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A Presentation

on

SALIENT FEATURES OF GOODS &SERVICE TAX (GST)

At ByResidential Refresher Course Dr. Sanjiv AgarwalOrganized by ICAICMI FCA, FCS,Hosted by Goa Branch of WIRC JaipurJune, 2012

Dr. Sanjiv Agarwal

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SALIENT FEATURES OF GOODS &SERVICE TAX (GST)

This Presentation Covers : Indian Economy- An overview Taxonomy of Indian taxation Presenttax system suffer from Need for GST GST- Journey so far What is GST and its key features GST- Global perspective

GST- How it works ? GST - Issues yet to be decided

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Indian EconomyAn overview

Indias economy is the 11thlargest economy in the worldand the third largest by purchasing power parity (PPP)

G-20 major economies and a member of BRICS

World is presently facing recession-II but Indianeconomy is still better than comparable economies. Agriculture, services and industry are the major sector of

India an economy. Contribution of different sectors inMarch, 2012 was :

Agriculture 19% Services 59% Industry 22%

to be contd.

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GDP COMPOSITION IN MARCH, 2012

Agriculture

19%

Industry

22%

Service

Sector

59%

Indian EconomyAn overview

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Growth in Tax GDP RatioSlow but Steady

Years Tax GDP ratio

2003-04 9.2%

2007-08 11.9%

2009-10 9.7%

2010-11 10.3%

2011-12 10.1%

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Power to Tax in India Central Government and the State Governments under Part XI of Indian

Constitution have power to levy taxes. Legislative power v Administrative power Legislative power has three lists:-

Union list,States list and

Concurrent list Administrative powerCBDT, CBEC Union list consists of 100 items -Parliament has exclusive power to levy Tax. State list consists of 66 items -Individual states have exclusive authority to

levy Tax.

Concurrent list consists of 47 items - both governments can levy tax.

to be contd..

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Power to Tax in India India has a two tier federal power to collect tax

the Union Government,

the State Governments includingurban/rural localbodies

Presently goods are liable to Vat / Excise / Customs dutywhile taxable services attract service tax.

Certain transactions subject to both - Vat and Service tax Efforts to revamp the direct tax structure - New direct

tax code (Income Tax Act, 1961 & Wealth Tax Act, 1957

would be scrapped) proposed Efforts to bring on a single indirect taxGST proposed

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Taxonomy of Indian Taxation

TAXATION POWERS OF UNION

Income Tax on income, exceptagricultural income

Excise Duty on goods manufacturedCustom Duty on importsService Tax on specified servicesCentral Sales Tax on inter-state sale of goodsStamp Duty on 10 specified instruments

To be contd..

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Taxonomy of Indian Taxation

TAXATION POWERS OF STATE

VAT / Sales Tax - on sale of goods, other thannewspapers

Stamp Duty - on other than 10 specified instrumentsTax - on agricultural incomeToll tax - on utilitiesOther taxes - on

Land and buildings

Entry of goods in local Area (Entry Tax or

Octroi)Consumption or sale of electricity

Vehicles

Luxuries including taxes onentertainment, Betting and gambling

Alcoholic Liquor, Narcotic Drugs and

Opium

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Presenttax systemsufferfrom

Confusion and Mistrust

Complex and lacking in stability

Hidden tax on exports, no state tax on imports

High transaction costs

Narrow base

High compliance cost

To much litigations

Lack of harmony and inter state practices

Highly corruption

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Goods & Service Tax (GST)

A Common Tax on

Goods Services

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Pre-requisites for migrating to aGST regime

Setting up of empowered committee for GST (like VAT) which can steer theroad map into action - done

Broaden the tax base for excise duty (presently 40% comes frompetroleum products) being done

Finishing area based and product based exemptions being done

Rationalization of concessions and exemptions including that on exports

being done Expanding service tax to almost all services now proposed Common/unified tax rate for goods and services which may be ideally,

revenue neutral (a suitable GST rate) dual tax proposed Avoiding or minimizing differential tax rates under discussions Abolition of other small taxes - under discussions

Abolition of CST in a phased manner - being done Power to levy service tax on select/agreed services to States - underdiscussions

Issue of inter-State services and goods movement vis--vis levy of duty ortax to be sorted out - under discussions

Revenue sharing mechanism to be rationalized - under discussions

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GST - Journey so far

Feb, 2006 : First time introduced concept of GST and announced the date of its

implementation in 2010

Jan. 2007: First GST study by ASSOCHAM released by Dr. Shome

Feb. 2007: F.M. Announced introduction of GST from 1 April 2010 in Budget

April 2007 : CST phase out started - CST reduced to 3%, currently 1% May 2007: Joint Working Group formed by EC

Nov. 2007: Joint Working Group submits report

April 2008 : Empowered Committee (EC) finalizes views on GST Structure

July 2009: FM announces commitment to bring GST from April 2010

Consultation on interstate services in progress

to be contd

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Budget 2010 to achieve the roll out of GST by April 2011

Revamping of indirect tax administration at centre/ statesinternal work processes based on use of information technology- massive information technology (IT) platform

project ACES-Automation of Central Excise and Service Taxrolled out

rate of service tax retained at ten per cent

states to revamp their internal work processes

to be contd

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Budget 2011 non-committal on timing and roll out but the Government keen to bring in

Constitutional Amendment Bill overall amendments targeted towards moving close to harmonize with GST regime in

future

major highlights of budget discussions/proposals on GST DTC and GST to mark a water shed Decisions on GST to be taken in concert with the states Areas of divergence between centre and states narrowed Constitutional Amendment Bill likely to be introduced in current session Drafting of model legislation for central and state GST underway Establishment of IT infrastructure in process (GST network) NSDL selected as technology partner for GST

Tax rates maintained at same level of 10% to stay on course towards ST Certain central excise rates changed to prepare the ground for transition to GST by

reducing number of exemptions Nominal central excise duty of 1% imposed on 130 items, no Cenvat credit allowed on

such items. In service tax, proposals aim to achieve a close fit between the present service tax

regime and GST.

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Budget 2012

No announcement on GST rollout date GST to be implemented in consultation with the States at the earliest GST network (GSTN) likely to be in place from August, 2012

GSTN will implement common PAN based registration, return filing andprocessing of payments for centre and all states on a shared platform.

Bringing closer of Service Tax and Central Excise for transition to GST Drafting of modal legislation for CGST and SGST under progress. Common forms for Service Tax and Central Excise registration and return

proposed.

Place of Supply Rules, 2012 to trigger debate to assess issues that mayarise in taxation of inter state services for eventual launch of GST.

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GST todayNeed & Advantages

As a developing country, India needs a transparent & unambiguous taxstructure

A complex tax structure with multiple rates of taxes Multiple taxes across the supply chain High transaction cost in the hands of the tax payers

Increased tax collections due to wider tax base and better compliance

Improvement in international cost competitiveness of indigenous goodsand services.

Enhancement in efficiency in manufacture and distribution due toeconomies of scale

GST encourages an unbiased tax structure that is neutral to businessprocesses, business models, organization structure, product substitutesand geographical locations

Helping as a weapon against corruption GST operates on a negative list i.e. all goods and services are subject to

GST unless specifically exempted

to be contd..

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Nature of complexities i.e. classification to valuationregarding taxability, exist in the present structure.

Some of such burning issues are:

Excise on MRP Excise, VAT and Service Tax on Software,

VAT & Service tax on: Works Contracts

Right to Use

Composite Contracts such as AMC transactions

to be contd..

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Tax cascading effect

Central Sales Tax (CST) on inter-state sales, collected by

the origin state and for which no credit is allowed by anylevel of governmentbeing phased out now

Real estate transactions are outside the scope of both VATand CENVAT

Exempt sectors are not allowed to claim any credit for theCENVAT or the service tax paid on their inputs

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What is GST

GST is a comprehensive value added tax on goods and services

It is collected on value added at each stage of sale or purchase in the supply chain

No differentiation between Goods and Services as GST is levied at each stage in thesupply chain

Seamless input tax credit throughout the supply chain

At all stages of production and distribution, taxes are a pass through and tax is borne bythe final consumer

All sectors are taxed with very few exceptions / exemptions

Full tax credits on inputs 100 % set off

In most countries, a single VAT exists which covers both goods and services.

Typically it is a single rate VAT but two - three rate VAT systems are also prevalent India will be following multi rate / multi tier tax

Canada and Brazil alone have a dual VAT

Standard GST rate in most countries range between 15-20 percent

GST exists in over 140 countries .

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GST : Proposed Key Features

Dual GST : Central GST & State GST

Destination based State GST

Common Base

Uniform Classification Uniform FormsReturns, Challans( in electronic mode)

No cascading of Central and State taxes

Cross credit between Centre and State not allowed

Tax levied from production to consumption

to be contd..

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GST : Proposed Key Features

HSN to be applied for goods

One Common return for both Central and State GST

Uniform collection procedure for central and state GST

13 digit PAN based Common TIN registration

TINXSYS ( Tax Information Exchange System) to track transactions

States to collect CGST for SSI < 150 L and transfer to Central Government

Balance of Fiscal Autonomy to Center and States and need forHarmonization

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Goods & Service Tax - GST

GST is expected to be more efficient system of taxation Boost to the revenues of the Centre and statesYears Excise Service Tax

2000-01 68,282 2,612

2010-11 1,37,427 70,391

2011-12 1,50,600 95,000

2012-13 (target) 1,94,350 1,24,000

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Taxes proposed to be subsumed in GST

Central Taxes Excise Duty

Additional Excise duty

Excise duty under medicinal and toilet preparation Act

Service Tax

Additional Custom duty commonly known as countervailing duty (CVD), special additionalduty( SAD)

Surcharge

Cess

State Taxes Value added tax (VAT)

Entertainment tax levied by states

Luxury Tax

Tax on Lottery, betting and gambling

Entry tax other than for local bodies

State surcharge Cess /

to be contd..

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Taxes proposed to be subsumed in GST

State governments still not have consensus on following taxes to be

subsumed in GST

Purchase tax

Octroi duty Tax on alcoholic beverages (country liquor / IMFL) Tax on petroleum products Tax on tobacco items

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GST- WHAT ALL IT WILL INCLUDE

A sale or supply includes a sale of goods

Lease of premises

Hire of equipment

Giving advice Export of goods and supply of other things.

A purchase includes an acquisition of goods or services such as

trading stock a lease, consumables and other things.

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GST : Global Perspective

More than 140 countries have introduced GST. It has been a part of the tax landscape in Europe for the past 50

years.

It is fast becoming the preferred form of indirect tax in the Asia-Pacific region.

It is interesting to note that there are over 40 models of GSTcurrently in force, each with its own peculiarities.

While countries such as Singapore and New Zealand tax virtuallyeverything at a single rate, Indonesia has five positive rates, a zerorate and over 30 categories of exemptions.

In China, GST applies only to goods and the provision of repairs,replacement and processing services.

It is only recoverable on goods used in the production process, andGST on fixed assets is not recoverable.

There is a separate business tax in the form of VAT.

to be contd..

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GST- RATES WORLD WIDE

Country GST Rates

China - 17%

Indonesia - 10%

Philippines - 10%

Taiwan (Chinese Taipei) - 5%Australia - 10%

Germany - 16%

Denmark - 25%

Japan & Singapore - 5%

UK - 17.5%

France - 19.6%

New Zealand - 12.5%

to be contd..

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GST : Global Perspective Goods and Services Tax in Canada

GST is a multi-level value added tax introduced on January 1, 1991. The GST replaced a hidden 13.5% Manufacturers Sales Tax (MST). As of May 18th, 2010, the GST rate is 5% and some goods &

services are exempt from GST zero-rated goods & services

Model has helped the Canadas economyto bemore efficient andcompetitive Goods and Services Tax in Japan

In Japan, VAT or GST is known as Consumption Tax (CT)introduced in January 1989.

It requires re-calculation and payments to the tax authorities ateach transaction point in the onward sales chain.

The Japanese Consumption Tax rate is currently 5% and out ofwhich 4% is national levy and 1% regional levy.

There is an annual threshold ofYEN 10 million,based on the baseyear of two years prior to the tax year.

to be contd..

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Goods and Services Tax in Australia Consumption tax is called Value Added Tax. GST provisions are set out in a piece of Legislation called theA

New Tax System (Goods and Service Tax) Act 1999 and the GSTwas implemented on 11th July, 2000.

GST@10% will be charged on most goods and services consumedin Australia.

All imported goods are assigned a tariff classification obtained fromthe Australian Customs Tariff which determines the rate of duty willpay for the product.

GST is not intended to apply to goods and services which are

exported from Australia and there are specific provisions in the GSTlaw designed to make exports GST-free.

to be contd..

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Goods and Services Tax in Brazil Brazil was the first country to adopt GST system. Brazil has adopted a dual GST where the tax is levied by

both the central and the provincial governments. GST rate is 20 %.

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GST- CAN WE ADOPT IT

An information network allowing states to cross-check payment information(TINXSYS) has been put to trial and is expected to improve compliance andreduce evasion.

What is needed is an IT system like the Tax Information Network (TIN),

where the TDS or the VAT credit is recorded in a central database.

Paper bills and fraud to be largely eliminated.

Obligations to be fulfilled by IT System Registration

Return Current status of the system

Refund

Tax Deposition

GSTN to be operational by August, 2012

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Features of Dual GST Model

Dual levyby Centre & States

Various taxesthat get subsumed in GST

Manner of Implementation

Dual Chain vis a vis Single Chain

Inter-chain VAT ability

Inter State VAT ability

Items included in each chain Dualrates of taxation

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Key Features of Credit Mechanism

CGST can be set off against CGST SGST can be set off against SGST

CGST cannot be used for set off againstSGST and vice versa.

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Seamless Credit Mechanism

Input tax credit to be available for Central GST as well as

State GST paid irrespective of the collecting agency

Create a nationwide clearinghouse mechanism tofacilitate transfer of Central and State GST and allow

credit for tax paid

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Seamless Credit Mechanism

It will also end the distortion in differential tax

treatment of various goods and services.

GST is going to be pinnacle of achieving anintegration of excise duties, service tax, State

value added tax and other local taxes.

With GST, uniformity of levy of indirect taxes will

be ensured across the country.

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Central GST (CGST)

levied by the Centre through a separatestatute on all transactions of goods andservices made for a consideration.

Exceptions would be exempted goods andservices, goods kept out of GST andtransactions below prescribed thresholdlimits.

CGST would be levied across the value chain. Rates for CGST would be prescribed

appropriately reflecting revenue considerationsand acceptability.

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State GST (SGST)

Levied by the States through statute on all transactionsof goods and services made for a consideration.

Exceptions would be exempted goods and services,

goods kept out of GST and transactions below prescribedthreshold limits.

Basic features of law such as chargeability, taxableevent, measure, valuation, classification would beuniform across these Statutes as far as practicable.

State GST would be paid to the accounts of therespective State.

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Inter-state Transactions

Centre would levy IGST which would be CGST +SGST.

IGST would be levied on all inter-Statetransactions of taxable goods and services withappropriate provision for consignment or stocktransfer of goods and services.

Inter-State dealer will pay IGST after adjustingavailable, IGST, CGST and SGST on purchases.

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IGST

The seller in State - A will pay the IGST to theCentre.

While paying IGST the seller will adjust against

available credit of IGST, CGST and SGST. State Government - A will have to transfer thecredit of SGST used by the seller for payment ofIGST to the Centre.

To be cont.

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IGST

Buyer in State - B can avail credit of the IGSTcharged.

Buyer in State - B can use the IGST to dischargeoutput tax liability in his own State. Centre has to transfer credit of IGST used for

payment of SGST to State Government - B.

.

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IGSTILLUSTRATION

Maharashtra seller selling to Karnataka buyer forRs.1,00,000/-.

IGST payable assuming an 8% rate is Rs.8,000/-.

Rs.8,000/- can be paid by adjusting Inter-State purchases (IGST) Rs.3,000/-

Local purchases (CGST) Rs.1,500/-

Local purchases (SGST) Rs.1,500/-

Since dealer has used SGST of Maharashtra to the extentof Rs.1,500/-, Centre has to transfer Rs.1,500/- toMaharashtra Government.

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IGSTILLUSTRATION

IGST of Rs.8,000/- is availed as credit by Karnatakabuyer.

Karnataka dealer sells the goods at Rs.2,00,000/-

attracting CGST of say Rs.16,000/- and SGST ofRs.16,000/-.

If IGST of Rs.8,000/- is used to pay the SGST thenKarnataka Government has to transfer Rs.8,000/- to the

Centre.

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ILLUSTRATION OF GST

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Taxing of Inter State Transactions

Tax Payment by exporting dealer to the account of receiving

state

Credit allowed to the buying dealer by receiving state on

verification Retention by receiving state on sale to non-dealer

Declaration form to be discontinued

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Knowing more about GST

We all will pay GST on every product or service we buy/ consume

All indirect taxes levied by the States and the Centre will bemerged into one GST, we would exactly know how much tax wepay which at present is difficult to understand.

No distinction would be made between imported or Indian goodsand they would be taxed at the same rate.

The sellers or service providers collect the tax from their customer.

Before depositing the same to the exchequer, they deduct the taxthey have already paid.

The success of GST would rest upon efficiency, equity andsimplicity.

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GST- How It Works

Dealers will charge GST on the price of

goods and services. Claim credits (CENVAT) on purchases of

goods and services.

collect the tax from their customer, anddeduct the tax already paid.

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Imports should be taxed?

Dual GST should be levied on imports also with

facility of credit for the tax paid

Exports must be zero rated i.e. there should be

no tax element in the price of goods exported

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Tax Exemptions

Area Based

To be discontinued after current eligibility period

Product Based

To be converted in to refund route

Limited Flexibility

To Centre & States barring few exceptions

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GST - Challenges

Rapid increase in assessee Place of supply even after place of supply

rules Legislative challenge Effective credit mechanism

IT Infrastructure

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Issues from Traders Perspective

Dialogue with Trade & Industry and all other stake holders

Industrial inputs, Capital goods to be at lowerrate

List of exempted goodsspecific/common across states

Stock transfers should be exempted monitors throughsystem basedcontrols

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GST : Professional Opportunities

Knowledge management Preparatory advisory Cost benefit analysis

GST implementation Training / seminars / awareness Planning compliances Advance ruling representation

Employment with corporates Client retainerships GST Audit

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Issues From Industrys Perspective

Multiple state jurisdictions.

Full set-off : a question mark

Building of IT backbone

Uniform legislation, forms, rules, rates, compliance requirements.

Any change post implementation should be uniform by all states not

piecemeal.

Bar on increase in rates, imposition of new taxes by states

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Issues Yet To Be Decided

Constitutional amendment authorizing state tocollect and retain tax on services.

Integration of certain Central & State taxes(Various Cess, Electricity duty, Entertainmenttax etc)

Stock transfers

Road permits and check posts

to be contd.

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Issues Yet To Be Decided

Taxation of inter-state services and their method of taxation

Difficulties in defining Place of supply, place of delivery

Group Health Insurance

Consulting services

However most of the B2B services not a problembecause of availability of credit

Disputes even with regard to classification of goods

Jurisdictional Issues with regard to registration and SCN /Assessments

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Favorable Impact on Industry

Seamless credit to trade and industry throughout supply

chain will improve competitiveness

Common Tax Base will eliminate tax cascading

CST phase-out will reduce supply chain cost

Economy in production scale & efficiency in distribution

Simplified structure to reduce transaction cost

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GST - Humor

Business Man: Yes Sir.CA: Now Empowered Committee of states is saying that their demand

was not taken into consideration and negative list will lead to doubletaxation and litigation.correct?

Business Man: Yes Sir.CA: So the negative list of services when implemented will Complement

the Centre -States contended road to GST, and can fit in aspavement along with that road whenever it comes into

existence.Understood??Business Man: No Sir..I mean. Yes SirI mean I will think over

itand am sure that I will understand!!!

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THANK YOUFOR

YOURPRECIOUS TIME

AND

ATTENTIONDr. Sanjiv Agarwal

FCA, FCS, Jaipur

[email protected]@gmail.com

Documents

01 GST