Expected Structure of GST and its Impact on Business. 19 May Presented by: Anand Khetan

Transcription

1 Expected Structure of GST and its Impact on Business 19 May 2015 Presented by: Anand Khetan Rödl & Partner

2 Agenda GST- History and Implementation Constitution Amendment Bill Taxes to be subsumed and Exceptions Exceptions to GST GST- Structure Rate of GST Input Tax Credits Sourcing and Distribution Models- Example Pricing of Goods- Example Procedural Aspects Benefits & Issues Proposed Place of Supply Rules Summary of Industry wise analysis 2

3 GST- History February Government announced its intention to introduce GST by 1 April 2010 May Empowered Committee of State Finance Ministers set up November First Discussion Paper released by Empowered Committee December Report of 13 th Finance Commission released June Sub-working groups constituted for drafting GST laws March Constitution (115 th Amendment) Bill introduced in Parliament November Committee on GST Design constituted by the EC February Committees constituted for threshold, rate, Place of Supply Rules etc March GSTN incorporated as Section 25 company August Standing Committee on Finance submitted report December Constitution (122 nd Amendment) Bill introduced in Parliament May Constitution Amendment Bill passed in Lok Sabha May Bill referred to Select Committee of Rajya Sabha (21 Member panel) 3

4 GST- Implementation Select Committee of Rajya Sabha to give its report by first week of July 2015 The bill is expected to be pushed through in both houses of Parliament in the Monsoon session (July 2015) Ratification of Constitutional Amendment Bill by minimum 51% States legislations Presidential Accent to the Constitutional Amendment Bill Constitution of the GST Council comprising of Central and State Finance Ministers within 60 days of the Constitution Amendment Bill becoming effective Central and State GST Laws expected to be rolled out around December 2015 Central and State GST laws to be passed by simple majority by Central and State legislative assemblies. GST is expected to be enforced by 1 April

5 Constitution Amendment Bill- GST Council GST Council to make recommendations on: Taxes to be subsumed Exemptions and Threshold limits GST Rates Special rates for a specified period to raise additional resources during natural calamity or disaster Model GST law and procedures Laws relating to special states (J&K, Himachal Pradesh and North Eastern states) Date from which Petroleum products to be covered within GST Compensation for loss of revenue to the States It is expressly mentioned that while discharging its functions, GST Council shall be guided by need of harmonized structure of GST and development of harmonized national market in order to keep provisions of law constant across the country. 5

6 Present Indirect Tax structure in India Policy/Tax/ Duty Governing authority Nature of levy Foreign Trade Policy Central Government Governs imports into and exports from India Customs Duty Central Government Duty on import of goods into India Excise Duty Central Government Duty on manufacture of goods in India Central Sales Tax/ Value Added Tax Entry Tax/ Local Body Tax Central Government/ State Governments State Governments/ Municipalities Tax on sale of goods in India Tax on entry of goods into a particular local area within a State Service Tax Central Government Tax on provision of services R&D Cess Central Government Cess on import of technology under a foreign collaboration Stamp Duty State Governments Duty on registration/ sale of immovable properties; execution of legal documents Others (Entertainment Tax, Luxury Tax, Electricity Duty etc) State Governments Taxes for specified purposes 6

7 Taxes to be subsumed in GST Central Taxes/ Duties State Taxes/ Duties Central Excise Duty VAT/ CST Additional Excise Duty Excise Duty on Medicinal & Toiletries Service Tax Entry Tax Local Body Tax Purchase Tax Additional Customs Duty (CVD) Special Additional Customs Duty (SAD) Surcharge & Cess Luxury Tax Entertainment Tax (other than those levied by declared local body Taxes on advertisements 7

8 Exceptions to GST Exceptions Exempted Goods & Services/ Exports Transactions below Threshold limit Other Exceptions Basic Customs Duty on import of goods Stamp Duty R&D Cess on import of technology Electricity Duty on electricity charges Existing taxes on Alcohol for Human Consumption Existing taxes on Petroleum Products (for initial years) Profession Tax Excise Duty on tobacco products 8

9 GST Structure GST is a dual based comprehensive tax adhering to the destination principle. GST tax base shall comprise of: CGST: Central Goods & Service Tax to be levied by Central Government SGST: State Goods & Service Tax to be levied by State Government IGST: Integrated Goods & Service Tax to be levied by Central Government GST CGST- To replace Central Taxes SGST- To replace State Taxes IGST- To replace CST 9

10 GST Structure CGST & SGST will be applicable on supply of goods and/or services in case of intrastate supply. Both taxes would apply in parallel in the complete supply chain. IGST (i.e. combination of CGST & SGST) will apply in case of inter-state supply. IGST (plus BCD) would also apply on import of goods and services instead of CVD and SAD Intra-State Supply Inter-State Supply/ Import CGST SGST IGST (CGST + SGST) 10

11 Constitution Amendment Bill- Important Definitions Article 366 (12A): Goods and Service Tax means any tax on supply of goods, or services, or both except taxes on supply of alcoholic liquor for human consumption The term Supply has not been defined. All other taxable events such as manufacture, sale, provision of service etc will loose its relevance. Consideration has not been linked to supply. Therefore, transactions without consideration, gifts and barter transactions could be taxable (if not excluded by law). Works Contracts covered in GST Alcohol outside the purview of GST Article 366 (12): Goods include all materials, commodities and articles Article 366 (26A): Services means anything other than goods Given the wide coverage, Service might also cover activities such as actionable claims, transaction in money etc. 11

12 Taxable Event: Supply Manufacture of goods Inter-State branch transfer Import of Goods/ Services Supply Job-Work Transfer Provision of Service Sale of goods and Deemed Sales 12

13 Rate of GST Report of 13 th Finance Commission provided a Revenue Neutral Rate (RNR) of 16%. RNR as mooted by EC is 27% which is very high. EC may not have considered: Higher taxes to Central Government due to CGST being applicable right till the end of the supply chain Additional revenue source for State Government due to SGST on services Due to the above, combined merit GST rate is widely expected to around 20%. GST is expected to have 4 types of rates: Merit rate for essential goods and services. Standard Rate for goods and services in general Special rates for precious metals NIL rate Floor rate with small band of rates for standard rated goods or services specially for SGST to empower states to regulate within the rate band. 13

14 Rate of GST Optional Threshold exemption in both components of GST Optional compounding scheme for taxpayers having turnover up to a certain limit. HSN codes are likely to be used for classification of goods Present Accounting Codes are likely to be used for services Non-omittance of Article 366 (29A): Whether an indication towards separate GST rates for goods and services? In case of separate rate for goods and services, classification issues might continue Additional non-vatable tax of 1% on inters-state supply of goods (NOT services) including import of goods for a period of 2 years or more: Replacement of CST In case of Work Contract, ambiguity to determine the value of goods for levying 1% additional GST. 14

15 Input Tax Credit Input CGST Input SGST Input IGST (in the below order) Output CGST Output IGST Output SGST Output IGST Output IGST Output CGST Output SGST Input CGST Cross-utilization of CGST is not available against SGST & vice-versa Input SGST 15

16 Supply chain IDT impact Current Regime State A Supplier 12.5% 12.5% 12.5% Manufacturer + Distributor Customer 12.5% 2% Supplier VAT Credit restricted Branch 12.5% Distribution channel 2% Distributor 12.5% Customer State B Legends Credit is available Credit is not available 16

17 Supply chain IDT impact GST Regime State A CGST & SGST CGST & SGST CGST & SGST Supplier Manufacturer Distributor Customer Supplier IGST IGST Branch CGST & SGST Distribution channel State B Legends Credit is available Distributor CGST & SGST Customer Credit is not available 17

18 Input Tax Credit: Present Structure: Manufacturers CVD: Available as credit SAD: Available as credit Excise Duty: Available as credit Service Tax: Available as credit VAT: Available as credit CST: Cost Manufacturer Intra-State Sale Inter-State Sale Excise Duty + VAT Excise Duty + CST Issues of Inverted duty structure due to higher input duties as compared to output duties which results in large unutilized CENVAT credits balances and working capital issues 18

19 Input Tax Credit: GST Structure: Manufacturers CGST: Available as Credit SGST: Available as Credit IGST: Available as Credit Intra-State Supply Manufact urer Inter-State Supply CGST + SGST IGST Issues of inverted duty structure avoided as output taxes would be higher than input taxes 19

20 Input Tax Credit: Present Structure: Traders CVD: Cost unless passed on SAD: Cost unless Refunded Excise Duty: Cost Service Tax: Cost VAT: Available as credit CST: Cost Intra-State Sale Trader Inter-State Sale VAT CST Various input taxes not available as credit resulting in higher cost in supply chain 20

21 Input Tax Credit: GST Structure: Traders CGST: Available as Credit SGST: Available as Credit IGST: Available as Credit Intra-State Supply Trader Inter-State Supply CGST + SGST IGST Seamless flow of Input Tax Credit under GST regime would reduce tax costs in supply chain 21

22 Input Tax Credit: Present Structure: Service Provider CVD: Available as Credit SAD: Cost Excise Duty: Available as Credit Service Tax: Available as Credit VAT: Cost CST: Cost Service Provider Provision of Services Service Tax Various input taxes not available as credit resulting in higher cost in supply chain 22

23 Input Tax Credit: GST Structure: Service Provider CGST: Available as credit SGST: Available as credit IGST: Available as credit Intra-State Supply Service Provider Inter-State Supply CGST + SGST IGST Seamless flow of Input Tax Credit under GST regime would reduce tax costs in supply chain 23

24 Sourcing & Distribution models: Present Scenario Commission Model Foreign Supplier Indian Customers Import of Goods: CVD + SAD: available as Credit Payment of Commission: Service Tax: Cost in supply chain (applicable from 1 Oct 14) Commission Agent Import of Goods: CVD + SAD: Cost unless passed on Trading Model Sale of Goods: VAT/CST Foreign Supplier Importer dealer Indian Customers Commission Model was preferred over Trading model due to issues involved in mitigating CVD and SAD paid by importer dealer 24

25 Sourcing & Distribution models: GST Structure Commission Model Trading Model Foreign Supplier Payment of Commission: Higher rate of IGST: Cost in supply chain (assuming current POPS Rules Import of Goods: ISGT (Credit available) Foreign Supplier Import of Goods: ISGT (Credit available) Commission Agent Sale of Goods: CGST+SGST / IGST Trader Indian Customers Indian Customers Under GST Scenario, trading model would be preferable due to increased availability of input tax credits as compared to tax cost in Commission model. 25

26 Pricing of Goods: Present Structure Particulars Rate Current tax regime Value of goods purchased from a raw material vendor State VAT (available as credit) 12.5% Cost of goods for the Manufacturer Add: Value Addition plus Margin 100% Base Value of goods Add: Central Excise duty (Cost) 12.5% Taxable value for VAT State-VAT (available as credit) 12.5% Price to distributor Add: Margin by the distributor 10% Sale price for the distributor State VAT (available as credit) 12.5% Total price for the retailer Add: Margin by the dealer 20% Sale price for the retailer Add: State VAT (cost in the hands of the customer) 12.5% Maximum Retail Price

27 Pricing of Goods: GST Structure Particulars Rate GST Value of goods purchased from a raw material vendor CGST 10% SGST 10% Cost of goods for the Manufacturer Add: Margin 100% Base value of goods CGST 10% SGST 10% Taxable value for the distributor Add: Margin 10% Sale price for the distributor CGST 10% SGST 10% Total price for the retailer Add: Margin 20% CGST 10% SGST 10% Maximum Retail Price

28 Procedural Aspects PAN based identification number would be allotted to each taxpayer under GST. Requirement to obtain multiple registration within the same State unclear A single return shall be required to be prepared by the taxpayer under GST. The copy of same return shall be filed with both Central GST and State GST authorities. Compliance issues in terms of disclosure of sales and purchases for each transaction as matching of sale and purchase would be done for input tax credits under GSTN (in line with Form 26AS/ Form J1-J2). No need of Statutory Forms (Form C etc) for reduced CST rates Minimal restrictions for availment of input tax credits. Restrictions on input services/ time limit for taking input tax credit 28

29 Benefits of GST Mitigation of cascading of Taxes: VAT is applicable on sale price plus excise duty No double Taxation: Service Tax and VAT on Software/ Intangibles/ Transfer of right to use Service Tax and Entertainment Tax on events, amusements Better neutralization/ cross utilization of Taxes: Credit of Excise Duty/ Service Tax not available against output VAT/ CST CVD and SAD paid on imports not available against output VAT unless passed on/ refunded. Inverted duty structures can be fully avoided Lower Compliances: Single return and payment 29

30 Issues High GST Rate (27% as mooted by the EC) may result in inflation and higher noncompliance Growing Services Sector to face very high tax regime from existing 12.36% tax rate levels Extension of non-vatable additional tax of 1% on inter-state supply of goods beyond the period of 2 years. Threshold limits for taxability/ compounding: Whether to be at VAT levels or Excise Duty levels Administrative Issues- Regulation by Central Government or State Government Transitional Provisions specially carry forward of accumulated CENVAT Credit Setting up of effective online GST Network for cross verification 30

31 Place of Supply Rules- Proposed In the international GST model, place of supply is determined on the basis of supplies made under Business to Business (B2B) model and Business to Consumer (B2C) model. In case of B2B supply, the place of supply is the place where the receiver is located In case of B2C model, the place of supplier is the place of supply. The above is imperative to affect the concept of destination based GST However, under the Indian federal tax system, the said models would undergo significant changes for certain types of services, such as: Immovable property Telecommunication service Electronic supplied service Banking & other financial service Intangibles 31

32 Summary of GST Impact: Industry wise Software Software exports expected to be Zero Rated as of now. For companies paying output taxes of around 25% (Service tax: 12.36% plus VAT: 12.50%), increased in GST rates would not be a challenge. Service providers would have higher taxes on output. The most vexed issue of applicability of both VAT and Service Tax on sale of software/ software license would get resolved. Improved input tax credits due to elimination of VAT/ CST 32

33 Summary of GST Impact: Industry wise Auto Sector As major sales of auto sector represent inter-state sales, reduction of CST cost and further tax cascading of VAT charged by dealers would be a benefit. Elimination of Excise duty which is presently a cost to the dealers would also be beneficial. Requirement of maintaining multiple warehouses in separate states in order to avoid CST on interstate sales would not be required as IGST charged on interstate sales would be available as input tax credit to the customers without any restriction. No need of undertaking complex transactions such as in-transit sales which involved paperwork and possibility of disallowance by tax department Reduced compliances and simplified duty structure Reduction of input tax credits on account of interstate stock transfers would not be required. Some exemptions enjoyed by the auto sector (like tractors etc) are expected to be repealed. Lack of clarity about treatment of GST under the Packaged Scheme of Incentives. 33

34 Summary of GST Impact: Industry wise Transportation Industry To become costlier due to increase in output taxes (IGST Vs Service Tax) As petroleum products are kept outside the purview of GST, input taxes paid on such procurements would become a cost resulting in higher tax costs in the supply chain. Coal & Electricity Lack of clarity on treatment of electricity as the same has not been specifically excluded from GST- Double Taxation (GST + Electricity Duty) Electricity duty would continue to be cost to all consumers. Including coal within GST ambit without subsuming electricity duty would contribute to hike in prices. 34

35 Summary of GST Impact: Industry wise Pharma The issue of inverted duty structure for most pharma companies would be addressed as inputs were being taxed at higher rates as compared to output taxes on medicines. GST is expected to bring an end to area based exemption. With taxes on the output, input taxes would be available. Due to the proposed use of HSN Tariff, classification issues for chemicals may continue. 35

36 Q&A Questions Discussion 36

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