How to handle India's Goods and Services Tax An informative guide

Introduction

Indirect tax policy is complex — for both the lawmakers who craft the laws, as well as the stakeholders that tax changes affect. The historic Goods and Services Tax (GST) tax reform in India, which ranks among the world’s fastest-growing economies, is no exception.

The ambitious reform will replace the assortment of value-added taxes that the central and state governments currently levy on goods and services with a standard, all-in GST rate fixed at 5%, 12%, 18% and 28%, dependant on the goods or services being sold, with some goods and services being zero rated or exempt from tax. While creating a greater degree of certainty with respect to rates is generally appealing, the policy was criticized by analysts and observers just weeks before implementation.

Initially, India’s GST could be regressive. Critical stakeholders also lacked visibility on what would be affected just five weeks before its scheduled implementation.

“Unfortunately, many goods and services used by India’s millennials (and the urban poor) will attract a higher tax rate initially. However, their prices could fall if manufacturers and service providers cut costs after taking into account some tax rebates under GST.” — Quartz India, May 2017

Critical stakeholders also lacked visibility on what would be affected just five weeks before its scheduled implementation, as Bloomberg View economic columnist Mihir Sharma observed in May 2017:

“This is perhaps India’s most comprehensive and revolutionary tax reform ever. Yet till just a few days ago, nobody had any idea about what would be taxed at what rate, nor how inflation might or might not be affected.” — Bloomberg View, May 2017

Benefits and Drawbacks

India’s GST is a substantial reform effort to bring the tax of goods and the tax of services more in-line with each other, and to coordinate jurisdictional oversight in a way that produces more certainty for businesses and the government. It will affect thousands of businesses and apply to many Crore in annual transactions. Like most pieces of fiscal policy, it has benefits and drawbacks.

BENEFITS DRAWBACKS

• Reduces multiple taxation and unifies India’s jurisdictional approach to tax on commerce

• Unifies all rates related to the sale of goods and services, which effectively lowers taxes on manufacturers that export

• Intends to promote the availability of credit

• Raises rates, particularly at the point of sale, and increases tax on imports

• Creates deeper bureaucracy because both central and state governments have a say in how business is regulated, which can increase compliance costs

• Depends on an online platform for credit dispersion, and government IT projects have a questionable reputation

Crafting and implementing strong changes to existing tax policy that provides both businesses and consumers the certainty that they desire — and continues to bring in the revenue required to fund crucial, pro-growth government programs and services — is profoundly difficult, which begins to explain why so few governments do it. India’s GST reform framework combines into one rate an assortment of indirect taxes that have traditionally created complexity and uncertainty for businesses and costs for consumers that were often higher than necessary. The status quo in India created a commercial environment in which goods and services were double-taxed and impeded the swift movement of goods.

For companies that do business in or through India, the immediate question is: With India’s Goods and Services Tax now live as of July 1, will we have to change anything to continue to do business as usual?

The broader question is: In the grand scheme of things, what does handling this significant change mean for our tax technology and our overall approach to delivering value through our tax department?

The Two Phases of Indirect Tax

India’s Goods and Services Tax presents fundamental changes to the tax compliance process. It centralizes the regulatory authority responsible for business taxation, it alters the statutory rates of many goods and services and it creates a new process for declaring input tax credits. These changes place new burdens on businesses.

To understand why, it’s important to consider how indirect tax departments operate. The normal process of an indirect tax department involves two basic phases: an upstream phase and a downstream phase.

UPSTREAM: Making proper financial transaction tax determinations on the applicable tax rates and product taxability

DOWNSTREAM: Operating in a compliant manner

It's the first objective of the tax department to work with other departments and stakeholders in a business, either manually or systematically, to achieve compliance with as little risk as possible. As a unit, the tax team first and foremost must ensure that completing their returns and filing their remittance are done in a timely, complete manner.

But this is the downstream phase. The upstream phase comes first.

Reconciliation processes, corrections and adjustments are a necessary part of the upstream objective. To achieve that objective, the team must have all the correct data — from multiple data sources, including online and offline sources — in a centralized place. And to get that done, applicable transactions must be identified so that the team knows to perform determination manually, and then researched to ensure the determinations are correct.

Companies have a high degree of control over their own compliance processes and personnel (the downstream phase), but comparatively little control over the frequency with which statutory rates change (the upstream phase). Try as they might, companies don’t have much influence when it comes to the fiscal policy of sovereign nation-states.

The Two Phases of Indirect Tax continued

The main impact that India’s Goods and Services Tax has on tax teams is first and foremost with the upstream phase: the parts of the process that involve either having the correct data or having the foresight to know that the right data is not available in the company's available data sets and must therefore be collected and recorded manually.

Getting those rates right is the source of the river that eventually becomes the vast ocean that is indirect tax — and India has changed these rates.

A Day in the Life of Tax and IT

Policy

Returns Filing &Remittance

Determination (Upstream) Compliance (Downstream)

The Two Phases of Indirect Tax continued

The challenges that India’s Goods and Services Tax will place on tax and finance departments exemplifies why an end-to-end approach to tax automation is essential for companies that do business globally. This approach massively reduces the need for tax departments to spend valuable time and mental energy on the upstream phase of tax compliance when they're also working to meet their objective of achieving compliance with as little risk as possible.

The Thomson Reuters ONESOURCE Indirect Tax determination engine provides tax content that is continually updated and delivered in real time to users around the world — and it covers nearly 200 countries that also includes cross-borders tax determination logic. ONESOURCE Indirect Tax is the only end-to-end global solution for indirect tax determination, and it automates three steps of the two-phase tax compliance process:

• It automatically determines the rates based on the type of product• It calculates tax withholdings tax• It records the tax in a way that can be easily shared with tax authorities

The ONESOURCE solution records this information into a database so that returns can use this data and be easily filed in the downstream phase. All of the information necessary to respond to an audit is available quickly and in the right format.

End-to-End Automated Global Indirect Tax

Thomson ReutersCorporation

Returns Filing &Remittance

Global Transactions

Automated Determination (Upstream) Automated Compliance (Downstream)

Global Tax Research & Content Updates

Global Content

LiabilityData

Audit Defense

Specific Details of India’s GST

There are six primary elements that determine the taxability of a good or service under India’s Goods and Services Tax. On the taxability side, the supply of the good or service in question is one determining factor, and the place of supply of the good or service sought is the other. On the qualifications and payments side, there are four variables: the person liable for the tax, the value of the good or service, the statutory rate and the time of supply (i.e., the point of tax).

Elements determining taxability

Supply

Rate ofGST

Good orservice

Place ofsupply

Personliable

for tax

Value ofsupply

Time ofsupply

Essentials for taxability

• Supply of goods/services

• Place of supply in taxable territory

Essentials for quantification and payment of tax:

• Person liable to pay tax

• Value of supply

• Rate of tax

• Time of supply (i.e., point of tax)

Specific Details of India’s GST continued

The framework, coverage and structure of the Goods and Services Tax is unique, and the place of supply has specific rules that define it. Any supply of goods or services imported in India will be treated as an interstate supply liable to the Integrated Goods and Services Tax (IGST).

Structure Proposed for GST in India

FRAMEWORK COVERAGE RATES

• Levy: Tax on all supplies (including stock transfers)

• Mechanics: Dual GST for central and states, IGST on interstate supplies including stock transfers

• Situs: Place of supply rules to determine sites of supply of goods and services

• Credits: Full credit of all GST paid shall be available, except cross credits between Central GST (CGST) and State GST (SGST)

• Subsumed: Excise duty, CVD, SAD, Service tax, VAT, CST, Entry tax, Purchase tax, Entertainment Tax, Luxury Tax, Cesses

• Excluded products: Alcohol for human consumption, petroleum products

• Rate structure: Finalized as per the latest GST Council meet:

– Lower Rate: 5% – Standard Rate: 12% & 18% – Higher Rate: 28% – Sin / Demerit Rate: 28% + Cess (for specified goods)

• Schedule: Product-wise, the schedule of rates is yet to be released by the government

Specific Details of India’s GST continued

Place of Supply of Goods and Services

Five conditions can justify the claim of tax credits:

• Possession of a tax invoice, or other tax-paying document issued by a supplier• The goods/services on which tax credit is claimed have been received• Tax charged in respect of said supplies has been actually paid by the supplier to the government• Inward supply return has been furnished by the recipient• Payment for the invoice has been made to the supplier within 180 days of date of invoice

RELEVANCE OF PLACE OF SUPPLY

Supply of goods/services in the course of intrastate trade or commerce — liable to CGST and SGST

Supply where the location of the supplier and the place of supply are in the same State

Supply of goods/services in the course of interstate trade or commerce — liable to IGST

Supply where the location of the supplier and the place of supply are in different states

Any supply of goods or services imported in India will be treated as an interstate supply — liable to IGST

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About ONESOURCEThomson Reuters ONESOURCE™ is the industry’s leading corporate tax technology platform. ONESOURCE enables global tax compliance and accounting decision-making. In over 180 countries, ONESOURCE helps companies stay in compliance, avoid penalties and audits, save time and increase efficiency through every step of the tax lifecycle, including corporate income tax, indirect tax, property tax, trust tax, tax information reporting, transfer pricing, data management and internal processes.

For more information on ONESOURCE solutions for India GST, visit https://tax.tr.com/onesource/indirect-tax/india-gst-software/.

onesourceindirecttax.com This guide was adapted from a webinar, “Are You Ready For India’s Goods and Services Tax?,” hosted by Thomson Reuters and KPMG. View the recording or read the slides for more information.