EY GST News Alert. Executive summary. Highlights of the revised Model GST Law released by the Ministry of Finance.

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1 29 November 2016 EY GST News Alert Highlights of the revised Model GST Law released by the Ministry of Finance Executive summary This Alert provides an insightful coverage of news related to GST and recent developments that are likely to impact trade. It will act as a summary to keep you on top of the latest GST news. For more information, please contact your EY advisor. We are pleased to release News Alert providing insights on the revised Model Goods and Services Tax Law 1 (MGL) released on 26 November 2016 by the Ministry of Finance. The first draft of the MGL had been released by the MoF on 14 June 2016 for seeking recommendations from industry, trade bodies and other stakeholders. Goods and Services Tax (Compensation to the States for loss of revenue) law has been put in public domain alongwith the draft Central Goods and Services Tax (CGST) law / State Goods and Services Tax (SGST) law [forming part of MGL] and Integrated Goods and Services Tax (IGST) law. There are significant changes in the revised draft laws with respect to the definitions, levy of tax, Input Tax Credit, time and place of supply etc. GST rules, Valuation rules, exemption list and the classification of goods and services are yet to be notified. These Laws will be reviewed and finalized by GST Council in its meeting scheduled on 2 and 3 December 2016 and then tabled in the ongoing winter session of the Parliament. 1

2 GST update The first draft of the model GST law (MGL) had been released by the MoF on 14 June 2016, for seeking recommendation from the industry, trade bodies and other stakeholders. After considering the suggestions, the revised MGL is released by the MoF on 26 November The same has been also circulated to States for their comments. Goods and Services Tax (Compensation to the States for loss of revenue) law has been put in public domain alongwith the draft of Central Goods and Services Tax (CGST) law / State Goods and Services Tax (SGST) law [forming part of MGL] and Integrated Goods and Services Tax (IGST) law. The key changes made to the earlier draft of MGL and the IGST law are highlighted below. Changes in CGST/ SGST law Definitions Earlier MGL had borrowed the definition of capital goods from the CENVAT Credit Rules, The definition has now been amended to include all goods which have been capitalized in the books of accounts. The definition of works contract which earlier included both movable and immovable property has been confined only to immovable properties. Composite supply has been defined to cover bundled supply of goods and services one of which will be principal supply. The tax liability will be determined based on the rate and other provisions applicable to the principal supply. Concept of mixed supply is introduced. This will cover the cases of bundled goods and services, supply of which are not dependent on each other. The tax liability will be determined based on the supply which attracts the highest rate of tax. E-commerce operator has now been defined as any person who owns, operates or manages digital or electronic facility or platform for e-commerce. Securities have been excluded from the definition of goods as well as services. Securities were earlier included in the definition of goods. The definition of zero-rated supply, which referred to a supply of goods or services on which no tax is payable but ITC is admissible, is deleted. Actionable claims are included in the definition of goods and hence, excluded from the definition of services. The explanation in the definition of goods under the earlier MGL which excluded intangible property from the scope of goods has been deleted. Thus, scope of goods is widened to include intangibles also. As intangibles are also covered under services, the cases where intangibles will be treated as goods or services shall be specified. The definition of money has undergone change. The words any such similar instrument have been replaced with any other instrument recognized by RBI. Accordingly, only the instruments which are recognised by RBI will be treated as money. Definition of India is shifted from CGST law to IGST law without any change. Supply The scope of supply excludes the importation of services without consideration except when received from a related person or its foreign establishment in the course or furtherance of business. The provision deeming the aggregator as a supplier of service is deleted. Schedule I Schedule I dealing with supply made without consideration has been amended.

3 Tax on disposal of business assets under Entry I of Schedule I shall be payable only in cases where input tax credit has been availed on such assets. Entries 2, 3 and 4 of the Schedule I dealing with use of business assets for non-business use, services for nonbusiness use and assets retained after deregistration respectively are deleted. Entry 5 of the said schedule (supply made by taxable person to another taxable/nontaxable person) has been deleted. New Entry 2 has been inserted to cover supplies between related and distinct persons in the course of furtherance of business as taxable supplies Time of supply Time of supply for goods and services is simplified. The taxable event shall be the date of issue of invoice or receipt of payment, whichever is earlier. Time of supply for goods in case of supplies attracting tax under Reverse Charge Mechanism (RCM) shall be the receipt of goods / receipt of payment / 30 days from the date of invoice, whichever is earliest. Time of supply for service in case of supplies attracting tax under RCM shall be receipt of payment / 60 days from the date of invoice, whichever is earlier. Section 10 of the CGST Act defines the distinct persons as establishments of same person having separate registrations under GST. Therefore, stock transfer continues to be taxable under Schedule I (New Entry 2). Importation of services without consideration by a taxable person from a related person or from his other establishment outside India in the course or furtherance of business is now included in Schedule I (New Entry 4). Levy of tax Cap of GST 14% is introduced with respect to both SGST and SGST. As against the concept under earlier MGL that the employee is a non-taxable person, it has now been provided that the services by an employee shall neither be treated as a supply of goods nor a supply of services. This is in line with the current provision of service tax. Earlier only traders were covered under composition scheme where the minimum tax rate of 1% was prescribed. Now, even the manufacturers have been covered under composition scheme with minimum tax rate of 2.5% of the turnover, under both CGST & SGST Act. A separate provision for time of supply in case of vouchers has been inserted. Time of supply shall be the date of issue of voucher, where the supply is identifiable at the time of issuance of voucher. In all other cases, it shall be the date of redemption of vouchers. Input Tax Credit Restriction imposed on the availment of credit on motor vehicles procured and used captively for transportation of goods is now removed. ITC on input services can be availed subject to the condition that the value of the invoice is paid within 90 days (similar to current CENVAT provisions). There is no similar provision for credit on goods. ITC on rent-a-cab, life insurance, health insurance which the Government notifies as service which is obligatory for an employer to provide to its employee under any law for the time being in force shall be allowed as eligible credit. ITC on goods or services used for construction of an immovable property, other than plant and machinery, shall not be allowed even if such property is used in course or furtherance of business. It has now been made amply clear that ITC of works contract services shall be eligible only in the hands of workscontractor.

4 Availment of ITC on pipelines and telecommunication tower fixed to earth by foundation or structural support (including such foundation and structural support) has been restricted to 1/3 rd of the total ITC in each financial year. TDS / TCS Rate of TDS has been prescribed as 1% of the payment made or credited to the supplier, under both CGST and SGST Act and 2% under IGST Act. ITC shall not be eligible on the tax paid on the goods detained or confiscated or cases involving litigation in respect of fraud etc. Rate of TCS has been prescribed as 1% of the net value of taxable supplies (Gross less returns) under both CGST & SGST Act and 2% under IGST Act. ITC shall not be allowed on the goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. The word may used in Input Service Distributor (ISD) provisions has been changed to shall bringing in clarity on mandatory distribution of credits. Transaction Value Subsidies provided by the Central / State government which are directly linked to price of goods and services shall not form part of the transaction value. Value of materials which are issued on free basis by the customer shall not be included in the transaction value of supplier. Registration The threshold limit for registration is increased to INR 20 lakhs (INR 10 lakhs for north eastern and other specified states) as against INR 10 lakhs (INR 5 lakhs for north eastern and other specified states). Provision for mandatory registration has been introduced for overseas supplier supplying Online Information and Database Access or Retrieval services to an unregistered person in India. Refunds Provisional refund in case of exports has been increased from 80% to 90%. The period of 90 days has been reduced to 60 days for grant of refund. Interest will be payable for any delay beyond 60 days. Job Worker The time limit for the goods to be received back from the job worker has been increased from 180 days to 1 year for inputs and from 2 years to 3 years for capital goods. Anti-profiteering measure Price charged to the consumer shall need to be reduced to an extent of benefit accruing due to (i) admissibility of ITC in the hands of supplier and (ii) price reduction on account of reduction in tax rates on procurement. Transition provisions First stage dealer, second stage dealer and registered importer have been included for allowing the transitional credits. As per earlier MGL, for transition of the credit carried forward in returns, the credit should be eligible both under the existing law as well as the GST law. The said provision has been amended and the criteria of eligibility under existing law for allowing the credit to be transitioned has now been removed. VAT/ Entry tax credit attributable to CST transactions where forms could not be collected within the period stipulated under Rule 12 of Central Sales Tax (Registration & Turnover) Rules, 1957 cannot be transitioned as credit in electronic ledger account. The said credit shall be available as refund on subsequent substantiation of the claim through collection of the forms.

5 Works contractor shall be allowed to take the credit of CENVAT on the inputs held in stock on the transition day (which is currently not allowed as credit) with the condition that the benefit of credit shall be passed to the recipient. Credit will be allowed to the recipient where the goods were in transit on the day of transition. Changes in IGST law Custom frontiers has been defined and considered in Section 3 to clarify that supply of goods in the course of import till they cross customs frontiers shall be deemed to be inter-state supply. Any supply which is not intra-state and not specifically covered as inter-state shall be deemed to be inter-state supply. Where IGST has been paid on import of goods under Customs Act, the importer can claim ITC under IGST law. If exemption to any goods or services is provided under CGST law, the exemption would be available under IGST law as well. Place of supply Place of supply in case of imports shall be the location of importer. Place of supply in case of exports shall be the location outside India. IGST shall be levied on inter-state supply other than import of goods. It has been now categorically provided that IGST on imports shall be levied in accordance with Section 3 of Customs Tariff Act alongwith Basic Customs Duty on the value as determined under Customs Act. Cap on IGST 28% has been introduced in Section 5 which deals with levy of tax. Separate Chapter has been introduced for zero-rated supplies under IGST which covers exports and supplies made to SEZ (developer and unit). Exporters will have the option of either: i) export without payment of IGST and claim the input tax credit as refund or ii) pay IGST on exports and claim refund of such IGST paid. The SEZ developer or unit receiving zero rated supply shall be eligible to claim refund of IGST paid on such supplies. Supplier making supplies to SEZ will be able to claim ITC in respect of such supplies also which are otherwise exempt from GST. Supply to or by SEZ shall be deemed to be inter-state supply even if both SEZ and DTA are located within the same state. Refund provision has been introduced for refund to outbound tourists. Rules will be notified separately. Provisions for place of supply of service has been split into two parts: i) Where location of both supplier and receiver of service is in India and ii) Where location of either supplier or receiver is outside India. In case where both the location of supplier and receiver is in India and the immovable property or event is held outside India, the place of supply will be the location of the recipient. In case where location of either supplier or receiver is outside India, provisions similar to current Place of Provision of Service rules under service tax have been introduced. GST Compensation Cess All the provisions of CGST and IGST Act shall apply mutatis mutandis to GST Compensation Act. Cess will be levied at the rate to be notified, on the transaction value of supply of goods and services as may be prescribed on recommendation of GST Council. Cess shall be levied at each stage of supply with availability of credit. Cess shall not be levied on the supplies made by the dealers opting for composition scheme.

6 Cess can be utilised against payment of such Cess only. Comments The effort of Government in addressing various concerns of the stakeholders in the revised GST laws is commendable. It needs to be appreciated that proposed GST framework is a materially unique tax regime and therefore, the dialogue between Industry and the Government on the legislation needs to continue. The policy makers need to give adequate emphasis on the key objective of GST of creating a single market, removing cascading tax impact as also ease of doing business. The current framework appears to be increasingly driven by anxieties related to perceived leakage and reduction of revenue. The compromises made at times arguably are unfortunately significant. Sensitive implementation of legislation is of paramount importance.

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