Virtual Certificate Course on GST Organised by: IDT Committee of ICAI

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1 1 Virtual Certificate Course on GST Organised by: IDT Committee of ICAI Sector Specific Studies on Construction Information Technology Tourism Service Trader Manufacturer 23 of June 2017

2 2 HIGHLIGHTS OF THE GST LAW Supply Rate structure Registration Taxable event to be supply. Rate structure No concept of centralised registration Current indirect tax regime - manufacture, sale of goods or provision of service. 3%, 5%, 12%, 18% & 28%, apart from zerorated and exempt supplies Persons making taxable supplies from a State liable to obtain registration in every such State, where all- India turnover crosses threshold of 20 lakhs 2

3 3 HIGHLIGHTS OF THE GST LAW Input Tax Credit ITC allowed on all inward supplies of goods and services (other than those specifically restricted), including inter-state supplies when used or intended to be used in the course of furtherance of business Credit on goods purchased could seamlessly be utilised to set-off output tax liability on services and vice versa Concept of matching of ITC introduced Anti-profiteering To ensure that benefits of ITC and reduction in rates of tax are passed onto end consumers 3

4 4 GOODS AND SERVICES TAX Construction

5 5 STAKEHOLDERS Developer Sub-Contractor Supplier Land owner Customer

6 ANALYSIS Supply Includes all forms of supply of goods or services or both such as sale transfer barter exchange license rental lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business 6

7 7 MEANING OF WORKS CONTRACT Article 366(29-A)(b) A tax on sale or purchase of goods includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract Sec 2(119) The CGST Act, 2017 A contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract Entry 6 of Schedule II to the CGST Act, 2017 Activity of works contract as defined under Sec 2(119) being a composite supply SHALL BE TREATED AS SUPPLY OF SERVICES 7

8 8 WORKS CONTRACT Schedule II Entry 5(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. Sec 17(5)(c) of The CGST Act, 2017 Restricted credit works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service 8

9 9 NATURE OF SUPPLY Examples: All other works contract relatable to movables would be treated as composite supplies - Sec 8(a) r/w Sec 2(30) of CGST Act A contractor engaged in fabrication, say railings or gates; Repair contract of plant and machinery; Extraction, testing and commissioning contract involving goods and services 9

10 CURRENT TAX STRUCTURE Service Tax Construction of a complex, building, civil structure or a part thereof 15% (30% of value) Service portion in the execution of works contract 15% (Value value of property in goods transferred or 40%/70% of value) VAT Construction activities 14.5% (Value exclusive of land labour and other like charges, subcontractor payments, etc.) Composition scheme for works contracts 4% (Value exclusive of land sub-contractor payments) 10

11 TAX STRUCTURE UNDER GST GST Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly 12% (Value inclusive of land) With Full ITC but no refund of overflow of ITC Entry 19 Works contract for building, construction, fabrication, completion, erection, installation 18% (Value exclusive of land) Residual entry All other services not specified elsewhere Entry 36 11

12 12 ISSUES TO BE ADDRESSED Classification of Services Applicability of L&T Sale of constructed flats to land owner treated as barter? Barter covered in scope of supply under GST Sale of flats to customers and land owners will have to be classified into works contract and construction services Re-look at applicability of L&T decision Taxation of TDR Right to immovable property or actionable claim not liable to GST Valuation Flats constructed for land owner, differential pricing to customers price is not the sole consideration valued as per valuation rules 12

13 13 ISSUES IN TIME OF SUPPLY Implication of tax on the following would have to be examined: Booking advance received; Full consideration received but no agreement executed; Invoice raised monies not received or short received; Demand note raised but not an invoice; Payment received but no invoice or demand note raised; Transfer / Assignment / Exchange / Cancellation of flats; Free issue of material, Deduction from RA Bills Revision in prices; Modification charges received at the time of settlement; Retention money and defect liability period 13

14 14 TRANSITIONAL ISSUES Implication of tax on the following would have to be examined: Contract entered before AD, Supplies after AD; Excess carry forward of sub-contractor payments; Inputs held in stock Credit available Capital goods held in stock Credit not available Goods-in-transit; Capital goods in transit not covered; Labour and other like charges No more deductions under GST Switching over from Composition Scheme to Regular *AD Appointed day Running projects Rate of tax to be applied? 14

15 15 IMPACT AREAS Activities of contractors Activities undertaken by contractors like civil works contractors, electrical works contractors etc., - regarded as composite supply of services taxed at 18% RCM/ URD All purchases and services Received from unregistered persons liable to tax on RCM basis Anti-profiteering Reduction in cost of projects due to additional credits being available under GST Clarification issued by Ministry of Finance on reduced liability of tax on complex, building flat, etc. 15

16 GOODS AND SERVICES TAX Information Technology 16

17 STAKEHOLDERS IT/ITES Companies Holding Companies Customers Subsidiary Companies 17

18 TYPES OF SOFTWARE Customised Software Created as per customer s specifications Packaged / Canned Software Off the shelf, readily available no customization required 18

19 CURRENT TAX STRUCTURE Service tax Development, design programming, customisation 15% (gross value charged by service provider) Service portion in the execution of works contract Software maintenance activities treated as works contracts 15% (Value value of property in goods transferred) VAT IT products including telecommunication equipment % Service and maintenance of IT products works contract 5.5% 19

20 ISSUES Does the confusion still continue on classification of software? Is software goods or service? Would GST end the dual levy on software? Whether the SC judgement in the case of TCS v State of Andhra Pradesh [2004] 137 STC 620 (SC) hold good under the GST regime? What would be the taxability of cross charges / reimbursements of expenses under GST? What would be the taxability of cloud computing under GST? Would it be OIDAR or would it be information technology software? Will classification of services under Service Tax continue under GST? 20

21 TAXATION UNDER GST Sec 2(102) Definition of services Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, for which a separate consideration is charged; Schedule II Activities to be treated as supply of service Temporary transfer or permitting the use or enjoyment of any intellectual property right Entry 5(c) Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software - Entry 5(d) 21

22 PRACTICE OF INDUSTRY Domestic Tariff Area Inter-State / Intra- State Taxable as service ITC available Software Technology park (exporting units) Export of software Zero rated Refund available Special Economic Zones Inter-State Supply Zero rated Refund available 22

23 23 IMPACT AREA Currently, software maintenance activities are liable to ST on 70% of the value & VAT on 75% of the value (i.e., 145% of the value is taxed). Under GST laws classified as supply of services Double taxation Accessing ERP/ software of HO/ branches IT services whose delivery is via online modes would be taxed as supply of OIDAR services Pan-India customer base Service tax is a central levy, the need for determination of place of supply did not arise. Under GST, Place of supply will have to be determined for each supply Place of Supply Grouping of Income Re-look at nature of outward supplies (Ex: On-site IT consulting would qualify as manpower services and not IT services) 23

24 24 IMPACT AREA No upfront exemptions in GST STPI units are likely to face working capital issues Refund and working capital Input Tax Credit Availability of ITC on inputs like computers, software packages, etc Cross charges and cost allocations between units to be treated as supply Valuation as per valuation rules Cross charge Input Service Distributo r Concept of ISD set to gain relevance since no concept of centralised registration 24

25 25 Brief of tax on transactions involving software Software Transaction Taxes Applicable Remarks Import of packaged software (physical) Import of packaged software (non-physical) Export of packaged software Export of software services Supply of packaged software (within India) BCD + IGST IGST Zero-rated Zero-rated CGST-SGST or IGST Physical import of goods requires to be assessed by Customs by section 5 of IGST Act Non-physical import of software liable to payment of IGST on reverse charge basis by section 7 of IGST No IGST payable by section 16 of IGST Act Same as above. Export of services conditions to be satisfied Taxable as goods; right-to-use is involved in all goods supplied 25

26 Brief of tax on transactions involving software 26 Software Transaction Taxes Applicable Remarks Supply of services of development of software Customization of software already developed and supplied separately Installation of software already supplied Captive delivery center in another State for software development project in different State CGST-SGST or IGST CGST-SGST or IGST CGST-SGST or IGST CGST-SGST or IGST Taxable as services (entry 5(d), sch II) Taxable as services (entry 5(d), sch II) Taxable as services (entry 5(d), sch II) Inter-branch supply of services under 7(1)(c) of CGST Act r/w entry 3, sch I 26

27 27 GOODS AND SERVICES TAX Tourism

28 28 TAX STRUCTURE A GLANCE Tour Operator 15%* 5% (No ITC) Hotels 15% (60% of value) 5.5%/14.5% or 4% COT Excise 6%/ 12.5% Luxury Tax, as per slab rates No GST if tariff < Rs. 1,000 12% if tariff Rs. 1,000 Rs. 2,500 18% if tariff Rs. 2,500 Rs. 7,500 28% if tariff Rs or higher and 5 star rating Restaurants 15% (40% of value) 5.5%/ 14.5% or 4% - COT Excise 6%/ 12.5% 18% 18% - AC restaurants with rating of 5 star and above *Note: Abatements have been provided in case of services in relation to packaged tour, services of solely arranging/ booking accommodation, etc.

29 IMPACT AREA Hotel/ restaurant chains operating across India currently have a single centralised registration. Under GST, separate Statewise registrations will have to be obtained. Corresponding compliances w.r.t filing of returns etc., would also multiply Concerns w.r.t valuations likely to arise in view of industry practice of membership offers, discounts etc. ITC cannot be claimed on inputs used for construction/ renovation undertaken on own account Perceived Challenges Alcohol and cooking fuel like natural gas are currently outside the purview of GST. Credit cannot be claimed on tax paid. Suitable bifurcations are to be maintained 29

30 GOODS AND SERVICES TAX Trade, Manufacture & Service 30

31 TAXES TO BE SUBSUMED UNDER GST Luxury Tax VAT Except tax on liquor for human consumption Except tax on liquor for human consumption Entry Tax Central Excise Service Tax Entertainm ent tax Race horsing and betting tax Supply chain under current indirect tax regime suffers multiple levies of taxation Adds to the cost of the product which is ultimately borne by the end-consumer. Ex: If a trader purchases goods from a manufacturer, the excise duty component paid by trader is included in the cost on such goods since this excise duty cannot be utilized by him. Various other levies like CST/VAT, entry tax, Octroi, were being added to the cost of the final product 31

32 CASCADING EFFECT UNDER CURRENT LAWS & IMPACT OF GST Current Laws The supply chain is structured in such a way that the multiple levels of taxation are ultimately borne by the end-consumer. GST GST will remove the cascading effect of taxes and the seamless flow of input credit will rule out the possibility of taxes turning into costs. An anti-profiteering clause has been introduced to ensure that the benefits under GST are passed onto end-customers Business Decisions GST would enable businesses to take decisions on the basis of economic considerations instead of tax considerations. 32

33 COMPOSITION LEVY The composition scheme under GST laws is open to manufacturers and traders and to service providers in the hotel/ restaurant industry Conditions to be satisfied Aggregate turnover does not exceed 75lakhs Not engaged in supply of services other than composite supplies of food & drink as specified in para 6 of Sch. II Not engaged in supply of non-taxable goods, inter-state supplies Not supplying through e-comm operator required to collect TCS Not a manufacturer of notified goods Particulars Manufacturers 2% Persons engaged in composite supplies of food & drink specified in para 6 of Sch. II Rate of tax 5% Other suppliers 1% 33

34 34 DEEMED SERVICES SCHEDULE II Transactions involving goods 1. Transfer of right in goods or of undivided share in goods without the transfer of title 2. Transfer of business assets 3. Job work Transactions 4. Construction of a complex, building, civil structure or a part thereof 5. Transfer of the right to use any goods for any purpose (whether or not for a specified period) 6. Supply of goods being food or any drink (other than alcoholic liquor for human consumption) 34

35 35 DEEMED SERVICES SCHEDULE II Transactions involving services 1. Any lease, tenancy, easement, licence to occupy land 2. Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce 3. Renting of immovable property 4. Temporary transfer or permitting the use or enjoyment of any intellectual property right (IPR) 5. Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software 6. Agreement, Refrainment and Tolerance to an act or a situation 7. Works contract as defined in section 2(119) 35

36 DEEMED SERVICES SCHEDULE II Effectively, Sch II sets out guidelines for classification and taxation of activities either as supply of goods or as supply of services Ex: Execution of works contracts will be treated as a supply of services under GST. Accordingly, when determining the time and place of supply of a works contract, the time and place of supply rules applicable to services would be applicable, instead of those applicable to supply of goods. 36

37 IMPACT AREAS Trader Tax paid on input services, imports and capital goods which were hitherto not available or only partially available Manufacturer Reorganisation of supply chain movements to and from suppliers, job workers & customers Mitigate impacts on working capital due to locked-up credits Service Provider Tax paid on inputs could seamlessly be utilised for discharging tax liability on outward supply of services State-wise registration would be mandatory (major impact on entities operation across India Banks, IT companies, etc.) 37

38 Thank you 38