GST Revealed from an ERP Perspective

“Goods and Services Tax means any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption”, says Article 366 (12A); amended by the 122^nd Constitutional Amendment Bill, 2014; passed in the parliament with all amendments on 29 March 2017; finalized with all updates during the 17th meeting of the GST Council on 18 June 2017; and rolled out on 01 July 2017.

 

Introduction

GST replaces all indirect taxes levied on goods and services by the central and state Governments. Its implementation will have a far-reaching impact on almost all the aspects of business operations in India. With more than 140 countries adopting some form of GST, India joins the cluster after being an exception for quite some time. GST is a destination-based value-added tax levied at all points in the supply chain, with credit allowed for any tax paid on input acquired for use in making the supply. It would apply to both goods and services in a comprehensive manner, with exemptions restricted to a minimum.

 

The sudden shift from the existing taxation procedures to GST, though may simplify the remittance procedure, is bound to destabilize the Accounting and Financial management aspects of a majority of businesses in the manufacturing as well as service sectors. Roadmap’s GST ready ERP solution is designed to aptly adapt and fit in between any accounting platform and the GST regime’s scenario.

 

Who is liable for GST registration?

People and businesses covered by the factors listed below are liable for GST registration:

 

1. Every person if supplying goods or services more than INR 25 lakhs (Rs.10 lakhs for north east states including Sikkim).
2. If you are purchasing or selling goods outside the state irrespective of the limit mentioned in point 1.
3. If you are receiving or providing services outside the state irrespective of the limit mentioned in point 1.
4. If you are required to pay tax under reverse charge.
5. If you are non-resident taxable person irrespective of the limit mentioned in point 1.
6. Input Service Distributor.
7. An aggregator who supplier services under his brand name or his trade name irrespective of the limit mentioned in point 1.
8. Every electronic Commerce operator like Flipkart, Amazon, etc., irrespective of the limit mentioned in point 1.
9. A person who supplies goods and services through electronic commerce. In other words, if you want to sell on Flipkart, Amazon, then you will need to register yourself first irrespective of the limit mentioned in point 1.
10. Any person who is required to deduct TDS under GST (not under Income Tax Act, 1961).

 

Registered, Composition, and Unregistered

Companies with more than INR 75 lakhs turnover are categorized as Registered.

 

Companies with not more than INR 75 lakhs turnover will come under the Composition scheme. Under this scheme, Manufacturers are liable to pay 2% GST; suppliers of food or any other article or drink for human consumption (except alcoholic liquor for human consumption) are liable to pay 5% GST; and suppliers other than the aforementioned are liable to pay 1% GST.

 

Companies with less than INR 20 lakhs turnover will not be liable for paying GST, and come under the Unregistered category. In the instance of an unregistered dealer selling to a registered dealer the registered dealer is required to pay GST on Reverse Charge basis for such supply. Reverse Charge means the liability of the person receiving goods and/or services to pay GST instead of the person supplying the goods and/or services in respect of specified categories of supplies.

 

Every registered person availing services from an unregistered dealer or purchasing goods from an unregistered dealer has to pay the GST under the respective HSN Code of the Service / Goods by raising an Invoice. It means all the registered persons, liable for GST for unregistered services/ goods are to raise Invoice on self and file returns to take Input Tax Credit (ITC). ITC means at the time of paying tax on output, the supplier can reduce the tax already paid on inputs.

 

Registered dealers selling to Unregistered dealers will have to mention that they follow Reverse Mechanism and relieve the Unregistered company from GST. The registered dealers, who are liable to pay GST under reverse charge mechanism, are supposed to know the rate of GST and HSN code for each and every category of service or goods procured by them in this order.

 

The HSN / SAC factor of GST

In GST regime each invoice will have to mention HSN code for each item sold or SAC for each service provided. HSN stands for Harmonized System of Nomenclature, which codifies and categorizes trading goods of similar nature into fitting sections. This is accomplished by assigning unique HSN code to each class of commodity according to its nature and usage.

 

In case of services, each type of service is provided a unified code for recognition, measurement and taxation; known as SAC (Services Accounting Code for GST in India). SACs issued by the Government for current Service tax shall remain the same for the GST regime as well.

 

Based on their turnover the previous year a majority of traders will need to adopt two, four, or eight digits HSN codes for their commodities. Businesses with less than INR 1.5 crores turnover does not have to use HSN codes for its commodities. Businesses with turnover between INR 1.5 and 5 crores will have to use two-digit HSN codes for its commodities. Businesses with a turnover of INR 5 crores or above will have to use four-digit HSN codes for their commodities.

 

In the case of imports/exports, HSN codes of eight digits shall be compulsory, as GST has to be compatible with global standards. HSN codes in the GST website can be downloaded, checked, and used for businesses. These HSN codes will have to be mentioned in Invoices while filing GST tax returns on the GST portal. Further, at the time of registration/migration, a taxable business will be required to mention the HSN code of the goods dealt by it.

 

Striking Aspects of GST

GST is a welcome breakthrough in India’s taxation procedure, which presently stipulates levy of tax at multiple points in Central and State levels. But GST is a single point tax, which subsumes the following current Central and State Government taxes:

 

 

However Basic Custom Duty (BCD) on Imports, Electricity Duty on Electricity, and Stamp Duty on Real Estate will continue to exist. In all the details mentioned above it is to be noted that:

 

1. The Petroleum sector has been kept out of the ambit of GST;
2. Liquor for human consumption is exempt;
3. Tobacco and tobacco products will fall under GST; and
4. The Centre shall levy a 1% ‘Additional Tax’ on top of the GST for inter-state movement of goods and services; and assign the same to the state from where the supply originates.

 

GST Rate Slabs

To achieve RNR (Revenue Neutral Rate), which allows the Central and State Governments to procure their current volume of revenue from tax collections, GST rates are broadly classified as:

 

1. Merit Rate for essential goods;
2. Standard Rate for goods and services in general;
3. Special Rate for precious metals; and
4. High / Demerit Rate

 

In order to control inflation, the Central Board of Excise and Control (CBEC) has exempted salt, milk, gur (jaggery), egg, curd, unpacked food grain, paneer, fresh vegetables, unbranded atta, maida, besan, and honey, besides education and health services from the GST.

 

Gold, silver, and diamonds are placed in a new rate category of 3% while rough diamonds would attract a nominal rate of 0.25%.

 

Otherwise, the GST Council has finalized a four-tier GST tax structure of 5%, 12%, 18% and 28% on over 1,200 goods and 500 services.

 

A GST rate of 5% would apply for common use items and agricultural implements. Two standard rates of 12% and 18%, would apply for the bulk of the goods and services, including fast-moving consumer goods. The 28% tax slab will be applicable to items that are currently taxed at 30-31% (excise duty plus VAT).

 

The existing four categories of footwear on which different rates of tax are applied have been simplified into two categories, those costing below INR 500 and those costing above this amount. They will be taxed at 5% and 18%, respectively.

 

In textiles, silk and jute yarn are placed in the exempt category, while cotton and other natural fiber will be taxed at 5%. Man made yarn will attract a rate of 18% while natural yarn will be taxed at 5%. All fabric will be taxed at 5%. Apparels and made-ups priced below INR 1000 will be taxed at 5% and those above INR 1000 will be taxed at 12%.

 

Beedi leaves, currently taxed at anywhere between 5% and 28%, depending on the State, will be taxed at 18%. Beedis will be taxed at 28%, with no additional cess being levied. Ultra luxury, demerit and sin goods (like tobacco and aerated drinks), will attract a cess for a period of five years on top of the 28% GST.

 

The GST subsumes the Swachh Bharat Cess, the Krishi Kalyan Cess and the Education Cess; and only the Clean Environment Cess is retained. The revenues from the collection of cesses for ultra luxury, demerit and sin goods; and clean energy would be used for compensating states for any loss of revenue during the first five years of implementation of GST. It is also observed that the cess would be lapsable after five years.

 

As per the draft transition law, once GST is implemented, a company can claim credit of up to 40 percent of their Central GST dues for excise duty paid on stock held by it, prior to the rollout.

 

The elements of GST

The federal nature of Indian democracy stipulates the Centre and the States to have distinct responsibilities to be performed in accordance to the prescriptions of the Constitution. To accomplish such responsibilities the Centre and State governments need to raise resources. Therefore we have a dual GST system, wherein the tax collected is appropriately shared between the Centre and the State.

 

The dual GST on the outset is comprised of Central GST (CGST), and State GST (SGST) or Union Territory GST (UTGST). CGST is levied and administered by the central government for supply of goods and/or services within a state, i.e. intra state; while SGST is levied and administered by the State on the same. But SGST cannot be levied in Union territories without a Legislature. So instead of SGST in the UTs of Chandigarh, Lakshadweep, Daman & Diu, Dadra & Nagar Haveli, and Andaman & Nicobar Islands; UTGST, which is on par with SGST in all aspects, is levied.

 

Then there is Integrated GST (IGST), where CGST and SGST / UTGST are levied in the form of IGST by the Central government on every inter-state supply of goods and/or services. The Destination based Principle of GST will entitle the State or UT of ‘Destination’ to tax the goods and/or services supplied.

 

 The operational sequence of appropriating taxes through IGST levied on an inter-sate sale is as follows:

 

1. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases;
2. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST;
3. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State;
4. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

 

Note: In the earlier tax regime inter-state transfer of Goods between branches of the same company was non-taxable upon filing of ‘Form - F’. But as per GST assessment such transfers will be treated as inter-state supply of goods and hence will attract IGST.

 

Export and Import implications

As per the FDP (First Discussion Paper), exports from India will be exempted from GST. According to a Customs circular on export procedure in the GST regime, “Supplies of goods and services for exports have been categorized as ‘Zero Rated Supply’ implying that goods could be exported under bond or Letter of Undertaking without payment of integrated tax (IGST) followed by claim of refund of unutilized input tax credit or on payment of integrated tax with provision for refund of the tax paid,”.

 

SEZs (Special Economic Zones) also receive such benefits; except the processing zone of SEZs, and sale from the SEZs to the DTA (Domestic Tariff Area).

 

GST subsumes Countervailing Duty (CVD) and Special Additional Duty (SAD), however, Basic Customs Duty will continue to do its round in the import bills. BCD has been kept outside the purview of GST and will be charged as per the current law only. Thus, import of goods and/or services into India is considered Inter-State supply and accordingly attributed Integrated Goods and Services Tax (IGST) along with Basic Customs Duty (BCD) and other surcharges.

 

Some of the benefits of GST

1. GST replaces 17 indirect taxes, thereby reducing compliance cost.
2. Tax evasion is set to drop; and Input tax credit will encourage suppliers to pay taxes; thus, boosting revenue.
3. A Common Market would emerge, eradicating the currently fragmented Market, which pushes costs up by 20 to 30%.
4. Abolition of octroi checks at state borders will bring down logistics and Inventory costs by quickening the movement of Transportation facilities.
5. As there is no Cascading of Taxes, double taxation, and inter-state tax; manufacturing will get more competitive, accomplishing the mission of Make in India, and also rendering manufactured goods cheaper.
6. GDP will rise by 0.9 to 1.7% predicts NCAER, while HSBC estimates an 80 basis point rise in GDP growth.
7. GST will rule out state restrictions and levies that complicate ecommerce.