I remember the first day of my article-ship when I was sitting in a corner looking at all the things happening around me- my seniors working seriously, some talking to the clients, a few referring Acts or Rules, a few others having discussion with the partners and amidst all this, two of my seniors were talking about this “GST Act”. Having recently cleared my IPCC exam, the Act didn’t sound familiar and I started googling about it. Naturally I didn’t find anything informative then. Afraid that I might have skipped it for the exam, I rushed to seek help from my seniors regarding this mysterious Act. All that I was told was that it is a new act to be rolled out.
Now, finally after all these years, this mysterious act will see the light of the day as the 122ndConstitutional Amendment has been approved by both the houses of Indian Parliament. Considered as one of the biggest reforms in India’s indirect tax structure, GST is set to integrate all the state economies and increase the revenue while simultaneously reducing the compliance cost.
But with all the headlines this Act is making and with all the attention it is grabbing-for instance actress Pallavi Joshi explaining the tax system of a country, infamous for having one of the most complicated taxation laws, to her son who might not even understand the term “TAX”, is it really enough to know that GST is just an Act subsuming all the indirect taxes and aimed to make taxation easier?
I guess not. Hence, lets try to understand What is GST, how does this Act work and what are the key highlights of the Draft Model Law
What is GST and How GST works?
GST is a comprehensive tax on supply of goods and/or services applied at every stage in the value chain, credits against which shall be available in the subsequent stage of value addition.
In a country where, both the State as well as the Centre generates huge revenue from the taxes collected, a single centralized form of taxation wouldn’t see the light of the day and hence a dual GST was introduced where in both the State as well as the Centre will impose and collect taxes on a single transaction in the form of State Goods and Service Tax (SGST) and Central Goods and Service Tax (CGST).
Further, another mechanism has been introduced to monitor interstate trade of goods and services called as the Integrated Goods and Service Tax (IGST) where in the dealer of the selling state will collect IGST (Combined rate of SGST and CGST) from the purchaser and claim the credit of CGST and SGST (paid by the seller on purchases) while discharging the IGST liability.
Key Highlights of the Draft Model law are as follows:
Each SGST will extend to the relevant state and the CGST will extend to the whole of India. (Jammu & Kashmir too is included in the ambit of GST)
B) Key Definitions
1) Aggregate Turnover” is the
Value of all taxable and non-taxable supplies,
(+) value of exempt supplies and exports of goods and/or services
(-) taxes, if any, charged under the CGST Act, SGST Act and the IGST Act of a person having the same PAN, to be computed on all India basis.
However, Aggregate turnover does not include
- The value of supplies on which tax is levied on reverse charge basis
- The value of inward supplies.
Hence, it can safely be put across as the aggregate value of all the taxable and non-taxable supplies, exempt supplies and exports of goods and/or services of all the entities of a person having a common PAN across the whole of India.
2) Capital Goods: The definition is similar to present definition of capital goods under CENVAT Credit Rules, before amendments made in budget, 2016.
3) Casual Taxable Person : Person who occasionally undertakes transactions involving supply of goods and/or services in the course or furtherance of business whether as principal, agent or in any other capacity, in a taxable territory where he has no fixed place of business
4) Deemed Exports: Refer to those transactions where the goods do not leave the country but the payment against these goods are received in Indian Rupees or in convertible foreign exchange
5) Goods has been defined to include every kind of movable property, securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply but excludes actionable claim, any intangible property and money.
6) Input means any goods other than capital goods used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.
7) Input Service means any service used or intended to be used by a supplier for making an outward supply in the course or furtherance of business
8) Export of Services and Import of services have been defined to exclude transactions between establishments of the same person in India and outside India.
9) Non-resident Taxable Person means a taxable person who occasionally undertakes transactions involving supply 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.
10) Works Contract means an agreement for carrying out for cash, deferred payment or other valuable consideration, building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, renovation or commissioning of any moveable or immovable property
C) Meaning and Ambit of Supply
Since the taxable event under GST Law being the “supply” of goods and services it becomes all the more important to understand what the term “supply” includes in its ambit.
a. All forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal and importation of services for a consideration by a person in the course or furtherance of business,
b. Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.
c. A Supply specified in Schedule I, made or agreed to be made without a consideration
d. Further, it also includes supplies covered under Schedule II which primarily includes deemed supply of goods and services.
e. The supply of any branded service by an aggregator, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.
Hence, to put it in simple terms, “Supply” is widely defined to cover all forms of supplies including a few which were not under the tax net earlier such as barter transactions. It also includes specified transactions such as permanent transfer of business assets, temporary application of business assets to a non-business use, services put to non-business use, and supply by a taxable person to another taxable or non-taxable person in the course of business. However, It is specifically clarified that supply of goods by a registered taxable person to a job worker shall not be considered as a supply of goods. Further, under Section 43A, supply of raw material and receipt of goods after completion of job-work may be done without payment of tax, subject to permission from the Commissioner.
D) Composition Levy
An officer of the Central or State Government on the recommendation of the Council, and subject to such conditions and restrictions may permit a registered taxable person, whose aggregate turnover in a financial year does not exceed Rs 50 lakh, to pay, in lieu of the tax payable by him, an amount calculated on a composition rate ( A rate lower than the rate at which he would have to pay taxes otherwise) which, shall not be less than 1% of the turnover during the year.
Further, a taxable person who effects any inter-State supplies of goods and/or services shall not be eligible for composition levy.
Benefit of composition levy once opted, will have to be uniformly opted for all the registered taxable persons having the same PAN.
Further, a taxable person opting for composition levy cannot collect any taxes from its recipients and also will not be entitled to claim any input tax credit on the inward supplies.
E) Time of Supply
1) Time of Supply of Goods
The time of supply of goods shall be the earliest of the following dates, namely:
- The date on which the goods are removed by the supplier for supply to the recipient, in a case where the goods are required to be removed;
- the date on which the goods are made available to the recipient, in a case where the goods are not required to be removed;
- the date on which the supplier issues the invoice with respect to the supply;
- the date on which the supplier receives the payment with respect to the supply;
- the date on which the recipient shows the receipt of the goods in his books of account.
2) Time of Supply under Reverse Charge Mechanism
The time of supply shall be the earliest of the following dates, namely
- the date of the receipt of goods/services ;
- the date on which the payment is made;
- the date of receipt of invoice;
- the date of debit in the books of accounts.
3) Time of Supply under taken on approval or sale or return or similar terms
The time of supply shall be the earliest of the following dates, namely
- time when it becomes known that the supply has taken place;
- Six months from the date of removal.
4) Time of Supply of Services
The time of supply shall be the earliest of the following dates, namely
- the date of issue of invoice or the date of receipt of payment, if the invoice is issued within the prescribed period;
- the date of completion of the provision of service or the date of receipt of payment, if the invoice is not issued within the prescribed period;
- the date on which the recipient shows the receipt of services in his books of account.
F) Value of Supply
MRP valuations has been done away with under the GST Law and emphasis has been made on the transaction Value which is the price actually paid or payable for the supply and where the parties are not related and price is the sole consideration.
Further, to arrive at the transaction value certain specific additions are to be made to the price charged to the extent not included in the price actually paid or payable and includes:
i. Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply
ii. The value of goods and/or services that are supplied directly or indirectly by the recipient of the supply free of charge or at reduced cost
iii. Royalties and licence fees related to the supply of goods and/or services
iv. Any taxes, duties, fees and charges levied under any statute other than the SGST Act or the CGST Act or the IGST Act;
v. Incidental expenses, such as, commission and packing, charged by the supplier to the recipient of a supply, including any amount charged for anything done by the supplier in respect of the supply of goods and/or services at the time of, or before delivery of the goods or services;
vi. Subsidies provided in any form or manner, linked to the supply;
vii. Any reimbursable expenditure or cost incurred by or on behalf of the supplier and charged in relation to the supply of goods and/or services;
viii. Any discount or incentive that may be allowed after the supply has been effected.
However, discounts including post- supply discounts known at or before the time of supply and specifically linked to relevant invoices shall not be included in the transaction value.
GST Valuation (Determination of Value of Supply of Goods and Services) Rules, 2016 proposes to determine value of supplies in the following cases where:
- The consideration, whether paid or payable, is not money, wholly a partly
- The supplier and the recipient of the supply are related
- There is reason to doubt the truth or accuracy of the transaction value declared by the supplier
- Business transactions undertaken by a pure agent, money changer, insurer, air travel agent and distributor or selling agent of lottery.
G) Input Tax Credit
i. The Act provides ITC on all the inputs held in stock or inputs contained in semi-finished gods or finished goods in stock barring a few exceptions.
ii. ITC shall be allowed to be claimed within 1 year from the date of issue of tax invoice related to such supply.
iii. Where the goods and or services are utilized for both business as well as other purposes, ITC shall be restricted only to the extent the goods and or services that are utilized for business purposes.
iv. ITC cannot be claimed on non-taxable and exempt supplies.
v. Transfer of ITC to the extent it is unutilized is allowed in case of change in the constitution (Mergers, Demergers, Lease, Amalgamation etc) of the registered taxable person
vi. When goods are received in installments/ lots , credit will be available only after the receipt of the last lot/ installment.
vii. ITC is not available in respect of:
- Motor Vehicles (Except when utilized for specified purposes)
- Services received/ used by the employees for their personal consumption or use
- Goods and/or services used in the execution of a works contract of construction of an immoveable property other than P/M
- Goods and /or services used for personal consumption
- Where depreciation has been claimed on the tax component of the capital goods
viii. Further, ITC shall be available to a registered taxable person subject to:
- Possession of tax invoice, supplementary invoice, debit note or any other tax paying document
- Received the goods and/ or services
- Taxes charged in respect of such goods and /or services have been paid in cash or by utilizing ITC
- Furnished a return under Sec 27.
Further, ITC will not be allowed in respect of any of the invoices after the return for September of the next financial year has been filed or filing of the annual return which-ever is earlier.
In simple words, the period for claiming the ITC in respect of purchases made after September is reduced.
H) Utilization of Credit
However, no cross credit utilization is permitted between CGST and SGST.
I) Distribution of Input Tax Credit
- Distribution of Input Tax Credit by an Input Service Distributor is restricted only to tax on input services. i.e ITC in respected of goods cannot be distributed.
- The credit can be distributed against a prescribed document or an invoice.
- The amount of tax distributed cannot be in excess of credit available for distribution
- The credit of tax attributable to a supplier shall be distributed to that supplier only.
- The credit of tax attributable to more than one supplier shall be distributed on pro rata basis.
J) Procedural Aspects
A person is required to get registered only if the aggregate turnover of all the entities sharing the same PAN in the financial year exceeds Rs9 lakh and Rs4 lakh in case of North Eastern states. However, the liability of tax arises only once the aggregate turnover exceeds 10 lakh and 5 lakh as the case may be.
Further, if the person is making inter-state supply of taxable goods and/or services the above threshold limit of Rs 9/4 lakh shall not be applicable and he would be required to get registered from that point onwards.
A separate registration shall be taken for each state, even though the taxable person is supplying goods, services or both from more than 1 state as a single legal entity.
To understand this concept better, let us take a few examples:
Situation 1(Intra-State + Taxable Supplies + Exempt Supplies)
Let’s say Mr Harsh has started a business of supply of taxable and exempt services in Gujarat.
In this case, he shall be required to apply for registration once the turnover exceeds Rs 9 Lakh.
Situation 2 (Intra-State + Inter-State + Taxable Supplies)
The business of Mr Harsh is blooming and has achieved a Turnover of Rs 5Lakh. He now enters into a contract with Mr Pulkit to supply his services in Bangalore.
In this case, Mr Harsh will no longer enjoy the benefit of the threshold limit of 9 Lakh and will have to apply for registration under GST Act.
Situation 3 (Inter-State + Taxable Supplies)
Mr Pratik of Bangalore starts a business and his first supply is taxable inter- state supply of Services
In this case, the threshold limit of Rs 9 Lakh will not be applicable and Mr Pratik will have to apply for registration.
Situation 4 (Taxable Intra-state + Exempt Inter-state Supplies)
Mr Darshan supplies taxable intra-state services and exempted inter-state services.
Mr Darshan is eligible to the threshold limit of Rs 9 Lakh and only once the aggregate turnover exceeds Rs 9 lakh, he is required to apply for registration.
Situation 5 (Multiple Branches)
Mrs Harsh runs a boutique and has branches in Mumbai, Gujarat and Bangalore. She has only intra-state supplies and no inter-state supplies.
Mrs Harsh will be required to apply for registration for all the branches once the aggregate turnover all the branches exceed Rs 9 Lakh i.e the turnover is to be considered for all the branches put together and not individual branches.
In addition to the above the following persons will have to obtain GST registration irrespective of the turnover:
- Casual Taxable Persons and Non- Resident Taxable Persons.
- Person required to pay tax under reverse charge
- Persons making supply on behalf of other registered taxable persons, whether as agent or otherwise
- Persons making supply (except of branded services) through an e-commerce operator
- E-Commerce operator.
Every registered taxable person shall furnish a return, electronically, of inward and outward supplies of goods and/or services, input tax credit availed, tax payable, tax paid and other particulars within 20 days after the end of such month.
Dealers who have opted for composition scheme has have to file returns electronically within 18 days after the end of each quarter.
Every registered taxable person required to deduct tax at source shall furnish a return, electronically, for the month in which such deductions have been made along with the payment of tax so deducted, within 10 days after the end of such month.
Input Service Distributor (ISD)
Every Input Service Distributor shall, for every calendar month or part thereof, furnish a return, electronically, within 13 days after the end of such month.
Every registered taxable person paying tax shall furnish the first return containing the details of outward supplies and inward supplies from the date on which he became liable to registration till the end of the month in which the registration has been granted.
And in case of dealers opting for composition levy, a return for the period starting from the date on which he becomes a registered taxable person till the end of the quarter in which the registration has been granted shall be furnished.
Every registered taxable person, other than an input service distributor, a deductor under section 37, a casual taxable person and a non-resident taxable person, shall furnish an annual return for every financial year electronically on or before the 31st day of December following the end of such financial year.
Every registered taxable person who applies for cancellation of registration shall furnish a final return within 3 months of the date of cancellation or date of cancellation order, whichever is later.
Further, A return furnished by a registered taxable person without payment of full tax due as per such return shall be considered an invalid return for allowing input tax credit in respect of supplies made by such person.
Every registered taxable person shall furnish a return for every tax period whether or not any supplies of goods and/or services have been effected during such tax period.
Looking at the speed with which the work is being done, GST is going to be a reality very soon. While the draft law provides visibility on the GST structure, there still are many unanswered questions. The full impact of the law on various industries can be gauged only when we have a clarity regarding the GST rate, exemption list, Negative list, credit rules etc.