Framework for the Goods and Services Tax

Contents Constitutional Framework Process Framework IT Framework 1 Constitutional Framework 2 Process Framework 3 IT Framework 4 Getting ready for GST

Constitutional Framework

Goals of GST reform Neutralities Labour–Capital neutrality – non-cascading Geographical neutrality– Common market Trade neutrality – Make in India Supply chain neutrality Product neutrality Transaction/ Finance neutrality

GDP flow chart

Current indirect tax system in India State VAT CENVAT / Service Tax Primary Producers Primary Producers Service Providers Service Providers Primary Producers Primary Producers Service Providers Service Providers Manufacturers Service Resellers Manufacturers Service Resellers Distributors Resellers Real Estate Distributors Resellers Real Estate

Proposed GST framework Primary Producers Primary Producers Service Providers Service Providers Manufacturers (less exclusions) Service Resellers Distributors Resellers Real Estate/ Petroleum

Issues under debate Fiscal Autonomy Vs Harmonization Tax Rates Tax Base Taxes to be subsumed Compensation to States Consensus in GST Council Dispute Resolution

Taxes to be subsumed by GST Central taxes State taxes Excise Duty, except petroleum and tobacco Countervailing Duty (CVD) in lieu of Excise Duty Special Additional Duty (SAD) of Customs Service tax CST Surcharges & Cesses (relating to supply of goods & services) R&D Cess ?? VAT Entry tax Luxury tax Tax on entertainment and amusement, lottery, betting and gambling State Cesses & surcharges (relating to supply of goods & services)

Taxes that will not be subsumed by GST Central taxes State taxes Stamp Duties Electricity duty Taxes on goods and passengers carried by road or on inland waterways Taxes on vehicles (Road tax) Tolls Basic Customs Duty and Export Duties

Empowering the Union and States to levy the GST Dual GST: Both the Centre and States given concurrent powers to levy GST IGST: Centre given exclusive powers to levy GST on supplies in the course of inter-State trade and commerce and imports into India GST defined as any tax on supply of goods and services other than on alcohol for human consumption Effective date of these powers to be the date recommended by the GST Council Centre empowered to formulate rules for the Place of Supply

GST base Consists of goods and services Goods defined in Article 366(12):  ”goods includes all materials, commodities, and articles” Services defined as “anything other than goods” No concept of deemed sales for GST (e.g., works contract, leasing, etc.) Debatable whether land and real property sales included in the definition of services Agreements for purchase of real property prior to construction could be outside the scope of GST without the concept of ‘deemed sale’ Real property leases considered a service and thus subject to GST Electricity to be excluded because electricity duty not subsumed

Current inputs and capex cascading base Inputs subject to cascading # Description Present system (Rs. Trillion) Truncated GST A Current inputs 1 Petroleum sector < 3.48 3.48 2 Electricity sector < 1.29 1.29 3 Alcohol sector ? 4 Service sector – goods subject to VAT .> 6.5 5 Trade sector – goods inputs subject to excise duty 0.19 6 Trade sector – service inputs subject to service tax 1.77 Total current inputs < 13.23 4.77 B Capital inputs 7 0.80 8 1.13 9 10 Construction 7.94 11 Other Capex – Trade and Service sector < 4.5 Total Capex < 14.37 9.87

Cascading through CST 2% CST (Rs crores) 1% Additional Tax Inter-state Sales 34,000 17,000 Inter-state Consignments Nil >50,000

Tax rates GST rates to be decided by the GST Council Revenue Neutral Rates (RNR) estimated by NIPFP: Three-rate structure (combined CGST+SGST): 1% (or 2%?) for precious metals and articles, 12% for basic necessities, 27% Standard Rate for all other goods and services. Extreme discomfort with these rates and their accuracy Options for a single moderate rate are under consideration

Indirect tax revenues – Centre & States - Taxes to be subsumed within GST # Description FY13 (Rs. Cr) Actual FY14 (Rs. Cr) RE 1 Union Excise Duties (UED) + Service tax incl. POL revenues) 3,08,446 3,43,714 2 UED less POL revenues + Service tax 2,23,548 2,55,114 3 State revenues to be subsumed within GST (incl. POL and Alcohol) 4,46,566 4,92,260 4 State revenues to be subsumed within GST (excl. POL and Alcohol) 3,00,530 3,28,515 5 Centre + State revenues (incl. POL & Alcohol revenues) 7,55,012 8,35,974 6 Centre + State revenues (excl. POL & Alcohol revenues) 524,078 583,629 7 GDP at current market prices 1,01,13,281 1,13,55,073 8 Centre + State revenues/ GDP ratio (incl. POL & Alcohol revenues) 7.47% 7.36% 9 Centre + State revenues/ GDP ratio (excl. POL & Alcohol revenues) 5.18% 5.14% Note: State taxes to be subsumed include State VAT, CST, Entry tax, Entertainment tax, Purchase tax Source: RBI study of State Finances, CSO, Union Budget documents

RNR estimation - Alternate scenarios # Description Unit Amount 1 GDP at current market prices (FY13 approx.) Rs. Trillion (Lakh crore) 100 2 Comprehensive GST base – PFCE + GFCE on goods and services (approx. in FY13) Rs. Trillion 60 3 Centre and State indirect tax revenues / GDP ratio (incl taxes to be subsumed within GST and excl. taxes from Petroleum products and Alcohol) % 5.18 Revenue Neutral Rate – alternative scenarios 4 If base is Rs. 60 trillion (60% of GDP) 8.6 5 If base is Rs. 45 trillion (45% of GDP) 11.5 6 If base is Rs. 20 trillion (20% of GDP) 25.9

GST Base and Revenue Productivity Modern VATs have broader tax base, and yield higher revenues New Zealand has the broadest base, the highest revenue productivity

Process Framework

GST Registration Salient Features Open Points Separate registration for each State 15-digit (alpha-numeric) PAN-based GSTIN Fully online registration process with no physical documentation / inspection of business premises involved Flexibility to use existing registration data in one State as template for further registrations Option to authorize representative during Registration Amendments of non-core fields of registration data on self-service basis Migration of existing dealers Dual Jurisdiction mechanism Single vs Multiple registration within a State No clarity on how Input Service Distribution (ISD) mechanism will work Extent of State specific fields in the Registration Form

GST Return Salient Features Open Points Monthly return filing for all Regular taxpayers Self-assessment of tax liability (for one tax period only) Common e-Return for CGST, SGST, IGST and Additional Tax (for each registration) Upload of B2B supply invoice information is must before filing of return; Procurement list (B2B) to be generated automatically by GSTN Annual Return to include reconciliation statement with the audited financial statements of the taxpayers Place of Supply rules and its implications on Return filing Destination State wise aggregation of B2C inter-State supply details Capturing and processing of information pertaining to non-eligibility / partial eligibility of credit (including capital goods) Mechanism for auto reversal of credit; revision of submitted invoice information and its impact on counter-party

GST Payments Salient Features Open Points Common challan for CGST, SGST, IGST and Additional Tax Filling up of electronic challan is must for payment (irrespective of payment method) Both Online (including Credit Card, Debit Card) and offline modes of payment will be available Offline payment modes have certain restrictions in terms total amount that can be paid Payment can be made anytime Date of realization vs date of deposit as date of payment Whether tax payment to be linked to tax period or a personalized ledger will be maintained Dispute resolution

Input credit mechanism Taxes paid at input stage are available as credit against the output tax liability GST credit mechanism CGST SGST IGST CGST SGST IGST CGST IGST IGST SGST Impact If CGST credit may be pooled in for all the States, chances of blocked excess credits would be minimal Utilization possible if ISD is introduced Separate credit pools would be maintained for each State Credit utilization possible to the extent of output SGST & IGST Hierarchy of utilization – top down as above Fungibility should be allowed across registrations for a legal entity as IGST is administered by Central Government

IT Framework for GST

IT Pre-requisites for GST IT strategy for GST IT Pre-requisites for GST IT Strategy for GST Harmonization of Business Processes & Forms Uniform Tax Payer Interaction and Experience Monitoring of inter-State supply with complete details Comprehensive Automation Common and shared IT Infrastructure: A GST Common Portal for the core services of Registration, Return and Payment Common PAN-based registration Common Business Processes and Forms -standardized return and challan for all taxes (with different account heads for CGST, SGST, IGST and Additional Tax) Each tax authority to have full flexibility in using this data for in- house automation, integration, and enforcement

IT Strategy - Balancing autonomy with harmonization Core Services Registration Returns Payments IGST Settlement – processing of information on Inter-State supply and cross-credit utilization Helpdesk support Tax Payer Profiling Common & Shared IT Infrastructure (GST System) Harmonization of Business Processes and Formats Centre/States Tax IT Systems Autonomy of back-end systems of States and Centre Approval of Registration Assessment Refunds Audit and Enforcement Adjudication Internal workflows to support above functions Statutory Functions Non-Statutory Functions IT Interfaces IT Enablement

Goods and Services Tax Network (GSTN) Limited Service Model – Mandatory Full Service Model – Optional GST System (with common GST Portal) providing three core services common across the country 13 States have already opted for full service model; others may also join in Appeal / Refund Registration Audit Assessment Payments Returns GSTN Payments Returns Registration GSTN GSTN

Illustrative Return filing steps Upload of B2B supply invoice level details Auto-drafting of counter-party purchase register based on such uploaded supply invoice details Acceptance of auto-drafted purchase register by counter-party dealer Generation of draft return Payment of due tax Submission of Return

Getting ready for GST

Key issues for Auto sector Rates and base Availability of input tax credit Refund of excess input tax credit Pooling of tax liability and available input credit across States 1% additional tax and its applicability to consignment transfer Whether premium automobiles will be subject standard rate of tax Whether tax on vehicles will be fully creditable to commercial users Transitional provisions Carry forward of excess credit from current regime Continuation of Centre and State incentives

Key issues for Auto sector Treatment of Sales incentives, e.g. Financing subsidies, free insurance etc. Trade-in allowances Resale of used vehicles Post-sale volume discounts to dealers Add-on options in case automobiles are taxed at a higher rate Fuel provided with a new vehicle Neutrality in the treatment of sale and leased finance vehicles Extended warranties and replacements under warranty

GST readiness – process and IT Migration of existing registrations Complete specification of compliance reporting procedure Modalities of interfacing with GSTN System Place of supply rules

Accounting & Reporting GST Transition Cycle Advocacy GST Impact Assessment Supply Chain Accounting & Reporting Technology Refresh Compliances Program Management Change Management

Questions?

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