Framework of Goods and Service Tax Act in India

Efforts are made to show the present structure of VAT, Service Tax and CST in brief. Present Constitutional framework is added along with constitutional amendment required to be made for introducing GST. GST's proposed structure, components, exemptions, rates of tax, exclusions, issue of composite supplies, legislative powers of central and state government, structure of GST council, scope of work of council and suggestions for implementation is added to give a concise picture.

1. Consult Construction is a consulting firm with all governance, compliance and IT related services related to the construction sector under one roof . Focus Areas :- Corporate Governance Management Audit Project Budgeting and Monitoring Indirect Tax Compliances Corporate Training Information Technology and Allied Services ISO Implementation

2. Indirect Tax Services Advice on the applicability and levy of Service Tax, CST and State VAT on Contracts entered into or proposed to be entered into by the company. Assistance in the structuring of transactions and agreements in relation to inter-state and intra-state sales to optimise the tax incidence Conduct tax based health checks to determine the service tax & Multi State - VAT implications on the operations, Giving Multi State VAT opinions

3. Subscribe to our E-Bulletin   Call at 9426024975 email - [email protected] • VAT and Service Tax updates for the construction / Project sector companies. • Legislative changes and major case laws under the State VAT Laws and under Service Tax law affecting the construction /Project Sector. • In addition our brief analysis and comments on the various developments.

4. GST - The Journey Past Current National GST Dual GST ??????

5. Current Tax Cost in India Intra-State Ex. Duty – 12% Edu. Cess – 3% VAT– 5%/12.5% Imports Customs Duty Basic – 10% CVD – 12% Ed. Cess – 3% Service Provider Serv. Tax – 12.36% Factory Retailer Dealer  Toll Manufacturer  Goods Transporter Serv. Tax-12.36% Interstate purchase (CST) Stock transfer (No tax) Octroi – 0.5 to 5% Inter-State Ex. Duty – 12% Edu. Cess – 3% CST – 2% Local purchase VAT – 5%/12.5% Other Service Provider Serv. Tax – 12.36% Local purchase VAT – 5%/12.5% Other Service Provider Serv. Tax – 12.36% Central Levy State Levy VAT rate may range from 12.5-15% depending on the State Credit not fungible between State and Centre; resulting in a cascading impact of taxes - Cumulative burden of Indirect Taxes in India – 28% to 44% (approx.)

6. Multiple rates Different rates in different states Different definitions Border controls TODAY in VAT…

7. No credit on CST purchases leading to cascading effect Complex law on stock transfer and transit sales TODAY in CST…

8. Negative List Regime started Concept of Declared List Cenvat credit disputes Valuation related issues Reverse charge TODAY in ST…

9. Taxes levied by Central / State / Municipality Authority to levy a tax is derived from the Constitution of India Article 265 - "No tax shall be levied or collected except by the authority of law” Article 246 – Distribution of legislative powers including taxation, between the Parliament of India and the State Legislature 9 Constitutional Framework...

10. Schedule VII – Three Lists 10 Union List State List Concurrent List Income Tax Custom Duty Excise Duty Corporation Tax Service tax Central Sales Tax Stamp duty in respect of bills of exchange, cheques, promissory notes, etc Taxes on lands and buildings Excise duty on alcoholic liquor etc Entry tax Sales Tax Tolls Luxury Tax Stamp duty in respect of documents other than those specified in the provisions of List I Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty Encroachment of each other’s jurisdiction by state & centre

11. Constitutional Amendment Bill Introduction of Article 246A in the Constitution: “ Parliament and the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by that State respectively. Provided that Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”

12. Entry 84 of Union List to amend to empower Centre to levy tax on SALE of goods. Entry 54 of State List to amend to empower State to levy tax on SERVICES. Entry 92A of Union List to amend to empower Centre to levy tax on inter – state SERVICES. 3/4 th majority in Parliament & 50% collegium of State Assembly ratification. Constitutional Amendments…

13. Duality of charge – pre negative list Goods Vs. Services Lines between the taxation of Goods & Services is constantly blurring Duality of Charge 13 Sr. No. Activity Customs duty Central / State Excise duty Service tax VAT / CST 1. Intellectual Property Services     2. Import of Designs, Technical Know etc..   3. Works Contract   4. Construction Services   5. Manufacture of Products liable to State Excise  

14. Discrimination – Mfg / SP / Traders Non-uniform application of exemptions, credit provisions, etc. Cascading impact of taxes Non-transferability – lack of fungibility Inverted duty structures Rate structure - no uniformity no clear basis on which effective rates determined Non availability of cross credits leading to accumulation Basis of levy of Service Tax was uncertain and variable Rendition / performance Consumption / use Receipt Other pain points in the current system

15. Components of gst ..

16. Key taxes subsumed Dual GST CST TO BE PHASED OUT

17. To be levied by the Centre through a separate statute on all transactions of goods and services made for a consideration To cover end – 2 end transactions across value chain Exempted goods and services, non - GST goods and transactions within threshold limits are to be out of CGST Central GST (CGST)

18. To be levied by the State through a separate statute on all transactions of goods and services made for a consideration To cover end 2 end transactions across value chain Exempted goods and services (uniform across all States!), non - GST goods and transactions within threshold limits are to be out of SGST State GST (SGST)

19. Each State to have a separate statute Uniformity on basic features. Would be paid to the accounts of respective States SGST …

20. For inter-state transactions Centre to levy IGST which would be CGST + SGST Appropriate provision for consignment sale/stock transfer Inter-state dealer will pay IGST after adjusting IGST, CGST and SGST credit on purchase Integrated GST (IGST )

21. The seller in State X will pay the IGST to the Centre While paying IGST, seller will adjust his lying IGST/CGST/SGST credit State X will have to transfer the credit of SGST used by the seller for payment of IGST to the Centre IGST …

22. Buyer in State Y can avail credit of IGST Buyer in State Y can use the IGST to discharge his output tax liability Centre has to transfer credit of IGST used for payment of SGST to State Y A clearing house has to be formed for facilitating IGST IGST …

23. CGST against CGST SGST against SGST No Cross sectoral set-off between CGST & SGST IGST for CGST/SGST & vice versa Set - off …

24. Both CGST and SGST would be levied on import of goods and services Tax would be based on destination principle Tax revenue of SGST would accrue to the State where the imported goods / services are consumed Full set-off of GST on imports available GST on Imports…

25. Interest of small traders and SSI to be protected Upper ceiling on gross annual turnover and a floor tax rate to be prescribed Compounding cut off at Rs. 50 lakhs with a floor rate of 0.5% across the States Compounding …

26. 10 lakhs limit for goods and services across all States / UT for SGST 1.5 crore for SSI manufacturers on CGST CGST exemption limit on services to be increased (presently at 10 lakhs) Threshold exemptions…

27. Dual GST should be levied on imports also with facility of credit for the tax paid Exports must be zero rated i.e. there should be no tax element in the price of goods exported Imports should be taxed?

28. Area Based To be discontinued after current eligibility period Product Based To be converted in to refund route Limited Flexibility To Centre & States barring few exceptions Tax Exemptions

29. Two-rate structure – Lower rate for necessary items and items of basic importance Standard rate for goods in general. Special rate for precious metals and a list of exempted items. taxation of services - may be a single rate for both CGST and SGST. It will be total of the rate as applicable under CGST & SGST. Rate of Tax

30. Between 18% to 22%. Gove rnment is yet to indicate whether the revenue neutral rate of tax on goods and services would be the same. RNR

31. Identity – Single supply Vs. Multiple Supplies

32. Concept of principal supply Vs. Ancillary supply (Example – Oil Consumption in car repair)

33. Composite Supplies - Different Elements with Different Tax Rates International Practice in developed countries– Remain Silent in Law Answers from Judicial Pronouncement

34. Discussion paper proposes government to clarify if a transaction – a) is to be treated as supply and not service of goods b) is to be treated as supply of service and not goods c) is to be treated neither as supply of goods nor services

35. GST- RATES WORLD WIDE Country GST Rates China - 17% Indonesia - 10% Philippines - 10% Taiwan (Chinese Taipei) - 5% Australia - 10% Germany - 16% Denmark - 25% Japan & Singapore - 5% UK - 17.5% France - 19.6% New Zealand - 12.5% to be contd …..

36. Additional tax in lieu of cst Additional tax on inter-State sale of goods (akin to CST) at a rate not exceeding 1% imposed for a period of two years or more, as approved by GST council

37. Exclusions of gst Petroleum (but may be included within GST subsequently basis recommendation by GST Council) Alcohol for human consumption lottery and betting Basic customs duty and safeguard duties on import of goods into India Entry taxes levied by municipalities or panchayats Electricity duties/ taxes Stamp duties on immovable properties Taxes on vehicles

38. Declared goods will not exist No concept of ‘declared goods’ of special importance under the amended provisions of the Constitution

39. Widening the scope of service… ‘Service’ meaning anything other than goods.  Due to wide definition of service, GST may also apply on real estate, actionable claims, shares, securities etc. Hence suitable amendments should be made for excluding activities/ sectors on which GST is not intended to be applied.

40. Legislative powers….

41. Legislative powers rest with parliament… Parliament enjoy  exclusive power  to make law for GST on supply of goods or services in the course of inter-State trade or commerce Parliament to formulate the principles for determining the  place of supply  of goods or services

42. Legislative powers of state - States not empowered to levy GST on transaction for supply of goods or services on a transaction that is import, export or inter-state

43. Gst council… To be formed within 60 days under the Chairmanship of Finance Minister and 33members – Finance Minister Minister of State for Finance State Finance Ministers or any other Minister nominated by State Governments (i.e. 29 States and 2 Union Territories with legislature, totaling to 31 members)

44. Council to recommend union and state on …… Model GST law Taxes to be subsumed Rates and slabs Exemption Threshold Special provisions for North-Eastern States, J&K, Himachal and Uttarakhand Date on which the GST shall be levied on petroleum products

45. Voting rights at the meeting… One half of the total number of Members of Council form quorum at its meetings Central Government to have a weightage of 1/3 rd  of the total votes and all the State Govt.s together to have a weightage of 2/3 rd  of the total votes Every decision of the GST Council to be taken by majority of not less than 3/4 th  of the weighted votes of the members present and voting

46. No proposal can be passed by GST Council if…… half of the members (i.e. minimum 17) are not present, no proposal can be passed without the approval of Centre, Assuming all the 31 State members are present and voting along with Centre, then 20 States/ Union Territories should accept a proposal for approval

47.      Rules to determine place of supply of goods or service Central Sales Tax Act, 1956 needs to be amended (basis recommendation by GST Council) for laying down rules to determine place of supply of goods or services: in the course of inter-State trade or commerce; in the course of import; locally within a State

48. Effect of Article 366(29A)…… Article 366(29A) defining deemed sales not proposed to be removed, but the same will be irrelevant for GST In the previous Constitutional Amendment Bill it was proposed to be omitted This provision may be retained during the transition period (one year from GST Amendment Act, 2014 or repeal of the State Acts, whichever is earlier)

49. Compensation Compensation to States for loss of Revenue for a period of five years (i.e.100% compensation for first three years, 75% in the fourth year and 50% in the fifth year)

50. important issues need to be duly addressed in GST regime: Transitioning of area based excise and VAT exemptions Transitioning of VAT and CENVAT credits lying with taxpayers on the date of introduction of GST Applicability of GST and credit mechanism on stock transfers Rate(s) of GST on various products and services particularly the ones that presently attract lower taxes.  Consistency in rate of GST across the states Applicability of GST and credit mechanism on imported goods Credit of additional tax of 1 percent sought to be imposed Consistency in compliance procedures across the States Dispute resolution mechanisms  Continuity of surcharges and cesses like automobile cess , oil cess etc

51. GST system should distinctly cover areas of taxation in e-commerce, IT industry and also spell out tax treatment for cross-border transactions in the digital space. Bill gives the state leverage to vary taxes within a spectrum of acceptability. Corporate world is likely to face issues to determining the state of consumption important issues need to be duly addressed in GST regime:

52. Suggestions for effective implementation.. Industries will also have to look into compliance obligations for B2B and B2C transactions Due to lack of clarity on the Revenue Neutral Rate, the GST structure, the draft legislations, threshold limits, treatment of unutilized Credits, status of exemptions and incentives, it is difficult to comment on whether the Amendment Bill is actually a win-win for all the stake holders.

53. With the release of OECD’s discussion draft on “place of taxation of B2C supply of services and intangibles”, in connection with formulation of GST Guidelines, industries are required to make contributions by providing suggestions on the same. Suggestions for effective implementation..

54. Thank You