Indo-American Chamber of Commerce Getting GST Ready! Sachin Agarwal October 2016
Contents Current Indirect Taxes Landscape GST Snapshot GST Where we stand? Model GST Law Impact of GST GST Transformation: People, Process, Tax & Technology Learnings from GST implementation across the globe GST Implementation Roadmap Page 2
Current Indirect Tax Structure in India Service tax 15% Luxury tax Customs duty - effective rate 29.4% Central Taxes CST Entertainment tax State Taxes VAT 5 % to 14.5% Local Body Taxes Central excise duty 12.5% cesses Electricity duty Entry tax Under the current tax system, multiplicity of taxes and cascading effect results in the overall increase of the cost of the product and services Page 3
GST Key feature The Tectonic Shift Dual rate tax Broad base of taxation Taxing principle Tax on supply of both goods and services Subsumed - Central Excise, Service Tax, VAT, Entry tax, CST, etc. Dual GST - CGST & SGST levied on common base RNR rate ~ 18-20% (GST Council meeting- 6,12,18 & 26% plus Central Cesses) IGST on inter-state supplies and import Decentralized registration and compliances Shift to destination based tax - Place of Supply Rules Seamless flow of input tax credit Threshold limit for Registration- INR 20 Lakhs / 10 Lakhs Page 4
Existing Vs. Proposed Framework General Particulars Current tax regime Under GST Regime Taxability Compliances Import of goods - Custom duty Domestic clearance of goods - VAT/CST Providing of services - Service Tax Export of goods and services - No tax Stock transfers against statutory forms - No tax State wise for VAT Centralized for service tax Import of goods Basic custom duty & IGST Sale of goods and provision of services CGST/SGST/IGST Stock transfers becomes taxable Statutory forms likely to be discontinued Export to be zero rated Multiple State registrations depending upon the State of Supply Multiple returns e.g. inward supplies, outward supplies etc. Tax Excise Service Tax VAT CST Present Taxable Event Manufacture Provision of Taxable Service Intra-State Sale of Goods Inter-State Sale of Goods Place of Supply Goods are taxed in the State of Origin Services are taxed as per Place of Provision of Service rules Goods and Service location is determine as per Place of Supply Rules Tax GST Proposed Taxable Event Supply Input Tax Credit No cross utilization of taxes is permitted and ultimately is a cost Free Flow of Credit Page 5
GST Timeline Where we stand 1 2 3 Constitutional Amendments 8 Sep 2016 Order appointing date for giving effect to provision relating to Formation of GST Council 12 Sep 2016 Formation of GST council Representation of Centre & States Finalizing Model Law and allied matters including threshold, rates & exemptions (60 days from the Order) GST likely rollout time All legislative bills to be passed in the winter session of the Parliament and the State assemblies (November/ December 2016) Establishing Goods and Services Tax Network (GSTN) framework by November 2016 Testing of software with live transactions by January 2017 4 Passage of CGST/ IGST Bills by Parliament (Centre) & Passage of SGST Bill by respective States (Winter Session - Nov / Dec 2016) Outreach program as a part of change management to be completed by March 2017 Go-live date is expected to be 1 April 2017 Page 6
Model GST Law General Supply Classification Time of supply Place of provision Sale, lease or disposal for consideration in the course or furtherance of business beside others Self supplies Sale/ disposal of assets Supply from one taxable person to another taxable or non-taxable person is included appears to include supplies made by one branch to another i.e. branch transfers within same entity Goods include every kind of movable property, whereas Services have been defined to mean everything other than goods Works contract and all intangibles to qualify as Service Classification to be based on HSN Classification Rules and tax rates for goods and services yet to be notified Separately provided for goods and services Time of supply of goods shall be earlier of the following: Date of removal of goods Date of issuance of invoice Date of receipt of payment Date when recipient shows receipt in his books Separate for goods and services Default for services continues to be location of service recipient Page 7
Model GST Law Credits Widened credit pool Credit on payment of tax by vendor Restrictions of credit on non-taxable supply Refund mechanism overhauled wide definition of input tax only requirement of goods and services having been used/ intended for use in course of furtherance of business Specific exclusions still continue Credit on capital goods used for effecting both taxable and non-taxable supplies shall be proportionately available. Credit of input taxes available only when tax deposited by the vendor Need for businesses to protect themselves in case of default by vendors Adequate indemnity to be inserted in vendor agreements to cover risk Other measures Restrictions on availability of credit for non-taxable supplies (like exempt supplies) continue Mechanism for computation of ineligible credit in case of use of common goods & services yet to be provided Electronic filing of refund claims State-wise for IGST/ CGST/ SGST Refund only allowed on account of exports and inverted duty structure Provisional refund of 80% in case of exports Page 8
Model GST Law Value of Supply Supplier and recipient are not related Price is the sole consideration Transaction at arm s length price Transaction Value Valuation Rules Comparative Value Goods/ services of like kind and quality supplied at same time to other customer Adjusted for difference in date of supply, quality, quantity and freight/ insurance depending on place of supply Computed value method Cost + charges for design or brand + profit and general expenses Residual method Value determined using reasonable means Page 9
Model GST Law Transitional Provision Provisional certificate of registration valid for 6 months issued to all persons registered under the previous law Every person to furnish prescribed information for issue of certificate of registration Carry forward of CENVAT credit/ input tax credit as disclosed in the last return furnished Transfer of credit permissible only when same is eligible under earlier law as well as new law Unavailed CENVAT credit on capital goods, not carried forward in a return to be allowed in certain situations Credit of eligible duties and taxes in respect of inputs held in stock allowed in certain situations Pending proceeding of appeal, revision, review initiated before the appointed day to be disposed of in accordance with the provisions of the earlier law Page 10
Paradigm Shift in Compliance- As per draft Rules Present Compliance Regime GST Compliance Regime Return Time period To be filed by Return In relation to To be filed by Excise ER 1 Monthly return 10 th of next month GSTR 1 Outward supplies (sale, stock transfer, export) 10 of next month ER 4 Annual return 30 th November of next FY VAT return in each State Monthly / Quarterly return As prescribed Annual return As prescribed Audit reports As prescribed Service Tax GSTR 2 Inward supplies (purchases, import) 15 th of next month GSTR 3 Final Monthly return 20 th of next month GSTR 7 Tax deducted at source 10 th of next month GSTR 9 Annual return 31 st December of next FY ST 3 (Half yearly) 25 days from half year end ITC ledger Cash ledger Continuous Continuous Annual return 30 th November of next FY Tax ledger Continuous Page 11
Multiple inter-dependent return filing steps Tax Payer Modifications in details and filing of GSTR 2 by 15 th of succeeding month Reconciliation to be done by 20 th of succeeding month GSTN Inward supply details in GSTR 2 to be auto populated on basis of GSTR1 filed by supplier Pay tax Uploading of supply details by 10th of succeeding month To file GSTR 1 by 10 th of succeeding month GSTR 3 to be filed by 20 th of succeeding month Page 12
Impact areas under GST Transitional provisions Provisional certificate of registration valid for six months issued to all persons registered under the previous law Input tax credit available under the existing indirect tax law to continue under the new GST regime Tax incentives Exemption on purchases for export incentive zones (Export Oriented Units, Software Technology Parks of India Units) may be discontinued Special Economic Zone benefit likely to continue Area based exemption ~ Net Refund GST rate band Standard rate: 18% to 20% (GST Council ~ 6% to 26%) Lower rate: 12% [essential goods and services (pharma, health/education services, etc.] Zero rate: Exports (exceptions may include marketing support, testing, cloud-based services, etc.) Some tax minutiae Place of supply / Time of supply ~ Specifics Transition stock ~ Inbuilt taxes Inter-unit transfers - Taxable Valuation principle for transfer Related party Input credit ~ Matching concept Sales return ~ reverse supply Compliance Transaction level details to be reported Compliance to increase significantly. Estimated 39 returns/statements in a year for each state Reconciliation between supplier and customer returns ERP infrastructure & Change management Requirement for GST compliant ERP systems (invoicing, tax rates, accounting/capturing taxes and credits) Process mapping Employee related claim documents, policies Contracts ~ GST clause Page 13
GST Transformation: People, Process, Tax & Technology.areas impacted and readiness required Sourcing strategy Terms & conditions Negotiations Payments processing Supply Chain Compliance GST registrations Transition provisions Return reporting and documentation Testing System Changes GSTN Compliance Information Technology Change management GST awareness training GST communication SOPs GST Auditability Automation Accounting and HR Chart of Accounts/Masters Tax accounting Policies Tax and finance Impact analysis and tax positions Working Capital management Change Management Controls Compensation management Page 14
Learnings from GST implementation across the globe Goal 1. No business disruption Timely manage risks and opportunities Start early: Several months in advance for readiness and implementation Governance GST Steering Committee, PMO and Change management are critical 2. 100% Compliance GST Insights 3. Business value creation Significant impact on policies, procedures and controls IT implementation takes time and requires testing Comprehensivene ss: Mapping of all possible scenarios for flow of goods and services Page 15
GST Implementation Roadmap 30-50 days action plan: Mapping of scenarios and process heat maps IT landscape mapping and impact assessment Awakening the organization GST workshops Transition plan/ cut over Go live and post implementation April 2017 and looking ahead Steering Committee / PMO August/ Sept 2016 On-boarding and kick off Change Management plan Risk/opportunity assessment Impact assessment Business process design Considerations IT Implementation and testing Technology enablement 50-100 days implementation plan Policy/ SOP changes Transition/ Cut over plan IT implementation and testing Go live and compliance testing Page 16
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