Demystifying challenges in embracing Goods and Service Tax in India – Part III

In the Part I of this series Demystifying challenges in embracing Goods and Service Tax in India we have seen about the Training of the Teams and Registration Numbers and in Part II have seen about the Contract Renegotiation, Change in Business Process and Impact on Costing of Products and Services  and in this we will review the impact on working capital management, IT Systems & future expansions. ……………..Happy Reading

6. Working Capital Management

Working capital is the lifeline of any business. Working capital is required for day-to-day operations for meeting cash expenses, for payment to vendors, for payment of salaries, etc. Working capital is financed by the banks based on the current asset ratio, the Gross Current Assets of the company and other current liabilities (i.e. excluding CC limits, term loans etc.

Impact on working capital will be increased due to the following reasons

a) Increase in tax rates

b) Removal of exemptions

c) Change in input tax credit mechanism

d) Service Tax to be levied by states also

a) Increase in tax rates

In GST the number of taxes are being reduced, this is a welcome gesture as the complexity and tax administration is minimized but the flip side is there will be an increase in the tax rates. Under current tax regulations. today when goods are procured from neighboring states only CST is being paid at the rate of 2% or 1% based on the exemptions availed by the seller. In GST CST is being replaced with IGST which is a sum of CGST plus IGST and the total of these two expected to be around 18% and even more in the case of sin goods. The taxes rate will be increased from 14.5% (12.5% Excise duties plus 2% CST) to 18%, this means an increase in tax rate of about 25% (18%-14.5% / 14.5%).

This has an immediate impact on the cash outflows as the supplier has to be paid normally within 30 days if goods are procured on credit basis and if in on cash basis the impact will be even more. In most of the organizations about 20% to 30% of the goods are procured from other states, in some case it may be more also. Keeping in view of this, the organizations have to plan accordingly.

b) Removal of exemptions

The basic objective of GST is the rationalization of goods and services taxes which means that goods and services will be taxed in the same manner and a lesser number of exemptions. Currently, under central excise there are around 300+ items which are taxed at lower rates and going forward under GST, these exemptions will be removed that means the cost of these products will go up along with additional cash outflow.

Today for overall balanced economic development in various locations excise exemptions are granted to promote the industry. Under GST, these exemptions will no longer be applicable for new units and also for the existing units  will be supported till the sunset clause. We need to wait for the actual bill to see who the same will be handled. In the case of the exemptions are removed asking the existing units to levy GST during supply and apply for the refund, the organization will have to pay additional funds.

c) Change in input tax credit mechanism

In the current taxation, the credit of Excise and VAT is available on the receipt of goods based on the invoice. The credit availed on receipt of goods in case of Central Excise and VAT and on receipt of Invoice for Service Tax helps the business to adjust with the output tax liability to be paid during the month end. This will help in the cash flows as there is no need for additional cash to be spent and it is taken on the accrual basis i.e supplier payment is not a criteria for availing the input tax credit.

Under GST the input tax credit is available only when the supplier pays the taxes. This input credit will be validated for the buyer based in the GST2 based on the GSTR1 filed by the seller. This means that credit cannot be taken immediately on receipt of goods or service invoice. The seller may remit the taxes in the immediate month or subsequent months, the longer the seller delays the tax payment the longer period the buyer has to wait to avail the credit. This process means the cash out flow for payment of taxes will be more i.e increased in working capital limits. In case if the buyer avails the credit without linking to supplier payment in GSTR 2, if the seller does not pay the taxes, the same will be reversed with penalty i.e additional outflow. The  Government has proposed this approach to reduce the revenue leakage.

d) Service Tax to be levied by states

Currently under the existing constitutional provisions service tax is being levied by the center government but under GST states are also entitled to levy service tax. This means additional taxes to be paid on the service being procured like security charges, finance charges, courier charges etc.

Under the current tax regulations, the service tax is charged at 14.5% including Swach Bharath Cess of 0.5% with effective from 15th Nov, 2015. Under GST the tax rate is proposed to be around 18% as per the recommendations of the chief economic adviser. The service tax will be increased by around 25% ( (18%-14.5)  / 14.5%).

Under today’s conditions service tax is be paid on all services, this means additional outflow of funds i.e impact on working capital. Companies have to plan accordingly to meet the cash flows.

The working capital requirements are going to be increased to an extent of 5% to 10% minimum based on the size of the operations and nature of the business. In some cases, it may even go up to 20% also. An increase in the  working capital means, an increase in finance costs, which means increase in overhead and ultimate increase in the cost of production. In today’s competitive market the business have to take a call to pass on the increased costs or absorb the same. Absorbing the same means decreases in bottom-line or increase in selling price means decreases in the top line.

While evaluating the purchase proposals, care should be taken on the genuineness of the seller also going forward apart from the price, quality of supplies, timely delivery.

7. IT Systems

Nowadays, most companies are using various accounting packages or enterprise resource planning software’s of various vendors. All these packages are designed specific to Indian requirements as taxes are applicable on the movement of goods, unlike in other countries, on invoicing.

For GST to be rolled out, the one hundred and twenty-second constitutional amendment bill has to be passed in both the houses of Parliament and then ratified by at least 50% of the States in their Assemblies. Once this process is done or during this process, the government is planning to introduce the actual GST Bill. The last two sessions of the parliament were washed out for whatever be the reasons. We need to wait and watch for the budget session scheduled form 23rd of February 2016.

Since IT plays a critical role in today’s business, ERP’s or the accounting software’s should be changed to meet the new tax requirements in the following areas

a) Provision to capture the new registration number for GST – GSTIN

b) Infrastructure to enable input tax credit only on supplier payment

c) New reporting requirement

d) Revising of the current transaction processing

a) Provision to capture the new registration number for GST – GSTIN

In the current systems, the tax registration numbers are captured at the manufacturing plant level in case of ECC, Service Tax at national level, ISD in case of the client’s business requirements, VAT at state level and for CST again at state level. In GST, the GSTIN is at state level and the same registration number is applicable for all taxes. The existing registration numbers have to be end-dated and provision for the new one has to be provided by the accounting software / enterprise resource planning software vendors.

This information is available based on the business process document on Registrations issued by the Joint Committee.

b) Infrastructure to enable input tax credit only on supplier payment

In the current tax regulations, input tax credit is available on receipt of goods and the same is being supported by the accounting software’s or enterprise resource planning vendors. Under GST the same is being shifted to payment of taxes by the supplier, to track that the existing mechanism will be very cumbersome as the user is expected to query for each and every receipt and update the receipt accordingly.

As it is confirmed, the accounting software / enterprise resource planning software vendors can come out with a design where the user can query based on supplier or invoice number and update the same accordingly.

Apart from this, there is also change in the credit utilization i.e offset against each tax. Changes can be made in the accounting software / enterprise resource planning software vendors so these will save time for them to develop when the actual details are available.

c) New reporting requirements

Under the current tax regulations the business houses have to file around 400 + returns / declarations / annexures by whatever name we call it if they have presence across India. This means the business houses need to have dedicated team of indirect tax professionals to file them on monthly / quarterly or yearly basis. These returns or reports are different for central and states and differ from state to state.

This complexity is being done away in GST and the business houses have to file four to five returns for both the central and state reporting.

The reports to be filed under GST are

GSTR -1: to be filed on monthly basis, uploading transaction wise details for B2B transactions and for B2C with different conditions. It has to be filed by 10th of the subsequent month

GSTR -2: to be filed by the buyer and it will auto populate the credit for the invoice for which supplier has paid the taxes and buyer can also upload adjustment documents like credit memos, debit memos etc.

GSTR – 3: to be filed by the buyer and it will show summary of the purchase, sales, tax paid, adjustments if any etc

GSTR – 4:  quarterly return to be paid by dealers who have opted for compounding scheme under GST

GSTR – 5; return to be filed by non-resident tax payers

GSTR – 6; monthly return to be filed by input service distributor

GSTR – 7: to be filed by tax deductor

GSRT – 8; annual return to be filed by the sellers with for the year showing the sales, purchases, services details, tax break up for input tax, output tax, etc

All the above returns have to he developed and tested by the accounting software / enterprise resource planning software vendors.

d) Revising of the current transaction processing

In the current accounting software or the enterprise resource planning software’s the purchase and sales transactions update the Excise records like RG 1, RG23 A Part I/ II, RG 23 Part C Part I / II etc and with roll out of GST all these registers should not be updated. To stop updating the relevant changes for the software must be done.

To make all these changes the accounting software or the enterprise resource   planning software’s have an option to release a new release or a solution with the changes.

8. Future Expansions

In India, most of the decisions related to setting up of new manufacturing facilities is based on tax exemptions provided by the State Governments or based on the geography or economically backwardness of the area, etc. Taxes play an important role as the governments may give Sales Tax exemption, i.e. exemption from sales tax for a certain period or deferment, i.e. Sales Tax will be collected from the buyer but will be deposited to the tax authorities after a period of time. The deferment of Sales Tax helps in cash flows for the company in the initial years. Apart from this, there are exemptions related to land registration fees, stamp duty, etc.

The tax exemptions have helped in India for States like Himachal Pradesh and Uttarakhand. But going forward in GST, these exemptions do not have any meaning as the taxes will be based on the destination principle as against the origin principle.

The latest constitutional amendment bill has laid down very clearly that the exemptions are to be decided by the GST council and some of the States are clearly stated in the bill for attaining balanced growth. Based on the recommendations of the GST council, the exemptions to the States will be granted.

The current exemptions will be applicable till the sunset clause and there will not be any change. The current exemptions for Excise may undergo some change as the destination State will not get any tax if goods are shipped from an exempted locations. We will come to know the exact process when the actual GST bill is made available to the public.

The future decisions for setting up of industries will no longer be based on tax exemption but on factors related to the nearest point for supply of raw materials or place of consumption. If the industry is close to the place of supply of raw materials, the transportation costs will be minimal; or if it is near the place of consumption too, the transportation costs will be less and the cost advantage will be passed on to the customers.

This approach will bring a paradigm shift in the decision-making process of setting up of industries. This method also leads to development of all geographic areas as there is no skewed benefit of taxation.

Even though GST is dubbed to be mother of all indirect tax reforms in India, there quite a few challenges in rolling out GST as well as corporate’s adopting GST. To have a smooth transition, a detailed action plan has to be prepared and executed in a timely and meticulously to be an early adopter and reap the benefits of the at the earliest.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

Website – http://india-gst.in/

Facebook page – for latest news on GST –  www.facebook.com/ingst

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Demystifying Returns under Goods and Service Tax – Part 1

Roll out of Goods and Service Tax in India is dubbed to be the mother of all indirect tax reforms in India after Independence. Though GST is not rolled out but the government of India has released business process documents on Registrations, Payment, Refund & Returns. In this blog we will review the business process document on returns, it implications on the business, it process and systems.

A tax return is a statement filed by the taxable person stating his transactions or summary of the transactions for the period along with the amount of output tax payable, input tax credit availed and amount paid in cash towards discharge of the output tax liability. This return is supposed to give the full information on the business transactions of the taxable person.

As a measure to make the roll out of GST is smooth, the GOI has detailed out the returns to be filed along with the format and the required information as this will give some time for the taxable person to changes in his business process.

As per the business process document on returns, the following are the key points

  • Single return is to be filed for the state and central government
  • Single return for all the taxes i.e CGST, SGST, IGST and Additional Tax
  • Return filing is online
  • Transaction level data to be uploaded in the return

Various returns to be filed under GST are

Sl.No Report Name To be filed by Content of the report Due date
1 GSTR – 1 Other than by compounding tax payer and input service distributor Outward supplies – goods and services 10th of next month
2 GSTR – 2 Other than by compounding tax payer and input service distributor Inward supplies – goods and services 15th of next month
3 GSTR – 3 Other than by compounding tax payer and input service distributor Monthly return 20th of next month
4 GSTR – 4 Compounding tax payer Quarterly 18th of the next month of the quarter
5 GSTR – 5 Non Resident Tax Payer Inward supplies – goods and services Last day of registration
6 GSTR – 6 Input service distributor Inward supplies – services 15th of next month
7 GSTR – 7 Other than by compounding tax payer and input service distributor Return for tax deducted at source 10th of next month
8 GSTR – 8 Other than by compounding tax payer and input service distributor Annual Return By 31st December of next financial year

 Data Points in the report

 Unlike in the current excise and service tax reports where the summary of the sales and purchases information in shown in the respective reports but in GST all the transaction level data has to be show in the report for the supply of goods or services based on the place of supply and point of taxation rules under GST.

Major data points in the report

  • GSTIN of the tax payer
  • period for which the report is being filed
  • GSTIN of the buyer
  • Line level invoice data showing the taxable amount and tax amounts for CGST, SGST, IGST and additional tax
  • HSN code in case of items
  • SAC (Service Accounting code) in case of services
  • To flag the transactions is reverse charge is applicable
  • if the goods are being received in a different state, then state code under the column POS

HSN Code

In the current tax regime, the HSN code is applicable only for the Excisable goods known as Tariff Codes and for customs. Under the proposed GST the same is rolled out for the all the taxes like SGST and IGST also.

In the reports, 4 digits of the HSN code is to be shown by the tax payers if the turnover is more than Rs 5 Cr and in case of turnover between Rs 1.5 Crs and 5 Crs the tax payer can show first two digits of the HSN code. In case of compounding tax payers, in the first year they are exempted to show the HSN codes.

In case if the tax payer is willing to show 8 or 6 digits of the HSN code there is no restriction.

Service Accounting Code

In the current service tax requirements, the tax payer is required to show the service type on the transactions and now the same is being replaced under GST and Service Accounting Code. This code must be shown in all the reports where supply of service transactions is being reported.

The above information is common across the reports and in the next section we will review the requirements for each report.

GSTR – 1

GSTIN of the tax payer along with the period for which the return is being filed.

The system will auto populate the previous year turnover from the second year on wards and in the first year the same has to be entered by the tax payer manually.

Invoice level details have to be shown in the report irrespective of the invoice value in case of B2B transactions for both interstate and intra state transactions separately for the supply of goods and services.

In case of B2C transactions, invoice value above Rs 2, 50,000 have to be reported in the report state wise and in case of transactions less than Rs 2, 50,000 summary of those transactions state wise has to be reported.

List of all debit notes and credit notes to be shown along with the original invoice for which these documents are issued with tax amounts.

In section 9, details of the transactions for which discounts are issued for the supplies made in the previous periods to be show here along with the original invoice number.

In section 10 summary of the transactions for interstate and intra state to be show for supplies made for NIL rated goods, exempted and Non GST supplies.

Shipping details i.e. Bill of Lading number and date to be show in section 11 of the report for direct exports and deemed exports. This information will be validated by the department with ICEGATE for processing of refunds if any applicable.

Advance received from the customers have to be shown section 12

Supplies made against advance received under section to 12 to be shown in section 13.

GSTR – 2

Most of the data in the GSTR – 2 will be auto populated based on the data filed by the seller in GSTR – 1. This is a radical shift from the current process of availing input tax credit where it is available based on the receipt of goods in case of excise and invoice in case service tax. Under the current process there is lot of revenue leakage and to plug this new process is being implemented wherein the buyer will be entitled to take credit only after the seller pays the taxes.

In Section 4 of the report, the data is auto populated based on the data filed by the seller. For this data, the buyer has to classify if the goods purchased are capital goods or inputs or none. Based on this classification the input tax credit is available. The buyer can also add purchase receipts if the same are not uploaded by the seller.

In section 5 of the report, the buyer has to list all the import supplies of goods for both capital and inputs along with the bill of entry details and total input credit available and input credit being availed during this month.

In section 6 of the report, the buyer has to declare the import of services with invoice wise details along with the input tax credit available and also the input tax credit available in the month.

In case of import of goods and services from outside India only IGST is applicable under GST apart from the other import duties.

In Section 7, the debit and credit notes issued by the supplier for the price adjustment or for any other reason uploaded will be auto populated and the tax payer has to classify the credit if for inputs or capital goods.

In Section 8, the information will be auto populated based on the data uploaded by the supplier in section 9 of GSTR – 1 for the discounts offered post supply of goods.

In Section 9, purchases from un registered dealers, compounding dealers, NIL Rate or exempt supplies are to be summarized by HSN or SAC code for interstate and intrastate supplies.

In Section 10, the input tax credit based on the ISD will be auto populated by the supplier’s returns.

In Section 11, the TDS credit for all the taxes will be auto populated based on the suppliers return.

In Section 12, will list the invoice for which partial credit taken during the previous months based on the invoice number. The data will be auto populated based on the previously uploaded information.

GSTR – 2 has to be filed by 15th of the next month for auto populating the data and corrections if any can be done by 17th.

GSTR – 3

It is a monthly return to be filed by the tax payer and it is mostly auto populated based on the data in GSTR – 1 and GSTR – 2. This report is to be filed by 20th of the month and first three columns will be auto populated once the user logs in.

 Turnover Details including Gross Turnover, Export Turnover, Exempted Domestic Turnover, Nil Rated Domestic Turnover, Non GST Turnover and Net Taxable Turnover by the user manually.

Section 6 is for the outward supplies and in this section most of the data is auto populated.

Section 6.1 is for reporting the supplies to registered tax payers for interstate transactions and data is auto populated from Section 5, 8 and 10 of the GSTR -1 report.

Section 6.2 is for reporting the intra state supplies to registered tax payers and is auto populated from Section 5, 8 and 10 of the GSTR -1 report.

In GSTR – 1 for section 5, we have the state for each and every transaction and based on this state code the values are bifurcated between the interstate and intrastate to section 6.1 and 6.2 in this report.

Section 10 of GSTR – 1 has the breakup of the nil rate, exempted and non GST supplies for interstate and intrastate and from there the data is processed and shown in the respective columns.

In GSTR – 1 the user does not upload the tax rate and in GSTR – 3, the data is auto populated based on tax rate, so there should be process to determine the tax rate and show the data here, in case if the user collects higher or lower rates to the rates prescribed, will there be an validation or not, for this we need to see for the actual data validation at the time of submission of the report.

In Section 6.3 and 6.4 the supplies to consumers is shown for interstate and intra state and auto populated based on the data uploaded in GSTR – 1 from section 6,7,8 & 10.

Section 6.5 shows the deemed exports and data will be auto populated from Section 11 of the GSTR – 1 report.

Section 6.6 show the data related to discounts issues post sales or on account of clerical error or for any other reason and data is auto populated from Section 9 of GSTR – 1.

Section 6.7 shows the total tax liability for all the taxes derived from Section 6.1 to 6.6 auto populated for goods and services.

Section 7 of the GST – 3 deals with the input credit portion and similar to the output tax section in 6, most of the data is auto populated in the return based on data filed in GSTR – 2.

Section 7.1 deals with the input credit related to Inter State supplies received with respect to inputs, capital goods and services. The data is auto populated based on the data uploaded in section 4, 7 and 9 of GSTR – 2.

Section 7.2 deals with the input credit related to Intra State supplies received with respect to inputs, capital goods and services. The data is auto populated based on the data uploaded in section 4, 7 and 9 of GSTR – 2.

The list of invoices for the interstate and intrastate is derived based on the GSTIN mentioned in section 4 of GSTR – 2.

Section 7.3 is for summary of the input tax credit received on account of import of goods and services from foreign countries for inputs, capital goods and services based on section 5 & 6 of GSTR – 2.

Section 7.4 is for summary of Input tax credit received on account of post sales discount or on account of clerical error or for any other reason for inputs, capital goods and services for all taxes. Data is auto populated based section 8 of GSTR – 2.

Section 7.5 is for summary of output tax on account of reverse charge and for goods and services. Data is populated based on Section 6 of GSTR – 2.

Section 8 is for determining the total tax liability for the month for all the taxes under GST for the period for which the return is being filed. Data is auto populated based on sum of section 6.7 and section 7.5.

Section 9 auto populated based on section 11 of GSTR – 2 for the tds credit received for the period.

Section 10 shows the total input tax credit available for the month based on the Input Tax Credit ledger for each tax of GST by rate.

Section 11 shows the data for the tax amounts adjusted on account adjustments, penalty, late fee etc. and data is auto populated from cash and ITC Ledger.

Section 12 shows the amount eligible for refund and excess tax paid during the current and previous periods.

GSTR – 4

Is a quarterly return to be filed by the tax payers if they have opted for compounding scheme under GST. The tax payer after crossing the prescribed threshold limit can opt to be a regular tax payer wherein he can take credit of the input taxes or opt for a scheme where he can pay fixed rate on the sales and at the same time cannot avail input tax credit. This return is to be filed by 18th day on completion of the quarter.

Section 1 to 4 contains the regular information like the GSTIN, name of the tax payer, period for which the return is being filed etc.

Section 5 shows the purchases made by the compounding dealer and this data is auto populated based on the suppliers GSTR – 1. It also contains the purchases made from unregistered dealers. The data is split into two sections, one for the purchases without reverse charge and another with reverse charge.

Section 6 is for the imports made by the compounding dealer if any and the data is to be shown along with the Bill of entry number and HSN code of the item in 8 digits.

Section 7 is import of services by the compounding dealer if any along with the SAC code and the tax amount.

Section 8 shows the summary of the supplies made by the compounding dealer for the period with respective to supplies made to intra state supplies, un registered GST dealers along with exports.

Section 9 shows the amount of tax payable by the compounding dealer for the period along with interest and late fee if applicable.

Section 10 shows the payment details for the amount of tax paid.

In section 11 the dealer also has to clarify if the turnover is likely to cross before filing the next return for next quarter.

GSTR – 5

GSTR 5 is to be filed by the non-resident tax payers within 7 days on expiry of the registration certificate or monthly return till the registration number is valid. In case of monthly return it has to be filed by 20th of the next month.

Section 1 to 4 contains the generic date like the name, address, GSTIN and period for which the return is being filed.

Section 5 contains the details of the imported goods during the return period. HSN code has to be shown in 8 digits along with the Bill of Entry number, date, qty imported along with IGST if paid.

Section 6 contains the supplies made by the non-resident dealer for the return period and it contains the transaction level data along with the GSTIN of the buyer is available.

Section 7 contains the input tax credit availed for the return period for goods and services along with the GSTIN of the supplier.

Section 8 contains the amount of tax to be paid for all taxes under GST after adjusting the input tax credit if any available.

Section 9 contains the details of the closing stock at the month end or at the time of filing of the return.

GSTR – 6

GSTR – 6 is a return to be filed by the Input Service Distributor by 15th of the next month.

The first three sections of the report contains the information like the GSTIN, period for which return is being filed and also the name of the ISD.

Section 4 contains the purchase of service made by the ISD and this information is auto populated based on the GSTR -1 filed by the service provider / supplier. It also shows the supplies attracting reverse charge. We need more information for “Total tax available as ITC for distribution”, this needs to be interpreted based on the rules on GST when announced.

Section 5 contains the information relating to the distribution of the input credit.

Section 6 show the ISD ledger which is nothing but the summary of the input tax received, reversed and distributed along with the opening and closing balance for all the taxes under GST.

GSTR – 7

GSTR – 7 is to be filed by 10th of the next month by the tax payer who withholds / deducts TDS under GST.

The first three sections of the report are the generic data like the registration number, name of the deductor and the period for which the return is being filed. If we go through the dotted line in the report it talks about the GSTIN / GST TDS IN – does it mean there will be a different registration number for TDS under GST? The Business process document does not mention about this, for further information we need to wait for the rules and the act.

Section 5 contains the data for all the transactions where GST is deducted along with the GSTIN of the supplier for all the taxes under GST and it also shows the Challan number through which TDS has been paid.

Section 6 contains the amount of interest on delayed payments or late payment fee if any.

GSTR – 8

It is an annual return to be filed by the regular tax payers by 31st December of the next financial year. The return also has to be accompanied with a reconciliation statement signed by the auditor of the company. Details of the reconciliation statement format is awaited.

The following are the content of the GSTR – 8

  • Details of the income and expenditure of the dealer
  • Data is re grouped based on the data filed in monthly returns
  • It shows the amount of refund if any payable by the department
  • Details of the tax liability
  • Details of the input tax credit
  • Details of the items along with the HSN code, unit of measure and quantity for purchases and sales.
  • Details of the input services and output services along with the SAC code.

Section 5 (a) contains the total value of interstate purchase of goods and services on which the input tax credit availed in two different tables.

It shows the item wise details of the purchases along with HSN code, description, unit of measure and quantity purchased along with IGST credit if any availed.

Section 5 (b) contains the information similar to 5 (a) but it is for intra state purchases and here the taxes shown are CGST and SGST along with tax credit availed.

Section 5 (c )  contains the details of the import of goods and service in two different tables along with the HSN code for item and SAC code for services with tax rate, amount and customs duty paid in case of goods.

Section 5 (d) contains the details of the purchases on which input tax credit is not availed, basically the purchase from compounding dealers and non-registered dealers.

Section 5 (e ) contains data related to sales returns, this means that whenever the customer returns the goods, the same has to be shipped on invoice with payment of taxes and the taxes are available as input tax credit. It contains item wise details along with HSN code and individual taxes like CGST, SGST and IGST.

Section 5 (f) contains the expense incurred other than purchases i.e. the ledger account along with the amount has to be shows in the section.

Section 6 is for the details of the income for the period during which the return is being filed.

Section 6 (a) contains the interstate supply of goods and services. HSN code, description of item, unit of measure, quantity, tax rate and tax amount along with taxable value for supply of goods and in case of supply of services it contains the description of service, SAC code, tax rate, taxable value and the tax amount.

Section 6 (b) similar to section 6 (a), this section contains the intra state supply of goods and service.

Section 6 (c) contains the export of goods and services on which GST is paid in two different tables along with the item and service details. In case of goods it contains the description of the goods, HSN code, tax rate, FOB value, IGST and customs duty if any paid. In case of service, the description of service, SAC code, tax rate, FOB value and tax amount.

Section 6 (d) contains the export of goods and services on which GST is not paid with same details as in section 6 (c).

Section 6 (e) contains the value of goods and services supplied on which GST is not paid.

Section 6 (f) contains the list of purchase returns made during the year along with the item description, HSN code, taxable value and tax amounts.

Section 6 (g) contains the income earned not on account of supply of goods and services. The details of the ledger account and the amount earned has to be shown in this section.

Section 7 is the reconciliation statement for each tax under GST like CGST, SGST and IGST. Month wise amount of tax paid, tax as per the audited account, difference if any and interest on it along with penalty has to be show in three different tables.

Section 8 contains the details regarding the refunds, arrears on account of audit or assessment.

Conclusion

The returns under GST are common for the state and centre and this helps in drastic reduction in the time taken for preparation of returns and more over all the state have the same format so there are no complexities involved to large extent. The paradigm shift with these proposed returns is that transaction level data has to be uploaded on monthly basis which is not required under Central Excise or Service Tax.

The data required to generate the returns is very simple and it is more or less like a listing report so any accounting software or enterprise recourse planning software should be able to support the same. The only open item for the time being is the process of filing of the return is directly on the GSTN server or on service providers appointed by the GSTN. It cannot be GSTN as the transaction level data has to be uploaded by each and every registered tax person and the servers cannot manage the traffic on the last days of the return filing.

Though the basic information is available the details will be known along with exact formats when the rules and announced.

Formats of the report can be accessed from http://dor.gov.in/sites/upload_files/revenue/files/mygov_1445315831190667.pdf

Challenges in returns and other ledgers will be continued in next part.

to be continued……..

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

Website – http://india-gst.in/

Facebook page – for latest news on GST –  www.facebook.com/ingst

Mail – mallikarjunagupta@india-gst.in

Demystifying challenges in embracing Goods and Service Tax in India – Part II

In continuation from the previous blog, in this blog we will some more areas which impact the business

3. Contract renegotiation

The second important thing when GST is rolled out is contract renegotiation. All the business contracts are based on the assumption of continuity of business and with a clause of, “All applicable taxes will be extra as on date of delivery.” If the contracts are drafted in the above fashion then they are not required to be renegotiated as the existing taxes like Excise, Service, VAT and CST will be replaced with the CGST, SGST and IGST Taxes since the wording ‘applicable’ tax is used in the contract with respect to taxes.

Cost being a crucial element in the business, it determines the bottom line. Some organizations are entering into contracts to pass on the tax implications to the seller; the organizations are more interested in the supply of the goods and services at a pre-determined price inclusive of taxes. Such contracts are normally for the taxes which are not recoverable in nature like the CST and some costs like freight, insurance, packing, etc.

Under GST, the taxes are based on value addition and all taxes being recoverable, will have an impact on such contracts. The impact can be on the selling side or on the buying side based on the party to the contract. If it is on the buying side, there would not be much impact as the taxes are inclusive; hence the cost of procurement will be low, thereby reducing the cost of production and cash outflows. On the selling side, it has a huge impact on the transaction value as well as on the bottom line.

For example, considering A and B are from different States and if A agrees on a contract to supply item X to B, at a price of Rs. 10,000 on following terms: exclusive of Excise Tax, inclusive of all other applicable taxes and other costs like packing, freight and insurance. Packaging based on B’s Specifications.

Based on the contractual terms, the tax applicability under the current tax regulations for the transaction will be, Excise Duties @ 12.5% and CST of 2% against ‘Form C’ and packing cost based on B’s specification is Rs. 500. Excise duties are recoverable as A & B are registered dealers and item X is excisable.

The invoice values will look like this pre GST implementation:

Table 4.1

In this case, the extra cost for Dealer A is Rs736 (Rs500 for packing plus Rs236 on account of CST). B, on the due date will pay only Rs. 11,313 (Rs. 12,052– Rs. 736) to A

Now let’s extrapolate the same example when GST is rolled out, keeping in abeyance the actual rate, assuming IGST of 18% (when GST is rolled out it may be less). When GST is rolled out the transaction will be like this:

Table 4.2

Since the contract says ‘exclusive of Excise’, there are no  Excise Taxes under GST as  Excise Tax is subsumed with CGST when GST is rolled out. And A Ltd cannot charge IGST to B Ltd on this transaction, as it says ‘inclusive of all other taxes and costs’. As per the contractual terms IGST is to be borne by the seller A Ltd. This means an additional cost on the transaction for Rs. 1,654, which is the difference of IGST plus packing charges CST [Rs. 2,390 (Rs. 1,890 + Rs. 500) – Rs. 739]. This will straight away have a huge impact on the bottom line of B Ltd.

When GST is rolled out all sellers like A Ltd will have to review their contracts and re-negotiate them, if they do not do that, then they have to take a huge hit on their bottom lines, which will in turn impact the stock prices on the stock market if they are listed companies.

If A Ltd wants to amend the contract, it has to renegotiate, and say that ‘all applicable taxes will be extra’ and including costs like packing, freight, etc. This activity has to be done much before the rollout of the GST so that there are no last minute surprises.

Even the service contracts have to be re-negotiated as there will be a service component levy by the State Governments. Apart from the sale and purchase of goods contracts, the service contracts as well as the Annual Maintenance Contracts have to be re-negotiated if they are have contractual term of inclusive of applicable taxes or Service Tax.

Say for Example X Ltd is service provider and Y Ltd is service receiver. X Ltd enters into a contract with Y Ltd for servicing of machinery on annual basis in business parlance called Annual Maintenance Contract (AMC) with the contract term as “inclusive of all applicable taxes for service component only and for material at actual costs and taxes on them if any applicable on the date of servicing”. The contract is valued for Rs. 10,000. During the course of the year, X Ltd renders the services and he does not replace any material so the invoice is only for the Service Tax and X Ltd issues an invoice as given below

Table 4.3

On the due date Y Ltd pays Rs.10,000 to X Ltd only for the cost of service as it is inclusive of Service Tax based on the contract terms. In this case X Ltd treats the Service Tax as is cost.

Now let’s see if the same contractual terms are applicable once GST is implemented. For academic purpose let’s take CGST on services @ 10% and SGST @ 8%. The invoice under GST will be like this

Table 4.4

On due date, Y Ltd pays X Ltd Rs. 10,000 only as it is inclusive of taxes. Under GST, X Ltd has to pay total tax of Rs. 1,800 (Rs. 1,000 for CGST Service & Rs. 800 for SGST Service). It means his total tax cost on this contract is additionally for Rs. 350 (Rs. 1800 under GST – Rs. 1450 under previous tax regime). If X Ltd does not renegotiate the contract, it has to take additional burden on his profit for Rs. 350. There will be many such contracts, this will ultimately reduce the profits of X Ltd.

Rewriting of contracts is not a simple task; it will take lot of time and require lots of negotiations and approvals from various operations heads. The earlier such things are put in place, the better from the organization point of view.

In most cases when the contracts are re-negotiated, the same has to be sent for approval to the legal teams also, apart from the operations heads. This is done to safeguard the interests of the company in the long run.

4. Change in business process

In the current taxation the levy of incidence of taxes is different for different taxes and as result the treatment for taxes is different. Excise is levied on manufacturing, service tax on completion of service or raising of invoice, VAT on supply of goods etc.

Some of the business process have to be revisited or re-engineered keeping view of the changes   under GST. The business process which need change are

a.Branch / Depo Transfers

In the current tax regime while moving goods from factory to depo / branches excise duty is paid and goods are removed based on the excise valuation rules in place. Going forward in GST, the same is applicable but it is not only for CGST but also for IGST. This process of tax defaulting on the transaction has to be redesigned and also keep track of the same. In case if the transfer of goods between the factory and the depo / branch in the same state, the treatment may be different. In case of different state, IGST will be applicable and charged on the transaction.

b.Trading

Under the current tax regulations for central excise, the taxes on purchases are passed on the sales and also a register to be maintained. Going forward under GST the same is not required as it is on supply of goods and services, so the taxes have to be applied on the supply price. This means that that credit of taxes on purchases is applicable and the same can be used for payment of output tax.

There will be no longer required to maintain the registers.

c.Job Work

Another import decision which the business have to take care is regarding the job work i.e make or buy when goods and service tax is implemented. Under the current tax regulations, the material is sent for job processing under a challan. Tax is levied on the value addition and goods are received back under the same challan and no excise duties are paid if the same are received back in 180 days else duties are liable to be paid. Based on the available information in the public domain, the process is not clear under goods and service tax. The following are the possibilities

  • Current business process may be continued, if this is the case, then there is no need to make any change in the business process.
  • As goods and service tax is on supply of goods and services, job work can be also be considered as supply, if this is the case then taxes have to be paid on shipment of goods for job work, the job worker will take credit of the same and ships back the goods when processing is done along with taxes. This involves lot of changes in business process as well as additional outlay of funds for tax payments.

If the second option is followed then the business have to take a call on make or buy decision.

d.Deemed Exports

In the current business process, exemptions are available for deemed exports but going forward under GST, exemptions are no longer applicable and refund process has to be followed. This means additional cash outflow initially and also wait for the refund. With the approach, the business have to take call to make supplies for deemed exports houses like EOU’s / SEZ’s etc.

5.Impact on Costing of Products and Services

Input costs of goods and services are the key in determining the cost of products or services apart from the overheads which contribute to it indirectly. For any manufacturing unit, all the items or components will not be available for procurement from the same State. They have to procure the same from other States. When they are procured from other States, the organizations have to pay Central Sales Tax and this is not recoverable in nature. When GST is rolled out, the organizations still have to procure the same from other States, but the only difference now is that the CST, which is2% against Form ‘C’, will be replaced with IGST, which can be about roughly 18%. For this, the manufacturer has to pay the seller for the item price along with the increased taxes, which in turn increases the working capital; this leads to increase in the interest leading to higher overheads.

Another paradigm shift in GST is, taxes will be based on the destination principle unlike the current principle of origin-based. In the current scenario, the procurement is made from a vendor who gives the lowest price coupled with the percentage of non-recoverable taxes. Under GST, the credit is available only when the seller remits the taxes. The challenge is now on how to prepare the monthly costing statements which are used for various decision making process in the organization. Material cost has to be considered after taking the relevant credit on assumption basis? If this is the approach and down the line if the seller does not remit the taxes then it has to be added to material cost and this will increase the cost of the product but decision is taken on assumption that credit is available and such situations can lead to a huge impact on the bottom lines of the organizations.

In case of services, under GST the States are also given the power to levy the same. If the service provider is not a registered dealer with the tax authority, then credit cannot be taken, if registered, credit can be availed. This will again have an impact on the costing of the product or service as the tax will be treated as expense and added to the landed cost. If the service provider adopts or goes for the composite scheme, then the final impact will be known only when the actual bill is announced. In most cases, the credit for the taxes is not available if the supplier or service provider opts for the composite scheme and this will increase the cost of the products or services. In order to survive in today’s competitive market the inputs costs have to be minimum, to attain this again the contracts have to be revisited and if required change the supplier or service provider to maintain the cost competitiveness.

There will be certain services on which credit cannot be taken, like Service Tax on banking charges; though the amount may be less, the total cost will go up on account of introduction of Service Tax by States also. All these have to be observed and the costing details have to be reworked before fixing the prices in the new tax regime else there will be an impact on the bottom line for the organization be it a listed company or an unlisted entity.

Now it is clear that under GST, the credit for the input taxes is available only when the supplier remits the taxes to the government. This means there is a time lag between the receipt of the material and credit availment i.e. the input tax credit cannot be utilized for making the payment of the output tax immediately. Which means output tax liability has to be paid through cash, which means increase in working capital costs, resulting in increased overheads.  The buyer will come to know about this only when the government rejects the invoices for which claim is made and submitted but the same is not paid by the seller. This means that while purchasing goods or services, the seller’s history of tax payments also has to be considered else the tax will be treated as non-recoverable thereby impacting the bottom line of the organizations.

To be continued ………….

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

Website – http://india-gst.in/

Facebook page – for latest news on GST –  www.facebook.com/ingst

 

Demystifying challenges in embracing Goods and Service Tax in India – Part I

Goods and Service Tax (GST) is a comprehensive tax on levied on supply of goods or services or both  It is also known as Value Added Tax (VAT) in few countries and it is implemented in about 165 countries across the globe. Rolling out of GST in India is being dubbed to mother of the indirect tax reforms. Basic features of GST

  • Goods and services treated in same manner
  • No tax cascading – tax on tax
  • Uninterrupted input tax credit in the whole supply chain cycle
  • Same taxation at pan India level
  • Harmonization of state and central taxes
  • Minimal number of taxes

Whatever may be the time frame for the rollout and implementation of GST in India, it has huge impact on the business process and to the business houses. The business process have to be changed due to the above mentioned points. The budget session of the Parliament is being proposed from 23rd February, 2016 and it is expected to be placed in the Rajya Sabha for discussion. The government is in favor of accepting two of the three demands raised by the opposition party congress to drop additional tax of upto one percent on the interstate sales, structure of the GST Council and not willing to accept the demand of introducing the cap on the GST rates in the constitutional amendment bill. Keeping this apart, the business houses have change their process in the way they work today rite from the decision of setting up of new plant or on purchase and sales contracts etc.

At whatever date the GST will be rolled out, there will be some initial hiccups and the business must be well prepared to face them and for this meticulous planning is required with a strategy for running the business with minimal impact and ensuring that the bottom-line and the top line are not impacted.  Listed here are some of the areas under which the business have to make changes to have smooth business operations under GST when it is rolled out. Organizations have to work in the following areas predominantly for smooth roll out of GST and also to have continuous business  operations without any interruptions

  1. Training of the teams
  2. Registration Number
  3. Contract renegotiation’s
  4. Change of business process
  5. Impact on costing of goods and services
  6. Working capital management
  7. IT Systems
  8. Future expansions
  1. Training of the Teams

Organization are spending a lot of amounts on the training of their teams to meet the ever changing business models, new technology to meet the competitive edge in doing the business. The finance, purchase and sales team along with other teams, wherever necessary, should be provided with an overview of the GST as a first step. The second step starts when the GST Bill is passed or the details are available; a formal training should then be provided to all the teams. As a part of the overview on GST, there is enough information/material available on the secondary sources – What is GST?, why GST is required for the country? Various models of GST, Reasons for selecting Dual GST along with the taxes that will be subsumed in GST, etc. This activity will provide an insight into the proposed GST. This will help companies to identify the areas which are directly and indirectly impacting their business processes when GST is rolled out.

The business process of all companies may not be the same; they vary from company to company and also from industry to industry. The various team leaders or owners are the masters of their processes. Once the overview is provided, the teams can identify processes and prepare a plan of action or take it up with the industry bodies to the government’s notice, if there is any impact. Say for example, in the current Excise laws, the inputs for the bulk drug industry are excisable and the sale of bulk drugs is exempted from the Excise taxes. If the same is continued in GST too, the same can be represented to the government. Similarly, in the case of sale of agricultural tractors taxes, there is an element duty reversal on inputs i.e. of reversal of Cenvat Credit of 4% on sales, as agricultural tractors are exempted from duty. Like this, there will be many specific issues which are industry specific and the same issues should be identified well in advance to handle them once the law is in place.

In the previous section we have seen how the change in the tax structure can impact the bottom line with respect to specific contracts. The companies may have huge numbers of contracts and it is very tough to go through all of them in a short span of time. If the concerned teams are trained, and an overview is provided well in advance, the teams have time to go through all the critical contracts and have a plan of action in place when GST is implemented.

Apart from the purchase of goods and sales contracts, the contracts relating to the service providers also have to be revisited as GST proposes levy of Service Tax by the State Governments also.

It is agreed that petroleum products are outside the purview of the GST. A petrochemical industry which is in the process of setting up a refinery has a huge amount of capital investment. Credit of Excise taxes was available and the same was being used for offsetting the liability on the sales front. But with GST, the credit of GST will be available on the capital goods and services but the output is not liable under the GST, so the company cannot utilize the same. If the finance team is trained in GST they can take the best decision on the same based on analysis of availing credit or not etc. Given below is the gist of the cases where they can do an in-depth analysis and recommend the management accordingly

  • If credit is not taken the recoverable taxes can be added to the capital cost and depreciation can be availed.
  • If refund is applicable, then companies can apply for the refund
  • If it is decided that credit can be retained, the same can be used, in future.

The finance team will be able to take a decision only if they know about GST, which is possible only through training. Based on the in-depth analysis the finance team can take a decision which is best for the organization keeping in view its impact on the bottom line, cash flows, etc.

Training plays a critical role in organizations for transition to GST. This will help them to reap benefits of the tax reform. The earlier the organizations adapt to the changed tax laws, the more benefit they will enjoy compared to their competitors.

  1. Registration Number

For any taxation system to work effectively the heart line is the registration number. The tax registration number helps in tracking the transactions and also tax payments made by the registered dealers.

In the current indirect tax regime, we have multiple registration numbers as there are different taxes being governed by different tax departments. Reports have to be filed submitted based on the registration number, this increases the complexity even more. Under the current tax regulations in India we host of tax registration numbers like the Excise Control Code (ECC) for Central Excise at the factory level and if an organization has multiple manufacturing units, they have multiple ECC numbers; likewise for Service Tax – another registration number and Value Added Tax, one registration number for each State called Tax Identification Number (TIN number) and Central Sales Tax another registration number. Added complexity is there are different reporting requirements and coordination between the departments to be filed at different time interval. The above challenges give room for tax evasion, which results in loss of revenue to the Central and State Government.

Under GST it is being proposed to have a single registration number based on the Business Process Document issued by the Joint Committee, there is only one registration number for all the taxes and the same is at state level. The registration number under GST is called Goods and Services Identification Number (GSTIN) and this required to be mentioned in all the business documents like invoice, debit memo, credit memo etc. Apart from this another number is required to be obtained known as Input Service Distributor Number, this is required in case of services if the organization has multiple office at different locations and wants to avail and pass on the credit on the purchases of services to the manufacturing unit.

The data structure of GSTIN

GSTIN

The first two digits, determine the state in which the GSTIN in being obtained, the list of the states is based on 2011 Indian Census. Under this each state will be allocated a two digit number.

Next 10 digits are PAN number of the entity issued by the Income Tax Department.

Thirteenth digit is alpaha numeric and it is based on the users requirement to get registration based on the business vertical. There can be 35 sequences maximum for this 1-9 numbers and alphabets a – z . If the tax payer is going for a single registration then it will be 1 in the thirteenth field but if he goes for more than one registration like one two business vertical say for example one for consumer durables and another for automobiles then the second one will be having 2 in the thirteenth number and the third registration number will be having 3 in the thirteenth field.

14th digit is a being reserved by the GSTN for the future use and the 15th digit is check digit.

The business houses now have to collect the data with respect to the registration number in a centralized location with respect to the locations where it has factories / warehouses, branches and   authorized signatories at the respective locations. This activity will take at least two days to 10 days based on the volume and geographic spread of the business.

My website – http://india-gst.in/

Any views or opinions represented in this section are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

 

 

 

Demystifying Refund Process for Goods and Services Tax

In normal course of business, the registered dealer buys goods from the registered dealer and avails the input tax credit and utilizes the same for paying the output tax liability on sales. There will be certain cases where the inputs are taxed and the output is not taxed or inputs are taxed at higher rate and output is taxed at lower rate or inputs are taxed at normal rates and output is tax exempted on account of supplies to deemed export units or exports etc. In all these cases there will be accumulation of the input tax credit and the same has to be claimed as refund with various tax agencies like central excise, service tax etc. Claiming refund is a tedious process for the assesse as well as processing refund by the tax authorities. Under GST most of the taxes are being subsumed, so the refund process should be simple.

The objective of GST is to have uninterrupted credit in the supply chain and also exempt exports from taxes so that Indian goods and services will have a competitive edge in the international markets and thereby increase the exports and improve the balance of trade.  To achieve this, the refund mechanism has to be very simple and tax payer friendly.

As per the business process document released by the Joint Committee, refunds can arise due the following conditions

  • Excess payment of tax due to mistake or inadvertence.
  • Export (including deemed export) of goods / services under claim of rebate or Refund of accumulated input credit of duty / tax when goods / services are exported.
  • Finalization of provisional assessment.
  • Refund of Pre – deposit for filing appeal including refund arising in pursuance of an appellate authority’s order (when the appeal is decided in favor of the appellant).
  • Payment of duty / tax during investigation but no/ less liability arises at the time of finalization of investigation / adjudication.
  • Refund of tax payment on purchases made by Embassies or UN bodies.
  • Credit accumulation due to output being tax exempt or nil-rated.
  • Credit accumulation due to inverted duty structure i.e. due to tax rate differential between output and inputs.
  • Year-end or volume based incentives provided by the supplier through credit notes.
  • Tax Refund for International

Excess payment of tax due to mistake or inadvertence

In normal course of business no assesse makes excess payment intentionally, if such payments happen it may be due to mistakes like writing wrong account codes for the tax to be remitted or typo’s for tax liability or payment of tax for another registration number. These are cases which do not occur commonly but still it leads to lot of complexity and procedural delay to be followed for getting refunds. In proposed GST as per the business process document it says the excess amount will be refunded after verification which should be simple and mostly on line process or carried forward for adjustment for offsetting the future liability.

Export (including deemed export) of goods / services under claim of rebate or Refund of accumulated input credit of duty / tax when goods / services are exported

As per the business process document, the treatment for the exports and deemed exports are going to be handled / processed separately.

Export of Goods

Under the current tax regulations we have the following provisions for the exporter for goods

  1. Importing the goods without payment of duties and exporting the final product without payment of duties.
  2. Importing the goods with payment of duties and claiming refund of the same while exporting the goods without payment of duties.
  3. Importing the goods with payment of duties and also paying the taxes at the time of export and claiming rebate on the duty paid exports.

Under GST it is being proposed that the first option will not be available and all the exporters have to pay taxes during import or domestic purchase and also clear the goods with payment of taxes at the time of export by utilizing the input tax credit available. After exporting the goods the, the taxes will refunded though a simple process. The process being processed is mostly online to minimize errors and also reduce the time for refund process. For this basic reason only in the GST registration application, IEC i.e. import export number is being captured and it will be verified by with ICEGATE (though online mechanism). Normally for processing of refunds the information required is related to supply i.e. invoice details along with the shipping bill, export invoice, packing list, bill of lading etc. and these document would be available with the ICEGATE. GSTN will also have these details of all the purchases and sales as the tax payer is expect to upload invoice wise details in the monthly returns.

It is also being proposed to have the option of import of goods without taxes but again as in the current process the importer have to file lot of documentation and prove the same. We need to wait for the actual bill for the exact details of the same.

It is being proposed to have a time limit of one year for claiming the refund.

Export of Services

The process of export of services is simpler compared to goods as there is no customs documentation involved. To ascertain exports the two basic document required are invoice and the bank realization certificate (BRC). These two documents will prove that export of services has taken place.

Under GST it is being proposed to make BRC as mandatory document for processing of refund. For processing of the refund the latter date of the invoice or BRC will be considered. This will also take care of the advance received in some cases. It is also recommended that e-BRC module may be integrated in the refund process under GST.

Deemed Exports

Exports are considered to be deemed exports based on the listings in the chapter 8 of the foreign trade policy. Supplies by domestically produced goods to EOU’s / SEZ’s / Mega Power Plants / World Bank Funded Projects and projects under international competitive bidding are considered as deemed exports. Under the current tax regulations for excise duty paid on inputs for manufacturing or purchasing such goods the supplier can claim drawback.

Under GST it is being proposed to treat deemed exports also as regular exports.

Refund of tax on purchase made by UN Bodies, Supplies to CSD Canteens or para military forces etc.  

Under the current tax regulations the taxable purchases made by the UN bodies are eligible for tax refunds. In proposed GST also it is will be continued and the process is being simplified and also manual intervention is being planned to be reduced to the maximum extent possible.

All the UN bodies will be assigned a unique identification number under GST with PAN or without PAN. In case if PAN is not there a separate series may be followed. The purchase invoice must have this unique identification number and the same is expected to be mentioned on the returns and in the refund documents. The GSTN will validate the purchases made by the UN bodies as the supplier of the goods or services is uploading the invoices in his GSTR1 return. It is expected that all purchases may not be allowed for refund and the refund amount will be derived based on the total purchase tax reducing the ineligible purchases.

The same process is applied for the supplies to CST canteens or other para military forces. The refund will be for all the taxes i.e. CST, SGST and IGST. A separate return is being proposed for these organizations.

Tax credit on inputs used for manufacturing / generation / production / creation of tax free supplier or non GST supplies  

Under the current tax regulations either by the center or the state input tax credit is not allowed or refunded on inputs used for tax exempted or nil rated goods.

Under GST there would be some cases where the goods or service may be exempted or nil rate. In such cases the input tax paid on the goods or services is not eligible for input tax credit or for refund. In case of mixed supplies, it is allowed proportionately.

Refund of carry forward of input tax credit 

UN interrupted flow of input tax credit is one of the features of GST. In some business cases this can lead to accumulation of input tax credit like

  • Inputs are taxed at a higher rate and output taxed at lower rate
  • Capital goods
  • Stock accumulation
  • Partial reverse charge

Under GST the occurrences for such cases is very minimal as there will be fewer exemptions and minimal number of tax slabs.

Under GST it is being proposed that refund may not be possible for stock accumulation and capital goods and such input tax credit will be transferred for the next period and in other cases the same is possible.

In the other case refund may be granted after matching the purchases and sales based on the returns filed by the tax payer. For obtaining refund an application has to be filed by the tax payer.

It may also happen in case of services where the service provider is under reverse charge and he is not able to utilize the full amount of input tax credit claimed under reverse charge mechanism.

Refund on account of year end or volume based incentives 

In the current business practice during the year end volume based discounts are given and for this credit notes are issued. This process is being misused by the downstream dealers as they are showing negative value addition and as a result of it many of the state governments are not allowing the same.

Under GST it is being proposed that this practice will be allowed and to avail the input tax credit on the credit notes a charted accountant’s certificate is required to be issued for validating the same or through self-assessment based on a threshold limit. GSTN is also required to make certain validations to make the same eligible for refunds if any.

Tax Refunds for international tourists

Tax refunds are given to the foreign tourists in most of the countries as it promotes tourism and also gives a flip to the manufacturing in the country. Currently this practice is followed in about 50 nations across the globe.

Under GST this is proposed to be implemented and the refund will be issued at select air / sea ports.

Apart from the above mentioned process where refund is processed there are also some other cases where the refund will be eligible if the tax payer is awarded by the appellate authority order or when excess tax was paid during the provisional assessment. These are also going to be continued in the GST also and the process will be simple compared to the current process.

Refund Process

Under GST the refund process is being proposed to be simple as the refund application is to be filed online and the validation of it is also mostly done through online as the relevant data is already available in the system. The business process document for refunds have prescribed some formats the same may be implemented as it is or modified based on the public feedback and the actual rules being in force at the time of roll out of GST.

It is being proposed that the refund process should be validated within 90 days from the date of filing and. It is also being proposed to levy interest if the refund order is not processed in stipulated time period.

It is proposed that refund may be allowed to be filed within one year from the relevant date and the relevant date defers from case to case and the following are the relevant dates to be considered as per the business process document

  • Date of payment of GST when the refund arises on account of excess payment of GST due to mistake or inadvertence.
  • Date on which proper officer under the Custom Act gives an order for export known as “LET EXPORT ORDER ” for the purpose of refund filed on account of export of goods under claim of rebate of GST paid on exported goods or refund of accumulated input credit of GST when goods are exported.
  • Date of BRC in case of refund on account of export of services under claim of rebate of GST paid on exported services or refund of accumulated input credit of GST when services are exported.
  • Date of the finalization order where refund arises on account of finalization of provisional assessment. (May not be required if the GST law does not provide for provisional assessment)
  • Date of communication of the appellate authority’s order where the refund arises in pursuance of an appellate authority’s order in favor of the taxpayer.
  • Date of communication of adjudication order or order relating to completion of investigation when refund arises on account of payment of GST during investigation, etc. when no/less liability arose at the time of finalization of investigation proceedings or issuance of adjudication order.
  • Date of providing of service (normally the date of invoice) where refund arises on account of accumulated credit of GST in case of a liability to pay service tax in partial reverse charge cases.
  • Date of payment of GST for refund arising out of payment of GST on petroleum products, etc. to Embassies or UN bodies or to CSD canteens, etc. on the basis of applications filed by such persons.
  • Last day of the financial year in case of refund of accumulated ITC on account of inverted duty structure.

While filing the refund application, the filer is expected to submit some bear minimum documentation so that it can be processed and validated quickly like the invoice copies, proof for payment of taxes, documentary proof to show that tax burden is not passed on to the buyer and also certification from the charted accountant.

As the refund application is being proposed to be filed online, there is no requirement for filing of multiple copies and the same application can / will be used for processing all the taxes i.e. CGST, SGST and IGST.

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