gst industry - impact on different sectors

K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT

Flat No.3, First Floor,

No.9, Thanikachalam Road,

T. Nagar,

Chennai - 600 017, India

Tel.: 044 + 2433 1029 / 4048

402, Front Wing,

House of Lords,

15/16, St. Marks Road,

Bangalore – 560 001, India

Tel : 080 22244854/ 41120804

Mobile: 98400-96876

E-mail : [email protected] / [email protected]

www.vaithilegal.com

Passed by the Lok Sabha on 06.05.2015 Select Committee Report released The Bill has to be passed by the Rajya Sabha. In terms of Article 368, the amendment requires

2/3rd majority and since List in the Seventh Schedule are being amended, the amendment has to be ratified by legislatures of not less than one half of the States.

K.Vaitheeswaran - All Copyrights Reserved

Path breaking tax reform Harmonization of taxes Elimination of tax as a cost Possible elimination of unwanted business structures Long way to go Too many compromises Complex legal structure Cascading effect continues Not a simple law Huge potential for conflict


Both Government and industry are keen to implement GST. Governments are looking at increasing the tax base and tax

collections through GST. State is looking at GST as a window for taxing services. Centre is looking at GST to go beyond the point of

manufacture. Industry wants GST to eliminate the cascading effect of

taxes. Industry considers GST as a path breaking tax reform in the

field of indirect taxes.


GST is a tax on both goods and services across the supply

chain.

It is levied at every stage of supply.

GST is a levy which commences from the manufacturer /

producer / trader and goes upto the retailer .

An effective and efficient GST system would provide for

elimination of the cascading effect of taxes.

The GST on inputs is generally available as a credit for set off

against the GST on the output supply. There could be

restrictions which would however defeat the concept of GST.

K.Vaitheeswaran

Implementation of GST in a federal structure has its own complications.

The Federal, State and even the Municipality have their own powers and sources of revenue.

122nd Constitutional Amendment provides for dual GST as well as an IGST.

Instead of one GST that exists in most countries, India would have three GSTs namely CGST, SGST and IGST.

K.Vaitheeswaran

Excise Duty Countervailing Duty Customs Duty Duty of 4% under Section 3(5) of the Customs Tariff Service Tax Products specific cess Research and Development cess


VAT CST by originating State Entry tax Octroi by Municipality Entertainment tax Luxury tax Stamp duty and Registration fee


GST Report on payment processes. GST Report on refund process. GST Report on registration. Order given to Infosys for building and maintaining

technology network crucial for implementing GST system across the country for five years (Rs. 1,380 crores).


Excise duty charged by the manufacturer forms part of the price in the supply chain.

Since the cenvat credit is linked with manufacture, the dealer cannot set off the excise duty against any other tax.

CST purchases form part of cost as there is no VAT credit. VAT has a cascading effect since sale price includes excise,

customs, CVD. Cost savings on account of GST due to elimination of

cascading effect. Understanding of one’s own business; supplier’s business;

customer; and understanding the changes that GST would bring about in all three segments.


• Multiple rates • Different rates in different States • Different definitions • Multiple forms • Cascading effect due to CST purchases • Deviations • Refunds


Origin based tax No credit on CST purchases leading to

cascading effect Exempt stock transfer related distortions Complex law on stock transfer and transit

sales CST Vs. VAT


CGST would be a levy by the Central Government through law made by the Parliament.

SGST would be a levy by each State through law made by State Legislature.

IGST would be a levy by the Centre through law made by the Parliament on the supply of any goods and / or services in the course of inter-State trade or commerce.

IGST would also apply on a supply of goods and / or services in the course of import into the territory of India.

• Assuming an IGST rate of 20%, the tax calculations would be as under when a manufacturer sells goods from Tamil Nadu to Karnataka.

• Prices increases • Sale price assumed to be constant. • Cenvat Credit not factored as GST credit would be available on raw materials . • Only possible savings in cost would be non-vatable CST of 2% becoming non-vatable new

additional tax of 1%. • The savings in cost on account of restructuring of the business or alteration of the

supply chain and the impact in terms of price reduction has not been factored.


Existing System Proposed System

Sale Price 1,00,000 Sale Price 1,00,000

Excise Duty @ 12.5% 12,500 Excise Duty Nil

CST @ 2% 2,250 New Additional Tax @ 1% 1,000

IGST @ 20% 20,000

Inclusive Price 1,14,750 1,21,000



Purchase Price including ED and CST taken as cost

1,14,750 Purchase Price excluding IGST but including new additional tax.

1,01,000

Credit Nil Credit – IGST 20,000

Cash flow saving Nil Cash flow saving 20,000



Purchase Price including ED and CST taken as cost

1,14,750 Purchase Price excluding IGST but including new additional tax.

1,01,000

Credit Nil Credit – IGST 20,000

Cash flow saving Nil Cash flow saving 20,000

Profit @ 10% on cost 11,475 Profit @ 10% on cost 10,100

Sale Price 1,26,225 Sale Price 1,11,100

KVAT @ 14.5% 18,302 CGST (assumed @ 7%) 7,777

SGST (assumed @ 13%) 14,443

Inclusive price 1,44,527 Inclusive Price 1,33,320

No credit for KVAT payment

IGST Credit of 20,000 is available for payment of CGST of 7,777 and SGST of 14,443

In the current system stock transfers are exempted under Section 6A of the CST Act.

Input tax reversal. Excise duty is payable on stock transfer. Depots and godowns have been created for

non-business reasons. Restructuring of business would involve

closure of many godowns / branches / depots and business would drive such structures.


Inter-State stock transfers would attract IGST. Currently manufacturers pay excise duty on stock

transfers but do not pay CST. Currently traders doing stock transfer do not pay

any excise duty or CST.


Since the depot is part of the same organisation huge cash outflows on stock transfers.

Impact for a couple of months after introduction of GST. Even though depot can avail IGST credit, the set off can happen only on

sale which may not be immediate. Dealers ability or willingness to hold stock. Relevance of depot / godowns / C&F. Assuming goods are sold directly to customer without stock transfer

IGST and 1% new tax would be recovered from the customer within a normal credit period.

The 1% levy is still an issue in the Parliament and may be dropped . Zero CST Vs. IGST


Explanation to Article 269A provides that supply of goods or of services or both in the course of import into the territory of India shall be deemed to be a supply of goods or services or both in the course of inter-State trade or commerce.

Parliament by law may formulate principles for determining when a supply of goods or of services or both takes place in the course of inter-State trade or commerce.

When goods are imported from abroad into Tamil Nadu (Chennai Port), the importer apart from customs duty will now be required to pay IGST to the Centre.

The IGST paid by the importer would qualify as credit. Impact on make in India.




Assessable value 100 Assessable value 100

BCD 10% 10 BCD 10% 10

Value 110 Value 110

CVD 12% 13.2 IGST (assumed @ 20% with a cascade on BCD)

22

Education cess on CVD Nil

S&HE Cess 1% Nil

Customs Duty for cess 23.2

Customs Education Cess 2% 0.46

Customs S&HE Cess 1% 0.23

Value for SAD 123.89

SAD @ 4% 4.96

Total Duty 28.85 Total Duty 32

Trader can avail credit of IGST and set it off against CGST / SGST on local supply or against IGST on inter-State supply.

Increased competition from traders who import and sell – through pricing.

Additional duty of 1% would apply on inter-State supply of goods but not on imports.



Landed cost including BCD, CVD & SAD

128.85 Landed cost including BCD 110

No credit IGST credit 22

Will dealers be willing to hold stock If limited stock is held by dealers due to huge IGST

outflow, depots would not disappear and huge cash outflows for the manufacturer would be inevitable.

Zero CST Vs. 20% IGST In stock transfers there is upfront outflow of IGST whereas

the turn around time for sale could be higher. If customer cannot take credit, IGST is prohibitive. Assuming hospitals are not in GST, IGST rates charged

would be extremely high. Government as a buyer will have to pay more compared to

the current rates.


Inter-unit movement Job work transactions


CGST would be a tax on supply of goods or services or both except taxes on the supply of alcohol for human consumption.

It would be levied and collected by the Centre. CGST would be levied across the value chain. CGST rate


Price of the manufacturer may reduce only marginally to the extent of 3% to 4%. Credits not factored since existing law as well as proposed law allows credits. Tax collections to State would come down from 16,313 to 13,000. The savings in cost on account of restructuring of the business or alteration of

the supply chain and the impact in terms of price reduction has not been factored. K.Vaitheeswaran - All Copyrights Reserved

EXISTING PROPOSED

Sale price 1,00,000 Sale price 1,00,000

Excise duty @ 12.5% 12,500 SGST (assumed @ 13%) 13,000

Value for VAT 1,12,500 CGST (assumed @ 7%) 7,000

VAT @ 14.5% 16,313

Inclusive price 1,28,813 Inclusive price 1,20,000

Total tax outflow on transaction

28,813 Total tax outflow on transaction

20,000


EXISTING PROPOSED

Purchase price 1,12,500 Purchase price 1,00,000

VAT credit 16,313 SGST credit 13,000

Profit @ 10% of cost 11,250 CGST credit 7,000

Sale price 1,23,750 Profit @ 10% of cost 10,000

VAT @ 14.5% 17,943 Sale price 1,10,000

VAT credit 16,313 SGST @ 13% 14,300

Net VAT outflow 1,630 CGST @ 7% 7,700

Net SGST outflow 1,300

Net CGST outflow 700

Price to customer 1,41,693 Price to customer 1,32,000

Tax collections to State would come down from 1,630 to 1,300

Currently, service tax is paid to the Centre at the rate of 14% with an additional SBC of 0.5%.

Currently, a PAN India Organisation generally pays service tax at one location.

New Law makes a distinction between supply of services within a State and supply of services in the course of inter-State trade or commerce.

Parliament would make law for determining when a supply of goods or of services or both takes place in the course of inter-State trade or commerce.

An IGST rate of say 18% or 20% would be prohibitive and much higher than existing rates.


Higher rates Disadvantage for an existing player compared to a new

player Possible tax outflow incase the current Rule 3 of POP is not

retained and place of supply rules provide for service receiver to be registered

Increase in compliance cost Refund claims in multiple States B2C Issues with reference to accumulation of credit at corporate

office or head office Telecom, insurance and banking

Significant inter-State sales. CST charged has been a cost to the customer and a factor in price

negotiation. Better pricing due to availability of credit for the buyer. Review of depots and godowns created across the country and possible

scaling down of such depots. Major savings on CST purchases since IGST would qualify as a credit as

against CST 2% which is a cost. Increased credit on services due to elimination of the concept of

manufacture. Elimination of cascading effect (except to the extent of the 1% duty). Cost savings on account of business review. Cash outflow on account of transactions coming into the tax net (job

work).

FMCG companies have a mix of own manufacturing plants; manufacture through job workers.

Excise duty for most products are on MRP basis with abatement. Job worker pays excise duty based on the selling price of the principal

manufacturer. No VAT on job worker. No service tax on job worker as the activity is manufacture. FMCG sector has a long supply chain involving manufacturers – depots –

wholesale distributor – sub-distributor – dealer – retailer. Major business decisions will have to taken in the context of dealers / C&F /

depots / job workers. GST would initiate a leaner supply chain. Huge cost saving on account of savings in inventory cost insurance,

transport, rentals, security, employee costs, local compliance, etc. Savings on account of elimination of cascading effect of VAT on excise duty;

elimination of entry tax and octroi; elimination of CST cost. Manufacture Vs. Import


• Jewellery exempted from excise duty. • Attempted levy on branded jewellery in 2005. • Branded jewellery completely exempted in 2009. • Another round of attempted levy from 01.03.2011. • VAT on jewellery at 1%. • In the GST regime, would jewellery qualify for a

special rate?


Significant inter-State sales. CST charged has been a cost to the customer and a factor in price

negotiation. Better pricing due to availability of credit for the buyer. Review of depots and godowns created across the country and possible

scaling down of such depots. Major savings on CST purchases since IGST would qualify as a credit as

against CST 2% which is a cost. Increased credit on services due to elimination of the concept of

manufacture. Elimination of cascading effect except to the extent of the 1% duty. Cost savings on account of business review. Cash outflow on account of transactions coming into the tax net (job

work).

GST as against exemption from excise duty. Complex chain of manufacture with multiple job

workers working in sequence. GST rate could be higher than existing VAT rates. Inter-State supply would involve savings in cost

since CST would be eliminated and IGST would qualify for credit.

Cost savings on account of GST credits on rentals / insurance / security / infrastructure relevant to outlets.

Manufacture Vs. Imports. K.Vaitheeswaran - All Copyrights Reserved

ED which is a cost and forming part of the purchase price would be eliminated.

Savings on account of elimination of cascading effect of VAT, CST and ED.

Whatever GST that is charged by the vendor would qualify as credit.

Possibility of cost savings on account of credit in respect of other purchases by a retailer subject to legislation.

Service tax on renting, insurance, maintenance, support, consultancy, currently a cost and in future GST on these services can be set off against GST on supply by retail outlet.

Impact on e-commerce. K.Vaitheeswaran - All Copyrights Reserved

Business impact Lean supply chain Relevance of multiple depots and warehouses. Impact on sourcing – freedom to source intra as well

as inter State Withdrawal of exemptions. Optimization of credits. Repeal of CST Act and consequent withdrawal of

high sea sales and transit sales. Working capital management with huge demands

for tax outflow in the initial months


Lead time IT systems of companies Long term contracts Quoting for projects Transition


Make or Buy ? Can the supply chain be scaled down and

whether there would be a social cost to such an exercise?

Can sourcing be centralized ? Multiple warehouses or centralized

warehouse? Relevance of depots? Relevance of intermediaries? Market share as against profits


Date of coming into force of GST Technology Rate Industry preparedness Training Learning and unlearning


Constitution Amendment Act Constitution of GST Council IGST Model Law CGST Law SGST Laws Place of Supply Rules Procedure for registration, refunds, returns

and payments.


K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT

Flat No.3, First Floor,

No.9, Thanikachalam Road,

T. Nagar,

Chennai - 600 017, India

Tel.: 044 + 2433 1029 / 4048

402, Front Wing,

House of Lords,

15/16, St. Marks Road,

Bangalore – 560 001, India

Tel : 080 22244854/ 41120804

Mobile: 98400-96876

E-mail : [email protected] [email protected]

gst industry - impact on different sectors

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