DISCUSSION PAPER ON GST - E & Y

[GURU]

GST – Analysis of the First Discussion Paper – Earnest & Young
The Empowered Committee of State Finance Ministers at their meeting
dated November 10, 2009 has released a “First Discussion Paper on GST
in India” (‘Discussion Paper’). In this document, we have summarized
the key features of the proposed GST as suggested in this Discussion
Paper.
Broad framework
• GST will apply on all transactions involving supply of goods and/or
services
• A ‘Dual rate structure’ consisting of ‘Central GST’ (to be levied
and administered by the Central Government) and ‘State GST’ (to be
levied and administered by the respective State Governments) would be
the new form of taxing sale of goods and/or supply of services. Both
taxes would simultaneously apply on a transaction and principally on
the same tax base (except in cases where exclusions apply due to
turnover thresholds). An Integrated GST or IGST would apply on
interstate supplies of goods and services.
• From a legislative framework perspective, a single legislation for
levying Central GST has been proposed. However, each State and Union
territory will enact its own State GST legislation and are supposed
to stay within the bounds of a common, overarching framework with an
endeavor to adhere to uniform basic features of law such as:
o Chargeability;
o Definition of taxable event and taxable person;
o Measure of levy including valuation of goods and services;
o Basis of classification of goods and services; and
o Procedure for collection and levy of tax
• In view of the above dual-structure, Centre and States would have
concurrent jurisdictions for all the tax payers; thereby resulting in
dual administration and compliances
Coverage
Existing indirect taxes to be subsumed under GST
The Discussion Paper proposes that the following indirect taxes would
be subsumed:
Central Taxes State Taxes
Central excise duty Value Added Tax/ Sales tax
Additional excise duties Entertainment tax*
Service tax Luxury tax
Excise duty under Medicinal & Toiletries Preparation Act Tax on
lottery, betting and gambling
Countervailing duties (on imports in lieu of excise duty) Entry tax
not in lieu of Octroi
Additional duty of Customs (levied on imports in lieu of value added
tax or central sales tax) State surcharges and cesses in so far as
they relate to supply of goods and services
Surcharges and Cesses**
*Unless levied by local bodies
**The list of Cesses covered is not provided
At present, it is being debated whether ‘purchase tax’ should also be
included under GST; this area is one of the open aspects of the
proposed structure.
Certain indirect taxes such as electricity duty, octroi, etc are
currently not proposed to be subsumed under GST. It appears that the
list currently provided for taxes that would be immediately subsumed,
but there may be scope for covering more taxes in the future.
Import of goods/ services
• Import of goods would attract both Central GST and State GST in
addition to basic customs duty. CVD and other additional duties on
imports would therefore get subsumed.
• Import of services will also attract Central GST and State GST.
• Central GST and State GST paid on import of goods and services would
be allowed as a credit for payment of output Central GST and State GST
liability, respectively
• State GST paid on import of goods and services are proposed to
accrue to the State where such goods and services are consumed, and
not necessarily in the State where goods are imported; this is in line
with the principle of destination based tax. However, it is not clear
whether each State (of destination) would be responsible to collect/
administer State GST on imports directly.
Taxability of Alcohol, Tobacco and Petroleum products
Items containing alcohol Tobacco products Petroleum products
• Likely to be kept out of GST framework
• Levy of VAT/ sales tax to continue
• Levy of State excise duty to continue • Subjected to GST
• Central excise duty (without input tax credit) may also be levied
(over and above GST) • Crude, motor spirits, Aviation Turbine Fuel and
High Speed Diesel to be kept out of GST purview
• Levy of VAT/ sales tax to continue. Central levies to also continue
• Decision to include ‘natural gas’ under GST, yet to be taken
Point of levy
• It is suggested that all transactions of goods or services, made for
a ‘consideration’ would attract Central GST as well as State GST,
except:
o exempted goods and services;
o goods and services which do not fall within the purview of GST; and
o transactions which are below the prescribed threshold limit
• Currently, the Discussion Paper is not explicitly clear on precisely
how transactions where there is no specific consideration (such as,
branch transfers, inter-unit movements, free issues and captive
consumption) would be dealt with. However, it appears that taxes may
also possibly be applied to branch transfer of goods and services.
• Clarity is also awaited on transactions which have historically been
‘deemed sales’ under VAT/ Sales, including transactions involving both
supply of goods and provision of services (such works contract
transactions) and lease transactions. Given that the GST rate for
goods and services may be different, it is imperative to determine
appropriate taxable value, separately for goods and for services and
the principles for treatment of such transactions.
Rate of GST
Goods
The Discussion Paper proposes a dual rate structure for both Central
GST and State GST, as under:
• Lower rate for necessary items and goods of basic importance; and
• Standard rate for general goods
A special rate of GST is proposed for precious metals and a list of
exempted goods would also be prescribed. Discussions on whether the
exemption list currently under the VAT regime could be used for GST as
well. The rates are currently awaited.
Services
A single GST rate, applicable to both Central GST as well as State GST
is proposed for taxation of services. The rate is currently awaiting
finalization.
Steps to ensure uniformity of rates
The Discussion Paper has indicated that an appropriate mechanism would
be put in place to legally bind the Centre and States to achieve (and
maintain) a harmonized rate structure. This could possibly be a fall-
out of the VAT experience, wherein several States have deviated from
the agreed revenue neutral rate (‘RNR’).
Taxation of inter-state supplies
The Discussion Paper has proposed that an Integrated GST model
(“IGST”) model be adopted for taxation of inter-state transactions of
goods and services. The mechanics for levy of IGST are as follows:
• The Centre will levy an IGST (rated at the combined Central GST
plus State GST rates) on all inter-state transactions of goods and/or
services with ‘appropriate provisions’ to be made for consignment or
stock transfer of goods
• Inter-state seller would levy the IGST on inter-state transactions
involving sale of goods and/or provision of services
• While discharging the output IGST liability, the inter-state seller
would be allowed to utilize input tax credit of IGST, Central GST and
State GST
• Seller State to transfer to the Central Government, amount of State
GST credit utilized by the inter-state seller to discharge output IGST
liability in that State
• Inter-state purchaser would claim the input tax credit of such IGST
while discharging his output liability
• Central Government would accordingly transfer the amount of IGST
used in payment of State GST to the account of Purchasing State
• Central agency to act as clearing house mechanism and be responsible
to monitor and verify credit movements and on the basis thereof inform
respective Government to transfer funds
The above model has been proposed for interstate supply of goods and
services. While it may be possible to characterize a transaction as
an interstate supply in case of goods (based on established principles
under current regulations), it is currently unclear as to how the
place of supply/ destination of services will be determined to
crystallize the jurisdiction where tax is payable on supply of
services. This would specifically be relevant in respect of composite
contracts having multiple states of supply of services, ie, such
contracts may need to be split.
The Discussion Paper only states that the principles for taxation of
intrastate and interstate transactions have already been formulated.
However, these principles have not been enumerated in the Discussion
Paper.
Input credit mechanism
• Central GST and State GST are proposed to be treated separately for
the purposes of availing input tax credit (‘ITC’)
• Utilization of ITC would be as under:
o Input Central GST to be utilized against output Central GST and IGST
o Input State GST to be utilized against output State GST and IGST
o Input IGST to be utilized against output IGST, Central GST and State
GST
Further, it appears that the protocol for utilizing credit against
output IGST would be in the order of input IGST, input Central GST and
input State GST.
• Cross utilization of ITC between Central GST and State GST is not
proposed to be allowed
• It is proposed to align the rules for availment and utilization of
ITC for both Central GST and State GST
• Taxpayers (including exporters) may be required to maintain separate
books of account for utilization and refund of ITC
• There is an in principle assurance that refund/ adjustment of
accumulated ITC would be granted/ completed in a time bound manner;
however how this will get implemented is yet open for debate.
Export of goods/ services
• Continuing the current stated policy on exports, it has been
reiterated that export of goods and services would be zero-rated ie no
tax would apply on exports, and the input credit relatable to such
export supplies would be allowed to be used against other domestic
liabilities or refunded.
• Supply of goods and provision of services, to processing zones in a
Special Economic Zone (‘SEZ’) would be zero rated
• Supply of goods and provision of services by a SEZ to Domestic
Tariff Area would be liable to GST
Special cases
Threshold limits for levy of GST
Gross Annual Turnover Central GST State GST
Goods INR 15 million INR 1 million
Services Yet to decided; however the threshold may be higher than INR
1 million INR 1 million
It appears that tax payers would be required to monitor the turnover
of goods and services separately, both for Central GST and State GST.
The levy of Central GST and State GST may trigger at different levels
of turnover, separately in respect of goods and services.
Composition/ compounding scheme
The Discussion Paper proposes a composition/ compounding scheme under
State GST (at the option of the tax payer) for tax payers with annual
turnover up to INR 5 million. The floor tax rate prescribed for levy
of Composition/ Compounding tax is 0.5 percent across States.
Special Industrial Area Scheme
• All existing area based exemption schemes are proposed to be
converted into cash refund schemes for the remaining period of the tax
holiday.
• No new exemption schemes to be introduced and existing schemes to be
discontinued
Compliances
Registrations
• Income-tax Permanent Account Number based tax-identification number,
vetted by the Income Tax Department, with total of 13/15 digits is
proposed would be issued to the tax payers
• Separate registrations would continue to be required relevant State
GST legislations, wherever liability is incurred. Currently, it is
unclear whether State-wise registrations would also be required for
Central GST
Tax payments
• Central GST and State GST are required to be paid separately
• State GST is to be paid to the credit of respective states

Returns
• Separate periodical returns to be filed to the Central Government
and the concerned State Governments
• The Discussion Paper proposes a common return format for both
Central GST and State GST legislations
GST enablers
Constitutional amendments
The Discussion Paper has indicated the following constitutional
amendments, for:
• Empowering the States to levy service tax;
• Levy of GST on import of goods and services; and
• Consequential issues
Legislations
A Joint Working Group has been constituted to prepare draft
legislations for the following:
• Central GST legislation, along with rules and procedures;
• Model State GST legislation, along with rules and procedures;
• IGST legislation, along with rules and procedures
• Procedure for administering and collecting GST, including dispute
resolution mechanism and advance ruling mechanism
Concluding remarks
In summary, the Discussion Paper is a significant step towards
rationalizing the indirect tax framework of India. It has provided a
guideline for a common tax system on sale of goods and provision of
services in a seamless manner; given our Federal tax structure, this
has been a challenge for implementing a cohesive indirect taxing
system. The Government has prior to this Paper been saying that the
date for implementation of GST would be April 1, 2010. While there is
no specific commitment on this date of implementation in the Paper, it
is encouraging that some of the key “issues” have been ironed out. It
is now time for businesses to gear up for this change. Tax payers
should track future developments in terms of release of draft
legislations, rate structure etc; start analyzing the impact of
implementation of GST on their business models; assess the need to
realign supply chain to the revised framework; evaluate updating IT
systems and business processes, effectively manage transaction of
stocks and credits from the current (multi-tax) framework to the GST
(single tax) framework; and identify training needs for personnel.