PRESENT INDIRECT TAXATION STRUCTURE 

Present Indirect Tax structure of India provides various levies and taxable events in respect of such levies vary, depending upon the nature of tax. The four major constituents of present Indirect Tax structure and taxable events thereof can be described as under:

Nature of Levy	Taxable Event	Respective Entry under Schedule VII
Excise Duty	Manufacture / Deemed Manufacture	Entry No. 84- List I
Service tax	Provision of Service	Residuary Entry 97- List I
Sales Tax/VAT/CST	Sale	Entry No. 54- List II (VAT) and 92A of List I (CST)
Entry tax/ Entertainment tax	Entertainment & Entry of Goods	Entry No. 52 and 62- List II

WHAT IS GST?

‘G’- Goods ‘S’- Services ‘T’- Tax GST= Goods & Services Tax GST regime is proposed to subsume all taxes into one destination based tax at agreed rates with set-off available along with the value chain. GST will be applicable on both goods and services.

COVERAGE OF MODEL GST LAW

Empowered Committee of State Finance Ministers has released two drafts; (A) The Central/State Goods and Services Tax Act, 2016 (CGST Act/SGST Act); (B) The Integrated Goods and Services Tax Act, 2016 AND The Valuation Rules to be adopted under GST regime CGST/SGST comprises the following: (A)  25 Chapters; (B) 162 Sections; (C) 4 Schedules IGST comprises the following: (A) 11 Chapters; (B) 33 Sections Under the Central/State Goods & Services Tax Act, 2016, there are two components namely the CGST (Central Goods and Services Tax) and the SGST (State Goods and Services Tax). Besides these there shall be an IGST (Integrated Goods and Services Tax) applicable to inter-state transactions. This unified tax structure is designed as a dual system, wherein both the Centre and the states may impose taxes based on their respective constitutional mandate.

ANALYSIS OF DRAFT GST MODEL

[I]      Meaning and scope of supply (Section 3) 

It has been stated that supply includes

• All forms of supply of goods and/or services such as sale, transfer, barter exchange, license, rental, lease or disposal made or agreed to be made for a consideration by person in the course or furtherance of business;
• Importation of services, whether or not for a consideration and whether or not in the course or furtherance of business; and
• A supply specified in Schedule I, made or agreed to be made without a consideration

Comments Since GST will be applicable on ‘supply’, therefore, the erstwhile taxable events such as ‘manufacture’, ‘sale’, ‘provision of services’ etc. will lose their relevance. It is pertinent to note that certain supplies, even if made without consideration, such as permanent transfer of business assets, assets retained after de-registration etc. will attract GST. Even a ‘barter’ of goods transactions, which were hitherto un-taxed in VAT regime, will attract GST.

The said section further provides that Schedule- II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of service. Various transactions and their prescribed treatment are illustrated below:

Nature of Transaction	Treatment
Transfer of the title in goods or transfer of title through an agreement at a future date upon payment of full consideration	Supply of goods
Renting of immovable property including lease, tenancy, easement, license to occupy land etc.	Supply of Services
Treatment or process applied to goods belonging to another person	Supply of Services
Construction of a complex, building, civil structure or a part thereof intended for sale to a buyer	Supply of Services
Temporary transfer or permitting the use or enjoyment of any intellectual property right	Supply of Services
Works contract including transfer of property in goods involved in the execution of a works contract	Supply of Services
Transfer of the right to use any goods for any purpose	Supply of Services

Comments It has been clarified that ‘Temporary transfer or permitting the use or enjoyment of any intellectual property right’ will be considered as ‘Supply of ‘service’. However, the question whether ‘software’ is good or service will be finally undisputed. Similarly, works contracts or construction contract which involve supply of both ‘goods’ as well as ‘services’, in GST regime will be considered as ‘service’ for levy of GST. It will certainly lead to simplification for construction sector.

[II]     Time of supply of goods and services (Section 12 and 13 of CGST/SGST Act)

• The liability to pay CGST/SGST shall arise at the time of supply of goods or services.
• The time of supply of goods would be earliest of the date of (i) removal of goods / making available the goods if the same are not removed; or (ii) issuance of invoice; or (iii) Receipt of payment; or (iv) Date on which the buyer shows receipt of goods in his books of account
• The time of supply of service would be earliest of the date of (i) Issuance of invoice (if issued within the stipulated time period or  receipt of payment; (ii) date of completion of service or receipt of payment (in case invoice is not issued within the stipulated time period
• In case of continuous supply of services, the time of supply will be the due date of payment to supplier in case it is ascertainable from the contract and if such due date is not ascertainable from the contract, each time when the supplier of service receives the payment or issues an invoice, whichever is earlier. Also, where the payment is linked to the completion of an event, the time of completion of that event is the time of supply
• In case of payment of tax on reverse charge basis, the time of supply will be the earlier of (i) the date of receipt of service; or (ii) the date of payment; (iii) the date of receipt of invoice; (iv) the date of debit in the books of accounts

[III]    Value of taxable supply [Section 15 of CGST Act/SGST Act and Valuation Rules

• GST would be payable on the transaction value. The transaction value is the price, actually paid or payable for the respective supply of goods and/or services between unrelated parties.

Comments The transaction value is also said to include all expenses in relation to sale such as packing, commission, goods/services supplied free of cost, royalties/license fees payable as a condition of sale, etc. Even subsidies linked to supply would be includable in the transaction value. Reimbursable expenses, if relatable to sale, will also be part of value on which GST will be payable. However, in case these expenses qualify as ‘pure agent’ reimbursements, then exclusion from value will be permissible. As regards discounts/ incentives, it will form part of ‘transaction value’ if it is allowed after supply is effected. However, discounts/ incentives given before or at the time of supply will be permissible as deduction from transaction value. Maximum Retail Price (MRP)/Retail Sale Price (RSP) based valuation (exists under Excise Law), will not be there in GST regime. The value of supply of goods and/or services in specific cases including in the case of supply between related parties shall be governed by the rules framed by the government.

[IV]    Input Tax Credits [Chapter V of CGST/SGST Act (Section 16 to 18)]

• The draft GST law provides the provisions for availing and utilizing of the input tax credit subject to such conditions and restrictions as may be prescribed. Credit would be payable once the vendor pays GST and at the same time also files the return.
• Time limit of one year akin to Excise Law and Finance Act has been proposed under the GST draft law.
• Input tax credit shall not be available in respect of the inputs and inputs services as mentioned under sub-section (9) of Section 16 of the GST draft law.
• The amount of credit shall be restricted to so much of the input tax is attributable to the taxable supplies including zero-rated supplies when the goods/services are used for taxable as well as non-taxable supplies.

 

Comments GST law was expected to provide seamless credit without any denial or restriction except goods/services that are used for personal use. However, it has been proposed that credit of various inputs / input services are not available though it would be used for business purpose. The denial of credit will lead to substantial tax cascading in GST regime. The objective of introducing GST will be defeated if credit is denied on input/input service.

[V]      Registration [Chapter VI of CGST/SGST Act (Section 19 to 22)]

• Thresholds for registration under GST have been provided in Schedule III.
• For all the suppliers of goods and services, the threshold limit for registration will be INR 9 lakh (aggregate turnover in a financial year). However, for suppliers who conduct business in any of the North Eastern states including Sikkim, the threshold limit will be INR4 lakh.
• Persons making any inter-state taxable supply shall be required to obtain registration irrespective of the threshold specified above.
• No thresholds limit has been prescribed for persons required to pay tax under reverse charge (akin to the present situation under the Finance Act, 1994), Input service distributor, casual dealers, etc.
• The Model GST Law provides an option to a registered dealer to pay tax at a composition rate (of not less than one percent of turnover) if aggregate turnover in a financial year does not exceed INR50 lakh subject to the conditions and restrictions provided in this regard.

[VI]    Place of supply for goods and services (Section 5 and 6 of IGST Act)

The place of supply of goods and services is specified in IGST Act to ensure that the same is consistently followed across India without any deviation by any state.

Transaction of supply of goods	Place of supply
Supply of goods involving movement of goods	Location of the goods at which the movement of goods terminates for delivery to the recipient
Supply of goods by way of transfer of title documents of the goods to a person	The principal place of business of such receiver
If supply does not involve movement of goods	The location of such goods at the time of delivery to the receiver
Assembly or installation of goods at site	Place of such installation or assembly
Goods supplied on board a conveyance	The location at which such goods are taken on board

Transaction of supply of services	Place of supply
Supply of all services (unless specified otherwise) to a registered person	Location of the service recipient
Supply of all services (unless specified otherwise) to any person	Location of the service recipient if available on the record; or else location of the service provider

Comments Specific provisions have been made to determine the place of supply of services for the following services: (a)            relating to immovable property, (b)           performance based services, (c)            event related services, (d)           telecommunication services, (e)            advertising service, (f)            insurance services, (g)            banking and financial services, etc.

Disclaimer:

The contents of this document are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Author does not accepts any liabilities for any loss or damage of any kind arising out of any information in this document nor for any actions taken in reliance thereon.