GST by SabeerAli1


									Goods and Services Tax ("GST”) in India – Impact on IT Industry

                 Mahesh Jaising, Partner, BMR Advisors (

1.      What is GST?

GST is a comprehensive value added tax levied on goods and services. In a GST regime,
goods and services are not differentiated as they move through the supply chain.

GST is typically levied on all transactions involving goods and services including import,
supply of goods as well as provision of services. GST is levied on the value added at each
stage of sale and purchase or supply with an inbuilt credit mechanism such that the tax is a
pass through for businesses, and the tax burden is borne by the ultimate customer.

Being a destination based consumption tax, GST is usually levied on import of goods and
services with export transactions being zero rated under the GST scheme.

2.      GST proposed in India

The Empowered Committee of State Finance Ministers at their meeting dated November 10,
2009 has released a “First Discussion Paper on GST in India” („Discussion Paper‟)
summarizing some of the key features of the GST levy proposed in India.

2.1     Dual GST levy

       A „Dual rate structure‟ consisting of „Central GST‟ (to be levied and administered by
        the Central Government) and „State GST‟ (to be levied and administered by the
        respective State Governments) would be the new form of taxing goods and/or
       Both taxes would simultaneously apply on a transaction and principally on the same
        tax base (except in cases where exclusions apply due to turnover thresholds); and
       An Integrated GST or IGST would apply on interstate supplies of goods and services.

From a legislative framework perspective, a single legislation for levying Central GST has
been proposed. However, each State and Union territory will enact its own State GST
legislation, with an endeavour to adhere to uniform basic features of law such as:

       Chargeability;
       Definition of taxable event and taxable person;
       Measure of levy including valuation of goods and services;
       Basis of classification of goods and services; and
       Procedure for collection and levy of tax

In view of the above dual-structure, Centre and States would have concurrent jurisdictions for
all tax payers; thereby resulting in dual administration and compliances.

                                                                For discussion purposes
2.2     What are the taxes GST is likely to replace in India?

The Discussion Paper proposes that the following indirect taxes would be subsumed:

Central Taxes                                    State Taxes
Central excise duty                              Value Added Tax/ Sales tax
Additional excise duties                         Entertainment tax (unless it is levied on local
Service tax                                      Luxury tax
Excise duty under Medicinal & Toiletries         Tax on lottery, betting and gambling
Preparation Act
Countervailing duties (on imports in lieu of     Entry tax not in lieu of Octroi
excise duty)
Additional duty of Customs (levied on imports in State surcharges and cesses in so far as
lieu of value added tax or central sales tax)    they relate to supply of goods and services
Surcharges and Cesses**

**The list of Cesses covered is not provided - Clarity is awaited whether R&D cess
would be subsumed

2.3     Threshold limits for levy of GST

Gross Annual Turnover Central GST                               State GST
Goods                      INR 15 million                       INR 1 million
Services                   Yet to decided; however the        INR 1 million
                           threshold may be higher than INR 1

Further a composition/ compounding scheme under State GST (at the option of the tax payer)
for tax payers with annual turnover up to INR 5 million has also been proposed. The floor tax
rate prescribed for levy of Composition/ Compounding tax is 0.5 percent across States.

2.4     Rate of GST


The Discussion Paper proposes a dual rate structure for both Central GST and State GST, as

       Lower rate for necessary items and goods of basic importance; and
       Standard rate for general goods.

Discussions are on as to whether the exemption list currently under the VAT regime could be
used for GST as well. The rates are currently awaited.

Importantly, IT products do not feature in the first recommended list of goods for the
lower GST rate.

                                                                  For discussion purposes

A single GST rate, applicable to both Central GST as well as State GST is proposed for
taxation of services. The rate is currently under finalization.

Steps to ensure uniformity of rates

The Discussion Paper has indicated that an appropriate mechanism would be put in place to
legally bind the Centre and States to achieve (and maintain) a harmonized rate structure.
This could possibly be a fall-out of the VAT experience, wherein several States have deviated
from the agreed revenue neutral rate („RNR‟).

2.5     Point of levy

It is suggested that all transactions of goods or services, made for a „consideration‟ would
attract Central GST as well as State GST, except:

       exempted goods and services;
       goods and services which do not fall within the purview of GST; and
       transactions which are below the prescribed threshold limit

Currently, the Discussion Paper is not explicitly clear on precisely how transactions where
there is no specific consideration (such as, branch transfers, inter-unit movements, free
issues and captive consumption) would be dealt with. However, it appears that taxes may
also possibly be applied to branch transfer of goods and services.

Clarity is also awaited on transactions which have historically been „deemed sales‟ under
VAT/ Sales, including transactions involving both supply of goods and provision of services
(such works contract transactions) and lease transactions. Given that the GST rate for goods
and services may be different, it is imperative to determine appropriate taxable value,
separately for goods and for services and the principles for treatment of such transactions.

2.6     Taxation of inter-state supplies

The Discussion Paper has proposed that an Integrated GST model (“IGST”) model be
adopted for taxation of inter-state transactions of goods and services.

The mechanics for levy of IGST are as follows:

       The Centre will levy an IGST (rated at the combined Central GST plus State GST
        rates) on all inter-state transactions of goods and/or services with „appropriate
        provisions‟ to be made for consignment or stock transfer of goods;
       Inter-state seller would levy the IGST on inter-state transactions involving sale of
        goods and/or provision of services;
       While discharging the output IGST liability, the inter-state seller would be allowed to
        utilize input tax credit of IGST, Central GST and State GST;
       Seller State to transfer to the Central Government, amount of State GST credit
        utilized by the inter-state seller to discharge output IGST liability in that State;

                                                                 For discussion purposes
       Inter-state purchaser would claim the input tax credit of such IGST while discharging
        his output liability;
       Central Government would accordingly transfer the amount of IGST used in payment
        of State GST to the account of Purchasing State; and
       Central agency to act as clearing house mechanism and be responsible to monitor
        and verify credit movements and on the basis thereof inform respective Government
        to transfer funds .

While it may be possible to characterize a transaction as an interstate supply in case of goods
(based on established principles under current regulations), it is currently unclear as to how
the place of supply/ destination of services will be determined to crystallize the jurisdiction
where tax is payable on supply of services. This would specifically be relevant in respect of
composite contracts having multiple states of supply of services, ie, such contracts may need
to be split.

2.7     Import of goods/ services

Basic customs duty on import of goods is expected to continue. In addition to the same,
import GST is expected to be levied on import of goods and services. The credit of the import
GST is expected to be available against output GST.

       Import of goods would attract both Central GST and State GST in addition to basic
        customs duty. CVD and other additional duties on imports would therefore get
       Import of services will also attract Central GST and State GST;
       Central GST and State GST paid on import of goods and services would be allowed
        as a credit for payment of output Central GST and State GST liability, respectively;
       State GST paid on import of goods and services are proposed to accrue to the State
        where such goods and services are consumed, and not necessarily in the State
        where goods are imported; this is in line with the principle of destination based tax.

However, it is not clear whether each State (of destination) would be responsible to collect/
administer State GST on imports directly.

                                                                 For discussion purposes
2.8       Export of goods/ services

         Continuing the current stated policy on exports, it has been reiterated that export of
          goods and services would be zero-rated ie no tax would apply on exports, and the
          input credit relatable to such export supplies would be allowed to be used against
          other domestic liabilities or refunded;
         Supply of goods and provision of services, to processing zones in a Special
          Economic Zone („SEZ‟) would be zero rated. Supply of goods and provision of
          services by a SEZ to Domestic Tariff Area would however be liable to GST; and
         In the absence of any mention with reference to STP/ EOU and EHTP units in the
          Discussion Paper, it is likely that such units would be granted tax benefit by way of a
          refund on their procurements.

2.9       Input credit mechanism

         Central GST and State GST are proposed to be treated separately for the purposes
          of availing input tax credit („ITC‟). Cross utilization of ITC between Central GST and
          State GST is not proposed to be allowed.
         Utilization of ITC would be as under:

              o   Input Central GST to be utilized against output Central GST and IGST;
              o   Input State GST to be utilized against output State GST and IGST; and
              o   Input IGST to be utilized against output IGST, Central GST and State GST.

Further, it appears that the protocol for utilizing credit against output IGST would be in the
order of input IGST, input Central GST and input State GST.

         It is proposed to align the rules for availment and utilization of ITC for both Central
          GST and State GST; and
         Taxpayers (including exporters) may be required to maintain separate books of
          account for utilization and refund of ITC.

There is an in principle assurance that refund/ adjustment of accumulated ITC would be
granted/ completed in a time bound manner in certain cases; however how this will get
implemented is yet open for debate.

2.10      Special Industrial Area Scheme

         All existing area based exemption schemes are proposed to be converted into cash
          refund schemes for the remaining period of the tax holiday;
         Mechanics of the proposed refund scheme including whether refund of Central GST
          as well as State GST would be granted is awaited; and
         No new exemption schemes to be introduced and existing schemes to be

                                                                   For discussion purposes
2.11      Compliances


         Income-tax Permanent Account Number based tax-identification number, vetted by
          the Income Tax Department, with total of 13/15 digits is proposed would be issued to
          the tax payers; and
         Separate registrations would continue to be required relevant State GST legislations,
          wherever liability is incurred. Currently, it is unclear whether State-wise registrations
          would also be required for Central GST.

Tax payments

         Central GST and State GST are required to be paid separately; and
         State GST is to be paid to the credit of respective states.


         Separate periodical returns to be filed to the Central Government and the concerned
          State Governments; and
         The Discussion Paper proposes a common return format for both Central GST and
          State GST legislations.

3.        Impact of GST on business (Possible areas of impact/ Likely issues)

3.1       Procurement

         Possible higher tax outgo on procurement of goods and services on account of
          increase in rate of tax;
         Increased availability of credits across goods and services - Manner of credit
          availment including possible restrictions;
         Possible removal of exemptions on procurements;
         Educating vendors on GST related documentation.

3.2       Distribution

         Tax efficiency of direct interstate sales vis a vis stock transfers;
         Determining place of supply of services for payment of tax – possible need to split
          contracts state-wise;
         Possible change in taxable event: manufacture/ sale to supply of goods and services
         Manner of computation of tax;
         Replacement of area based exemption by refund schemes;
         Taxability of stock transfers, inter office supplies, captive consumption and warranty
         Determination of principles of classification and valuation of goods/ services/
          composite contracts/ deemed sales/ non sale transactions.

                                                                    For discussion purposes
3.3     Commercial

       Impact of GST on pricing of goods and services on account of increase in rate of tax
        as well as increase in GST credits;
       Review of tax clauses in contracts/ agreements and communication to customers.

3.4     Compliances

       Redesigning IT systems;
       Possible decentralized/ state-wise registrations and compliances;
       Possible interaction with State as well as Central GST authorities with respect to
        every transaction.

3.5     Others

       Training of personnel;
       Transitional issues – migration of registrations/ carry over of accumulated credits/
        continuing contracts/ transition billing etc

3.6     Industry Specific Issues

       Tax efficiency of Trading vis a vis Manufacturing;
       Evaluating tax benefits to SEZ vis a vis STP/ EOU units;
       Tax treatment of composite contracts such as AMCs and leases;
       Decentralized compliances/ refunds – Possible discontinuance of LTU concept;
       Abolition/ absorption of R&D Cess;
       Identifying issues for lobbying.

4.      Pointers for GST preparation/ transition

Impact analysis & solutions

       Review current business and transaction models;
       Analyze impact potential impact (including difference in tax cost) of GST vis a vis
        current indirect tax impact;
       Identify areas of likely GST impact; and
       Identify solutions and develop systems/ processes for addressing identified issues
        and to ensure smooth transition into GST

Implementation, transition and trainings

       Implement action steps including redesigning IT systems, addressing/ setting up
        compliance and documentation requirements with reference to state-wise GST
       Address and comply with transitional requirements for seamless transition into GST;
       Review GST preparedness and compliance processes pre and post introduction of

                                                                  For discussion purposes
5.      Possible issues for representation

       Committed timelines for making draft GST laws available for public consumption;
       Need for early and timely disclosure of formats of documents including returns and
        invoices for up-gradation of ERP systems to meet the April 1, 2010 deadline;
       Safeguards wrt maintaining uniformity in GST laws across the Central and State GST
       Lowering rate of GST on IT products and services? An analysis of the benefit/ issues
        around a lower rate should be done before making a representation on this matter.
       Continuance of tax benefits to SEZ, STP and EOU units;
       Abolition/ absorption of R&D Cess;
       Clarity on treatment of IT industry specific transactions, including taxation of AMCs,
        leases and warranty supplies;
       Simplified compliance procedure including:
        o        Grant of automatic refunds at regular intervals with a periodic audit – even if
                 on account of an inverted duty structure;
        o        GST reporting to/ assessment by a single authority;
        o        Continuance of concept of centralized registration for services and tax
        o        Abolition of statutory delivery notes/ way bills.
       Transition issues – ie, transition of credits, transition contracts etc


     The purpose of this note is to give a highlight of the proposed GST to flag out key
     possible impact areas relevant to the IT industry
     Our comments are based on our understanding of the proposed implementation of Goods
     and Services Tax in India. It is likely that the final model would differ from our
     understanding and the implications discussed herein would accordingly vary
     The proposed model discussed here is based on the information available in public
     domain, including draft working papers issued by the Empowered Committee, press
     reports, etc
     The note is solely for the benefit of MAIT members and is not intended to be relied upon
     by anyone other than MAIT members

                                                                  For discussion purposes

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