Taxes on goods and services are already there in our country in different forms like Excise Duty, VAT, Service Tax, Entry Tax, Entertainment Tax etc. All of these are different levies by Central or State Government and are having all together different set of taxable events, rates, procedures and compliances. Existing legal framework of these indirect taxes puts some challenges and issues before taxpayers like:
• Multiplicity of taxes.
• Cascading effect of taxes (tax on taxes).
• Classification issues.
• Excessive compliances.
• Fractured flow of Input Credits.
A single Goods and Services Tax (GST) was envisaged with a view to overcome all these issues of taxpayers. Ideally GST is a comprehensive Consumption Based Value Added Tax to be levied at all stages of supply of Goods and/or services, whereby Input Tax Credit on all types of business procurements (i.e. goods, services and capital goods) should be available without State Geographical Barriers.
Since the desired Constitutional Amendments has already been done and notifications for giving effect to provisions of the same have been issued, it is only a matter of time that the GST will be levied in the country. The Government at many point of times has disclosed its intention to levy GST as early as possible. It may be noted that as per constitutional amendment the Government will lose power to levy existing taxes on 15th September, 2017, hence it can be understood that GST will become reality in our country by September 2017.
In our country, instead of single comprehensive tax, GST is proposed to be levied on Dual Tier basis i.e. on all transactions of supply of goods and services, two taxes namely ‘State Goods and Services Tax’ (SGST) and ‘Central Goods and Services Tax’ (CGST) shall be charged. However, if such transaction takes place in the course of inter-state trade or commerce, then instead of two different taxes one single tax to be called as ‘Integrated Goods and Services Tax’ (IGST) shall levied, the rate of which shall be equivalent to sum total of SGST and CGST.
The GST is not only a tax reform, rather it is complete business reforms for number of reasons. It will greatly affect business practices and parameters. So apart from tax professionals it is important that the basic concepts of the GST should be known to businessman their finance, procurement and sales team.
Some of important aspects of the GST, on the basis of revised model GST law presented by the Govt. in November 2016, are summarised as under:
A. Taxable event
In the present regime levy of tax on goods are at the time of sale thereof or in case of services at the time of Provision of services. The term ‘Sale of Goods’ and ‘Provision of Services’, in the present respective legislations, normally creates charge when particular goods are sold by one person to another or some services are provided by one person to another for a consideration.
In the proposed tax regime, the taxable event will be Supply of Goods and Services. The term ‘Supply’ is much broader than existing charge of taxes i.e. Sale and Provision, it includes all commercial supplies such as Sale, Transfer, Barter, Exchange, Licence, Rental, Lease, Disposal etc. In the proposed GST law, it is not necessary that Supply should be there from one person to another, i.e. even self supplies can be under GST tax-net. Further the proposed law provides list of activities/ transactions whereby even if no consideration is charged the transaction will be treated as deemed supply, that means liability to pay GST will be there. For instance if a company situated in Jaipur sends some of its assets (stock or otherwise, on which ITC was taken at the time of purchase) from its Jaipur office to its Mumbai office to be used there, the liability to pay GST will arise on such transactions, despite the fact that neither there were two persons involved nor any consideration was there in such transaction.
B. Time of Supply
The term ‘Time of Supply’ signifies the point of time when liability to pay any tax arises. It will be altogether new concept for existing dealers of goods i.e. paying VAT on their sales. In the present Sales Tax law, time of supply is Sale of Goods i.e. directly linked to taxable event. However, in GST, unlike existing practices, tax on supply of goods shall be required to pay at the earliest of following two events:
i) Date of issue of the invoice by supplier or the last date when he is required to issue the invoice.
ii) Date on which payment is received by the supplier.
Further the model law provides the invoice is to be made at the time or before delivery of the goods. So for all practical purposes the tax will have to be paid at the time of earliest of all major commercial events i.e. Delivery of goods OR preparation of Invoice OR Receipt of advances. In the current practices payment of VAT/ CST or Excise duty doesn’t have any bearing on receipt of advances. Whereas in GST regime, even if the delivery has not been given or sales has not been completed, if the advance is received the tax liability has to be discharged. Provisions for time of supply for services are more or less similar to the present provisions of ‘Point of Tax’ in the Service Tax Laws.
Time of supply provisions for supply of goods on approval basis and Continuous Supply of Goods/ Services are separately given to provide deserving relief. All taxpayers have to modify their systems and procedure so that all relevant dates are captured to determine correct Time of Supply for all transactions and taxes be paid timely.
C. Place of Supply
The concept of place of supply is important to work out whether a particular transaction is Intra-State or Interstate. If a particular transaction is Intra-State, there will be levied two taxes i.e. SGST & CGST. Whereas if the transaction is in the course of Interstate Trade, one tax i.e. IGST will be levied. The rate of tax of IGST will be equivalent to sum total of SGST & CGST.
A particular supply shall be treated as Intra-State if the ‘Location of Supplier’ and the ‘Place of Supply’ are in same State. On the contrary if the ‘Location of Supplier’ and the ‘Place of Supply’ are in different states then the supply will be treated as Interstate. Further below mentioned transactions are specifically treated as Interstate transactions:
i) Import of Goods/Services in India.
ii) Supply where ‘Location of supplier’ is in India and the ‘Place of Supply’ is outside India. (Majorly being, export and some other supplies which cant be technically classified as Export due to non-realisation of consideration in convertible foreign exchange or supply to distinct person of same entity).
iii) Supply to/by a SEZ unit or developer.
iv) Any other supplies which are not an Inter-State Supplies.
Accordingly, any transaction with SEZ developer or unit will be Interstate transaction even if the both parties to transaction are in the same State. Further since Union Territories without State legislature (eg. Chandigarh) are not State any transaction originating from them shall be treated as Interstate Transaction and accordingly will attract levy of IGST.
The concept of Place of Supply is new to the Service Tax assessees. Whereas the dealers paying VAT & CST are used to with the concept of Intra and Interstate Sales, however provisions of classifying particular supply of goods as inter state or intra-state are fairly different from the present legal provisions.
In the GST Regime the concept of Place of Supply is very important, because if by any reason any taxpayer deposits the IGST instead SGST/CGST or vice versa, then as per provisions of proposed law, unlike present regime, one has to first deposit the correct tax and then only refund of the wrongly deposited tax can be claimed.
D. Input Tax Credit
One of the main motives of introducing GST was seamless flow of credit during the supply chain and hence mitigating cascading effect of taxes. Under GST regime normally credit of input tax on all goods and services, used or intended to be used for business, shall be allowed to the registered taxpayer, which is restricted under current tax regime in many ways and hence results into higher cost of goods and/ or services. However, a registered taxpayer shall be entitled to ITC if below mentioned conditions are satisfied:
a) He is in possession of Tax Invoice/ Dr. Note/Prescribed Tax paying document.
b) He has actually received the goods and/ or Services.
c) Tax charged in the invoice has actually been paid.
d) He has furnished required return under the GST Law.
Further, in case of ITC of Services there is requirement to pay value of supply along with tax to the supplier within three months from the date of issue of invoice by the supplier, failing which ITC shall be reversed along with interest liability in the manner yet to be prescribed.
In the present tax regime, so many litigations are going on the allowability of ITC on the conditions of matching of taxes paid by vendors on respective sale, however this matching concept is presently not there in excise and service tax. Whereas in GST regime provisions for invoice level matching of input tax credit has been provided in law for all supplies of goods and services. In result if a supplier does not deposit taxes into the credit of Government account, the recipient will not be allowed to avail the ITC despite the fact that he had paid such taxes to the supplier. Accordingly one needs to carefully select the vendor from whom such goods and/ or services are to be purchased/ procured. If a taxpayer does not select the vendor diligently for procuring inputs under GST regime, it can result into double payment of taxes, hence categorisation of vendors becomes necessary.
Further, as it is a destination based consumption tax, there is a set order of utilising input tax credit under GST regime, which is as under:
• IGST in order of IGST, CGST and SGST;
• CGST in order of CGST and IGST;
• SGST in order of SGST and IGST;
However, cross utilisation of credit between CGST and SGST shall not be available. Further, unlike CENVAT Credit there is no specific concept of availment and utilisation of credit under MGST Law. Alike, current indirect taxes, reversal of input tax credit is there when inputs, input services or capital goods are used partly for business and non-business purpose, or taxable and exempted supplies purposes.
Compliances under GST is the area whereby any organisation complies with its obligation in relation to payment of taxes and filing of different returns and statements. In GST regime normally a taxpayer is required to file minimum three monthly statements/ returns per registration apart from annual return. Further in case the taxpayer is supposed to deduce tax at source one additional return per month per registration is required to be filed. That means if any taxpayer is having three registrations and is required to deduct TDS, he shall be filing 147 statements/ returns in a financial year. Moreover in most places these statements requires invoice level entry, i.e. information contained in each and every invoice has to be uploaded in the monthly statements e.g. Name, Address, GSTIN of Recipient, description of goods/services, HSN code, Details of tax etc. Apart from filing of statement and returns, in case of post supply events, such as return and/or rejection of goods, difference in rates, quantity etc. the GST law specifies adjustments of the same in a particular manner through debit and/or credit notes, which in turn also reported through monthly statement/ returns.
F. Transition to GST
Migration or Transition to GST is a process of existing taxpayer to transit into GST regime from existing taxation regime. Among many, two most important aspects of transition are Input Tax Credit and Registration:
• Carry forward of complete and eligible Input tax credits paid on goods, input services and capital goods. The taxpayer might have been paid Sales Tax, Services Tax and Excise Duty on inwards supplies in the existing tax regime which are eligible to be carried forward. Further it may be possible that those eligible credit may not be reflected in the returns filed in the existing laws. Identification and proper compliances to carry forward the same are most important aspect of the Transitional phase.
• It is better to decide the place or places of registration in the proposed regime as soon as possible. It may be noted unlike existing service tax system whereby the taxpayer can take centralised registration, as per model GST law there will not be any system of centralised registration. Persons located in different States will have to take separate registration under GST. In addition to it, person having multiple business vertical in the same States will be having option to take different registration within same State. All registrations shall be treated as separate taxable person from adjudication and compliances point of view under proposed GST law.
In summary the GST is effecting most of aspects of business be it Procurement, Supplies, Geographical Presence etc. Accordingly, it is advisable to all business houses, specifically those who are multi-located or are having multi registration, to analyse their business structure in the light of proposed law and have a complete impact analysis of their business process. By this taxpayer can plan their business structure in optimum manner. In absence of proper planning there may be situations whereby investment in working capital may raise significantly.