Few Important Points on Revised GST Model Law.

Right from the beginning of talks relating to GST, we all were hoping that with the introduction of GST, there will be “One Nation, one Tax” or at least “One Nation, Few Rates”. But the actual scenario is quite different. GST Council has already decided that there will be 4 rate slab i.e. 5%, 12%, 18%, and 28%. In addition to this there will be a new cess with the name “GST Compensation Cess” for first 5 years on some specified items. Now since government has come out with relevant draft law on this 26^th day of November, 2016, let’s understand this new levy of cess.

Background:

• As we all aware that the GST is a destination cum consumption based tax. Hence the revenue from these taxes would occur to the state where the goods are ultimately consumed.
• Till now the levy of VAT and CST was an origin based tax i.e. the revenue would be going to the treasury of originating state.
• Hence after Introduction of GST, there may be some losses to few manufacturing state like Gujarat and Maharashtra, on the other hand consuming state like Bihar and UP will be in benefit.
• So in order to compensate states from this kind of probable loss, in the Constitution (101^st Amendment) Act, 2016, section 18 has been introduced which read as “Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years”.
• Therefore in order to compensate states for loss of revenue, a new cess “GST Compensation Cess” has been introduced by the GST Council which will be levied on Luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks for this period of 5 years.

Levy and Collection of GST Compensation Cess:

• Sec 8 of “GST (Compensation to the States for loss of revenue) bill, 2016” (hereinafter called as compensation bill), is the charging section for levy of GST Compensation Cess.
• For the purpose of providing compensation to the States for loss of revenue arising on account of implementation of the GST for a period of 5 years, GST Compensation Cess will be levied and collected by Central Government.
• On the recommendation of GST Council, Central Government will prescribe the supplies of goods and services, on which GST Compensation Cess will be levied.
• The rate of aforementioned cess will be notified by the Government.
• However as per the press conference held by Hon’ble Chairman of GST Council, the aforementioned Cess will be levied on Luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks in a way that the total incidence of tax remains at almost the current level.
• If a particular supply of goods or services has been notified, the aforementioned cess will be levied on all supplies including import of goods and services, and those supplies on which tax is payable on reverse
• However no such cess shall be payable on such supplies made by a dealer who has been permitted to pay tax under composition scheme under section 8 of CGST Act, 2016. i.e. a composition dealer need not to pay this cess

1. Definition of capital goods simplified:

• Simple definition of capital goods has been given in the revised draft which states that “capital goods” means goods, the value of which is capitalized in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.
• No concept of chapter ID neither requirement of use in factory unlike in Cenvat credit rules.
• It will reduce litigation as accounting treatment will decide whether goods will be capital or otherwise.

2. Determination of Time of supply of service made logical:

• Time of Supply of service (Point of taxation ) shall be the earlier of invoice date or date of receipt of payment , however , if invoice not raised within prescribed period (not decided yet) , time of supply shall be the last day by which invoice was required to be issued .
• In service tax law , when assessee fails to raise invoice within prescribed time , point of taxation shifts back to date of completion of service ( which generally complete before the prescribed period to issue invoice )
• But as per revised draft, even if invoice not raised in prescribed time atleast point of taxation won’t shift to date of completion of service rather it would be last date on which invoice to be issued.
• Same provision to apply for determination of time of supply of goods.

3. Reverse charge on services – Overdue basis liability period curtailed:

• Time of Supply of service in case of reverse charge shall be  the earlier of : i) the date on which the payment is made, or b) the date immediately following 60 days from the date of issue of invoice by the supplier:

• In ST law overdue for more than 90 days payable under reverse charge, but as per revised draft overdue for more than 60 days will trigger liability to pay tax under reverse charge.

4. No concept of on-hold Cenvat in case of capital goods except for telecos:

• As per revised draft law , Cenvat on capital goods can be claimed in the first year itself i.e as soon as capital goods received. However, only exception is in case of telecom companies for telecom towers.
• Hon’ble Bombay HC denied Cenvat credit in respect of structure supporting telecom tower in case of Bharti Airtel. However , as per revised draft law input tax credit in respect of telecommunication tower fixed to earth by foundation or structural support including foundation and structural support can be taken over a period of 3 years.

5. Insurance on motor vehicles now eligible input service:

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• In cenvat scheme , ST paid on insurance is allowable only if the goods under certain chapter heading 8711 etc . , however , as per revised draft all services used in the course of furtherance of business are input service on which tax credit can be claimed unless the credit restrictions specifically provided.
• Insurance service not included in restricted credit provisions.

6. Credit transfer facility to centralized registered assesses:

• Assessee having centralized registration may transfer balance of Cenvat credit on appointed date (effective day of gst act implementation) to any of the registered taxable persons having the same PAN for which the centralized registration was obtained under the earlier law.

For Example: GST effective date: 1^st Apr ,2017. Wipro Limited having centralized registration in Bangalore of its units operating in Bangalore, Mumbai , Noida and Hyderabad having balance of 1 crores, 2crores , 3 crores and 4 crores respectively. Wipro can now transfer 10 crores to any of unit/units as Opening CGST because in GST scenario state wise registration to be taken where even CGST will be state wise pool.

Bullet Points on Transitional Provisions and Recommended Actions

I. REGISTRATION

• Application for provisional registration (valid for 6 months) within the scheduled dates
• Application for registration and furnishing the information for permanent registration
• Grant of Permanent Registration

◊ Action :

√ Registration procedure is to be followed in all the States where there is place of business.

√ Important task : Gathering of information for registration.

II. CARRY FORWARD OF CREDIT IN ELECTRONIC CREDIT LEDGER

• Ensure cenvat credit and VAT input to be carried forward is properly reflected in the last returns.
• Ensure that the credits are properly reflected in electronic credit ledger

III. UNAVAILED CENVAT CREDIT ON CAPITAL GOODS

Unavailed cenvat credit on capital goods not carried forward in the return under existing law as it is allowed only in subsequent years will be allowed under GST regime.

◊ Actions :

√ Ensure a proper working file is maintained which shows detailed bifurcation of credit taken and credit allowed in subsequent years.

√ Ensure that unutilised credit is admissible under GST regime.

√ Ensure that unavailed cenvat credit on capital goods is reflected in electronic credit ledger.

IV. INPUT CREDIT TO THOSE PRESENTLY NOT LIABLE FOR REGISTRATION OR MANUFACTURER OF EXEMPTED GOODS

Credit of eligible duties and taxes in respect of inputs held in stock or contained in semi-finished goods or finished goods held in stock will be allowed in GST regime to a registered person under GST regime who is not liable for registration or is a manufacturer of exempted goods under the current regime.

◊ Actions :

√ Start capturing the duties and taxes paid under the current regime.

√ Ensure that there is detained breakup of stock in hand as on the date when GST is implemented along with duties and taxes paid on the same.

√ Ensure that credit is shown in electronic credit ledger.

V. TAXPAYER OPTING OUT OF COMPOSITION SCHEME

A taxpayer who is currently paying tax under composition scheme and opts out of composition scheme will be entitled to take credit of eligible duties and taxes in respect of inputs held in stock and inputs contained in semi-finished or finished goods on the appointed date of GST implementation.

◊ Actions :

√ Start capturing the duties and taxes paid under the current regime.

√ Ensure that there is detained breakup of stock in hand as on the date when GST is implemented along with duties and taxes paid on the same.

√ Ensure that credit is shown in electronic credit ledger.

VI. TAXPAYER OPTING FOR COMPOSITION SCHEME

A taxpayer who is currently paying full tax and opts for composition scheme will be have to pay an amount equivalent to the credit of input taxes in respects of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the date when GST is implemented.

◊ Actions :

√ Ensure that there is detained breakup of stock in hand as on the date when GST is implemented along with duties and taxes paid on the same. This will help to avoid ambiguities at the time of assessment.

√ The amount is to be paid via debit in the electronic credit ledger.

VII. RETURN OF GOODS AND RETURN OF GOODS SENT ON APPROVAL BASIS

When goods are sold under the existing law and tax thereon is paid and subsequently is returned then there will be two possibilities :

♦ NO TAX IS PAYABLE

> Ensure goods which are removed with six months prior to date of GST implementation are returned within a period of six months from the date when GST is implemented.

♦ TAX IS PAYABLE

> If goods are not returned within time then GST would be payable.

◊ Actions :

√ Ensure that there is identity of goods returned back with the original supply of goods under the present regime.

VIII. REMOVAL OF INPUTS, SEMI-FINISHED GOODS AND FINISHED GOODS FOR JOB WORK

When inputs, semi-finished goods and finished goods are removed for job work under the existing law and subsequently is returned by the job worker then there are will be two possibilities which are to be taken care of :

♦ NO TAX IS PAYABLE

> Ensure goods which are removed with six months prior to date of GST implementation are returned within a period of six months from the date when GST is implemented.

♦ TAX IS PAYABLE

> BY JOB WORKER – If job worker returns goods after a period of six months from date of GST implementation.

> BY MANUFACTURER – If job worker does not return goods after a period of six months from the time of GST implementation.

◊ Actions :

√ A reconciliation as on the date of GST implementation is to be prepared by Manufacturer and Job Worker of goods sent for job by manufacturer and received for job work by job worker as a declaration has to be made by both the parties under the GST regime.

IX. REVISION IN PRICE PURSUANCE OF A CONTRACT

When a contract is entered before the date when GST is implemented and subsequently there is revision in price in GST regime then the effects thereon are to be taken care of :

• UPWARD REVISION IN GST REGIME

> LIABLE TO GST

− A supplementary invoice or debit note is to be issued within thirty days of upward price revision and this will be deemed to have been issued in respect of outward supply.

• DOWNWARD REVISION IN GST REGIME

> REDUCTION IN GST LIABLILTY

– A supplementary invoice or credit note is to be issued within thirty days of downward price revision and this will be deemed to have been issued in respect of outward supply.

X. REFUND CLAIMS

Service tax manual refund claims and VAT refund claims filed before GST is implemented shall be disposed of under the existing provisions and will be paid in cash. This will not be adjustable against any liability under GST.

◊ Actions :

√ All refunds of pending assessment will have to be claimed in cash.

√ Working has to be done for credits which are to be carried forward under present regime and are allowed in GST regime.

√ Proper documentation for credit carried forward in GST regime is required to be maintained.

√ Refund amount can either be claimed as cash refund or it can be carried forward in the last return under the existing laws and subsequently claim credit of the same in GST regime by reflecting the amount in electronic credit ledger. Therefore, based on the quantum, decision is to be made on whether cash refund is to be claimed or whether amount is to be carried forward in the last return and claim credit in GST regime.

XI. APPEALS, REVISION, REVIEW, ASSESSMENT

• All claims and recovery initiated under the existing law shall be under existing laws. This shall not be admissible as input tax credit under GST regime.
• If any amount becomes recoverable as a result of appeal, revision, review or reference then it shall be recoverable as an arrear of tax under GST.
• On account of revision of returns under the existing law, if there is any amount refundable then it will be paid in cash

XII. WORKS CONTRACTS / LONG TERM CONSTRUCTION

All supplies made in pursuance of contract entered before GST shall be liable to tax as per GST provisions

◊ Actions :

√ Agreements will have to be modified accordingly

XIII. CONTINOUS SUPPLY OF GOODS AND SERVICES

In cases of supply made after GST is implemented but consideration is received before GST is implemented and full tax thereon is paid under existing laws then no GST is payable

◊ Actions :

√ Time of supply rules will not be applicable here

√ Care should be taken that GST is not chargeable in these cases. A proper working file along with evidence of payment of taxes under existing laws is to maintained

√ Care should be taken that GST is not paid when advance is paid particularly for procurement of services and service tax is already paid

√ Agreements will have to be modified

XIV. TREATMENT OF RETENTION PAYMENTS

In cases of supply made before GST implementation but part consideration is received after GST is implemented and full tax thereon is paid under existing laws then no GST is payable

◊ Actions :

√ Time of supply rules will not be applicable here.

√ Care should be taken that GST is not chargeable in these cases. A proper working file along with evidence of payment of taxes under existing laws is to maintained.

√ Care should be taken that GST is not paid when advance is paid particularly for procurement of services and service tax is already paid.

√ Agreements will have to be modified.

XV. INPUT SERVICE DISTRIBUTOR

An input service distributor is eligible for distribution of credit under GST on account of services received before GST is implemented even if the invoices relating to such services are received after the date of GST implementation.

XVI. TREATMENT FOR GOODS AND CAPITAL GOODS LYING WITH AGENT

Agent will be entitled to take credit of goods and capital goods belonging to principal and lying with agent on the date of GST implementation

◊ Actions :

√ Agent has to take registration under GST.

√ A reconciliation has to be made by principal and agent as they have to declare the stock of goods and capital goods lying with agent on the date when GST is implemented.

√ Invoices for such goods are issued immediately preceding the date of GST implementation.

√ Principal should not avail input tax credit in respect of such goods and capital goods.

XVII. DEDUCTION TO TAX AT SOURCE

Deductor shall not deduct tax at source under the GST regime when the payment to supplier is made after GST is implemented whereas the sale of goods and invoice for the same was issued before the date of GST implementation.