GOODS AND SERVICES TAX – AN OVERVIEW
By: – Srikanth Rao
Goods and Services Tax – GST
Dated:- 11-12-2015
The Goods and Services Tax has frequently been in the news for the last one year or so ever since the new Government has come to power. It is worthwhile noting that introduction of GST as it is referred to, has been in the pipeline for nearly a decade now with the initial announcement being made in 2007-08 to the effect that the introduction would be with effect from 01st April 2010. This has not happened due to various reasons with one main reason being the complexities involved in introducing a tax which would be acceptable to both the Union and States with ours being a federal tax structure. This factor alone has gone a long way in delaying the GST roll-out as harmonization process would involve amendments to Constitution as well as consent of the States to the proposed model. Nevertheless, we have made some progress from the day the First Discussion Paper on GST
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the CENVAT scheme. The introduction of GST at the Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief avoiding cascading effect of taxes, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade.
At the State level there are several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., which are yet to be subsumed in the existing VAT. In addition to this, CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and leading to that extent to a cascading effect of taxes. Apart from this, present VAT does not involve integration between VAT on goods and tax on services which has also contributed to litigation before Courts on levy and valuation issues in respect of contracts where both goods and services are involv
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ure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes to the extent possible. The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration and to be paid to the accounts of the Centre and the States separately. Since these would be treated separately, no cross-utilisation between the two would be possible except in case of inter-state supply of goods and services.
How would it work?
It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. This has also been illustrated in the First Discussion Paper on GS
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supplier and the recipient are both located within the State. The tax in effect would only be on value addition as set off can be claimed by the seller i.e. CGST paid on purchases set off against his CGST liability while SGST paid on purchases within the State could be used and set off against CGST liability. CGST on purchases cannot be used for SGST payment on sale and vice-a-versa. Within CGST and SGST, cross utilization would be allowed in terms of tax on goods and services.
Intra-state transaction or transaction within a State
Going by Section 14 of the model law this would cover supply of goods within the same state or where the movement of goods commences and terminates in the same State even if goods pass through the territory of another state during such movement. In case of supply of services, the service provider and the service receiver have to be located in the same State.
Time of supply of goods
The liability to CGST and/or SGST would be at the time of supply. In respe
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ered to the extent invoiced or to the extent payment is received.
In case of continuous supply of goods (goods subject to such treatment to be notified by the Central/State Government), where successive statements of accounts or successive payments are involved, the time of supply shall be the date of expiry of the period to which such successive statements of accounts or successive payments relate. If there are no successive statements of account, the date of issue of the invoice (or any other document) or the date of receipt of payment, whichever is earlier, shall be the time of supply.
Sale on approval etc.
If the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, the time of supply shall be at the time when it becomes known that the supply has taken place or twelve months from the date of removal, whichever is earlier.
In other cases the time of supply shall in a case where a periodical re
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the due date of payment is ascertainable from the contract, the date on which the payment is liable to be made by the service receiver, whether or not any invoice has been issued or any payment has been received by the service provider. Where the due date of payment is not ascertainable from the contract, each such time when the service provider receives the payment, or issues an invoice, whichever is earlier. Where the payment is linked to the completion of an event, the time of completion of that event.
The aforesaid clause would pose issues to notified services where the point of completion cannot be known owing to practical difficulties. Even if payment terms are known from contract, delays in payment by clients could impact supplier of service as liability would be based on timing of accrual of dues based on contract.
Timing of liability in case of reverse charge liability
It shall be the earliest of the following dates –
* the date of receipt of services, or
* the date o
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Where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly.
Where the goods are supplied on board a conveyance, such as a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the location at which such goods are taken on board.
The place of supply of all services u/s 16 of the Model GST Law, except specified services made to a registered person shall be the location of the service receiver. Where made to any person other than a registered person shall be the location of the service provider. The specified services which are subject to different norms for determination of place of supply can be indicated as follows –
* Based on location of the immovable property or boat or vessel or intended to be located –
* Services in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any servic
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t park or any other place, or
* Services by way of organization of a cultural, artistic, sporting, scientific, educational or entertainment event including supply of service in relation to a conference, fair, exhibition, celebration or similar events, or
* Services ancillary to such admission to or organization of any of the above events or services, or
* Services by way of assigning of sponsorship of any of the above events.
* Based on the location at which such goods are handed over for their transportation – where services by way of transportation of goods, or mail or courier to an unregistered person is involved. Where the person is registered, it shall be the location of the service receiver.
* The place of supply of passenger transportation service shall be the place where the passenger embarks on the conveyance for a continuous journey. Where the right to passage is given for future use and the point of embarkation is not known, location of the service recipient where
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et service are provided on pre-payment through a voucher or any other means, be the location where such pre-payment is received or such vouchers are sold. (This is subject to location of service receiver as indicated in service provider's records being considered where pre-payment or recharge is by internet banking or electronic means)
* The place of supply of banking and other financial services including stock broking services to any person shall be the location of the service receiver on the records of the service provider subject to location of service provider being considered where services are not linked to account of the receiver.
* The place of supply of insurance services shall:
* to a registered person, be the location of the service receiver; and
* to a person other than a registered person, be the location of the service receiver on the records of the service provider.
* For all general insurance services related to an immovable property, be the location of the p
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ate sale, the location of supplier/service provider and the place of supply of goods or services are to be in different States going by Section 3 of The Integrated Goods & Services Tax Act 2016 proposed.
Place of supply of goods and services under IGST Act
The concept of place of supply of goods and/or services is identical to the one under Model GST Law covering CGST and SGST for taxing transactions within a State. One additional clause though is regarding place of supply of gas which would be the location where gas is used and consumed. It has been sought to be clarified that the view of the Central Government on place of supply for B2B supplies is that the location of service recipient would be the determining factor unless otherwise specified for certain specific cases.
The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Central Government the credit of SGST use
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rance of taxable person's business. This model would replace the existing Central Sales Tax on inter-state sale of goods reducing the cost of procurement to the inter-state buyer owing to set off being available on IGST.
Readers have to note that other provisions Model GST law applicable to CGST Act 2016 like for instance valuation, registration, returns, input tax credit, time of supply of services, exemption, tax payments, audit etc. are applicable to IGST Act and these have not been covered separately going by Section 11 of IGST Act 2016.
Import and Export
Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import of goods and services. Exports would be zero-rated with similar benefits to supplies to processing zones
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of services. This comes with the condition that the service recipient is registered. This may not work in case of service recipient being outside India. In such cases, the need for him being registered should ideally be done away with. This could help a taxable person to determine whether or not services are exported unlike in case of goods where physical movement of goods out of India would establish fact of export.
Who is liable? What is liable?
As per proposed Section 7(2), the liability to CGST/SGST would be on the taxable person. This has to be read with Section 7(1) where levy is on all intra-state supply of goods and services (with IGST being dealt with separately) and by the taxable person. The definition of “goods” is similar to the one prevailing now going by Section 2(31).
The term supply would generally include all forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal, and importation of services, made or agreed to be made for a co
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ries on any business at any place in India or the concerned State and who is registered or required to be registered under Schedule III of this Act for payment of tax. This Schedule requires all taxable persons having turnover above the threshold being required to register.
Turnover would include supplies on his own account as well as those on account of principal. A person supplying inter-state would be liable to register irrespective of his turnover. Casual taxable person (occasional supplier with no fixed place of business in the taxable territory) and person liable on reverse charge mechanism have also been covered.
Readers may note that while employees providing services to employer have been excluded from being regarded as taxable person, Central Government and State Government along with local authorities would be regarded as taxable person in respect of activities or transactions in which they are engaged as public authorities unless they are exempted on recommendations of th
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at there would be no restrictions in this regard. Where the goods and/or services are partly used for business purposes, credit attributable to business use alone would be admissible.
Similar condition exists for usage of goods (excluding capital goods) and services within the business for taxable supplies as well as non-taxable supplies and exempted supplies (other than zero rated supplies). Readers may observe here that relaxation would be admissible for capital goods as long as they are used for business. In other words, if not used for business even credits thereon would require to be split.
Owing to the dual structure, there are conditions in terms of manner of utilisation of credits. For instance, IGST credits should first be utilized for IGST payment and then for payment of CGST and SGST in that order. The CGST credits should first be applied to pay off CGST dues and balance if any can be used for payment of IGST. Similarly, SGST credits left over after utilisation for paying
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, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee
* goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery
* goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery
* goods and/or services on which tax has been paid under section 8 of the Act i.e. compounded levy; and
* goods and/or services used for private or personal consumption, to the extent they are so consumed.
The restrictions here are similar to the ones prevalent under Cenvat Credit Rules 2004. As far as petrol and petroleum pro
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axable person who occasionally undertakes transactions involving supply or acquisition of goods and/or services whether as principal or agent or in any other capacity but who has no fixed place of business in India. There is apparently a suggestion to include non-resident taxable person within Schedule III requiring them to register under law which if done, could lead to practical issues. Ideally this should be avoided.
Deeming provision on goods and services and supplies without consideration
The proposed Schedule I to the Model GST law presently includes the following as supplies deemed to be without consideration for taxability –
* Permanent transfer/disposal of business assets.
* Temporary application of business assets to a private or non-business use.
* Services put to a private or non-business use.
* Self-supply of goods and/or services.
* Assets retained after deregistration.
Section 3 of the Model Law proposed also provides for the Central Government or the State
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is a supply of services.
* Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.
* Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services.
* Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.
* Where any person
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value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and recipient of the supply are not related and the price is the sole consideration for the supply. This would be subject to any additional consideration not being part of the price being required to be added to arrive at the value. This would be similar to the valuation methodology presently being followed u/r 6 of Central Excise Valuation (determination of Price of Excisable Goods) Rules 2000. Readers may note that this would now apply to services as well and not just to goods.
The transaction value above shall not include any discount allowed before or at the time of supply provided such discount is allowed in the course of normal trade practice and has been duly recorded in the invoice issued in respect of the supply. This could mean post supply discounts being subjected to tax.
Reference to Valuation Rules
The proposed GST Valuation (determination of the Value of S
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ere is whether any abatement from the MRP is going to be notified moving forward as there could be increased tax burden to consumers in some cases.
Pure agent concept for reimbursement in respect of services
The concept of “pure agent” as is prevalent under service tax has been carried forth to GST in respect of services provided despite the Courts holding reimbursements as not being subjected to tax. The concept of transaction value u/s 17 includes anything charged by the supplier of goods and/or services at the time of or before delivery of goods or at the time of or before provision of services. This could mean reimbursements being kept out of tax net only where the concept of “pure agent” is satisfied.
Concept of “related person”
The definition proposed u/s 2(55) is wider in scope as compared to the present one under Section 4 of Central Excise Act 1944 and would apply to transaction in goods or services. Persons (including legal persons) shall be deemed to be “related persons'
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lies from agent to principal or vice-a-versa or from one place of business to another place of the same business (irrespective of State in which parties are located) would also be at transaction value.
Valuation Rules – When can transaction value be ignored for goods and/or services?
The valuation provisions under the valuation rules could be summarised as follows –
* The value of goods and/or services shall be the transaction value (value determined in monetary terms) unless the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any goods and/or services based on –
* the significantly higher value at which goods and/or services of like kind or quality supplied at or about the same time in comparable quantities in a comparable commercial transaction were assessed
* the significantly lower or higher value of the supply of goods and/or services compared to the market value of goods and/or services of like kind and quality at the time of
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s or, the cost of provision of the services
* charges, if any, for the design or brand
* an amount towards profit and general expenses equal to that usually reflected in supply of goods and/or services of the same class or kind as the goods and/or services being valued which are made by other suppliers.
The Rules provide for residual method consistent with principles of the said Rules where both the aforesaid methods cannot be followed. The author here is of the humble view that while analyzing comparative price details for goods would be easier, application of the same to services could pose problems.
Compounding Scheme
The upper ceiling in terms of gross annual turnover for composition scheme is expected to be ₹ 50 lakhs. A review of proposed Section 8(1) of the Model GST Law reveals that while the turnover limit has been kept at rupees fifty lakhs, the rate is expected to be more than one percent unlike the earlier indicated base rate of 0.5%. However, the turnover limi
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he higher rate for luxuries could be around 40% though this could change over time.
Reverse charge liability-whether mechanism exists?
It is worthwhile noting that proposed Section 7 of the Model GST Law as per Report of Sub-Committee II of Empowered Committee of State Finance Ministers incorporates a clause i.e. clause (3) which allows Central or State Government to specify by Notification, the categories of supply of services on which tax is payable on reverse charge basis. While this mechanism presently exists in service tax, the State Governments too henceforth would have the power to notify services for collecting tax on reverse charge basis. One saving grace as of now seems to be the fact that Section 2(49) regards tax payable on reverse charge basis as output tax.
A similar provision exists in Section 4 of The Integrated Goods & Services Tax Act 2016 proposed which enables the Central Government to specify categories of supply of services where the location of the service pro
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by the taxable person from another, the same would have to be deposited to the Government.
Registration and returns
The person liable would have to register himself within thirty days from the date on which it is due. The person would have the option of separate registration for each business vertical within a State. For registration a basic requirement would be that of PAN under Income Tax Act. The registered person would be required to maintain proper registers for sales, purchases, input tax, output tax besides movement of goods to and from business premises as well as processes within his business premises. The period of retention of records would be sixty months from the date of the annual return.
The registered person would be required to file various returns as indicated in the Report of the Joint Committee on Business Processes for GST on GST Returns. A common e-return for CGT, SGST and IGST is envisaged. While a compounding tax payer would be required to file GSTR 4 at qua
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unds
The time limit has been kept at two years from the relevant date (not applicable to payments under protest). Refund is to be granted within sixty days from the date of application where on account of export of goods and ninety days where on account of export of services. For unadjusted credits other than the earlier cases, it would be forty five days. Refund would be subject to condition of non-claiming of the tax from customer/recipient within India. Relevant date would in general refer to date of payment of tax with the exception of exports where it would be date of filing of relevant return. Where refund is on account of return of goods, it would be date of return to premises. In respect of unadjusted input tax, the end of the financial year in which claim arises.
Constitutional Amendment
The Constitution (One Hundred and Twenty Second Amendment) Bill 2014 has sought to insert Article 246A in the Constitution providing the Legislature of every State power to make laws with r
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etermining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
The term “goods and services tax” has also been sought to be defined in Article 366(12A) to means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. Amendments have also been sought to be made to Union and State Lists in the Seventh Schedule to the Constitution with the net result being petroleum and petroleum products not being subject to GST till such time recommended by GST Council. The following taxes would be subsumed into GST –
* Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services
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rvices prescribed for the States and the Centre. The thresholds are expected to be ₹ 10 lakhs in terms of gross annual turnover for goods and services for the State GST (including Union Territories) and ₹ 1.50 crores for goods under Central GST. The threshold for services under central GST should ideally be going up from the present ₹ 10 lakhs under service tax. GST would not be levied for turnover below these thresholds.
GST Council
The Council (provided for in Article 279A of the Constitution) shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in-charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government. It would be responsible for recommendations to the Union and States on –
* the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services
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