Understanding Goods and Services Tax

CA. Gaurav Gulyani

Given the passage of the Constitution (122nd) Amendment Bill, 2014 for Goods and Services Tax (GST) in the Lok Sabha on 6th May, 2015, the Government of India seems committed to replace all the indirect taxes levied on goods and services by the Centre and States and implement GST by 2016. With GST, it is anticipated that the tax base will be comprehensive, as virtually all goods and services will be taxable, with minimum exemptions.

GST the game changer: GST will be a game changing reform for Indian economy by developing a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the Tax Structure, Tax Incidence, Tax Computation, Tax Payment, Compliance, Credit Utilization and Reporting leading to a complete overhaul of the current indirect tax system.

GST will have a far reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services; supply chain optimization; IT, accounting and tax compliance systems.

Understanding GST:

♣ OBJECTIVE:

To have common national market.
Avoid cascading effect of taxes.
GST means a tax on supply (Not Sale) of goods or services or both. It is a consumption based tax.

DUAL GST:

State GST (SGST)
Central GST (CGST)
Both SGST and CGST will be on supply of goods and services within the state. Further, Integrated GST (IGST) will be there for inter-state transactions. IGST rate is expected to be double the CGST rate. It is expected to be equal to SGST plus CGST rate. Revenue from IGST will be apportioned among Union & States. It is required as Input Tax Credit of IGST can be used for SGST and vice versa. CGST and IGST rates will be common all over india. SGST rates will be decided by each state and will vary from state to state.

♣ Additional tax @ 1% on supply of goods (ATSG) in inter-state trade or commerce is proposed. Input Credit of this ATSG will not be available.

♣ Following Central Taxes should be, to begin with, subsumed under the GST:

(a) Central Excise Duty

(b) Additional Excise Duties

(c) The excise duty levied under the Medicinal and Toiletries Preparation Act

(d) Service Tax

(e) Additional Custom Duty, commonly known as CVD.

(f) Special Additional Duty of Customs – 4% (SAD)

(g) Surcharges, and

(h) Cesses

♣ Following State Taxes should be, to begin with, subsumed under the GST:

(a) VAT/ Sales Tax

(b) Entertainment Tax

(c) Luxury Tax

(d) Taxes on lottery, betting and gambling

(e) State Cesses and surcharges insofar as they relate to supply of goods and services

(f) Entry tax not in lieu of octroi

♣ CVD and Special CVD on imported goods will be at rate equal to IGST. Input tax credit of this duty will be available. Basic Custom Duty on imports will continue. Stamp duties and motor vehicle taxes will also continue.

♣ Supply does not need “consideration” free supply of goods and services can be subject to GST.

♣ REVENUE NEUTRAL RATE: The intention of the revenue is neither to increase government revenue nor to reduce it. Hence, government has to find a rate where the tax revenue continues to be same as before. This is termed as “Revenue Neutral Rate”.

♣ Zero Rated and Exempt transactions in GST: Distinction between “zero rated transaction” and “exempt transaction” is that in case of “zero rated transactions” input tax credit is available while in case of “exempt transactions” input tax credit is not available.

♣ INPUT TAX CREDIT: Credit will be available of:

(a) SGST and CGST paid on inputs procured and input services received within the state.

(b) IGST paid on inputs procured and input services received from outside the state.

(c) Credit will not be available of certain inputs procured like petroleum products, liquor, petrol, diesel, motor spirit.

(d) Credit will be available of GST paid on capital goods. However, it is not clear whether input will be available in one go or it will spread over 2/ 3 years. Negative list of capital goods include Motor Vehicle, office equipment and building material.

(e) Credit of SGST paid in one state cannot be utilized for payment of SGST in other state.

(f) Input tax credit of IGST can be utilized for payment of IGST, CGST and SGST on output goods and services in that order.

(g) No, ITC of 1% ATSG (Additional tax on supply of goods in inter-state trade & commerce).

♣ If the Service receiver is in one state and POPS is in other state. In that case, the service provider in other state will charge SGST and CGST. That SGST will be of the other state. Hence, service receiver (who is in other state) cannot avail input tax credit of that SGST. This will then be cost to him. For example, a dealer in State A may have commission agent in State B. That commission agent will pay SGST and CGST. The dealer in State A may not be able to avail input tax credit of SGST paid by his commission agent in State B. This will then be cost to him.

♣ Utilization of Input Tax Credit under GST Provisions

(a) In case of Both Supply of goods and services in the same state:

If excess credit of SGST and CGST cannot be utilized in any normal course of business due to rate difference between GST rate on inputs and outputs, the excess credit should be written-off to Profit\ loss account. If it is not written-off profit will be over-stated to that extent. Excess credit can be carried forward in input tax credit records, if SGST and CGST law allow such carry forward. Principally, refund of excess credit is not permissible in such transactions.

One to one relation is not required in GST provisions. Thus, entire ITC is available even if only 50% of the goods are sold. Excess credit can be carried forward and utilized in subsequent period.

(b) Receipt of goods and services within state but supply of goods and services outside the state:

Entire input tax credit of SGST and CGST can be utilized for payment of IGST on supply of goods and services.

SGST credit can be utilized for payment of IGST but NOT for payment of CGST.

Since the consumption of goods\ services is outside the state, the state is not entitled to get any tax out of this transaction. Hence, the SGST utilized for payment of IGST will be debited by Central clearing agency to that state (the reason is that entire IGST quantum should be received by union).

Sequence for utilization of Input tax credit of IGST will be:

IGST
CGST
SGST
(c) Receipt of goods and services Inter-state but supply of goods and services within the state:

Example: Value of supply of goods and services within state Rs. 100. SGST and IGST rate on supply of goods and services is 10% each. Value of supply of goods inter-states Rs. 1,100. Value of receipt of goods and services inter-state Rs. 1,000. IGST rate on receipts is 20%.

Details SGST CGST IGST ATSG Tax payable on intra-state supply of goods and services of Rs. 100 10 10 – – Tax payable on inter-state supply of goods and services of Rs. 1,100 – – 220 11 Input tax credit of taxes paid on input goods and services of Rs. 1,000 200 10 Net tax payable in cash by the dealer 10 10 20 11
1% ATSG on inter-state supply is really envisaged only at “originating state”. Thus once goods are procured in inter-state transaction, its subsequent inter-state sale should not be subject to ATSG, as the subsequent sale of goods is not from “originating state”. Hence, principally this tax should not be payable for inter-state sale subsequent to first sale. However, policy in that regard is not clear at this stage.

In IGST, the question of refund will be only in case of physical export of goods or supplies to SEZ, international bidding etc. In other cases, assessee will pay IGST in one state and its Input tax credit will be available to customer in other state. The inter-state adjustment will be made by central clearing agency; assessee is not concerned with that adjustment at all.

♣ Classification of goods and services:

Under GST, goods will have to be classified on the basis of Harmonised commodity description and coding system. Generally referred to as “Harmonised System of Nomenclature” or simply ‘HSN’.

Rules for interpretation of HSN are given in the HSN itself. These are termed as ‘General Interpretative Rules’ (GIR). Following are the steps of classification of a product as per GIR:

(a) The titles of Sections and Chapters are provided for ease of reference only; for legal purposes, refer the heading and sub-heading. Read corresponding Section Notes and Chapter Notes (Rule 1 of GIR). If there is no ambiguity or confusion, the classification is final. You do not have to look to classification rule or trade practice or dictionary meaning. If classification is not possible, then only go to GIR. The rules are to be applied sequentially.

(b) If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be established, find technical or dictionary meaning of the term used in the tariff. You may also refer to BIS or other standards, but trade parlance is most important.

(c) If goods are incomplete or un-finished, but classification of finished product is known, find if the un-finished item has essential characteristics of finished goods. If so, classify in same heading –

(d) If ambiguity persists, find out which heading is specific and which heading is more general. Prefer specific heading – Rule 3(a).

(e) If problem is not resolved by Rule 3(a), find which material or component is giving ‘essential character’ to the goods in question – Rule 3(b).

(f) If both are equally specific, find which comes last in the Tariff and take it – Rule 3(c).

(g) If you are unable to find any entry which matches the goods in question, find goods which are most akin – Rule 4.

(h) In case of mixtures or sets too, the procedure is more or less same, except that each ingredient of the mixture or set has to be seen in above sequence. As per Rule 2(b), any reference to a material or substance includes a reference to mixtures or combinations of that material or substance with other material or substance. Rule 2(a).

(i) Packing material is classified along with the goods except when the packing is for repetitive use – Rule 5.

♣ Exemptions and Composition Schemes for Small Assessees:

GST requires heavy compliance cost due to detailed accounting and paper work involved. Small assesses do not have sufficient knowledge and expertise to comply with the requirements relating to records and accounts. Hence, for them, a simplified composition scheme is normally provided. The scheme is optional. The assessee opting for composition scheme will have to pay a fixed percentage of gross turnover as tax. They are not entitled to any input tax credit.

Assessee whose all supplies of goods and services are within the state only will be eligible for the simplified scheme.

Assessees who opt for composition scheme will not be allowed to charge GST in their invoice. They will not be permitted to show GST in their invoice.

The rate will be much lower than the normal GST rate, as they are not eligible for any input.

♣ Summary of Key Business Impacts:

Sourcing Inter-State procurement could prove viable. This may open opportunities to consolidate suppliers/vendors. Additional duty/CVD and Special Additional duty components of customs duty to be replaced. Distribution Changes in tax system could warrant changes in both procurement and distribution arrangements. Current arrangements for distribution of finished goods may no longer be optimal with the removal of the concept of excise duty on manufacturing. Current network structure and product flows may need review and possible alteration. Pricing and profitability Tax savings resulting from the GST structure would require re-pricing of products. Margins or price mark-ups would also need to be re-examined. Cash flow Removal of the concept of excise duty on manufacturing can result in improvement in cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory. System changes and transaction management Potential changes to accounting and IT systems in areas of master data, supply chain transactions, system design. Existing open transactions and balances as on the cut-off date need to be migrated out to ensure smooth transition to GST. Changes to supply chain reports (e.g., purchase register, sales register, services register), other tax reports and forms (e.g., invoices, purchase orders) need review. Appropriate measures such as training of employees, compliance under GST, customer education, and tracking of inventory credit are needed to ensure smooth transition to the GST regime.
CONCLUSION:

The proposed GST is not an ideal GST. However, considering the present political situation and limitations, this is the best that could be achieved. IGST is the game changer. It will help in developing a national market and considerably reduce the cascading effect of taxes. The way of doing business will drastically change on introduction of GST. It is projected that GDP of India will improve by 1% to 2% by introduction of GST. In any case, distribution costs and procurement cost of every asessee will certainly be lower in GST.

References used in compiling the above article:

Taxmann’s Publication on All about GST by V.S. Datey
Economics Times