisors is a member of the WTS Alliance, a global network of selected firms represented in more than 100 countries worldwide.

Our recognitions• Dhruva Advisors has been consecutively recognized

as a Tier 1 Firm in the International Tax Review, World Tax Guide 2016 and 2017 to the world’s leading tax firms.

• Dhruva Advisors has also been awarded the Best Newcomer of the Year 2016 - ASIA by the International Tax Review.