Presentation on VAT

Accretive Business Consulting Private Limited

India Goods & Services Tax Proposed Framework

The Empowered Committee of State Finance Ministers has released the First Discussion Paper on Goods and Services Tax (GST) on 10.11.2009. This note outlines the key proposals provided in the

discussion paper.

Introduction X A dual tax structure is proposed having two components

> One levied by the Centre (CGST) and the other by the State (SGST).

> The implementation of the same would be through multiple statutes, viz., one for the Centre and one each for the respective State.

X The Centre and the State would have concurrent powers in the administration of the GST for the entire value chain and all the tax payers.

X The CGST and SGST would be applicable on all transactions of goods and services, except,

> exempted goods and services - the list is yet to be finalised and it is envisaged to be uniform across States

> goods and services which are proposed to be kept outside the purview of GST, such as, petroleum products and goods containing alcohol

X Most levies other than basic custom duty and select State levies are proposed to be included (subsumed) within the GST framework

X Import of goods into India is proposed to be subjected to both, CGST and SGST in addition to the basic customs duty

X Import of services to be liable to both, CGST and SGST

X Inter-State supply of goods and services would work under an Integrated GST (IGST)framework

Introduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

Introduction

X Uniformity in laws across states envisaged - various States appear to have a consensus on the following:

> Basic definitions and charge of tax > Rate/s of tax > Provisions relating to computation, valuation and classification> Rules for availment and utilization of input credits > Basic exemption thresholds for levy of tax > Submission of returns in a common format to the extent practicable > Structure and framework of compounding scheme of taxation > Process and timelines for refund of unutilized SGST

The Governments should ensure that the in-principle agreements are honoured. Previously, though the States had a prior in-principle agreement on various aspects under the VAT regime, uniformity across Statelegislations is yet to be achieved.

Introduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

It is proposed that the following central and state levies be subsumed into the dual GST.

Scope of the Levy

Central levies State levies Levies which would remain outside the purview of GST

1. Central Excise Duty2. Additional Excise Duties3. Excise Duty on

Medicinal and Toilet preparations

4. Service Tax5. Countervailing Duty6. Special Additional Duty

of Customs (SAD)7. Surcharges and cesses

1. VAT / Sales tax2. Entertainment tax (unless it

is levied by the local bodies)3. Luxury tax4. Taxes on lottery, betting and

gambling5. State Cesses and

Surcharges in so far as they relate to supply of goods and services

6. Entry tax which is not in lieu of Octroi

7. Purchase Tax *

1. Levies on items containing alcohol and petroleum products to remain status quo, viz., would not be under the GST regime.

2. Excise Duty by Centre may continue on tobacco products. This would be in addition to the proposed GST.

* The subsumation is yet being discussed by the Empowered Committee in consultation with the Government of India.

Introduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

Scope of the Levy

Nature of transaction

Proposed GST structure Current scheme of taxation

Importer - Basic customs duty - CGST- SGST

- Basic customs duty- Countervailing duty - Special additional duty of customs - Protective duties - Surcharges and cesses- Entry tax / octroi / purchase tax

Manufacturer - CGST + SGST or

IGST

- Excise duty (multiple, in certain cases)

- VAT / CST - Entry tax / octroi / purchase tax

Reseller - CGST + SGST or

IGST

- Central excise duty - VAT / CST - Entry tax / octroi / purchase tax

Service provider

- CGST + SGST or

IGST

- Service tax

Works contractors

- CGST + SGST or

IGST

- Central excise duty - VAT / CST- Service tax - Entry tax / octroi / purchase tax

A comparison of the applicability of GST vis--vis the current scheme of taxation is provided hereunder.

Introduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

X Goods - A two-rate structure> lower rate for necessary items and goods of

basic importance and > a standard rate for goods in general.

However, a special rate for precious metals would be prescribed.

X Services It is envisaged that there may be a single rate for services for both SGST and CGST.

X Exports and supplies to SEZs to be zero-rated.

X Supplies from SEZs into the domestic tariff area will not be eligible for any concessions.

The precise rate/s of SGST and CGST to be made known duly in the course of appropriate legislative actions.

The list of exempted goods and whether the same would be retained under the SGST in the initial years is being deliberated upon.

Differential rates for goods and services could continue to result in controversies on classification of transactions

Rates of TaxIntroduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

Exemption Thresholds

Particulars CGST SGSTGoods INR 15 Mil Services Not specified (envisaged to

be in excess of INR 1 mil)INR 1 Mil

A compounding scheme of taxation for SGST is also proposed for dealers having a gross annual turnover below INR 5 Mil with a flat

rate of tax at 0.5%.

The empowered committee has recommended the following thresholdsfor basic exemption from GST.

Introduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

X Tax on inter-State supplies would be levied by the Central Government and would be the sum of CGST and SGST on such goods and services - the Integrated GST (IGST) framework

X The mechanism is expected to facilitate and ensure > uninterrupted input tax credit chain on inter-State

transactions and > no upfront payment of tax for inter-State buyers /

suppliers.

X The scheme broadly involves:> Payment of IGST by the seller on his supplies after

adjusting available credit of IGST, CGST and SGST on the purchases

> The buyer would be entitled to claim credit of IGST paid on such purchases in the importing State

> The component of SGST used in discharging the IGST on supplies would be transferred by the exporting State to the Centre

> The Centre to transfer to the importing State, the component of IGST used in discharging SGST

X Appropriate mechanism would be provided for treatment of stock transfers

Clarity required for determining when a service would be classified as inter-State.

There is no mention of treatment in cases of free supplies, captive consumption and related party transactions.

Inter-State Supplies (IGST)Introduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

X The proposed structure provides for > utilization of credit of CGST on inputs only against

CGST payable on outputs; and> SGST paid on inputs only against SGST payable on

outputs

X Cross utilization of CGST and SGST would be allowed in case of inter-State supply of goods and services under

an IGST framework.

X It is aimed that the accumulation of unutilized GST credits would be avoided except in cases of exports, capital goods purchases and cases where the input GST rate is higher than output GST rate.

X In respect of import of goods into India, the CGST and SGST paid to be availed as credit based on destination

principle (no credit for basic customs duty). The importer will be eligible to claim credit of CGST and SGST paid on such imports in the destination State irrespective of where the CGST and SGST were paid.

Currently, CST paid on inter-State purchases is not allowed as credit under the VAT mechanism. Under the GST regime, inter-State supplies would be subjected to IGST which may be claimed as credit by the buyer in the destination State.

Credit for Input TaxesIntroduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

X Payment of Tax > CGST and SGST should be collected separately and paid

into the accounts of Centre and State respectively. X Registrations

> Each taxpayer to be allotted a PAN linked taxpayer identification number (TIN). This would be inline with the

existing PAN based system for Income Tax and facilitate data exchange and tax payer compliance.

> All inter-State dealers to be e-registered and communication would be through emails.

X Returns> Separate returns to be filed for CGST and SGST.

However, it is envisaged that the return formats would be common to the extent practicable.

X Refunds > Refund of unutilized CGST and SGST to be completed in

a time bound manner. The procedures and timeline are yet to be clarified.

X The functions of assessment, enforcement, scrutiny and audit would be undertaken by the authority collecting the tax with information sharing between Centre and States.

All tax payers including exporters would have to maintain separate details for utilization and refund of credit.

No relaxation for documentation / credit claims for exporters

CompliancesIntroduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

X Constitutional amendments - A Joint Working Group has been constituted to prepare a draft legislation for Constitutional Amendment to enable States to

levy service tax and GST on imports and consequential matters thereto.

X Special Industrial Area Scheme - The current tax exemptions and concessions under various industrial incentive schemes to be converted into cash refund schemes after collection of taxes to enable a continuous chain of set-offs under the GST model. This model would continue upto its legitimate expiry date. It is recommended that no new exemptions or remissions would be allowed under the GST framework. However, where need be, the same could be provided through a reimbursement mechanism.

X Dispute resolution and advance ruling - Appropriate provisions, rules and procedures would be made for dispute resolution and advance rulings.

OthersIntroduction

Scope

Rates

Thresholds

Inter-state supplies

Input Tax Credits

Compliances

Others

Concluding Remarks

X The discussion paper provides a much awaited clarity on the proposed framework and the levies which would be subsumed into the GST framework. This is a very positive step towards a comprehensive indirect tax reform in the country.

X Inspite of extensive deliberations over the last couple of years, the discussion paper fails to address the following. Consequently, it does not enable the trade and industry to assess the real impact of the change:

> There is no indication on the tax rates> No reference made to the transitional provisions

unutilsed credits under CENVAT and VAT mechanisms tax element contained in the goods in stock as on the date of implementation

> Lack of clarity on time-lines for implementation and a transition window for enabling a smooth transition to the businesses

Thank you

Accretive Business Consulting Private Limited# 112/12, 1st Floor, 11th Cross, 5th Main, MalleswaramBangalore 560 003. INDIA

www.accretiveglobal.com+91 (80) 4151 6187

vishnu@accretiveglobal.combadrinath@accretiveglobal.com

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India Goods & Services Tax Proposed Framework Introduction Introduction Scope of the LevyScope of the LevyRates of TaxExemption ThresholdsInter-State Supplies (IGST)Credit for Input TaxesCompliancesOthersConcluding Remarks