GOODS AND SERVICE TAX (GST) IN INDIA – Challenges Ahead January 29, 2012

AGENDA Present Indirect Taxation system in India Concept of GST and other salient points Why GST Proposed GST Model and How it would work IGST MODEL Challenge before us Opportunity for Company Secretary

PRESENT INDIRECT TAX SCENARIO IN INDIA INDIRECT TAXATION Sales Tax / VAT Entertainment Tax Luxury Tax Taxes on lottery, betting and gambling Entry Tax Octroi etc. Central Excise Custom Duty Export Duty Service Tax Central sales Tax STATE CENTRAL

GST – GLOBAL SCENATIO More than 150 countries have already introduced GST/ National Level VAT Typically GST is a unified Tax System in most of the Countries Canada and Brazil only have dual GST Standard rate of most of the Countries ranges between 16- 20%

WHAT IS GST ? GST is a tax on goods and services, which is leviable at each point of sale or provision of services, in which at the time of sale of goods or providing the services the seller or service provider can claim the input tax credit (ITC) which he has paid while purchasing the goods or procuring the services. A Comprehensive value added ax Value added in each stage on goods and services Taking Input Tax Credit (ITC)

Total Tax collection =(30+10+10)=Rs50 which equal to 20% of Rs.250/- GST CHART Wholesaler 40-30=10 150+(15+15) 200+(20+20) Department of Tax Manufacturer Retailer 50-40=10 30 250+(25+25) Customer Assume GGST & SGST is 10% Total Tax collection =(30+10+10)=Rs50 which equal to 20% of Rs.250/-

Self policing or voluntary compliances SALIENT POINTS OF GST: A Comprehensive Tax on Goods and Services Multi-point Tax on value added at each stage Tax is only cost to the end customer Consumption based tax not origin base No cascading due to input credit mechanism Self policing or voluntary compliances Reduction of Tax evasion /Widens the taxation base

WHY GST ? Division of power for imposition of tax between Central and State (Excise vs. VAT) Multiplicity of taxes at the Central and States Level. Multiplicity of taxable event. Complexity in the present system Cascading effect (i.e Tax on Tax) or Double Taxation Central Sales Tax (CST): No ITC Composite Contracts No harmonized system of taxation

India is federal country. GST MODEL DUEL GST CENTRAL GST STATE GST Why Dual GST : India is federal country. Centre and States have been assigned power to levy taxes Benefits of Dual GST: Reduction of no. of taxes at centre and State Decrease in effective Tax for widen of tax base Removal of current cascading effect Reduction of transactional cost through simplified tax compliances

Subsuming of Central CST Additional Excise Duty Additional Custom Duty (CVD) Service Tax Central Excise Duty Central GST Excise Duty levied under the MTP Act Special Additional Duty of Customs

State Cesses & Surcharges Taxes on lottery, betting & gambling Subsuming of State GST State Cesses & Surcharges Entry Tax Luxury Tax VAT / Sales Tax State GST Entertainment Tax Taxes on lottery, betting & gambling

DECISION DEFERRED ON FOLLOWING TAXES NOT- SUBSUMING IN GST Basic Custom duty Basket of petroleum products: crude, motor sprit (including AFT) and HSD Alcoholic beverages Stamp duty Purchase Tax Electricity duty Taxes on Natural Gas Tax on vehicles and transport of goods & passengers DECISION DEFERRED ON FOLLOWING TAXES

Salient Features of the Proposed GST Model Applicable to all transactions of goods and services except: the exempted goods and services Goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits CGST and SGST are to be paid to the accounts to the centre and the states separately. ITC (Input Tax Credit): ITC on central GST would be utilized only against the payment of CGST. The same principal will be applicable for SGST. Cross utilization of ITC between the CGST and SGST would not be allowed. The taxpayer would have to maintain separate book of accounts for utilization/refund of credit.

Salient Features of the Proposed GST Model Threshold limit : Minimum exemption limit has not decided as yet. Present exemption limit: Service tax:Rs. 10 lacs Central excise Rs.1.5crores Vat in different states Rs.1 lac to 5 lacs. Compound/ Composition Scheme: For Gross annual turnover of Rs. 50 lacs and the floor rate of 0.5% for small traders and small scale industries. Optional GST registration is also allowed to dealers whose turnover below the compounding cut-off. Each taxpayer would be allotted a PAN-linked taxpayer identification no. with a total of 13/15 digits. Works contract Tax (WCT) would be abolished on or after implementation of GST.

RATE STRUCTURE In GST, the rate may be expected be in the range of 16-20% There may single rate for GST on services at the Central and State level But in case of goods, there would be a few rates for Central and State GST : Standard rate for general (RNR) Special rate for gold & silver, other precious metal etc. lower rate for necessary and goods of basic important Exempted goods considering the special need of each state In every transaction, both CGST and SGST would apply at pre-determined level.

Constitutional Amendments is Required IMPORT BE TAXED UNDER GST ? Both CSGT & SGST will be levied on import of goods and services Incidence of tax will follow the destination based principal Tax so paid will be available as input tax credit (ITC) Constitutional Amendments is Required

EXPORT & EXEMPTION Export would be zero rated Similar benefits will be given to Special Economic Zones (SEZs). Industrial incentives & Special Industrial Area Scheme : The tax exemption, remission etc. related to industrial incentives would be converted into cash refund scheme after collection of tax. Area based exemptions will continue up to legitimate time. No new exemption, remission etc. would be allowed.

IGST MODEL: INTER-STATE TRANSACTIONS IGST (CGST+SGST) on all inter-state transactions of taxable goods and services Supplier will pay IGST after set-off available credit of IGST, CGST & SGST on his purchases. The exporting state will transfer to the central agency the credit of SGST used for payment of IGST The importing taxpayer will claim ITC of IGST against his IGST,CGST and SGST tax liability. The central agency will transfer to the importing state the credit of IGST used in payment of SGST.

ILLUSTRATION Delhi Mumbai Central Agency Input Credit in Hand IGST 100 CGST 50 SGST 25 Mumbai Input Credit in Hand IGST 200 CGST 25 SGST 25 Central Agency

Uninterrupted ITC chain on inter-state transactions ADVANTAGE OF IGST MODEL Uninterrupted ITC chain on inter-state transactions No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer No refund claim in exporting State Self- Monitoring model IT facility All inter-state dealers will be e-registered

RULES REGARDING SET-OFF OF GST Output Input Set-off Allowed IGST SGST YES CGST NO 21

MAJOR CHALLENGES GST Rates Constitutional Amendments for : Sharing of resources and compensation Administrative preparedness to implement the new tax regime GST Council and Dispute settlement authority Setting up IT structure : Treatment of un-utilised tax credit carried forward under CENVAT and State VAT Design and Structure: IGST Model, Issue like Service

Opportunity for CS and Other Professions Advisory /Support to Government Training to Corporate Staff Decision making functions such as market strategies, stock transfer etc. Registration of service tax in each State and cancellation of CST etc. Special Audit /Certification like non applicability, exemption etc. Helping the small business for composition scheme Impact on various sectors

“Law cannot stand still, it must change with the changing social concepts and value. If the law fails to respond to the needs of the changing society, then either it will stifle the growth of society and choke its progress” P N Bhawati THANKS