GST – the game changer

Sundeep Gupta, FCA, DISA

ASA & Associates LLP (www.asa.in)

Corporate Catalyst India (www.cci.in)
 Flow of Presentation
• INDIRECT TAX – PRESENT CONTEXT

• CHALLENGES IN THE PRESENT SYSTEM

• UNDERSTANDING GST

• THE INDIAN CONTEXT

• INDUSTRY EXPECTATIONS V. PROPOSED GST

• PLANNING BY INDUSTRY
 INDIRECT TAX – PRESENT CONTEXT

CENTRE STATES LOCAL

• Excise • Intra-State Sale • Octroi
• Inter-State Sale • Entry tax • Municipal tax
• Service tax • Entertainment tax
• Customs • Luxury tax
• Stamp duty
• Excise on liquor
 INDIRECT TAX – PRESENT CONTEXT
GENERAL

• Goods and services taxed separately

• Taxes on goods are termed as VAT at State level and CST at Central level; CST rate is
common across India ; VAT rates different based on levies by each State

• Input tax credit mechanism for taxation of goods with conditional cross-levy set-off

• Common rate across India services

• Excise levied on manufacture ; common rate across India

• Customs duty levied on import or export of goods ; common rate across India

• Various other State / Municipal level taxes viz. octroi, entry tax etc. ; different rates
based on levies by each State
 INDIRECT TAX – PRESENT CONTEXT
EXCISE DUTY

• Levied on manufacture of taxable goods in terms of Central Excise Act, 1944 on goods
manufactured or produced in India except petro products and tobacco
• Administered by the Central Government under the authority of Entry 84 of the Union
List (List 1) under Schedule VII read with Article 226 of the Constitution of India
• The rates of duty, ad valorem or specific, are prescribed under the Schedule I and II of
the Central Excise Tariff Act, 1985
• The taxable event under the Central Excise Law is ‘manufacture’ and the liability of
Central excise duty arises as soon as goods are manufactured; payment only on removal
of goods
• Allows instant credit for all taxes paid on inputs as well as for countervailing duty
(CVD) under CENVAT Credit Rules, 2004
• Elimination of cascading effect through tax credit mechanism
• Integration of excise duty and service tax and set-off of one against another
• No integration of excise duty and CST/VAT
 INDIRECT TAX – PRESENT CONTEXT
SERVICE TAX

• Levied on provision of taxable services

• No separate legislation; governed and administered by the Finance Act, 1994
• Administered by the Central Government under the authority of Residual Entry 97 of
the Union List (List 1) under Schedule VII of the Constitution of India
• Taxable event is provision of services; also levied on service to be provided viz.
advances received for provision of services
• Normally service provider responsible to pay tax; few cases the responsibility cast on
service receiver
• Elaborate rules to determine place of provision of service which is the critical factor for
taxability
• The CENVAT Credit Rules, 2004 provide for availing of set-off of service tax and
central excise duties paid on the input services/inputs/capital goods
• Duties of excise and the countervailing duties can be taken as credit for the payment of
service tax subject to conditions
• Cross levy set-off of service tax and CST/VAT is not permissible
 INDIRECT TAX – PRESENT CONTEXT
SALES TAX / VAT

• Levied on sale of goods vide entry No. 92A of List I (Central list) of the Constitution
of India for CST; entry No. 54 of List II (State list) of the Constitution of India for
VAT
• Sales are divided into local sales, central sales (inter-state sales) and exports from or
import into India for taxation
• Local VAT levied on local sales of goods, or intra state sales of goods i.e sales of
goods within a state and taxed under local sales tax laws i.e VAT laws of each State
• Central sales tax levied on inter-state movement of goods from one state to another
under Central Sales Tax Act, 1956
• Concessional rate of tax is allowed under Central Sales tax Act on submission of
prescribed declarations/ certificates
• Tax is levied at each point of sale / resale
• Set-off permitted subject to conditions
 INDIRECT TAX – PRESENT CONTEXT
CUSTOMS DUTY

• Levied on import or export of goods vide entry No. 83 of List I, Schedule VII of the
Constitution of India
• Administered by Central government vide Customs Act, 1962 and Customs Tariff Act, 1975
• Categories of items and the rates of duties specified in the Schedules to the Customs Tariff
Act, 1975
• Goods categorized in a systematic manner in accordance with an international scheme of
classification of internationally traded goods – termed ‘harmonized system of commodity
classification (HSN)’
• Rates of duties prescribed in First Schedule to Customs Act.
• Basic customs duty, additional duty (CVD), special additional duty (SAD) are the various
types of duties levied under the Customs law
 INDIRECT TAX – PRESENT CONTEXT
OTHER TAXES

• Research & Development Cess (R&D Cess)

• Octroi & Entry tax
• Luxury Tax
• Tax on consumption or sale of electricity
• Lottery Tax
• Betting and gambling tax
• Stamp Duty
• Property Tax
• Toll tax, passenger tax and road tax
 CHALLENGES IN PRESENT SYSTEM
• Inefficiencies of tax cascading: full set-off of input taxes not available viz. exempt
sectors; specific input taxes; cross set-off between excise/service tax with VAT

• Interpretational issues relating to levy on manufacture: definitional issues of

manufacturing; deemed manufacturing; valuation issues

• Sale v. service: increasingly becoming complex; frequently leads to overlap between

Centre and States; vested motive of States to tax as goods

• Multiplicity of State laws: lacks uniformity in rates, procedures, exemptions

• Local sales v. Central sales: conflict between Centre and States to tax any sale

• Interpretational issues: Sale v. works contract; multiple litigations

• Complex administration: lack of automation; uniformity; knowledge

 UNDERSTANDING GST
COMMON PRINCIPLES

• Destination based common tax on both goods and services levied at each stage of value
addition

• Coverage of all types of goods and services ; very limited items excluded

• Multiple tax rates and multiplicity of taxes reduced leading to simpler tax regime and
administrative efficiencies

• Allows input credit for taxes paid on purchases uniformly

• Common national market eliminating state boundaries

• Eliminates interpretational issues between goods and services

• Emphasis on voluntary compliance

 UNDERSTANDING GST
MERITS OF THE SYSTEM

• Abolition of multiple taxes, reduced administrative cost to Government

• Reduction in compliance cost with increased voluntary compliances

• Removal of cascading effects of taxation reduces litigation and corruption

• Reduced cost of production of goods and services

• Increase in demand of goods and services

• Widens the tax base and increase in tax revenue

• Avoidance of interpretational issues between goods and services; valuation principles

 UNDERSTANDING GST

Standard Models

Central GST State GST Dual GST

GST to be levied by
GST to be levied by GST to be levied by
the Centre and states
Centre States
concurrently

Australia, Germany, USA Brazil, Canada

Denmark
 UNDERSTANDING GST
CENTRAL GST

• Two levels of Government combine their levies in the form of single National GST,
with appropriate revenue sharing arrangements among them

From the Indian perspective:

MERITS DEMERITS
• Comprehensive base for single rate of tax • Requirements for drastic amendments in
• Removal of cascading effect of taxation Constitution of India
• Single statute instead of multiple, reducing • Change required in entire infrastructure
compliance cost developed for taxation at both levels
• Common market; Free movement; no check- • States may not agree to give up powers of
posts, internal tax frontiers or other barrier taxation ; worries about loss of revenue
to trade • May upset the present concept of fiscal
• Single tax authority; compliance with only federalism
one tax
• Customer will know the tax burden falling
on them
 UNDERSTANDING GST
STATE GST

• States alone levy GST and the Centre withdraws completely

From the Indian perspective:

MERITS DEMERITS
• Comprehensive base for single rate of tax • Impairment in Centre’s revenues
• Removal of cascading effect of taxation • Requirements of major amendments in
• Enhances revenue capacity of the states Constitution of India
• Reduced dependence on the Centre • May not be revenue neutral for individual
states
• Compliance requirements for separate state
tax laws
• Unhealthy competition among different
states
• Change required in entire infrastructure
developed for taxation at both levels
 UNDERSTANDING GST

Dual GST

Non –Concurrent Dual GST Concurrent Dual GST

GST to be levied by both tiers of

GST on goods levied by States only
Government concurrently
and services are taxed by Centre
only
GST to comprise Central GST and
State GST
Centre to play only coordinating
role for monitoring and application
CGST to subsume Central taxes
of tax on inter-state services
and SGST to subsume State level
taxes
Cascading can be eliminated by
States by allowing input tax credit
CGST to be administered by Centre
of tax levied by Centre
and SGST by States
 UNDERSTANDING GST
DUAL GST – CONCURRENT MODEL

From the Indian perspective:

MERITS DEMERITS
• Achievable in short term with no significant • Compliance costs may not reduce
changes required in current indirect tax significantly
structure • Uncertainties may exist on part of States
• Removal of cascading effect of taxation • Challenge of sharing revenue on inter-state
• Balance between fiscal autonomy of Centre transactions
and States • Taxation of services provided nationwide at
• Empowerment to both Centre and States to State level may pose challenge
levy taxes
• Requirements of least changes in
infrastructure
• Improves competitive environment for
MNC’s
• Cost reduction for customers
 UNDERSTANDING GST
GST WORLDWIDE

Country GST/VAT Rate (%)

Japan 5
Singapore 7
Canada 7
Australia 10
Germany 16
France 19.6
UK 20
Sweden and Denmark 25
 THE INDIAN CONTEXT
THE BEGINNING

• In 2000, the Vajpayee Government started discussion on GST by setting up an empowered

committee. The committee was headed by Asim Dasgupta (Finance Minister, Government
of West Bengal). It was given the task of designing the GST model and overseeing the IT
back-end preparedness for its rollout
• Recommendation by Dr. Kelkar Task Force for implementation of National GST
• The Empowered Committee of State Finance Ministers issued the first discussion paper on
goods and service tax in India on November 10, 2009
• Announcement made by the then finance minister in the central budget (2007-08) to the
effect that GST would be introduced with effect from April 1, 2010
• After this announcement, the Empowered Committee of State Finance Ministers set up a
Joint Working Group on May 10, 2007
• The Joint Working Group got itself divided into three Sub-Groups and had several rounds
of internal discussions as well as interaction with experts and representatives of Chambers
of Commerce & Industry
 THE INDIAN CONTEXT
THE BEGINNING

• On November 19, 2007, the Sub-Groups submitted their reports which were then integrated
and consolidated into the report of Joint Working Group
• On the basis of this report the Empowered Committee prepared and sent their report to
Government of India on April 30, 2008. The comments of Government of India were
received on December 12, 2008
• The views were submitted and were accepted in principle by the Empowered Committee on
January 21, 2009
• During this period, an important interaction took place between the then Union Finance
Minister and the Empowered Committee on the related issue of compensation for loss to
the States on account of phasing out of CST. The Empowered Committee took a detailed
view on the recommendations of the Working Group of officials and other related matters.
This detailed view was presented in terms of the First Discussion Paper
 THE INDIAN CONTEXT
HOW THINGS MOVED

2004 Dr. Kelkar Task Nov. 2007 Joint Working

April 1, 2007 CST phase
Force recommended the Groups submitted
out started
need of a National GST Report

Feb. 2008 F.M.

Jan. 2007 First GST study May 2007 Joint Working announced introduction
released by Dr. Shome Groups appointed by EC of GST from 1.4.2010 in
Budget Speech 2008-09

April 2008 Empowered

2007 Consultation with
Nov. 2007 13th Finance Committee (EC) finalized
stakeholders on GST
Commission Constituted its views on GST
Model
Structure
 THE INDIAN CONTEXT
HOW THINGS MOVED

Consultation on Model
July 2009 F.M.
of inter-State July 2014 : Commitment
announced Dual GST
transactions, RNR and by the new Government
from April 1, 2010 in
other issues – In for GST
Budget Speech 2009-10
progress

Nandan Nilekani given Dec 2014 : 122nd

Oct. 2009 13th Finance
the responsibility for Constitutional
Commission submitted
creating the required IT Amendment Bill
its Report
structure presented

Nov. 2009 Release of NSDL chosen as the 2015 : Government

First Discussion Paper on technology partner for committed to roll out
GST operating the structure GST by April 2016
 THE INDIAN CONTEXT
THE PROPOSED SCHEME

• GST is proposed to be implemented from April 2016

• Dual GST proposed to replace different indirect taxes levied on goods and services by
the Central and State governments.
• To be implemented concurrently by the Central and State governments
• Aimed at being comprehensive for most goods and services
• Alcoholic liquor for human consumption, real estate and electricity to be kept out of
GST
• Petroleum products to be brought within ambit from a future date
• Exports to be zero-rated and imports will be levied the same taxes as domestic goods
and services adhering to the destination principle
• Taxing of capital goods and inputs whether goods or services relatable to manufacture at
lower rate, so as to reduce inventory carrying cost and cost of production
• Common law and procedures throughout the country expected
THE INDIAN CONTEXT
TAXES TO BE SUBSUMED

Excise
Duty

CVD/ Service
SAD Tax

Local Cess
GST
CST
& levies

Local
Entry Tax/ Local VAT
Octroi
 THE INDIAN CONTEXT
THE MODEL

GST

INTRA- INTER-
STATE STATE

CGST SGST IGST

 THE INDIAN CONTEXT
THE MODEL
• Called Central GST
• To be levied by Centre
CGST • Applicable on Intra-state supply of goods and services
• Central taxes to be subsumed here

• Called State GST

• To be levied by State
SGST • Applicable on Intra-state supply of goods and services
• State taxes to be subsumed here

• Called Integrated GST

• To be levied by Centre
IGST • Applicable on Inter-state supply of goods and services
• Expected to be aggregate of CGST + SGST
• CST to be subsumed here
 THE INDIAN CONTEXT
THE MODEL

TRANSACTION INTRA-STATE INTER-STATE

Sale price of taxable goods or services 100 100
CGST 10 -
SGST 10 -
IGST - 20
Invoice Value 120 120

Presumed tax rates to be:

- CGST 10%
- SGST 10%
- IGST 20% (aggregate of CGST & SGST)
 THE INDIAN CONTEXT
TAXES TO BE SUBSUMED / LEFT OUT

Taxes/Duties to subsume in CGST Taxes/Duties to subsume in SGST

Central Excise Duty Value Added Tax (VAT)
Service Tax Purchase Tax
CVD as levied u/s 3(1) of Custom Act State Excise Duty (except on liquor)
Special Addl. duty as levied u/s 3(5) of Custom Act Entertainment Tax (unless levied by the local bodies)
Cesses levied by the Union (on rubber, tea etc.) Luxury Tax
Surcharges levied by the Union Octroi
E.g. NCCD, Education Cess, Special Additional Entry tax in lieu of Octroi
Duties of Excise on Motor-Spirit and High Speed Taxes on Lottery, Betting and Gambling
Diesel (HSD).

Taxes/Duties not to subsume in CGST Taxes/Duties not to subsume in SGST

Basic Custom Duty (Import as well as Export) Taxes on Liquors
 Excise Duty on Tobacco Products  Toll Tax / Road Tax
 Specific Cess (as may be notified)  Property Tax as well as Environment Tax
 Specific Central Cess like Education and Oil Cess  Stamp Duty and Tax on Consmp./sale of electricity
 THE INDIAN CONTEXT
TAX CASCADING BENEFITS

• IGST
Liability of IGST against • CGST
• SGST

• IGST
Liability of CGST against • CGST

• IGST
Liability of SGST against • SGST
 THE INDIAN CONTEXT
TAX CASCADING BENEFITS

• Input tax set-off benefits available completely except for between CGST and SGST

• Present system does not allow set-off between:

 Excise/service tax/CVD against VAT/CST
 CST against any output liability
 Excise and service tax offsets also conditional in many cases

• VAT is presently levied on Excise component also

• No set-off presently permitted against States taxes like Octroi, Entry tax, Luxury tax,
Entertainment tax

Cost of goods expected to fall under new regime ; cost of services to go up

 THE INDIAN CONTEXT
SALIENT FEATURES EXPECTED

• Uniform procedures for collection of both CGST and SGST

• Common format of returns for both CGST and SGST to both the Central Authority
and State Authority
• Each taxpayer to be allotted a PAN Linked taxpayer identification number with a
total of 14-15 digits which will bring GST as a PAN Linked system in line with
prevailing PAN based system of Income tax, facilitating data exchange and taxpayer
compliances
• Tax payment challan might contain some additional information and taxes may be paid
only through online mode
• Single registration within a state ; multiple registration across states
• Inter-state branch transfers may be taxed
• Issues of input accumulation resulting into refunds shall be avoided except in case of
exports, purchase of capital goods, input tax at a rate higher than output tax rate
• Separate assessments across states
 THE INDIAN CONTEXT
SALIENT FEATURES EXPECTED

• Threshold limits may be:

 Between INR 1 ~ 2 million for coverage
 Gross turnover of goods upto INR 15 million – assigned exclusively to State
 Gross turnover of services upto INR 15 million – assigned exclusively to Centre
 Gross turnover of both exceeding INR 15 million – assigned to both Centre and
State
• Threshold limits built to keep small organizations out of tax net since:
 Difficult to administer small traders
 Administrative costs higher in comparison to the tax collected
 Compliance cost and effort savings for such organisations
• Set-off to be provided against invoice or payment of tax or both (hybrid system)
 THE INDIAN CONTEXT
SALIENT FEATURES EXPECTED

• Exempted goods and services will not have the benefit of input tax set-off
• Place of Supply Rules to determine the situs of taxable supply; to be released shortly for
public
• Optional compounding scheme expected for small taxpayers; threshold may be INR 6
million
• Rates to be separate for:
 General rate for general items of goods and services
 Merit rate for essential goods and services
 Special rate for precious metals
 NIL rate
• 1 per cent additional tax proposed for few years on inter-state supply which will not be
available for set-off
Rates expected to be:
12% to 20% for the 1st year
12% to 18% for the 2nd year
16% for the 3rd year and onwards
16% from inception for service sector
 THE INDIAN CONTEXT
THE CHALLENGES

• Constitutional Amendment: Political scenario

• Framing Acts & Rules: Time has to be given public review; acceptance by States
• Common law: States should not come up with different regulations
• Online backbone: Building up online platforms across the States for seamless
integration of information; management of input tax credits; payment of taxes; filing of
returns; quick registrations
• Threshold: Determination should not be so low to bother small scale traders or service
providers; or high to lead to loss of tax revenue
• Taxes not subsumed: those left out will continue to have impact on costs
• Legislations: Multiplicity of statutes at State level
• Administration: Multiple administrative bodies – separate for Centre and each State
• Tax Rates: Arriving at Revenue Neutral Rate (RNR) so as not to impact inflation
• Exempt v. zero rated: identifying goods and services under each category
• Taxability: framing of suitable rules for place of provision for determining taxability
• Compensation to States: suitable packages to be framed to bring in consensus for
implementation
• Training: of government employees for GST
 THE INDIAN CONTEXT
THE PRESENT AND THE FUTURE

Basis For Present Taxation GST

Difference
Structure Difference Separate tax systems for Centre & Single system based on taxable supply
State based on manufacture and sale ; of both goods and services
separate for goods and services
Place of Taxation Taxable at the place of sale Taxable on destination as it is a
of goods or rendering of consumption based tax
Service
Customs Duty Separate Act of Centre; at the time Only BCD to remain; others to be
of import having BCD, CVD and subsumed
SAD components
Inter-State sale Exempt against Form F To be taxable

Inter-branch transfers Not taxable May become taxable

Input taxes set-off Not allowed between Excise/Service To be allowed
tax and VAT
 INDUSTRY EXPECTATIONS
• Stability: No frequent changes in regulations or rates
• Government employees: Clear definition of roles, responsibility, authority & accountability
between Central and State departments with thorough understanding of new laws
• Single administering authority: Avoid multiple governing departments; interaction with
single authority for registrations, assessments
• Input tax set-off: Seamless integration permitting claims
• Online backbone: Strong and stable computerized platforms
• Trainings: State officers don’t know service tax, excise and custom laws and central officers
don’t know VAT laws
• Uniformity: Rates of tax, regulations, across the states including for registration, invoice
formats, return filings, assessments, audits
• Cross set-off: between CGST and SGST
• Backlog: Suitable scheme to clear backlog of pending cases under excise, VAT, service tax
 PLANNING BY INDUSTRY
• Cost of implementation of GST

• Review of accounting system capabilities

• Supply chain relook to negotiate better contractual price

• Inventory holding costs due to taxation of inter-branch transfers

• Cash flow issues due to higher tax rate on services

• Hiring / training of employees