Table of contents About the authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Contents at a glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Chapter 1 Existing indirect tax structure in India. . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Framework of Constitution of India in respect of taxation. . . . . . . . . . . . . . . . . . 1 1.2 Main indirect taxes or duties in India at present. . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Customs duty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.4 Excise duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.5 Service tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.6 State value added tax (VAT) or central sales tax (CST) . . . . . . . . . . . . . . . . . . . . 7 1.6.1 Value added tax (VAT). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.6.2 Enactment of the Central Sales Tax Act, 1956 (CST Act). . . . . . . . . . 8 1.7 Other important indirect taxes or duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.8 Shortcomings of the present structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Chapter 2 GST – concept, features and advantages. . . . . . . . . . . . . . . . . . . . . . 13 2.1 What is GST and why GST?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.2 Features of Indian GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.3 Illustration of Local GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.4 Illustration of Inter-State GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.5 Illustrations of GST [As given in the first discussion paper]. . . . . . . . . . . . . . . . 21 2.5.1 In relation to supply of goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 In relation to supply of services – Illustration . . . . . . . . . . . . . . . . . . 21 2.5.2 2.6 Present indirect tax structure versus GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.7 Advantages of GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Chapter 3 Taxes or duties to be subsumed in the GST. . . . . . . . . . . . . . . . . . . . 31 3.1 Taxes or duties to be subsumed in GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.2 Taxes or duties not to be subsumed in GST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.3 Special status of tobacco and its products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Chapter 4 Incidence of tax, Rates of GST, Exemptions & Zero rated supply. . . . 35 4.1 Levy and collection of GST (Incidence of Tax) . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.1.1 Levy of GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.1.2 Levy of compensation cess. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 4.1.3 Collection of GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.2 Rates of GST in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 xiii
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4.4 4.5
4.6
4.7
Exemptions and exempt supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4.4.1 Power to grant exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Non-taxable persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.5.1 Who is a taxable person? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.5.2 Agriculturist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Zero rated supply and export of goods and services. . . . . . . . . . . . . . . . . . . . . . 42 Meaning of zero-rated supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.6.1 4.6.2 Eligibility of input tax credit or refund on zero-rated supply [Sec 16 of the IGST Act] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.6.3 Export of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.6.4 Export of services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.6.5 Deemed export. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Threshold limit (Basic exemption) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.7.1 Exemption limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.7.2 When the threshold limit is not applicable?. . . . . . . . . . . . . . . . . . . . 46
Chapter 5 Liability for registration under GST & determination of GST. . . . 47 5.1 Registration under the GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.1.1 Who is liable for registration mandatorily under GST?. . . . . . . . . . . 47 5.1.2 Time limit for taking registration [Section 25(1)] . . . . . . . . . . . . . . . 47 5.1.3 Who is not liable to take registration? . . . . . . . . . . . . . . . . . . . . . . . . 48 5.1.4 How to calculate aggregate turnover? . . . . . . . . . . . . . . . . . . . . . . . . 48 5.1.5 When is the threshold limit not applicable?. . . . . . . . . . . . . . . . . . . . 49 5.2 Steps for determination of GST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.3 Supply – Meaning, Time & Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 5.3.1 Meaning of the term “supply” (Section 7 of GST Act) . . . . . . . . . . . 50 5.3.2 Inter-State supply vs. Local Supply (Section 7 to 9 of IGST Act). . . 51 5.3.3 Time of supply (Section 12 & 13 of GST Act). . . . . . . . . . . . . . . . . . 52 5.3.4 Value of supply (Section 15 of GST Act). . . . . . . . . . . . . . . . . . . . . . 53 5.4 Calculation of output tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 5.5 Calculation of input tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Chapter 6 Enrolment in GST - Transition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.1 Existing taxpayers- registration on the appointed day under the Central and the State Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.1.1 Liability for registration of existing registered persons in GST. . . . . 55 6.1.2 Format of GST Registration Number. . . . . . . . . . . . . . . . . . . . . . . . . 56 Points/Issues regarding migration . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.1.3 6.1.4 Information and documents required to enroll with GST. . . . . . . . . . 58 6.1.5 What will be the procedure of migration of registration to GST?. . . 58 6.2 FAQ Released by CBEC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 6.3 FAQ Released by GSTN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 xiv
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6.4 6.5
GST Migration Help by CBEC (PPT). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Documents/Information to be furnished for migration to GST by an existing VAT registered dealer - Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Annexure 1 Legal Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Appendix- 1 Filing the Enrolment Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Appendix- 2 CEX & ST Assessee Migration to GSTN . . . . . . . . . . . . . . . . . . . . . . . . . 85 Chapter 7
Eligibility of unutilized tax credit -Transitional provisions. . . . . . 103
PART A - Central GST Act, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 7A.1 Carried over amount of Cenvat in the returns on the appointed day– Section 140(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 7A.2 Unavailed Cenvat on capital goods on the appointed day– Section 140(2) . . . 105 7A.3 Unavailed Cenvat on inputs held in stock on the appointed day– Section 140(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 7A.4 Unavailed/Unclaimed CENVAT on inputs held in stock on the appointed day– Section 140(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 7A.5 Inputs/Input services received after the appointed day (In transit) – Section 140(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 7A.6 Paying tax at fixed rate/amount under the existing law and paying GST under regular scheme– Section 140(6). . . . . . . . . . . . . . . . . . . . . . . . . . . 113 7A.7 Distribution of Cenvat by input service distributor (ISD)– Section 140(7) . . . 115 7A.8 Transfer of unutilized credit by taxable person having centralized registration– Section 140(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 7A.9 Availing Cenvat Credit in certain cases - Section 140(9). . . . . . . . . . . . . . . . . 117 PART B - State GST Act [based on the Telangana State GST Act, 2017]. . . . . . . . . 118 7B.1 Carried over amount of input tax credit in the returns on the appointed day– Section 140(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 7B.2 Unavailed VAT on capital goods on the appointed day – Section 140(2). . . . . 121 7B.3 Unavailed VAT on inputs held in stock on the appointed day– Section 140(3). 122 7B.4 Unavailed/Unclaimed ITC on inputs held in stock on the appointed day– Section 140(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 7B.5 Inputs received after the appointed day (In transit) – Section 140(5). . . . . . . . 125 7B.6 Paying tax under composition scheme on the appointed day and paying GST under regular scheme– Section 140(6). . . . . . . . . . . . . . . . . . . . . 126 7C To conclude. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Annexure 1 Legal Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
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Chapter 8
Output Tax, Revision of Returns and Return of Goods Transitional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
PART A - Central GST Act, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 8A.1 Return of goods in GST regime - Section 142(1). . . . . . . . . . . . . . . . . . . . . . . 141 8A.2 Revision of price – Supplementary invoice or debit/credit note raised in GST– Section 142(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 8A.2.1 Upward Revision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 8A.2.2 Downward Revision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 8A.3 Treatment of the amount recovered or refunded pursuant to revision of returns– Section 142(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 8A.4 Treatment of long term construction/works contracts Section 142(10) . . . . . . 143 8A.5 Taxability of supply of goods or services – Section 142(11) . . . . . . . . . . . . . . 144 8A.5.1 Supply of goods – VAT leviable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 8A.5.2 Supply of services – Service tax leviable. . . . . . . . . . . . . . . . . . . . . 144 8A.5.3 Supply of goods and services after the appointed day. . . . . . . . . . . 144 8A.6 Goods sent on approval basis are returned or rejected, on or after appointed day– Section 142(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 PART B - State GST Act [based on the Telangana State GST Act, 2017]. . . . . . . . . 145 8B.1 Return of taxable goods in GST regime, which were also taxable in existing law– Section 142(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 8B.2 Revision of price – Supplementary invoice or debit/credit note raised in GST– Section 142(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 8B.2.1 Upward revision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 8B.2.2 Downward revision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 8B.3 Treatment of amount recovered or refunded pursuant to revision of returns– Section 142(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 8B.4 Treatment of long term construction/works contract– Section 142(9). . . . . . . 147 8B.5 Taxability of supply of goods or services – Section 142(10) . . . . . . . . . . . . . . 148 8B.5.1 Supply of goods – VAT leviable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 8B.5.2 Supply of services – Service tax leviable. . . . . . . . . . . . . . . . . . . . . 148 8B.5.3 Supply of goods and services after the appointed day. . . . . . . . . . . 148 8B.6 Goods sent on approval basis are returned or rejected, on or after appointed day– Section 142(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Annexure 1 Legal Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 Chapter 9
Job Work -Transitional provisions. . . . . . . . . . . . . . . . . . . . . . . . . . 155
PART A - Central GST Act, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 9A.1 Removal of inputs for job work before the appointed day and return of goods after that day - Section 141(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 xvi
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9A.2 Removal of semi-finished goods for job work before the appointed day and return of goods after that day – Section 141(2). . . . . . . . . . . . . . . . . . 156 9A.3 Removal of finished goods to carry certain processes before the appointed day and return of goods after that day- Section 141(3) . . . . . . . . . . 157 PART B - State GST Act [based on the Telangana State GST Act, 2017]. . . . . . . . . 158 9B.1 Dispatch of inputs for job work before the appointed day and return of goods after that day - Section 141(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 9B.2 Dispatch of semi-finished goods for job work before the appointed day and return of goods after that day - Section 141(2). . . . . . . . . . . . . . . . . . . . . . 159 9B.3 Dispatch of finished goods to carry certain processes before the appointed day and return of goods after that day- Section 141(3) . . . . . . . . . . 160 9C To Conclude. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 Annexure 1 Legal Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 Chapter 10
Refund claims -Transitional provisions. . . . . . . . . . . . . . . . . . . . . . 167
PART A - Central GST Act, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 10A.1 Disposal of refund claims filed before/on/after the appointed day– Section 142(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 10A.2 Disposal of refund claims in respect of export– Section142(4) . . . . . . . . . . . . 168 10A.3 Disposal of refund claims in respect of services not provided – Section 142(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 PART B - State GST Act [based upon the Telangana State GST Act, 2017]. . . . . . . 169 10B.1 Disposal of refund claims filed before/on/after the appointed day– Section 142(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 10B.2 Disposal of refund claims in respect of export– Section 142(4). . . . . . . . . . . . 169 10C To conclude. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 Annexure 1 Legal Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Chapter 11
Assessment, adjudication, appeal, etc -Transitional provisions. . . 173
PART A - Central GST Act, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 11A.1 Disposal of claims of Cenvat credit filed through appeal, revisions, review, etc. under the existing law– Section 142(6)(a). . . . . . . . . . . . . . . . . . . 173 11A.2 Disposal of recovery of Cenvat credit filed through appeal, revisions, review, etc. under the existing law - Section 142(6)(b). . . . . . . . . . . . . . . . . . . 174 11A.3 Finalization of proceedings relating to output duty or tax liability initiated before the appointed day– Section 142(7). . . . . . . . . . . . . . . . . . . . . . 174 11A.4 Treatment of the amount recovered or refunded in pursuance of assessment or adjudication proceedings– Section 142(8). . . . . . . . . . . . . . . . . 174
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PART B - State GST Act [based upon the Telangana State GST Act, 2017]. . . . . . . 175 11B.1 Disposal of claims of input tax credit filed through appeal, revisions, review, etc. under the existing law– Section 142(5)(a). . . . . . . . . . . . . . . . . . . 175 11B.2 Disposal of recovery of input tax filed through appeal, revisions, review, etc. under the existing law - Section 142(5)(b). . . . . . . . . . . . . . . . . . . 175 11B.3 Finalization of proceedings relating to output tax liability initiated before the appointed day– Section 142(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 11B.4 Treatment of the amount recovered or refunded in pursuance of assessment or adjudication proceedings– Section 142(7). . . . . . . . . . . . . . . . . 176 11C To conclude. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Annexure 1 Legal Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 Chapter 12
Transitional provisions–Not covered in earlier chapters. . . . . . . . 181
PART A - Central GST Act, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 12A Deduction of tax at source (TDS)– Section 142(13). . . . . . . . . . . . . . . . . . . . . 181 PART B - State GST Act [based upon the Telangana State GST Act, 2017]. . . . . . . 181 12B Deduction of tax at source (TDS)– Section 142(12). . . . . . . . . . . . . . . . . . . . . 181 PART C - Integrated GST Act, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 12C Import of services made on or after the appointed day– Section 21. . . . . . . . . 182 Annexure 1 Legal Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 Chapter 13 Closing Stock in hand on the appointed day. . . . . . . . . . . . . . . . . . 185 13.1 Inventory held in stock or books of accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 185 13.2 Tax credit on the closing stock as on the appointed day. . . . . . . . . . . . . . . . . . 186 Chapter 14 Impact on Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 14.1 India’s GST Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 14.2 Impact – generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 14.3 Impact on various sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 14.3.1 Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 14.3.2 Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 14.3.3 Manufacturers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 14.3.4 Works contractors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 14.3.5 Leasing companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 14.3.6 Intangible goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Exempted units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 14.3.7 14.3.8 Power sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 14.3.9 Telecommunication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 14.3.10 Alcohol for human consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 14.3.11 Petroleum and petroleum products. . . . . . . . . . . . . . . . . . . . . . . . . . 203 xviii
Table of contents
14.3.12 International trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 14.3.13 Service providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 14.3.14 Event managers and hotels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 14.3.15 Land and real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 14.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Chapter 15 Safeguards and precautions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 15.1 Awareness and knowledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 15.2 Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 15.3 Tax credit balance not available in the returns . . . . . . . . . . . . . . . . . . . . . . . . . 210 15.4 Determination of output tax and raising of invoice in time. . . . . . . . . . . . . . . . 211 15.5 Existing long term contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 15.6 Existing exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 15.7 Taxpayers planning to sell their fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 212 15.8 Additional restrictions for claiming input tax credit. . . . . . . . . . . . . . . . . . . . . 213 15.9 Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 15.10 Invoices and records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 15.11 Additional working capital requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 15.12 Determination of cost or price structure in the GST. . . . . . . . . . . . . . . . . . . . . 215 15.13 Goods at maximum retail price (MRP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 15.14 Updating of software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 15.15 Human resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 15.16 Marketing model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 15.17 Adhere the time limits specified in transition provision. . . . . . . . . . . . . . . . . . 217 15.17.1 Action points after the AD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 15.17.2 Stock holding as on appointed day for claiming tax credit . . . . . . . 218 15.17.3 Other time limits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
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Existing indirect tax structure in India 1.1
Framework of Constitution of India in respect of taxation
As per Art. 246(1) of Constitution of India, the Parliament has exclusive powers to make laws with respect to any matters enumerated in List I of the Seventh schedule to the Constitution of India (called Union List). As per Art. 246(3), the state governments have exclusive powers to make laws with respect to the matter enumerated in List II (called State List). Schedule VII of the Constitution consists following three lists: • List I (Union List) contains entries over which the central government has a power to legislate, • List II (State List) contains entries over which the state government has a power to legislate, and • List III (Concurrent List) contains entries over which both the central government and the state government has a power. Broad indirect taxes/duties in Schedule VII of the Constitution Union List (List I)
State List (List II)
Entry 83 - Duties of Customs
Entry 51 - Excise duty on Alcoholic Liquors, Opium & Narcotics
Entry 84 - Duties of Excise
Entry 52 - Taxes on entry of goods
Entry 92A - Taxes on sale or purchase of goods between two States (CST)
Entry 53 - Taxes on the consumption or sale of electricity
Entry 92B - Taxes on the consignments of goods, where such
Entry 54 - Taxes on sale and purchase of goods where such sale/purchase 1
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Union List (List I)
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State List (List II)
consignment takes place in the course takes within the State (VAT), subject of inter-state trade to Entry 92A of List I Entry 92C/97 - Taxes on services
Entry 55 - Taxes on advertisements other than in newspaper, radio and television
Entry 91 - Stamp duty in respect of bill of exchange, cheques, promissory notes, bills of lading, letter of credit, insurance policies, transfer of shares, debentures, proxies & receipts
Entry 62 - Taxes on luxuries, entertainments, amusements, betting and gambling
1.2
Entry 63 - Stamp duty in respect of document other than those specified in List I
Main indirect taxes or duties in India at present
Indirect taxes/duties
Relevant entry of Sch VII to the Constitution
Taxable event
Maiden rate of tax/duty
Customs duty
83 of List I
Import & Export
Varies
Excise duty
84 of List I
Manufacture
12.5%
Service tax
97 (Residuary) of List I
Provision of service 15%
Central sales tax
92A of List I
Sale
Equal to State VAT Rate
State VAT
54 of List II
Sale
5%, 12.5% & 20%
State excise duty (On liquor)
51 of List II
Manufacture/Import Varies in state
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Existing indirect tax structure in India
India currently has a dual system of taxation of goods and services: by the Union as well as the state. Taxes on goods are described as “VAT” at both central and state level. It has adopted value added tax principle with input tax credit mechanism for taxation of goods and services, respectively, with limited cross-levy set-off. Until the introduction of MODVAT (now, CENVAT) Scheme in 1986 under the central excise duty, duty was levied as origin based single point taxation system on manufacture of goods with some exceptions where set off scheme was used to reduce cascading effect of taxes. Following are other features of present indirect taxation in India: •
Excise duty is levied only at manufacturing level and does not go up to the retail level.
•
Before the implementation of State level VAT, varieties of schemes were used, like origin based single point system (first point tax), multi point system with set-off, last point (retail level) system, and so on. This was, again, not standard even within a state. States adopted different systems for different commodities too.
•
Cascading effect at that time was reduced to a great extent with the use of declaration forms, though, that by itself, was a complex system. With the introduction of state VAT, there is combination of origin based (central sales tax) and destination based multi-point system of taxation.
•
Similarly, there was no Union level tax on services until the introduction of Service Tax in 1994. Selective levy on specified services by the states is continuing, e.g., entertainment tax, luxury tax, etc.
•
Set-off of input tax credit at the State level VAT is only on the goods and no cross set-off is allowed between the goods and the services. Further, no set-off of the central sales tax, whatsoever, is available. It is important to mention that the central sales tax, even though legislated by the union, is levied, collected and retained by the state where it is collected. At the Union level, it is in respect of goods (excise duty) as well as services (service tax) through input tax credit mechanism (CENVAT).
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1.3
Chapter 1
Customs duty
Indian Customs have been assigned a number of tasks, more important of which are: (i)
Collection of customs duties on imports and exports as per basic Customs Laws (the Customs Act, 1962 and the Customs Tariff Act, 1975);
(ii)
Enforcement of the various provisions of the Customs Act governing imports and exports of cargo, baggage, postal articles and arrival & departure of vessels, air crafts, etc;
(iii) Discharge of various agency functions and enforcing various prohibitions and restrictions on imports and exports under the Customs Act and other allied enactments; (iv) Prevention of smuggling including interdiction of narcotics/drug trafficking; and (v)
International passenger processing.
Salient features of customs duties in India are as under:
4
•
The Constitutional provisions have given to the Union, the right to legislate and collect duties on imports and exports as per Entry 83 of List I to Sch VII of the Constitution. The Customs Act, 1962 is the basic Statute, effective from 1 February 1963, empowering duties to be levied on goods imported into or exported from India.
•
The categories of goods and the rates of duties leviable have been specified in the Schedules to the Customs Tariff Act, 1975. The First schedule to the said Act specifies various categories of import commodities in a systematic and well considered manner, in accordance with the international scheme of classification of internationally traded goods – termed ‘Harmonized System of Commodity Classification’. Different rates of duties have been prescribed by the legislature on different commodities/group of commodities mentioned in the First Schedule.
•
The duties are levied both on specific and ad valorem basis(i.e. duties with reference to value); while there are few cases where at times specific-cum-ad valorem duties are also collected on imported commodities. Second schedule to the Customs Tariff Act, 1975 incorporates commodities subject to exports duties and rates thereof.
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Existing indirect tax structure in India
•
Where ad valorem duties are collected, which are the predominant mode of levy, the value of the goods for customs duty purposes is determined as per provisions laid down under sec 14 of the Customs Act and the Customs Valuation (Determination of Prices of Imports Goods) Rules, 2007 issued thereunder.
•
Customs duties on import are primarily of three types: (a) Basic Customs Duty (levied u/s 12 of the Customs Act); (b) Additional Customs Duty/Countervailing Duty (CVD) under sections 3(1) and 3(3) of the Customs Tariff Act, in lieu of excise duty; (c) Special Additional Duty of Customs (SAD) under sec 3(5) of the Customs Tariff Act to counter-balance the sales tax, value added tax, local tax or any other charges for the time being leviable on a like article on its sale, purchase or transportation in India to bring manufactured products in India at par with the imported goods.
1.4
Excise duty
Central excise duty is an indirect tax levied on goods manufactured in India. The duty is administered by the Central Government under the authority of Entry 84 of the Union List (List I) of Sch VII read with Art. 246 of the Constitution of India. Following are main features of central excise duty in India. •
The central excise duty is levied in terms of the Central Excise Act, 1944 and the rates of duty, ad valorem or specific, are prescribed under the Sch I and II of the Central Excise Tariff Act, 1985.
•
The taxable event under the Central Excise Law is ‘manufacture’ and the liability of central excise duty arises as soon as the goods are manufactured.
•
In 1986, modified value added tax (MODVAT) was introduced as the first step towards reforming Union excise duty. This provided set-off for about a small number of articles. In 1987, MODVAT was extended to some additional commodities. With the recommendations of the report of Tax Reforms Committee (TRC) (1991-93), the MODVAT was further extended to a large number of commodities. Gradually, the procedures of MODVAT have also been overhauled, resulting in a full system of Central VAT (CENVAT).
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Chapter 1
•
Excise duty allows credit for excise duty paid on inputs / specified capital goods as well as of countervailing duty (CVD).
•
New Central Excise Rules, 2001 replaced the Central Excise Rules, 1944 with effect from 1 July, 2001. Other rules were also notified namely, CENVAT Credit Rules, 2001, Central Excise Appeal Rules, 2001, etc. With the introduction of the new rules, several changes were effected in the procedures. The CENVAT Credit Rules, 2001 were later replaced by CENVAT Credit Rules, 2004, having the following broad features: o
Elimination of cascading effect through tax credit mechanism;
o
Integration of excise duty and service tax, and set-off of one against another;
o
However, it is not an integration of excise duty with sales tax/value added tax on sale of goods.
1.5
Service tax
Service tax was first imposed in India in the year 1994 with three services through Chapter V of the Finance Act, 1994. More and more services were brought into the tax-net. Since, there is no separate legislation for imposition of service tax in India, it is governed and administered by the Finance Act, 1994. The tax is administered by the Central Government under the authority of Residual Entry 97 of the Union List (List I) under Sch VII of the Constitution of India. Salient features of service tax in India are as under: • Taxable event of the service tax is ‘provision of services’. However, tax is also levied on services to be provided, i.e., the advances received for provision of services. • Up till 30 June 2012, service tax was levied on specified services by the Central Government, commonly known as positive regime. With effect from 01 July 2012, negative regime has been brought in, whereby all the services have been considered as taxable services, except services specifically excluded or exempted under the Act. • The CENVAT Credit Rules, 2004 provides for availment of the credit of the service tax and central excise duties paid on the input services/inputs/ specified capital goods used for providing output services. Such credit amount can be utilised by an assessee towards payment of service tax on their output services. 6
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•
•
Existing indirect tax structure in India
The CENVAT credit availed by a manufacturer on the input services can also be utilised for discharging his liability towards service tax on output services and/or central excise duties. Duties of excise and the countervailing customs duty (CVD) paid on the inputs & capital goods and the service tax paid on the ‘input’ services can be taken as credit. However, cross levy set-off of service tax and sales tax/value added tax on sale of goods is not permissible.
1.6
State value added tax (VAT) or central sales tax (CST)
Broadly, for taxation purposes, sales can be divided into: (a) Sales within a state (known as ‘intra-state sales’ or ‘local sales’); (b) Sales from one state to another state within the domestic boundaries of India (known as ‘inter-state sales’ or ‘central sales’); and (c) Sales in the course of export from or import into India. While the sales tax on the first head, i.e. local sales, is levied by the State Governments as per the provisions of their respective state sales tax laws (presently VAT laws), taxability of inter-state sale under the second head is within the purview of the Central Government. Sales under the third head, i.e., in the course of export and import, though defined under the Central Sales Tax Act, are exempt from the sales tax/VAT. Art. 286 of the Constitution imposes restrictions on the states to tax on sale or purchase of goods in the course of the import of the goods into, or export of the goods out of, the territory of India. Entry 54 in List II (State List) of the Seventh schedule read with Art. 246(3) of the Constitution of India empowers the states to impose “tax on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of the List I”. Entry 92A in the Union List in the Seventh schedule to the Constitution of India confers powers upon the Union to legislate in respect of “taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-state trade or commerce”. Power to impose sales tax in the Union Territory vests with the Parliament under Art. 246(4) of the Constitution of India.
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Chapter 1
As per Art. 269(3) of the Constitution, Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter-state trade or commerce. As per Art. 269(1) of the Constitution, tax on the sale or purchase of goods, where such sale or purchase takes place in the course of inter-state trade or commerce shall be levied and collected by the Government of India, but shall be assigned to the collecting states. 1.6.1
Value added tax (VAT)
VAT, one of the biggest reforms in the history of indirect tax structure in India, was implemented by a majority of the states with effect from 1 April 2005, and this could be possible due to joint efforts of the central government and the state governments. The replacement of the state sales taxes by the VAT marked a significant step forward in the reform of domestic trade taxes in India. Main features of value added tax are as under: •
VAT is a tax on value addition. It is a multi-point tax, which is levied at every stage of sale. It is collected at the stage of sale (whether manufactured goods or traded goods), and contemplates rebating of tax paid on inputs and capital goods. Despite its name, VAT is intended as tax on consumption, and is destination based tax within the State.
•
VAT replaced general sales tax structure, which was levied at the state level; however, the only difference is in the manner of levy. Powers of the states to levy tax on sales transactions, in the form of VAT, continue to be drawn from Entry 54 in List II of Sch VII of the Constitution of India. In VAT, every transaction of sale of goods in the course of business is taxed, thus providing revenue to the government on value addition at every stage. On account of set-off being provided on preceding purchase, cascading effect on cost of goods is avoided. It is a self-policing system, reducing the scope of tax evasion. VAT has reduced the scope for under-valuation and tax evasion, and has provided a broad tax base.
1.6.2
Enactment of the Central Sales Tax Act, 1956 (CST Act)
In exercise of authority conferred by the Constitution (Sixth Amendment) Act, 1956, the Parliament enacted on 21 December 1956, the Central Sales Tax Act, 1956 (‘CST Act’, in short). Imposition of tax became effective from 1 July 1957. 8
Chapter 1
Existing indirect tax structure in India
Inter-State sale of goods is taxable under the CST Act. For this purpose, goods have been classified into two categories: (a) Declared goods, i.e., goods of special importance in inter-state trade or commerce, and (b) Other goods. Rates of tax have been prescribed under sec 8 of the Act and differ from state to state and for a particular commodity, it generally depends upon the VAT rate prevailing in that state. Rate of tax on declared goods in any state cannot exceed 5% at present. Central Sales Tax is non-VAT’able, and the effect of double taxation, to some extent, is avoided through Form C. A registered dealer can purchase goods from another registered dealer located in other State at a concessional rate of tax on the strength of Form C. The Central Government reduced the central sales tax rate for sales made to registered dealers on the strength of Form C from 4% to 3% with effect from 1 April 2007; which was further reduced to 2% w.e.f. 1 June 2008.
1.7
Other important indirect taxes or duties
•
Betting and gambling tax;
•
Entertainment tax;
•
Entry tax and Octroi;
•
Lottery tax;
•
Luxury tax;
•
Property tax;
•
Research and development cess;
•
Stamp duty;
•
Tax on consumption or sale of electricity;
•
Taxes on transportation of goods and services;
•
Telecom license fees;
•
Toll tax, passenger tax and road tax;
•
Turnover tax.
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Migration to GST – Enrolment, Transition and Safeguards
1.8 (i)
Chapter 1
Shortcomings of the present structure
Tax Cascading Tax cascading occurs under the centre as well as the state taxes. The most significant contributing factor to tax cascading is the partial coverage by central and state taxes. Mining, agriculture, wholesale and retail trade, and range of services remain outside the ambit of the Cenvat and the service tax levied by the centre. The exempt sectors are not allowed to claim any credit for the Cenvat or the service tax paid on their inputs / input services. Similarly, under the State VAT, no credits are allowed for the inputs to the exempted sectors, which include the entire service sector and sale of exempted goods. Another major contributing factor to tax cascading is the central sales tax (CST) on inter-state sales, collected by the originstate, for which no credit is allowed by any state government.
(ii)
Complexity in determining the nature of transaction – Whether is it sale or service? The distinctions between goods and services have become more complex. Transfer of software, copyrights, patents and other intangible goods are always in dispute: whether these are sale of goods or provision of services? Further, goods, services, and other types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements. Under the current division of taxation powers in the Constitution, neither the Centre nor the States can apply the tax to such bundles in a seamless manner. Each government can tax only parts of the bundle, creating the possibility of gaps or overlaps in taxation.
(iii)
Lack of uniformity in provisions and tax rates Present VAT structure across the States lacks uniformity, which is not restricted only to the rates of tax, but also extends to procedures and, sometimes, to the definitions, computation and exemptions. Theoretically, one might expect that the lower tax rates would be applied to basic necessities that are consumed largely by the poor. This is not the case under the State VAT. The lowest rate of 1% applies to precious metals and jewellery, and related products. The middle rate of 5% applies to selected basic necessities and also a range of industrial inputs
10
Chapter 1
Existing indirect tax structure in India
and IT products. Packaged water is been taxed @ 12.5% by most of the states. In fact, necessities fall into all three categories – exempted from tax, taxable at 5%, and taxable at the standard rate of 12.5%. Higher rate of 20% is applicable mainly to the petroleum products and liquor. Many states, such as, Haryana, U.P. etc have also started levying additional tax or surcharge over and above the floor rates of tax. (iv)
Fixation of situs – Local sale v/s Central sale To decide whether a sale takes place in one state or another, i.e. to fix the situs of a sale transaction, is the major conflict since its taxability affects the revenue of the state. Though CST is a tax levied by the central government, it is collected and retained by the collecting state. Whether a transaction is a direct inter-state sale from state ‘A’ to the customer ‘PQR’ located in state ‘B’; or is a stock transfer from state ‘A’ to branch in state ‘B’ first, and then a local sale to the customer ‘PQR’ in the state ‘B’, will have a bearing on the revenue of the state ‘A’ or state ‘B’, as the case may be. A significant number of litigations pertain to this issue. Ultimately, the Central Government made provisions under the Central Sales Tax Act and created a Central Appellate Authority to resolve such matters.
(v)
Interpretational issues Interpretation of various provisions and determining the category of the commodities is the major problem; and significant number of litigation surrounds this issue only. To decide whether an activity is a sale or a works contract, a sale or a service, is not free from doubt in many cases.
(vi)
Levy of excise duty on manufacturing point The excise duty is levied on goods manufactured or produced in India. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax. Taxable event at manufacturing point itself forms a narrow base. For example, valuation as per excise valuation rules of a product, whose consumer price is INR 100/- is, say, INR 70/-. In such a case, excise duty as per the present provisions is payable only on INR 70/-, and not on INR 100/-.
(vii)
Narrow base of excise duty The starting base for the excise duty is narrow, and is being further eroded by a variety of area-specific, and conditional and unconditional exemptions. 11
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(viii) Complexities in administration Compounding the structural or design deficiencies of each of the taxes is the poor infrastructure for their administration. Taxpayer services, which are a lynchpin of a successful self-assessment system, are virtually nonexistent or grossly inadequate under both central and state administrations. Many of the administrative processes are still manual, not benefiting from the efficiencies of automation. All this not only increases the costs of compliance, but also undermines revenue collection. (ix)
Insufficient tax compliance Multiple tax administration machinery, compliance monitoring using manual practices, regular failure of IT support system, etc have led to blatant tax leakage/avoidance, missing transaction trail, under-reporting of invoice value, irregular availment of input credits by the purchaser without deposit of tax by the supplier. The above has put pressure on State’s resource availability for state development resulting in withholding of tax refunds by state administration to preserve state treasury, thereby impacting cash flow at the business level.
12