Accolet Advisors Private Limited

Accounting | Consulting | Legal | Tax

Goods & Service Tax

a reform or reformation

Deepak Kumar Jain B

B.Com., FCA., ACS., LLB

02 Sep 2010
Fiscal reform
Budget 2006

“…. that the country should move towards a

national level Goods and Services Tax (GST)
that should be shared between the Centre and
the States. I propose that we set April 1,
2010 as the date for introducing GST…”

Hon’ble Finance Minister

P Chidambaram

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Contents
Current tax laws

Moving into GST

Mechanics of GST

GST; impact

GST; open issues

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Current tax laws

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Current tax laws

Constitution empowers the Union & the State to tax:

Union: List 1 of 7th Schedule

State: List 2 of 7th Schedule

Dual: List 3 of 7th Schedule

Union State

Corporate Tax
VAT

Personal Tax
Property Tax

Central Excise
Agricultural IT

Service Tax
Entry Tax

Customs Duty
Luxury Tax

Entertainment, etc.

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Current tax laws

Total revenue earned by Central Government from indirect
taxes in FY 2010-11 (RE) is INR 315,000/- Crores.

Gross Indirect Tax Revenue Earned by Centre

150,000 137,874
118,930

100,000

64,460
50,000

325
0
Customs Central Excise Service Tax Other taxes & duties

Revenue 118,930 137,874 64,460 325

Source: RBI Statistics

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Current tax laws

The States’ own total tax revenue for FY 2008-09 (BE) is
INR 351,382/- Crores, excluding the Central share of INR
173,147/- Crores.

Break up - States' total tax revenue

250,000
213,833

200,000
173,147

150,000

100,000

39,463 50,954
50,000
18,441 15,427
10,713
878
-
Motor
VAT/CST Entertainment State Excise Stamp duties Electricity Others Central Share
Vehicles

Revenue 213,833 878 18,441 39,463 50,954 10,713 15,427 173,147

Source: RBI Statistics

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Moving into GST

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Moving into GST

Union State Municipal

VAT
R&D Cess Luxury Tax Toll Tax
Service Tax Entertainment Tax Passenger Tax
Central Excise Motor Vehicles Tax Octroi/ Entry Tax
Customs Duty Electricity Duty
State Excise

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Moving into GST

Union State Municipal

VAT
R&D Cess Luxury Tax
Toll Tax
Service Tax Entertainment
GOODS & Tax Passenger Tax
Central Excise Motor Vehicles
SERVICE Tax
TAX Octroi/ Entry Tax
Customs Duty Electricity Duty
State Excise

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Mechanics of GST

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What is GST

GST is a broad based ‘consumption tax’ on goods and services

A single unified tax on both ‘Goods and Services’

Levied at ‘each stage’ in the economic chain of supply

Levied on ‘value added’ to goods & services at each stage of value chain

A tax with an objective to ‘eliminate tax cascades’

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Why GST

Integration of prevailing indirect taxes to ensure uniformity

Preventing cascading of taxes

Simplified compliances

Credit available across goods and services

Availability of credit even for inter-state procurements

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Manufacturing; current scene
Procurement Manufacture Distribution

Imports
(Customs duty)
Entry tax (levied on entry of
goods into the State) may Intra State sale CUSTOMER
become cost in some States (in
absence of credit against
VAT
Services- output VAT/ CST liability) Levy of VAT/ CST on
import value inclusive of
(Service tax) Excise duty (cascading
of tax)

CST
(Entry tax)
Inter State sale
Domestic Manufacturer CUSTOMER
purchases: (Excise Duty)
(Excise duty)
(CST) Exports
(VAT) (No tax)
No credit of VAT/ CST
Domestic input against Excise duty
services Stock
(Service tax) No credit of CST against transfer Branch office
output VAT/ CST liability

VAT burnout

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Services; current scene

Procurement Service Provision

Domestic input services

(Service tax)

Output Service
Services- import (Service tax)
(Service tax)
Credit lockup through the CUSTOMER
Domestic supply chain
purchases:
(Excise duty) No Credit of ADC
CST Service provider

VAT (Service tax)

(Entry tax)

CUSTOMER
No Credit of VAT
and CST
Exports
Imports (No tax)
(Customs duty)

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Trader; current scene
Procurement Trading Distribution

Imports
(Customs duty) Intra State sale CUSTOMER
No Credit of CVD
VAT

Services- import No Credit

(Service tax) Credit lockup through the NO CREDIT

supply chain CST
Inter State sale CUSTOMER

Domestic
Trader Exports
purchases: (No tax)
(Excise duty, (ADC – refund
CST, & VAT) possible) Stock
No Credit
Branch office
transfer
of Excise & CST
VAT credit retention
Domestic input services
(Service tax) No Credit

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Proposed structure
FRAMEWORK • Dual GST for Centre and States, IGST on
inter-state transactions
A • Separate legislation, levy and
• April 2010 deadline missed administration
• Likely to be implemented on or • Threshold – CGST (goods) - 15 Mn , CGST
after April 2011? (services) - to be decided, SGST (goods
• Partial GST? and services) - INR 1 Mn

COVERAGE B
GST
D TIMELINE
• Excise duties/ Service tax/ CVD/
SAD/ Surcharges/ Cesses
• VAT/ Entertainment tax/ Luxury
• Between 16%to 20% tax/ Entry tax (except in lieu of
LIKELY RATE &
• Tax split into CGST & SGST Octroi)/ Surcharges/ Cesses
CREDITS
• Rate structure – Standard rate, lower • Certain taxes to continue – Octroi/
rate, special rate (for precious metals), Stamp Duty/ Local/ Municipal
exempted levies/ Royalty/ Electricity Duty/
• Services –Standard rate C Purchase Tax?
• No cross credit between CGST and SGST • Petroleum products, alcoholic
beverages likely to be excluded – no
decision on Natural Gas yet

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First step
Discussion paper released on 10 Nov 09 is the first official document on
States’ vision of GST

A macro document, with limited answers to common concerns around GST

Outlines the basic framework in terms of coverage, structure and tax

administration

No discussion on roadmap, rates, tax base, place of supply rules and many
more vital aspects

More steps to follow…

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Next step

Consultations between EC/ Central Government/ industry associations

Drafting of legislation

Constitutional amendments

IT & other infrastructure (e.g. clearing house for IGST)

Training of tax authorities

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GST; impact

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GST; high impact
GST impact on pricing
• Change in tax rates to impact product pricing
• Long term contracts
GST impact on bottom line
• Change in tax rates to impact procurement cost
• Re-look at procurement and distribution pattern
• Free flow of credits – improve bottom line or gain competitive edge on pricing?
GST impact on working capital requirements
• Taxes on stock transfer to block working capital
• Tax payments on services – on billing basis rather than on receipt of payments

GST impact on IT systems

• Build logic for appropriate tax charge, credits, stock transfer taxation etc

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GST; fiscal impact
Present Probable Impact
Varied tax rates:
• CGST & SGST to replace CVD, SAD & Cess
• Customs duty of 24.42% (including BCD of 10%) components of import duty (presently at 14.42%)

• Excise duty at 8.24% • Standard rate on all transactions of goods and

services likely to attract between 16%-20%
• VAT ranging from 4% to 12.5%
• A concessional rate may eventually be prescribed
• Services liable to 10.3% Service tax for necessities

Several product/ transaction specific exemptions/ GST would be based on concept of minimal
concessions (e.g. Form C, in-transit sales, supplies exemptions/ concessions
to specified projects)

Diverse treatment of taxable event, valuation, Unification could lead to cash-flow & commercial
discounts, etc. under each tax law impact on operations

Tax cost in terms of CST, VAT credit denial on Free flow of credits under GST regime. However,
stock transfers stock transfers become taxable.

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GST; impact on imports
Pre GST Post GST

Basic Customs 10% Basic Customs 10%

Duty Duty

Countervailing
Duty 10.30%
CGST 8%

Customs
Education Cess 3%

SGST 8%
Additional Cascading
Duty of 4% effect
Customs continues?

Applicable Applicable 27.60%

Customs duty 26.85% Customs duty

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GST; impact on local purchases
Pre GST Post GST

State 1 State 2 State 1 State 2

Interstate Purchase Interstate Purchase

Vendor Vendor
(Excise 8.24%) (IGST 16%)
(CST 2% / 4% / 12.5%)
Full credit of IGST

No credit for CST

No excise duty in case

Unit of purchased from Unit
dealer. Restriction on
excise duty credits
Local Purchase Local Purchase
(Excise 8.24%) (CGST 8%)
(VAT 4% 12.5%) (SGST 8%)

Vendor Vendor Full credit of SGST & CGST

Input credit only if
related to business
and for dealer in goods

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GST; impact on services
Pre GST Post GST

State 1 State 2 State 1 State 2

Interstate Interstate
Vendor Vendor
(Service tax 10.30%) (IGST 16%)

Full credit of IGST

Credit of service tax
available

Unit Unit

Local
Local
(CGST 8%)
(Service Tax 10.30%)
(SGST 8%)

Vendor Vendor Full credit of SGST & CGST

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GST; impact on stock transfers
Pre GST Post GST

State 1 State 2 State 1 State 2

Stock Transfer Stock Transfer

Unit Unit
Unit Unit
(No Tax) (IGST 16%)

Export Export
(No tax) (No tax)
Case for refund

Customer Customer

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GST; open issues

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GST; open issues

Taxable event – sale / supply (for inter-state) / raising of invoice

Taxability of stock transfers for subsequent exports

List of goods and services to be taxed at concessional rate

Uniformity in implementation

Uniformity in classification

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GST; open issues

Dual administration

Continuance of check posts

Timely refunds

E-Commerce Transactions

Transitional provisions – carry forward/ refund of credit

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Accolet Advisors Private Limited
Accounting | Consulting | Legal | Tax

Deepak Kumar Jain B

H/P: +91 98809 23240
Email: deepak@accoletadvisors.com
Web: www.accoletadvisors.com

Bangalore
S.K. Towers, No. 133, Unit No. 205,
2nd Floor, Narayana Pillai Street,
Bangalore – 560 001, India.
Phone: +91 80 4123 2815

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