All rights reserved | Preliminary & Tentative GOODS AND SERVICE TAX - IMPACT ON BUSINESS FEBRUARY 12 2015 Prashanth Bhat l Director l BMR & Associates
Jan 25, 2016
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GOODS AND SERVICE TAX - IMPACT ON
BUSINESS
FEBRUARY 12 2015
Prashanth Bhat l Director l BMR & Associates
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April 2016
GST Constitution Bill
GST legislations
Constitution Bill tabled
at the Parliament
Approval by both houses of Parliament
Ratification by more than 50% of State Legislatures
GST Council set up – within 2 months of presidential assent
Bill sent for Presidential
assent
Bill receives assent and
becomes Act
Model GST legislations / white papers (Centre,
States and IGST)
Final GST legislations (Centre, States and IGST)
GST ROAD MAP l EXPECTATION
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Excise duty
Service tax
Key Central Levies Key State Levies
Elements of Customs Duty • Countervailing duty • Additional customs duty
Value Added Tax/ Purchase Tax
Central Sales Tax
Entry tax Including cess and surcharge
on these taxes
Subsumation
of taxes
Basic Customs Duty on imports expected to continue
TAXES PROPOSED TO BE SUBSUMED
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Goods and Services Tax (GST) - Largest indirect tax reforms in India
GST to be a consumption based tax
GST expected to benefit
Taxpayers (in the long run), in terms of simplified taxation and compliance,
uniformity across states and minimal cascading of taxes
Reduced tax burden on consumers
Increased revenues for the Government with easy administration
State and Federal system of taxation to be maintained - GST in India shall
be a “dual tax” structure
Central GST; and
State GST
Every State likely to have its own SGST law; CGST law to be implemented
by the Centre
GST - A SNAPSHOT
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GST to be levied on all transactions of supply of goods or services or both
Shift in taxable event, from the existing manufacture, transfer of property in
goods, provision on services, etc
Taxes to ordinarily accrue to the State of consumption
Integrated GST (‘IGST’) to be imposed on inter-state supply of goods and
services and on imports
Rate of IGST – CGST plus SGST (of consumption State)
Parliament to formulate principles to determine place of supply and for inter-state
trade or commerce
Additional tax proposed at 1 percent on the interstate supply of goods, to
the State from where the sale originated
No credit of the same expected to be available
GST - A SNAPSHOT
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GST – PROPOSED CREDIT STRUCTURE
Taxpayer to track the input credits separately for IGST, CGST and SGST and the
utilization of such credits
Credit pool to be maintained State-wise!
IGST (input side)
IGST
CGST
SCGST
CGST (input side)
CGST
SGST (input side)
SGST
IGST IGST
GST l PROPOSED CREDIT STRUCTURE
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KEY AREAS OF IMPACT
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Manufacturing to be neutral by and large
Increase in compliance and reporting requirements
No levy on “manufacture” – but on supply
No deemed manufacture issues
CST cost of 2 percent to be eliminated - replaced by 1 percent additional
tax (for two years)
Increased rate of GST on goods and services- Higher working capital
requirement
Product pricing
Depends on GST rates, additional GST credits in the supply chain
Petroleum products excluded from GST net- impact on tax cost
Job-work exemptions? Valuations? Place of supply?
IMPACT l MANUFACTURING
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Purchase cost should reduce
Due to increased credits in the procurement chain
Pricing on the sales side and actual impact on margins depends on the GST rates
Warehousing may still matter
Due to likely rate arbitrage in procurement State
Due to 1% additional tax on interstate supplies
Possible tax stock transfer of goods
Positive Impact on e-commerce – tax to be paid to destination States
Ongoing disputes on taxation state to be irrelevant, under GST
IMPACT l TRADING
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Imports to attract basic customs duty and IGST
Whether payable to the customs authority at the stage of clearance of goods or
GST authority post clearance on a periodic basis?
Whether payable at the port of import or basis destination of goods in the bill of
entry filed?
Customs and tax functions of companies would need integration/ co-ordination
Levy of 1 percent additional tax on imports?
IMPACT l IMPORTS
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Services sector to be significantly impacted by GST
Financial impact
Potential increase in rate of tax (from 12% to ???)
More credit available
Likely increase in working capital impact
Compliance and contracting related impact
Services to be taxed at a State level (in addition to CGST) – challenges for PAN
India contracts, involving service delivery at State level
Decentralized compliances likely for SGST at State level
Possible centralized compliances for CGST
IMPACT l SERVICES
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Land and immovable property to be outside GST net – continue to attract
stamp duties
Increased credits in the procurement chain - could result in increase in margins for developers
Likely increase in output GST rates from the present tax rates
End customer price to be dearer – unless increased taxes are absorbed by the
developer on account of increased credits / reduction in construction cost
Construction by developer for landlord (under area share JDAs) should
continue to be taxable under GST
Needs special focus on valuation, time of payment, liability of landlord, etc
Fate of composition schemes for developers? To exist with no credits?
IMPACT l REAL ESTATE
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OVERALL IMPACT l BUSINESS
Need to gear up for being subject to dual administration by the State and Centre on the same transaction
Relook into procurement/sourcing pattern
Transition of
accumulated credits – especially CVD / ED credits in trading stock
Operational impact Financial impact
Ascertain impact on cash flow, working capital
on account of GST rates being in range of 22-27%
Possible changes in costing and pricing on account of change in tax rate, enhanced credits
Likely impact on topline to be evaluated
Infrastructure impact
IT infrastructure has to be geared up to support GST framework
Capturing multiple taxes IGST/SGST/CGST
Support decentralized compliance/accounting
Capturing and maintenance of state-wise credit data
Appraising vendors, customers & employees of the GST scheme
OVERALL IMPACT l BUSINESS
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KEY POINTS TO LOOK OUT
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Expected rate(s) of GST
Whether there would be a standard rate as well as merit rate under GST?
Whether GST rate for goods and services would be same?
GST RATE
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Mechanism to ascertain taxability of transactions where the payment,
invoice, delivery of goods/provision of services are spread over pre and
post GST regime
Treatment of accumulated VAT credit in the hands of the tax-payers –
Eligibility to be set-off against levies of SGST, CGST and IGST
Treatment of tax-paid inventory as available with trade/manufacturer as on
date of implementation of GST
Mechanism to claim credit of built-in excise duty component on stock
TRANSITIONAL ISSUES
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The Parliament is expected to formulate rules for determining the place of
supply of interstate transactions
Whether the proposed rules are expected to be aligned to current Place of
Provision of Service Rules, 2012?
Has the potential to be a source of dispute for revenue between the States
– resulting in litigation in the hands of taxpayers
INTERSTATE SUPPLIES
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Whether a taxpayer has to report to Central as well as State GST
authorities?
How will return filing work under GST?
- State-wise returns for CGST, SGST & IGST?
- State-wise returns only for SGST?
- Single return indicating taxes payable in each State?
Requirement to seek registration in each state ??
Who shall administer / assess IGST?
Manner of assessment of State GST component built into IGST
COMPLIANCE AND ADMINISTRATION
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ANNEXURE
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THANK YOU
Goods and Service Tax (GST)
Industry Perspective
Dhiraj Bindal
GST EXPECTATION – BACK THEN IN 2009
Simplification
• Eliminate multiple Central, State and municipal taxes on goods with a single tax
• Uniform tax rate across India
• Distinction between goods and services will go – Software, works contract
• Classification controversies will go - Now, classification controversies are galore
since there are so many rates of duty
• Concept of manufacture will go – Packing, repacking, labelling etc
Business Impact
• Eliminate cascading burden of taxes
• Create a unified national market in absence of CST & Entry tax - Setting up of
manufacturing plant and warehouses will not be driven by tax consideration
• Abolition of permits, way bills, check posts and toll plazas: Increasing productivity
GST EXPECTATION – BACK THEN IN 2009
Procedural ease
• Abolition form C, Form F, Form I
• Tax administration
• Invoicing will be simpler
Others
• Refunds would be converted to upfront exemption
• Lower cost of compliance
RECOMMENDATION – TAX ON SUPPLY
Article 366 – Definition ( A goods a d services ta ea s any tax on supply of goods, or services or
both e cept……………….
Issues
The tax is proposed to be on supply of goods or services or both and it does not seem necessary
whether such supply should be between separate legal entity or for consideration. In such scenario,
there would be tax on
• Stock transfer leading to huge cash flow impact
• Supply of goods on demo, job works, testing etc
• Supply of spares for warranty, Goods return
• Valuation
Recommendation: The taxable event should be supply for consideration
RECOMMENDATION – DEFINITION OF SERVICE
Article 366 of the Constitution:
‘ 6A “ervices ea s a thi g other tha goods
Issues
The definition of service is very wide and could lead to vague interpretation
• The transaction in immovable property could also be subject to GST (in addition to stamp duty as it
appears stamp duty will not be subsumed)
• Any payment by way of discount, reimbursements, grants etc could be subject to GST wherein there
is no element of service
Recommendation: Goods & service should be comprehensively defined and clarification should be
issued whether software, works contract is considered as goods or service and consequent place of
provision
RECOMMENDATION – 1% ADDITIONAL TAX
18. (1) An additional tax on supply of goods, not exceeding one per cent. in the course of inter-State
trade for a period of two years or such other period as the Goods and Services Tax Council may
recommend
(2) The net proceeds of additional tax on supply of goods in any financial year be deemed to have been
assigned to the States from where the supply originates.
Issues
• 1% non-vatable tax to be paid in origin state is a set back and will be akin to continuation of CST
• Supply of goods on Stock transfer, demo, job works, testing etc will also be subject to 1% additional
non-recoverable tax and impact on P&L
• Companies may want to have warehouse in all states to mitigate this 1% impact – against the
concept of unified national market
Recommendation: To have this 1% incorporated in revenue neutral rate (RNR) and Government can
have backend calculation for making payment to originating & destination state. The trade should not
be impacted.
SUGGESTIONS
• Time of 9 months for dealers to implement GST – supply chain, pricing, contracts, IT etc
• A clear guidance note may be issued with illustrations to determine place of supply of services to be
issued at earliest
• There should not be any negative list of either goods or services restricting the availability of GST
credit
• Continuance of tax benefits to SEZ, STP and EOU units
• Single authority (State or Centre) for administration, assessment, enforcement, scrutiny and audit for
CGST, SGST & IGST.
• Abolition of road permits, way bills and other statutory forms
• Minimal instance of refund by providing upfront exemption or provision to be drafted in law for
giving automatic time bound refund
• Transition process allow credit of VAT & Service Tax as well as CVD / ED built into GST opening stock
• Uniform GST rate to be applied on goods and services
• There should not be any domestic reverse charge taxes on goods and services