Goods and Services Tax in India

Highlights

BY

Timir Baran Chatterjee, Sr. Executive Vice President & Company Secretary

DIC India Limited

14th November, 2014

Reforms in the offering

INTRODUCTION OF GOODS AND SERVICES(GST)

IMPORTANT MILESTONE

ANNOUNCEMENT ON THE INTRODUCTION OF GST BY THE UNION FINANCE MINSTER IN THE UNION BUDGET 2007-08

EMPOWERED COMMITTEE OF STATE FINANCE MINSTERS GIVEN THE RESPONSIBILTY FOR PREPARING GST ROAD MAP

SUBMISSION OF VIEWS OF EMPOWERED COMMITTEE(EC) TO THE GOVERNMENT OF INDIA (GOI) ON 30TH APRIL,2008

RECEIPT OF COMMENTS OF GOVERNMENT OF INDIA ON DRAFT GST REPORT ON 12TH DEC., 2008

DISCUSSION IN THE EC ON THE COMMENTS OF GOVERNMENT OF INDIA ON 16TH DEC., 2008 AND FOLLOW UP STEPS

RELEASE OF FIRST DISCUSSION PAPER ON GST BY THE EC ON 10TH NOV., 2009.

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WHAT IS GST

A TAX ON GOODS AND SERVICES WITH COMPREHENSIVE AND CONTINUOUS CHAIN OF SET-OFF BENEFITS FROM THE PRODUCER’S POINT AND SERVICE PROVIDER’S POINT UPTO THE RETAILER’S/CONSUMER’S LEVEL

ESSENTIALLY A TAX ONLY ON VALUE ADDITION AT EACH STAGE.

THE GST PAID ON THE PURCHASE OF GOODS AND SERVICES IS AVAILABLE FOR SET-OFF

THE FINAL CONSUMER HAS TO BEAR ONLY THE GST CHARGED BY THE LAST DEALER IN THE SUPPLY CHAIN.

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Present Tax Structure

Union State Municipal

VAT

Luxury Tax

Entertainment Tax

Motor Vehicles Tax

Electricity Duty

State Excise

R&D Cess

Service Tax

Central Excise

Customs Duty

Toll Tax

Passenger Tax

Octroi/ Entry Tax

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SHORTCOMINGS OF CENTRAL AND

STATE VAT STRUCTURE

SHORTCOMINGS OF CENVAT

NON-INCLUSION OF SEVERAL CENTRAL TAXES LIKE Additional Customs Duty, Surcharge, etc.

DOES NOT CAPTURE THE VALUE-ADDED CHAIN BELOW THE MANUFACTURING LEVEL

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SHORTCOMINGS OF CENTRAL AND

STATE VAT STRUCTURE- Contd.

SHORT COMINGS OF STATE VAT

SEVERAL INDIRECT TAXES LIKE LUXURY TAX, ENTERTAINMENT TAX ETC. HAVE NOT YET BEEN SUBSUMED FOR SET–OFF.

CENVAT LOAD ON GOODS & SERVICES REMAINS INCLUDED IN THE VALUE OF GOODS ON WHICH VAT IS IMPOSED THUS CONTRIBUTING TO CASCADING EFFECT.

CENTRAL SALES TAX (CST) HAS NOT BEEN FULLY PHASED OUT.

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JUSTIFICATION FOR GST

IN GST THE CASCADING EFFECTS OF BOTH CENVAT AND

SERVICE TAX WOULD BE REMOVED WITH SET-OFF.

A CONTINUOUS CHAIN OF SET-OFF FROM ORIGINAL PRODUCER’S POINT AND SERVICE PROVIDER’S POINT TO THE RETAILER’S/CONSUMER’S LEVEL WOULD BE ESTABLISHED WHICH WILL REDUCE THE BURDEN OF ALL CASCADING EFFECTS

SEVERAL IMPORTANT CENTRAL AND STATE INDIRECT TAXES WOULD BE SUBSUMED

CASCADING EFFECT OF CST WOULD BE REMOVED AS IT WILL BE PHASED OUT.

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THUS GST IS NOT SIMPLY VAT PLUS SERVICE TAX BUT AN IMPROVEMENT OVER THE PRESENT SYSTEM OF VAT AND DISJOINED SERVICE TAX - A SIGNIFICANT STEP FORWARD IN TAX REFORMS IN INDIA

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Federal GST; Option I

GOODS &

SERVICE TAX

FEDERAL Merits Demerits

• Union Administered

• Unified Tax Rate

• Common market

• Replaces all taxes

• Free from cascading

• Industry favoured

• Union dependency

• Politically unviable

• Damage to basic

structure

• Seizure of State

autonomy

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Dual GST; Option II- PROPOSED

GOODS &

SERVICE TAX

Federal & State Central GST to cover State GST to cover

1. Excise Duty

2. Service tax

3. Additional

Custom duty

1. VAT

2. Entertainment tax

3. State excise

4. Luxury tax

5. Entry tax

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SALIENT FEATURES OF THE GST MODEL

Taxation on Destination Principle

The GST will have two components- one levied by the Centre referred to as Central GST(CGST), and the other levied by the States referred to as State GST(SGST)

Dual GST model would be implemented through multiple statutes (one for CGST and a SGST statute for every state).

Basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be inform across these statutes as far as practicable.

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SALIENT FEATURES OF THE GST MODEL –

Contd.

Both Central GST and the State GST would be applicable to all transactions of goods and services, except the exempted goods and services, goods which are outside the purview of GST, and the transactions which are below the threshold limits

Central GST and State GST are to be paid to the accounts of the Centre and the States separately.

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SALIENT FEATURES OF THE GST MODEL

–contd.

Taxes paid against the Central GST will be allowed to be taken as input tax credit (ITC) for payment of Central GST. The same principle will applicable for the State GST.

Cross utilization of ITC between the Central GST and the State GST will not be allowed except in the case of inter-State supply of goods and services under the IGST Model.

A taxpayer or exporter will have to only maintain required details in the same books of account for utilization or refund of ITC.

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SALIENT FEATURES OF THE GST MODEL –

contd.

The administration of the Central GST will be by the Centre and the State GST by the respective States.

Uniform procedure for collection of both Central GST and State GST may be prescribed.

Uniform State GST threshold across States recommended of gross annual turn over of Rs 10 lakh both for goods and services for all the States and Union Territories.

The threshold for Central GST for goods and services will be finalized by the Central Govt. in consultation with the Empowered Committee

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SALIENT FEATURES OF THE GST MODEL –Contd.

There will be a Composition/ compounding Scheme with cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States.

Option for registration under GST will be available to the taxpayer with turnover below compounding cut-off.

The tax payer will have to submit periodic return preferably in a common format to both the Central and the State GST authorities.

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SALIENT FEATURES OF THE GST MODEL –Contd.

A PAN-linked taxpayer identification number with a total of 13/15 digits will be allotted to each taxpayer for facilitating data exchange and taxpayer compliance.

Function such as assessment, enforcement , scrutiny and audit will be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.

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How GST works

Stage of supply chain

Purchase Value input

Value addition

Value at Which supply

of goods & services made to

next stage

Rate of

GST

GST of

output

Input Tax

Credit

Net GST=GST on output

- Input tax credit

Manufacturer 100 30 130 10% 13 10 13-10=3

Whole seller 130 20 150 10% 15 13 15-13=2

Retailer 150 10 160 10% 16 15 16-15=2

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CENTRAL TAXES TO BE SUBSUMED IN GST

Central excise Duty.

Additional Excise Duties.

The Excise Duty levied under the Medicinal and Toiletries Preparation Act.

Service Tax.

Additional customs duty, commonly known as countervailing duty (CVD).

Special Additional Duty of Customs- 4% (SAD)

Surcharges , and

Cesses.

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STATE TAXES TO BE SUBSUMED IN GST

VAT/Sales tax

Entertainment tax (unless it is levied by local bodies).

Luxury Tax

Taxes on lottery, betting and gambling.

State Cesses and surcharge in so far as they relate to supply of goods and services.

Entry tax not in line of Octroi.

Purchase tax: This issue is being discussed in consultation with the Government of India.

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Dual GST- Certain Positive Features (Expected)

State GST to subsume all state related taxes ( VAT, Entertainment Tax, State

Excise Duty, Electricity Duty, Entry Tax etc)- Single Legislation for State GST

Central GST to subsume all Central Taxes ( Central Excise Duty, CVD, Special

Additional Duty, Service Taxes, Cess etc)- Single Legislation to cover all Central

Taxes.

Central Sales Taxes to be phased out

Input Tax Credit available on inter state supplies- Both Central and State GST

Concept of C Form and other Central Forms are expected to be phased out;

Single Return to cover both Central and State GST

At present certain items are subjected to both VAT, Excise and Service Tax- Such

anomalies are expected to be non-existent;

No concept of Works Contract Tax under GST system

No reversal of Input Tax Credit for Branch Transfer

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GST; likely model

RNR to be between 16% to 18%

Dual GST; administered & monitored by Centre & State

4 rate structure; zero rates for goods of special importance , special

rates for gold & sliver (say 1%) , Merit rates (8% - 10%), Demerit

rates(16% - 18%)

Single rate of GST for services

Invoice to carry one GST, split into CGST & SGST

Interstate sales to be taxed

Taxed by originating State but revenue accrues to destination State

Destination State to give input credit to CGST & SGST

Taxable event – supply of goods & services

State to levy tax on services; only after introduction of GST

Place of supply Rules; to be framed by Centre & be applied uniformly

Differential rates & exemptions would be gradually phased out 21

GST; Challenges & Issues

•The ideal model for Indian scene

•Constitutional changes

•The optimum RNR

•Shifting from originating to destination based / Consumption based tax model

•Revenue deficit of poor states/producing states with low consumption-

•Place of supply/ Service Rules

•Place of Supply Rules for telecom , broadcasting , IT , BPO, Transport services etc

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GST; Challenges

•Conducive common market

•Exemption/ exclusion list

•Compensate states for revenue loss:

•Tax credit on exempted goods

•GST – Housing & Construction sector

•GST – Rail sector

•GST – Valuation – Branch & depot transport

•GST on Food items

•GST –non profit sectors & Public bodies

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GST – Expectations

(a) Withdrawal of Check Post

(b) Limited number of rates of taxes

(c) Abolition of Works Contract Tax

(d) Input Tax credit may be available on Invoice system like Cenvat and VAT

(e) Adjustment of Input tax credit on Central GST against output tax of State

GST and Vice versa

(f) Cross utilization of credits between Goods and Services

(g) Carry forward of accumulated Input Tax Credit (VAT) and Cenvat Credit

under GST system on the day of introduction of GST

(h) Exporters may be allowed to procure materials without payment of GST-

Abolition of Refund System.

(i) Existing exemptions be continued;

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GST – Expectations (Contd…)

j) The tax benefits already enjoying by the EOU, SEZ, Soft ware Technology Park

would continue to be available in the GST regime as well.

k) All area based exemptions schemes already in force may be converted into post-

tax cash refund schemes.

l) Introduction of self assessment system under dual GST;

m) Single Return system to cover both Central and State GST.

n) Simple legislation for both State GST and Central GST-. Uniform legislation for

State GST

o) Special Additional Duty (SAD) on imports may be replaced by State GST and

Central GST

p) Dispute Resolution: The disputes with regard to questions of facts at the first stage

may be undertaken by the respective authority. Further stages of appeal and issues

relating to questions of law may be dealt with by a joint entitry comprising the

Centre and states. This would ensure uniformity and fairness in decision making.

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GST – Expectations (Contd…..)

q) Units in Special Economic Zones may be relieved of the burden of all embedded

taxes, whether central or states. Supplies made to SEZ units may also be kept outside

the purview of GST.

r) There should be a common and uniform threshold limit of exemption for small tax

payers applicable to all states.

s) There should be a common and uniform threshold limit of exemption for availing

composition scheme amongst all states.

t) The authority to amend the common exempted list and the common composition

scheme, uniform threshold limit may be rest with a joint authority of Central and

State Governments to ensure that no single State or Central Government amends

either to these unilaterally.

u) There should be a common and uniform list of exempted goods;

v) Octroi and Entry tax should be brought within the ambit of GST

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GST – Expectations (Contd….)

w) Taxes on Tobacco products should be subjected to GST with Input Tax Credit

facility;

x) Alcoholic beverages should be brought under GST with ITC benefits;

y) Petroleum products should be subjected to GST with ITC benefits. If there is specific

administrative problem, all products excepting Crude, Motor spirit and HSD, all

petroleum products including ATF should be brought within the limit of GST.

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POSITION ON ALCHOL, TOBACCO AND PETROLEUM PRODUCTS.

Alcoholic beverages would be kept out of GST

Tobacco products to be subjected to GST with ITC.

Petroleum products I.e. crude, motor spirit (including ATF) and HSD will be kept outside GST.

A final view on Natural Gas will be taken after further deliberations.

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TAXATION OF SERVICES

Both the Centre and the States will have concurrent power to levy tax on all services.

The principles for taxation of inter-state and inter-State supply of services has been formulated.

An innovative model of Integrated GST(IGST) will be adopted for inter-State transactions of goods and services.

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MODEL OF INTER-STATE TRANSCATIONS OF GOODS AND SERVICES

Centre would levy IGST equal to CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.

The supplier will pay IGST after adjusting available credit of IGST, CGST, and SGST on his purchase.

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MODEL OF INTER-STATE TRANSCATIONS

OF GOODS AND SERVICES- Contd. The Exporting State will transfer to the Centre the credit

of SGST used in payment of IGST.

The Importing taxpayer will claim ITC of IGST against his output IGST , CGST and SGST tax liability.

The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

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Advantages of IGST Model

Maintenance of uninterrupted ITC chain on inter state transactions.

No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer.

No refund claim in exporting State, as ITC is used up while paying the tax.

Self monitoring model.

Level of computerization is limited to inter-state tax payer

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SGST RATE STRUCTURE

SGST WIL HAVE A TWO RATE STRUCTURE.

A lower rate for necessary items and goods of basic importance and a standard rate for goods in general.

A special rate for precious metals.

The exempted list under VAT regime including Goods of Local importance will be retained in the initial years in the exempted list under Sate GST.

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CGST RATE STRUCTURE

CGST rate for goods may also have a two- rate structure, with conformity in the levels of rate under the SGST.

The GOI may adopt a similar approach towards exempted list as has been done in case of SGST

There may be a single rate for services under CGST and SGST.

The exact SGST and CGST rates, including rate of services would be known in course of appropriate legislative actions.

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ZERO RATING OF EXPORTS

Exports would be zero-rated.

Similar benefits will be given to Special Economic Zones (SEZs). Such benefits will only be allowed to the processing zones of the SEZs.

No benefit to the sales from an SEZ to Domestic Tariff Area(DTA) will be allowed.

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GST ON IMPORTS

The GST is proposed to be levied on imports with necessary Constitutional Amendments.

Both CGST and SGST will be levied on imports of goods and services into the country.

The incidence of tax will follow the destination principle and the tax in case of SGST will accrue to the State where the imported goods and services are consumed.

Full and complete set-off will be available on the GST paid on import on goods and services.

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SPECIAL INDUSTRIAL AREA SCHEME

After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives will be converted into cash refund schemes for the unexpired period.

Tax benefits under Special Industrial Area Schemes will continue up to legitimate expiry time both for the Centre and the States.

Any new exemption, remission etc. or continuation of earlier exemption, remission etc. will not be allowed. In such cases, the central and the State Governments could provide reimbursements after collecting GST.

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IT INFRASTRUCTURE

Major responsibilities of IT infrastructural requirement will be shared by the central Government through the use of its own IT infrastructure facility.

The State IT systems will be integrated with the Central IT systems to ensure better tax compliance.

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CONSTITUTIONAL AMENDMENTS LEGISLATIONS AND RULES FOR

ADMINISTRATION OF CGEST AND SGST

Constitutional Amendments required for

Empowering the states for levy of service tax,

Empowering GOI for levy of tax on supply of goods

GST on imports and

Consequential issues

A Joint Working Group comprising of the officials of the Central and State Governments is working to prepare a draft legislation for Constitutional Amendment, draft legislation for CGST, a suitable Model Legislation for SGST and rules and procedures for CGST and SGST.

Simultaneous steps have also been initiated for drafting of a legislation for IGST and rules and procedures.

The Working Group will also address the issues of dispute resolution and advance ruling

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Thank You

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Every reform is like a mask

made to unfold, the existing

and

breeding to get unfolded

by another