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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