Goods and Service Tax GST Biggest Indirect Tax Reform In ...

1. Goods and Service Tax (GST)Biggest Indirect Tax Reform In India NIHAL KOTHARI Delhi December 23, 2009 Khaitan & Co. Advocates, Solicitors, Notaries, Patent & Trademark Attorneys

2. 2 IMPACT OF FLAWLESS GST Increase in GDP growth by 1.4 to 1.7% (Annual increase Rs.70,000 Crores at current level) Tax GDP Ratio may go up by 1.5 to 2% (Net Revenue increase by Rs.60 - 80,000 crores per annum) Overall cost of indigenous goods may reduce by 10% leading to reduction in price of manufactured goods Significant reduction in tax compliance and administration cost due to simple uniform structure Horizontal equity at National and Business entity level Win- win situation for all stake holders

3. 3 WHAT IS GST GST is a comprehensive value added tax on goods and services GST is levied on value added at each stage of supply chain. It provides seamless input tax credit throughout the supply chain Tax to be borne by ultimate consumer. Thus GST is a destination based consumption tax There is no distinction between goods and service No cascading effect of tax on cost thereby reducing the tax burden and overall cost with full transparency

4. 4 TAXES PROPOSED TO BE SUBSUMED CENTRAL TAXES: Excise Duty, Additional Excise Duty Service Tax Countervailing Customs Duty, Special Additional Customs Duty Various Cess and Surcharges Excise Duty on products with alcohol (Taxed under M&TP Act) STATE TAXES: Value Added Tax Entertainment Tax (levied by States) Luxury tax, Tax on Lottery, Batting and Gambling Entry Tax (other than for local government) Cesses and Surcharges

5. 5 TAXES NOT TO BE SUBSUMED AS PER E.C. CENTRAL TAXES: Excise Duty on 3 Petroleum Products Excise Duty on Tobacco Products (In addition to GST) STATE TAXES: Tax on Alcoholic Beverages Tax on 3 Petroleum Products Entertainment tax (by local bodies) Entry tax for local bodies Stamp Duty Finance Commission recommended GST on all the above items in addition to continuation of excise, except the report is silent on Entertainment tax levied by local bodies.

6. 6 DECISION YET TO BE TAKEN EC deferred decision on following taxes: Purchase Tax Electricity Duty Taxes On Natural Gas Taxes / Levies on Textile and Sugar Tax on vehicles and transportation of goods and passengers

7. 7 TAXABLE EVENT IN GST Taxable event for levy of tax under proposed GST regime will be �supply of goods or service� for consideration Hence the present taxable events such as �Manufacture� in case of Central Excise and �Sale� in case of VAT or CST will lose relevance Elaborate rules to determine the place and time of supply of goods and services will be formulated Branch transfer will be treated as �supply of goods� thereby chargeable to GST

8. 8 KEY FEATURES OF GST STRUCTURE Dual GST comprising of Central GST and State GST Comprehensive coverage of supply of goods and services except few exempted goods and services Similar tax treatment for goods and services Identical tax treatment for inter-state and intra-state supplies Common classification of goods by Center as well as all states �Negative definition' of taxable service proposed

9. 9 KEY FEATURES OF GST STRUCTURE Export & Supply to SEZ (Processing area) zero rated Same tax computation base under Central and State GST hence no cascading impact of taxes Similar compliance for Central & State GST Uniform returns and collection procedure for central and State GST Cross Credit not allowed between Central GST and State GST Check post at state boundaries may continue but will become irrelevant in due course with IGST

10. 10 TAX SPARING OF SME SECTOR Threshold Limit Under Central GST: EC proposed Rs.1.5 Crore annual turnover for goods. Finance Commission Task Force suggested Rs.10 lakhs for CGST for Goods and services Threshold Limit Under State GST: Gross annual turnover of Rs.10 Lakhs for Goods and Services Composition Scheme: Gross annual turnover of Rs. 50 Lakhs with a floor rate of 0.5% across all States Composition scheme will be optional.

11. 11 PROPOSED GST RATE STRUCTURE Specified goods taxable at a lower rate and other goods at standard rate Services taxable at single standard GST Rate Precious metal and stones at a very low rate Exemption of few specified products/ services 3 Petroleum Products (Petrol, Diesel, Aviation Fuel), Liquor and Narcotics will be outside GST Finance Commission TF recommended single rate 5% for CGST and 7% for SGST

12. 12 MECHANISM TO TAX INTERSTATE SUPPLIES Inter-State GST (IGST) Model Centre to levy IGST on all interstate transactions, equal to Central GST plus State GST. Tax payment by exporting dealer as IGST on value addition after adjusting credit of IGST, Central GST, State GST The Importing dealer can claim credit of IGST while discharging his output tax liability in his own state Information return to be submitted to Central agency Central agency to act as a clearing house between Centre and State Government, verify claims and inform respective government to transfer the funds

13. 13 MECHANISM TO TAX INTERSTATE SUPPLIES.. Discontinuation of CST IGST Rate equal to Central GST plus State GST Stock transfers taxable as inter-state sale Positive benefits of IGST Model: Maintains ITC chain No blockage of funds to claim refund from State Govt. Self policing model Possibility to do away with the check posts

14. 14 EXPORT, SEZ, AREA BASED EXEMPTION & TAXATION OF IMPORTS Exports will be Zero rated Supplies to Special Economic Zone will be zero rated as per EC (Finance Commission TF recommended SGL at par with other sales) Tax benefit of location based Industrial units would be protected during eligibility period but will be made GST compatible (e.g. cash refund)

15. 15 TAXATION OF IMPORTS Imports will taxable under CGST and SGST Tax revenue will accrue to state where imported goods or services are consumed State GST revenue accrues based on destination principle. Administrative mechanism to collect SGST at the ports to be determined.

16. 16 FINANCE COMMISSION RECOMMENDATIONS ON ITEMS NOT COVERED BY EC Full input tax credit for capital goods in the year of purchase Common Advance Ruling Authority Separate administration for CGST and SGST User charge not to be discontinued Twelve digit PAN based registration number

17. 17 OVERALL BUSINESS IMPACT OF GST GST will create single Indian common market with supply chain efficiency and scale economy Reduction in compliance cost on simplification of tax structure and uniform returns/ procedure Export cost will reduce due to zero rating of CGST & SGST (Annual saving estimated by NCEAR- 24000 to 48000Cr.) Imports parity with indigenous goods will change due to dual GST Services will bear Duel GST tax incidence Distributive trade will have impact of CGST

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19. 19 TAXATION OF SERVICES IN GST REGIME Negative definition of taxable service: What is service? Taxation of electronically transmitted inter state services is a major tax challenge Elaborate rules and procedures required to determine place of supply of services Few exempted services like primary health, Education? Services would be taxed at standard rate by CGST & SGST

20. 20 TAXATION OF SERVICES IN GST REGIME Essential to determine: Mechanism to tax inter-state supply of services under State GST Taxability in case of Import and Export of services Identification of exempted services Person liable to pay tax under reverse charge mechanism Taxability in case of services provided in the State of Jammu and Kashmir

21. 21 GST TRANSITION ISSUES Transitional Provisions in the GST legislation Un-utilised tax credit carried forward under CENVAT and State VAT Impact of withdrawing existing product based exemptions Taxability of works contract and sub-contractor Taxability in case of unregistered dealer Treatment of goods sent for job work or for temporary services

22. 22 GST TRANSITION ISSUES Refund procedures in the case of Exports, supply to SEZ and in the case of large capital investment Standardisation of systems and procedures across states and at national level Issues related to alignment of Accounting and IT System which can provide required details to avail full input tax credit and avoid tax losses Issues related to compliance requirements

23. 23 BUSINESS OPPORTUNITIES AND CHALLENGES AHEAD�

24. 24 OPPORTUNITIES AND CHALLENGES Opportunities to re-engineer business model and processes for procurement, manufacturing and sales/ distribution which is tax efficient Review full supply chain to maintain ITC chain to avoid any tax losses Ensure availing carried forward unutilised credit under CENVAT and VAT by preserving documents, records and complying with procedure Ensure smooth transition by creating awareness in the organisation about proposed GST regime

25. 25 OPPORTUNITIES AND CHALLENGES Core Decision Areas

27. FURTHER DETAILS ON GST DEVELOPMENTS Contact ASSOCHAM Secretariat : -National Committee on Indirect Taxes Email: nihal.kothari@khaitanco.com