GST - The Game Changer

Sundeep Gupta, FCA, DISA

ASA & Associates LLP (www.asa.in)

Corporate Catalyst India (www.cci.in)

GST – the game changer

http://www.asa.in/

http://www.cci.in/

Flow of Presentation

• INDIRECT TAX – PRESENT CONTEXT

• CHALLENGES IN THE PRESENT SYSTEM

• UNDERSTANDING GST

• THE INDIAN CONTEXT

• INDUSTRY EXPECTATIONS V. PROPOSED GST

• PLANNING BY INDUSTRY

INDIRECT TAX – PRESENT CONTEXT

CENTRE

• Excise

• Inter-State Sale

• Service tax

• Customs

STATES• Intra-State Sale

• Entry tax

• Entertainment tax

• Luxury tax

• Stamp duty

• Excise on liquor

LOCAL• Octroi

• Municipal tax

GENERAL

• Goods and services taxed separately

• Taxes on goods are termed as VAT at State level and CST at Central level; CST rate is

common across India ; VAT rates different based on levies by each State

• Input tax credit mechanism for taxation of goods with conditional cross-levy set-off

• Common rate across India services

• Excise levied on manufacture ; common rate across India

• Customs duty levied on import or export of goods ; common rate across India

• Various other State / Municipal level taxes viz. octroi, entry tax etc. ; different rates

based on levies by each State


EXCISE DUTY

• Levied on manufacture of taxable goods in terms of Central Excise Act, 1944 on goods

manufactured or produced in India except petro products and tobacco

• Administered by the Central Government under the authority of Entry 84 of the Union

List (List 1) under Schedule VII read with Article 226 of the Constitution of India

• The rates of duty, ad valorem or specific, are prescribed under the Schedule I and II of

the Central Excise Tariff Act, 1985

• The taxable event under the Central Excise Law is ‘manufacture’ and the liability of

Central excise duty arises as soon as goods are manufactured; payment only on removal

of goods

• Allows instant credit for all taxes paid on inputs as well as for countervailing duty

(CVD) under CENVAT Credit Rules, 2004

• Elimination of cascading effect through tax credit mechanism

• Integration of excise duty and service tax and set-off of one against another

• No integration of excise duty and CST/VAT


SERVICE TAX

• Levied on provision of taxable services

• No separate legislation; governed and administered by the Finance Act, 1994

• Administered by the Central Government under the authority of Residual Entry 97 of

the Union List (List 1) under Schedule VII of the Constitution of India

• Taxable event is provision of services; also levied on service to be provided viz.

advances received for provision of services

• Normally service provider responsible to pay tax; few cases the responsibility cast on

service receiver

• Elaborate rules to determine place of provision of service which is the critical factor for

taxability

• The CENVAT Credit Rules, 2004 provide for availing of set-off of service tax and

central excise duties paid on the input services/inputs/capital goods

• Duties of excise and the countervailing duties can be taken as credit for the payment of

service tax subject to conditions

• Cross levy set-off of service tax and CST/VAT is not permissible


SALES TAX / VAT

• Levied on sale of goods vide entry No. 92A of List I (Central list) of the Constitution

of India for CST; entry No. 54 of List II (State list) of the Constitution of India for

VAT

• Sales are divided into local sales, central sales (inter-state sales) and exports from or

import into India for taxation

• Local VAT levied on local sales of goods, or intra state sales of goods i.e sales of

goods within a state and taxed under local sales tax laws i.e VAT laws of each State

• Central sales tax levied on inter-state movement of goods from one state to another

under Central Sales Tax Act, 1956

• Concessional rate of tax is allowed under Central Sales tax Act on submission of

prescribed declarations/ certificates

• Tax is levied at each point of sale / resale

• Set-off permitted subject to conditions


CUSTOMS DUTY

• Levied on import or export of goods vide entry No. 83 of List I, Schedule VII of the

Constitution of India

• Administered by Central government vide Customs Act, 1962 and Customs Tariff Act, 1975

• Categories of items and the rates of duties specified in the Schedules to the Customs Tariff

Act, 1975

• Goods categorized in a systematic manner in accordance with an international scheme of

classification of internationally traded goods – termed ‘harmonized system of commodity

classification (HSN)’

• Rates of duties prescribed in First Schedule to Customs Act.

• Basic customs duty, additional duty (CVD), special additional duty (SAD) are the various

types of duties levied under the Customs law


OTHER TAXES

• Research & Development Cess (R&D Cess)

• Octroi & Entry tax

• Luxury Tax

• Tax on consumption or sale of electricity

• Lottery Tax

• Betting and gambling tax

• Stamp Duty

• Property Tax

• Toll tax, passenger tax and road tax


• Inefficiencies of tax cascading: full set-off of input taxes not available viz. exempt

sectors; specific input taxes; cross set-off between excise/service tax with VAT

• Interpretational issues relating to levy on manufacture: definitional issues of

manufacturing; deemed manufacturing; valuation issues

• Sale v. service: increasingly becoming complex; frequently leads to overlap between

Centre and States; vested motive of States to tax as goods

• Multiplicity of State laws: lacks uniformity in rates, procedures, exemptions

• Local sales v. Central sales: conflict between Centre and States to tax any sale

• Interpretational issues: Sale v. works contract; multiple litigations

• Complex administration: lack of automation; uniformity; knowledge

CHALLENGES IN PRESENT SYSTEM

COMMON PRINCIPLES

• Destination based common tax on both goods and services levied at each stage of value

addition

• Coverage of all types of goods and services ; very limited items excluded

• Multiple tax rates and multiplicity of taxes reduced leading to simpler tax regime and

administrative efficiencies

• Allows input credit for taxes paid on purchases uniformly

• Common national market eliminating state boundaries

• Eliminates interpretational issues between goods and services

• Emphasis on voluntary compliance

UNDERSTANDING GST

MERITS OF THE SYSTEM

• Abolition of multiple taxes, reduced administrative cost to Government

• Reduction in compliance cost with increased voluntary compliances

• Removal of cascading effects of taxation reduces litigation and corruption

• Reduced cost of production of goods and services

• Increase in demand of goods and services

• Widens the tax base and increase in tax revenue

• Avoidance of interpretational issues between goods and services; valuation principles

UNDERSTANDING GST

Standard Models

Central GST State GST Dual GST

GST to be levied by Centre

GST to be levied by States

GST to be levied by the Centre and states

concurrently

UNDERSTANDING GST

Australia, Germany,

DenmarkBrazil, CanadaUSA

CENTRAL GST

• Two levels of Government combine their levies in the form of single National GST,

with appropriate revenue sharing arrangements among them

From the Indian perspective:

UNDERSTANDING GST

MERITS DEMERITS

• Comprehensive base for single rate of tax

• Removal of cascading effect of taxation

• Single statute instead of multiple, reducing

compliance cost

• Common market; Free movement; no check-

posts, internal tax frontiers or other barrier

to trade

• Single tax authority; compliance with only

one tax

• Customer will know the tax burden falling

on them

• Requirements for drastic amendments in


• Change required in entire infrastructure

developed for taxation at both levels

• States may not agree to give up powers of

taxation ; worries about loss of revenue

• May upset the present concept of fiscal

federalism

STATE GST

• States alone levy GST and the Centre withdraws completely


UNDERSTANDING GST

MERITS DEMERITS

• Comprehensive base for single rate of tax


• Enhances revenue capacity of the states

• Reduced dependence on the Centre

• Impairment in Centre’s revenues

• Requirements of major amendments in


• May not be revenue neutral for individual

states

• Compliance requirements for separate state

tax laws

• Unhealthy competition among different

states

• Change required in entire infrastructure

developed for taxation at both levels

Dual GST

Non –Concurrent Dual GST Concurrent Dual GST

GST on goods levied by States onlyand services are taxed by Centreonly

Centre to play only coordinatingrole for monitoring and applicationof tax on inter-state services

Cascading can be eliminated byStates by allowing input tax creditof tax levied by Centre

GST to be levied by both tiers ofGovernment concurrently

GST to comprise Central GST andState GST

CGST to subsume Central taxesand SGST to subsume State leveltaxes

CGST to be administered by Centreand SGST by States

UNDERSTANDING GST

DUAL GST – CONCURRENT MODEL


UNDERSTANDING GST

MERITS DEMERITS

• Achievable in short term with no significant

changes required in current indirect tax

structure


• Balance between fiscal autonomy of Centre

and States

• Empowerment to both Centre and States to

levy taxes

• Requirements of least changes in

infrastructure

• Improves competitive environment for

MNC’s

• Cost reduction for customers

• Compliance costs may not reduce

significantly

• Uncertainties may exist on part of States

• Challenge of sharing revenue on inter-state

transactions

• Taxation of services provided nationwide at

State level may pose challenge

Country GST/VAT Rate (%)

Japan 5

Singapore 7

Canada 7

Australia 10

Germany 16

France 19.6

UK 20

Sweden and Denmark 25

UNDERSTANDING GST

GST WORLDWIDE

THE BEGINNING

• In 2000, the Vajpayee Government started discussion on GST by setting up an empowered

committee. The committee was headed by Asim Dasgupta (Finance Minister, Government

of West Bengal). It was given the task of designing the GST model and overseeing the IT

back-end preparedness for its rollout

• Recommendation by Dr. Kelkar Task Force for implementation of National GST

• The Empowered Committee of State Finance Ministers issued the first discussion paper on

goods and service tax in India on November 10, 2009

• Announcement made by the then finance minister in the central budget (2007-08) to the

effect that GST would be introduced with effect from April 1, 2010

• After this announcement, the Empowered Committee of State Finance Ministers set up a

Joint Working Group on May 10, 2007

• The Joint Working Group got itself divided into three Sub-Groups and had several rounds

of internal discussions as well as interaction with experts and representatives of Chambers

of Commerce & Industry

THE INDIAN CONTEXT

THE BEGINNING

• On November 19, 2007, the Sub-Groups submitted their reports which were then integrated

and consolidated into the report of Joint Working Group

• On the basis of this report the Empowered Committee prepared and sent their report to

Government of India on April 30, 2008. The comments of Government of India were

received on December 12, 2008

• The views were submitted and were accepted in principle by the Empowered Committee on

January 21, 2009

• During this period, an important interaction took place between the then Union Finance

Minister and the Empowered Committee on the related issue of compensation for loss to

the States on account of phasing out of CST. The Empowered Committee took a detailed

view on the recommendations of the Working Group of officials and other related matters.

This detailed view was presented in terms of the First Discussion Paper

THE INDIAN CONTEXT

HOW THINGS MOVED

THE INDIAN CONTEXT

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

Nov. 2007 13th Finance Commission Constituted

May 2007 Joint Working Groups appointed by EC

April 1, 2007 CST phase out started

Nov. 2007 Joint Working Groups submitted

Report

Feb. 2008 F.M. announced introduction of GST from 1.4.2010 in Budget Speech 2008-09

April 2008 Empowered Committee (EC) finalized

its views on GSTStructure

THE INDIAN CONTEXT

July 2009 F.M. announced Dual GSTfrom April 1, 2010 in

Budget Speech 2009-10

Oct. 2009 13th Finance Commission submitted

its Report

Nov. 2009 Release of First Discussion Paper on

GST

NSDL chosen as the technology partner for operating the structure

Nandan Nilekani given the responsibility for

creating the required IT structure

Consultation on Model of inter-State

transactions, RNR and other issues – In

progress

July 2014 : Commitment by the new Government

for GST

Dec 2014 : 122nd

Constitutional Amendment Bill

presented

2015 : Government committed to roll out

GST by April 2016

HOW THINGS MOVED

• GST is proposed to be implemented from April 2016

• Dual GST proposed to replace different indirect taxes levied on goods and services by

the Central and State governments.

• To be implemented concurrently by the Central and State governments

• Aimed at being comprehensive for most goods and services

• Alcoholic liquor for human consumption, real estate and electricity to be kept out of

GST

• Petroleum products to be brought within ambit from a future date

• Exports to be zero-rated and imports will be levied the same taxes as domestic goods

and services adhering to the destination principle

• Taxing of capital goods and inputs whether goods or services relatable to manufacture at

lower rate, so as to reduce inventory carrying cost and cost of production

• Common law and procedures throughout the country expected

THE INDIAN CONTEXT

THE PROPOSED SCHEME

THE INDIAN CONTEXT

TAXES TO BE SUBSUMED

GST

Excise Duty

Service Tax

CST

Local VATLocal

Entry Tax/ Octroi

Local Cess& levies

CVD/

SAD

THE INDIAN CONTEXT

THE MODEL

GST

INTRA-STATE

CGST SGST

INTER-STATE

IGST

THE INDIAN CONTEXT

THE MODEL

• Called Central GST

• To be levied by Centre

• Applicable on Intra-state supply of goods and services

• Central taxes to be subsumed hereCGST

• Called State GST

• To be levied by State

• Applicable on Intra-state supply of goods and services

• State taxes to be subsumed hereSGST

• Called Integrated GST

• To be levied by Centre

• Applicable on Inter-state supply of goods and services

• Expected to be aggregate of CGST + SGST

• CST to be subsumed here

IGST

THE INDIAN CONTEXT

THE MODEL

TRANSACTION INTRA-STATE INTER-STATE

Sale price of taxable goods or services 100 100

CGST 10 -

SGST 10 -

IGST - 20

Invoice Value 120 120

Presumed tax rates to be:

- CGST 10%

- SGST 10%

- IGST 20% (aggregate of CGST & SGST)

Taxes/Duties to subsume in CGST Taxes/Duties to subsume in SGST

Central Excise Duty

Service Tax

CVD as levied u/s 3(1) of Custom Act

Special Addl. duty as levied u/s 3(5) of Custom Act

Cesses levied by the Union (on rubber, tea etc.)

Surcharges levied by the Union

E.g. NCCD, Education Cess, Special Additional

Duties of Excise on Motor-Spirit and High Speed

Diesel (HSD).

Value Added Tax (VAT)

Purchase Tax

State Excise Duty (except on liquor)

Entertainment Tax (unless levied by the local bodies)

Luxury Tax

Octroi

Entry tax in lieu of Octroi

Taxes on Lottery, Betting and Gambling

Taxes/Duties not to subsume in CGST Taxes/Duties not to subsume in SGST

Basic Custom Duty (Import as well as Export)

Excise Duty on Tobacco Products

Specific Cess (as may be notified)

Specific Central Cess like Education and Oil Cess

Taxes on Liquors

Toll Tax / Road Tax

Property Tax as well as Environment Tax

Stamp Duty and Tax on Consmp./sale of electricity

THE INDIAN CONTEXT

TAXES TO BE SUBSUMED / LEFT OUT

THE INDIAN CONTEXT

TAX CASCADING BENEFITS

• IGST

• CGST

• SGSTLiability of IGST against

• IGST

• CGSTLiability of CGST against

• IGST

• SGSTLiability of SGST against

THE INDIAN CONTEXT

TAX CASCADING BENEFITS

• Input tax set-off benefits available completely except for between CGST and SGST

• Present system does not allow set-off between:

Excise/service tax/CVD against VAT/CST

CST against any output liability

Excise and service tax offsets also conditional in many cases

• VAT is presently levied on Excise component also

• No set-off presently permitted against States taxes like Octroi, Entry tax, Luxury tax,

Entertainment tax

Cost of goods expected to fall under new regime ; cost of services to go up

• Uniform procedures for collection of both CGST and SGST

• Common format of returns for both CGST and SGST to both the Central Authority

and State Authority

• Each taxpayer to be allotted a PAN Linked taxpayer identification number with a

total of 14-15 digits which will bring GST as a PAN Linked system in line with

prevailing PAN based system of Income tax, facilitating data exchange and taxpayer

compliances

• Tax payment challan might contain some additional information and taxes may be paid

only through online mode

• Single registration within a state ; multiple registration across states

• Inter-state branch transfers may be taxed

• Issues of input accumulation resulting into refunds shall be avoided except in case of

exports, purchase of capital goods, input tax at a rate higher than output tax rate

• Separate assessments across states

THE INDIAN CONTEXT

SALIENT FEATURES EXPECTED

• Threshold limits may be:

Between INR 1 ~ 2 million for coverage

Gross turnover of goods upto INR 15 million – assigned exclusively to State

Gross turnover of services upto INR 15 million – assigned exclusively to Centre

Gross turnover of both exceeding INR 15 million – assigned to both Centre and

State

• Threshold limits built to keep small organizations out of tax net since:

Difficult to administer small traders

Administrative costs higher in comparison to the tax collected

Compliance cost and effort savings for such organisations

• Set-off to be provided against invoice or payment of tax or both (hybrid system)

THE INDIAN CONTEXT


• Exempted goods and services will not have the benefit of input tax set-off

• Place of Supply Rules to determine the situs of taxable supply; to be released shortly for

public

• Optional compounding scheme expected for small taxpayers; threshold may be INR 6

million

• Rates to be separate for:

General rate for general items of goods and services

Merit rate for essential goods and services

Special rate for precious metals

NIL rate

• 1 per cent additional tax proposed for few years on inter-state supply which will not be

available for set-off

Rates expected to be:12% to 20% for the 1st year12% to 18% for the 2nd year

16% for the 3rd year and onwards16% from inception for service sector

THE INDIAN CONTEXT


• Constitutional Amendment: Political scenario

• Framing Acts & Rules: Time has to be given public review; acceptance by States

• Common law: States should not come up with different regulations

• Online backbone: Building up online platforms across the States for seamless

integration of information; management of input tax credits; payment of taxes; filing of

returns; quick registrations

• Threshold: Determination should not be so low to bother small scale traders or service

providers; or high to lead to loss of tax revenue

• Taxes not subsumed: those left out will continue to have impact on costs

• Legislations: Multiplicity of statutes at State level

• Administration: Multiple administrative bodies – separate for Centre and each State

• Tax Rates: Arriving at Revenue Neutral Rate (RNR) so as not to impact inflation

• Exempt v. zero rated: identifying goods and services under each category

• Taxability: framing of suitable rules for place of provision for determining taxability

• Compensation to States: suitable packages to be framed to bring in consensus for

implementation

• Training: of government employees for GST

THE INDIAN CONTEXT

THE CHALLENGES

THE INDIAN CONTEXT

THE PRESENT AND THE FUTURE

Basis For

Difference

Present Taxation GST

Structure Difference Separate tax systems for Centre &

State based on manufacture and sale ;

separate for goods and services

Single system based on taxable supply

of both goods and services

Place of Taxation Taxable at the place of sale

of goods or rendering of

Service

Taxable on destination as it is a

consumption based tax

Customs Duty Separate Act of Centre; at the time

of import having BCD, CVD and

SAD components

Only BCD to remain; others to be

subsumed

Inter-State sale

Inter-branch transfers

Exempt against Form F

Not taxable

To be taxable

May become taxable

Input taxes set-off Not allowed between Excise/Service

tax and VAT

To be allowed

• Stability: No frequent changes in regulations or rates

• Government employees: Clear definition of roles, responsibility, authority & accountability

between Central and State departments with thorough understanding of new laws

• Single administering authority: Avoid multiple governing departments; interaction with

single authority for registrations, assessments

• Input tax set-off: Seamless integration permitting claims

• Online backbone: Strong and stable computerized platforms

• Trainings: State officers don’t know service tax, excise and custom laws and central officers

don’t know VAT laws

• Uniformity: Rates of tax, regulations, across the states including for registration, invoice

formats, return filings, assessments, audits

• Cross set-off: between CGST and SGST

• Backlog: Suitable scheme to clear backlog of pending cases under excise, VAT, service tax

INDUSTRY EXPECTATIONS

• Cost of implementation of GST

• Review of accounting system capabilities

• Supply chain relook to negotiate better contractual price

• Inventory holding costs due to taxation of inter-branch transfers

• Cash flow issues due to higher tax rate on services

• Hiring / training of employees

PLANNING BY INDUSTRY

GST - The Game Changer

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