Goods & Services Tax (GST)

May 2011

-The Road Ahead
Contents
Introduction
Current Status
Present indirect tax regime
Constitutional Amendment
GST in India
Implications for businesses
Way forward
2
Introduction
Introduction
GST would be the single most significant fiscal reform of Independent India
till date
GST is expected to result in major rationalization and simplification of
transaction tax structure at both Central & State levels
GST is expected to subsume all indirect taxes currently applicable, thus
eliminating cascading effect due to multiplicity of taxes
GST in pure form is expected to significantly redistribute taxes across goods
and services
GST would significantly broaden the tax base and therefore the revenue neutral
rate is likely to be significantly lower
GST will necessitate a fundamental redesign and reengineering of supply
chain. It will enable supply chain to be operationally efficient as compared to
tax efficient as on date
Accordingly GST is expected to consolidate inventory holdings at strategic
locations, thus eliminating inefficiencies in inventory holding


4
Introduction

GST is also expected to reduce inventory holding cost, as businesses would be
able to claim credit of the tax paid on inventories leading to improved cash
flows
Highly efficient IT capabilities both at tax administration level and at tax
payers level are imperative for successful implementation of GST
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Current Status

Current Status

Constitutional Amendment presented in Parliament, but no discussion or
agreement
After Constitutional Amendment is passed by the Central Government, it has to
be ratified by atleast 50% of the State Assemblies before becoming effective
Still no agreement on various issues between the Empowered Committee and
the Central Government
States still insisting on retaining the fiscal freedom guaranteed under the
Constitution of India
Administrative machinery at the Centre and at various States are more or less
ready and waiting for the political mandate
The earliest date of implementation could be October, 2012


7
Present indirect tax regime
Present indirect tax regime
Central levies
Customs duties, levied on import of goods into India
Basic Customs duty
Additional Customs duty, levied in lieu of Excise duty (also known as CVD)
Additional duty of Customs, levied in lieu of Sales tax (also known as SAD)
Excise duty, levied on manufacture of goods within India
Service tax, levied on provision of specified services
Research & Development cess, levied on import of technical know-how into India
Credit of CVD and SAD available for utilization towards payment of output
Excise duty, subject to conditions
Credit of CVD available for utilization towards payment of output Service tax,
subject to conditions
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Present indirect tax regime
State levies
Value Added tax (VAT), levied on sale of goods within a State
Central Sales tax (CST), levied on inter State sale of goods
Entry tax, levied on entry of goods into a local area
Purchase tax, levied on purchase of goods made without payment of VAT/ CST
Stamp duty, levied on registration of instruments including sale/ purchase of
property
Credit of VAT, Entry tax and Purchase tax available for utilization towards
payment of output VAT/ CST, subject to conditions



10
Contd
Fallacies of the present regime
The present indirect tax regime is a disjointed value chain as no credit is available
of
SAD paid on import of capital goods/ inputs to service providers
Customs duty/ Excise duty on non specified capital goods
Customs duty/ Excise duty/ Service tax to traders
VAT to service providers
CST paid on inter State purchases

The disjointed value chain results in
cascading of taxes
loss of credit
higher inherent tax costs
lack of transparency and level playing field
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Fallacies of the present regime
Each tax operates on a narrow tax base, rather than on the entire value chain
Hidden tax costs in the value chain, results in competitive disadvantageous
situation
Creates barriers within the country as against creating India as one market
Multiple levies increase complexities, litigation and compliance costs


12
Contd
Constitutional Amendment

Constitutional Amendment

The proposed Constitutional Amendment aimed at levy of tax on supply of
goods or services by both Central and State Governments
Clause 29A of Article 366 related to deemed sale is proposed to be omitted
Import of goods shall be deemed to be transactions of inter state trade or
commerce. Thus, import would also attract GST
Certain petroleum products would be outside the scope of GST. The
Parliament would continue to have powers related to levy of tax on their
manufacture or production whereas States shall have powers to levy tax on sale
thereof
Sale or purchase of newspapers and advertisements published in such
newspapers would be brought in the tax net of GST
The Parliament and Legislature of every State will have concurrent power to
make laws with respect to GST, subject to the condition that the Parliament
will continue to have exclusive powers to make laws where the transactions
takes place in the course of inter state trade of commerce

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Constitutional Amendment


Elaborate provisions proposed with respect to the Constitution of a GST
Council for making recommendations to the Union and States on various
matters related to GST
A GST Dispute Settlement Authority to be constituted for adjudicating any
dispute or complaint referred by the State Government or the Union
Government on any issue arising out of the deviation from any
recommendation of the GST Council resulting in loss of revenue to any State or
Union Government
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GST in India
GST in India objectives
Integrated Goods and Services tax, with free flow of credits across goods and
services in the entire value chain
Barriers of States eliminated India would operate as a single market
More rational logistics
Economies of scale
No cascading of taxes
Cost competitiveness no hidden tax costs
Transparent tax regime
Simple invoice based regime easy to administer and comply
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GST in India salient features
The GST in India would be a dual GST, which would comprise of
Central GST (CGST)
State GST (SGST)
The CGST would replace
Central Excise duty (consequently CVD as well)
Service tax
The SGST would replace
VAT (including purchase tax)
Entry tax, Luxury tax, Octroi, etc.
State surcharge
Stamp duty ?
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GST in India salient features
Both CGST and SGST would simultaneously apply to intra State taxable
transactions in the value chain
Inter State transactions would be subject to Inter State Goods and Services Tax
(IGST)
CGST and IGST would be levied through a Central legislation while the SGST
would be levied through legislations of individual States
The basic features of the laws such as chargeability, taxable event, taxable
person, valuation provisions, basis of classification would be uniform across the
States, to the extent possible
The distinction between the taxable events such as manufacture of goods, sale of
goods or provision of services would have very limited relevance
CGST and SGST on goods proposed to be 6% and 10% while on services 8%, by
both Central and State governments. Thus aggregate GST rates would be 12%
and 20% on goods and 16% on services
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Contd
GST in India salient features
CGST and SGST would be paid separately to the Central and the respective State
governments
IGST would be paid to the Central Government who would operate as a clearing
house for this purpose
Cross credit between goods and services would be available. However, no cross
credit between CGST and SGST would be allowed
Accordingly, both CGST and SGST can be utilized towards payment of CGST
and SGST respectively, except on inter State transactions
Both CGST and SGST can be utilized towards payment of IGST. Similarly, IGST
can be utilized towards payment of CGST and SGST
Destination State would get the revenue
Accordingly, the State Government of the originating State would pay the Central
Government an amount to the extent of the CGST credit utilized in payment of
IGST
20
Contd
GST in India salient features
Similarly, the Central Government would pay the State Government of the
recipient State an amount equal to the IGST utilized in payment of SGST
Exports would be zero rated, while the imports would attract both CGST and
SGST, in addition to the Customs duty
The place of supply rules would have to be framed for determination of
appropriate State to levy tax, particularly in the case of provision of services of
inter State nature
Administration of CGST and SGST would be with respective governments
Each tax payer would have to submit both CGST and SGST returns to both the
authorities

21
Contd
Implications for businesses
Implications for businesses
A major discontinuity in transaction taxes
Continuity of competitiveness landscape needs to be ensured
Identification and mitigation of risks
Manage change
Continuity of business operations during transition
Training of staff at remote locations in order to ensure total compliance
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Key decision areas
Dispute regarding Goods vs Services continues
Works contracts
Telecom contracts
Lease transactions
Bundled supplies, software etc.
Indigenous procurements vs imports
Place of supply in case of services
Inverted duty structure due to multiple rates

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Transition to GST
Change in pricing policies
Taxes already sitting in inventory of goods and services
Availing of all credits, including on transition date
Allocation of credits over taxable and exempt supplies
Tracking parallel credits of CGST, SGST and IGST
Payment of GST on imports
Credit/ refund of GST on exports
Amendment of ERP/ accounting system
Changes in invoice formats/ records being maintained
Amendment in registration certificates
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Way forward
Way forward



A GST implementation strategy is imperative !!!
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GST implementation
strategy
GST implementation strategy
Mapping the
as is
Impact
assessment
study
Implementation Go Live
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Mapping the as is
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Mapping the as is supply chain
Indirect tax incidence of the as is supply chain
Recoverable taxes
Creditable taxes
Taxes to the bottom line

Impact assessment study
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Superimposing GST model on as is supply chain
Working out the GST impact on business
Identification of key areas of impact
Evaluation of options and sensitivity analysis



Implementation
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Alignment of the business structure/ supply chain to the GST regime
Change ERP and other MIS systems
Review all contractual arrangements with suppliers, customers and other
distribution partners and compute incremental incidence renegotiate
Communicate with all stakeholders
Train staff and distribution channel
Compliance manuals, clearly setting out criterion for availing credit, manner of
utilization and complying with the prescribed requirements




Go Live
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Amend/ apply for new registration
Review the formats of invoice, challan etc.
Avail credit of the transition stock in each State
Post implementation
Review of credits availed and utilized
Checking of books of accounts, invoice and other records
Review of the computation of GST
Review of the returns





Thank you