Background
The introduction of GST in 2017 seems to be certainty now. CGST, IGST and compensation Bill have got passed from Lok Sabha. The bills were introduced as money bills and do not need the Rajya Sabha approval. The Presidential assent is required to make into law.
The CGST Bill, 2017 has been made available officially in the public domain last week. This Act shall extend to whole of India except Jammu and Kashmir[similar to existing coverage of Service tax law]. It is expected that the States would follow suit and enact their respective state GST laws, which would adopt the broad contours of the CGST law.
The ITC, valuation, composition, registration, payment, refund and transition rules have also been released for comments.
The paper writers have examined the major features of the GST law in this article. This is first in series of articles on the CGST Bill and IGST bill and relevant rules.
Levy: Central Government and the State Governments/Union Territories would levy GST concurrently on supply of goods and or services. Central Tax would be charged or levied by Central Government and State Tax by State Governments. The Union Territories [UT] would levy Union Territory Tax.
Tax on event of supply of goods and or services: There would be no multiple taxable events such as present excise duty which is levied on goods i.e., on aspect of manufacture of goods+ VAT on aspect of sale of same goods. Central/respective State Government/UT would levy applicable tax on supply of goods and or services.
What is excluded/kept out of levy?
Presently kept out petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and ATF. Alcohol for human consumption is also out of levy.
The central tax on the supply of petroleum crude, high speed diesel, petrol, natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council. Electricity is also a notable exclusion. All of these are used in furtherance of business. Credit on procurements done with GST would be added on to cost.
Concept of Supply: The term ‘supply’ includes all forms of supply, such as sale, transfer, barter, exchange, license, rental, lease or disposal made in the course of business for a consideration. It includes importation of service with or without consideration.
Supplies without consideration are:
- Permanent transfer or disposal of business assets on which input tax credit is availed,
- Supply of goods or services between distinct persons[branch offices/depots registered under GST in different States. Supply from Karnataka to Tamil Nadu/ or to business vertical such as SEZ and non-SEZ unit of same entity having distinct GST registration number in Karnataka state]
- Supply of goods/services between related persons.
- Gifts of goods or services to employees exceeding Rs. 50000 per employee in a financial year.
- Supply of goods between principal and agents
- Import of services by taxable person from related person or from any of its establishments/branches outside India is also treated as supply. This would lead to tax on shared resources such as audit fee centrally paid, treated as service received from branch outside India. Liable under IGST under RCM in hands of Indian office.
Other supplies: ‘Supply’ also includes specified transactions such as transfer of business assets, application of goods held for business to a private/non-business use, goods forming part of assets of business before it ceases to be taxable person.
It is specified that, sale of under construction properties, temporary transfer of intellectual property rights, works contracts, transfer of right to use any goods and development, upgradation, customization etc., of software would be supply of service.
This sets out which supplies are supply of goods and which are those of services.
Activities which are not supply of goods or services:Services by employee to employer, the functions performed by the MP/MLS’s Members of Panchayats/ Municipalities and other local authorities, services by any court or Tribunal established under any law, Services of funeral, burial, crematorium or mortuary transportation of the deceased, sale of land and sale of completed building, actionable claims, other than lottery, betting and gambling. Transactions by Central/State Govt or local authority in which they are engaged as public authorities notified by Govt on recommendation of GST Council.
Composition scheme: This is an alternative method of levy of tax designed for small taxpayers whose turnover does not exceed the prescribed limit of Rs. 50 Lakhs pa in preceding financial year. Rate is 1% of turnover in State or UT in case of manufacturer and 2.5% of turnover in state/Union territory in case of restaurant services. Supplier of service[other than restaurant service] cannot opt for composition levy. ½% in case of other suppliers-traders. A person opting to pay under composition cannot take credit of taxes paid on inputs nor can collect any tax from the recipient.
This can be opted subject to satisfaction of conditions as under:
- Does not have any imported goods or goods procured interstate in stock,
- not making supplies of goods which are not leviable to taxunder this act;
- no interstate outward supplies of goods can be done,
- no supplies of goods done through e-commerce operator.
- He shall not be manufacturer of notified goods as notified by Govt on recommendation of Council.
Such dealers required to pay GST on reverse charge for procurement of goods or services from unregistered persons and from outside India at full rate.
Registered person not eligible to opt this scheme unless all registered persons with same PAN opt for this scheme.
Basic exemption limit: Upto Rs. 20 Lakhs pa limit on all India basis. Limit is Rs. 10 Lakhs pa in specified territories including the NE states. The threshold exemption benefit to the supplier would be there. It is not clear whether taxable recipient, is liable to pay tax under reverse charge on supplies of goods or services by unregistered person, who is within the exemption limit.
Exemptions: The list of exemptions is not out, expected in mid-May 2017. The existing service tax exemptions could continue such as priority sector exemptions for education, health care. The present excise duty exemptions for goods could be done away.
Area based exemptions would be converted into refund based or other compensatory mechanism.
Reverse Charge mechanism: The reverse charge mechanism would be applicable to registered person in respect of supplies of goods and or services made by unregistered person.
In addition, in respect of specified list of goods and or services as notified by Govt on the recommendation of Council, the recipient would be liable to pay tax.
A similar provision is there under IGST law.
An eligible credit of tax paid would be available to such receivers.
Tax rate: Tax rates for various categories of goods would be nil, 5%, 12%, 18% and 28% with rate on sin goods such as soft drinks at 40%. The specific rates for various kinds of goods is not known at present. Rate of tax on services expected to be 18%. It is not known whether abatement schemes would continue.
Time of Supply: Time of supply in case of goods is earliest of date of invoice or last date by when invoice to be raised or date of receipt of payment or date. VAT/CST at present is attracted based on transfer of property in goods for a consideration. In future tax would be payable on receipt of payment towards supply.
In case of services, time of supply is earliest of date of invoice or date of receipt of advance or date of completion of provision of service, when invoice not raised within specified date from date of completion of service. This is synchronized to present point of taxation rules under service tax.
Place of Supply: The place of supply could be within state or interstate supply of goods and or services. When location of supplier and place of supply are in same state, it is intra-state supply, leviable to CGST. When location of supplier and place of supply are in different states, it is interstate supply of goods and or services, leviable to IGST.
Place of supply of goods and services to be determined by applying the provisions for determining place of supply of goods and or services. It is critical to determine the place of supply of goods and or services, as wrongly treating intra state supply as interstate supply or vice versa, would lead to demand of tax from the tax jurisdiction where taxes were failed to be paid.
Valuation: Value of supply shall be the transaction value and includes the amount which has been incurred by the receiver, reimbursements, free of charge supplies, royalties/license fees as condition of sale, incidental expenses, subsidies linked to supply, discount after supply and all taxes other than GST levies.
Discount given after supply is permitted to be excluded if it is linked to the invoice and known at the time of supply.
The transaction value including the stated other elements would be considered as value of taxable supply if supplier and the recipient of supply of goods/services are not related and the price is the sole consideration for the supply.
In certain circumstances it is stated the value has to be determined as per the Valuation Rules. The circumstances are –
- The consideration, is not money, wholly;
- the supplier and the recipient of the supply are related/distinct persons ;
- supply of services by a pure agent, money changer, insurer, air travel agent and distributor or selling agent of lottery;
- Value of second hand goods, value of token/voucher stamp.
- Value of taxable services by class of service providers notified by Govt on recommendations of Council would be deemed nil.
It has been provided that where there is no consideration or the receiver can avail the credit, the value could be the declared value. This does not mean that one can value the same at nominal rates.
Input tax credit: Eligible credit can be taken in the electronic credit ledger of Central Tax/State Tax and Integrated tax[Integrated Tax] and UT tax. Central tax can be used to pay Central tax and Integrated Tax in that order. State tax can be used to pay State Tax and Integrated Tax in that order. Integrated Tax can be used to pay Integrated Tax, central tax and state tax in that order. UT Tax credit can be used to pay UT Tax and balance towards Integrated tax.
State tax and UT tax cannot be used to pay Central tax.
Central Tax cannot be used to pay State Tax/UT tax.
Credit which is specifically restricted is not available. Eligible credit could be availed based on receipt of goods and or services and under cover of tax invoice. Credit can be availed to extent attributed to taxable supplies of goods and or services.
Credit has to be availed in return.
The input tax credit availed to be matched with the tax paid by vendor. The credit given provisionally to recipient would be subject to matching. On matching, if the invoice is not uploaded by the supplier, both of them would be intimated. If the mismatch is rectified, provisional credit would be confirmed. But if mismatch continues even after intimation, the credit provisionally allowed would be reversed.
When the payment towards vendor tax invoice is not made within 180 days, the tax credit availed would be added back and the differential tax to be paid with interest. Eligible to avail after payment made. It is not clear at present whether interest would be permitted to be adjusted in future.
Job work: The principal has the option to send taxable goods without payment of GST to a job worker and bring it back, after processing, to any of his own place of business, for supplying such goods on payment of GST or export it.
The principal also has the option to directly supply final products to end customers on payment of GST or export from the premises of job worker itself, subject to fulfilment of applicable conditions.
GST credit is allowed in case of direct receipt of inputs or capital goods by the job worker, subject to receipt of goods back by the principal within specified period.
Instead of following job work procedure, the principal could supply material on payment of tax and job worker to avail credit. Later job worker pays output tax on his outward supply of processed goods to principal.
Export benefits: Export benefit schemes for export of goods and or services such as refund and rebate scheme would be available. The drawback scheme can be opted for the manufactured goodsexported from India. In addition specific schemes framed under Foreign Trade Policy 2015-2020 such as Advance license/EPCG/Merchant Exporter India Scheme (MEIS) and Service Exporter India Scheme [SEIS] could continue under GST. The clarity in this regard has not emerged as on date.
Other relevant issues for which clarity awaited:
- Specific List of rates for goods/services and exemptions
- EOU scheme status
Conclusion
In this article, the paper writers have sought to give brief overview of the important features of GST law in India. In next article, we would cover the scope of supply under GST and practical issues therein.
The authors can also be reached at madhukar@hiregange.com or roopa@hiregange.com.
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