Tax Quest - November 2016 - GST Special

T a x Q u e s t / N o v e m b e r 2 0 1 6
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Tax Quest
An e-newsletter from
K. VAITHEESWARAN & CO.
Advocates & Tax Consultants
Chennai, India.
GST Special
November 2016
Issue No.7
CONTENTS
GST REGISTRATION……………....2
GST – IMPACT ON
MANUFACTURING SECTOR……….6
ARTICLE ………………………..…8
GST –The Rate of Tax Debate

GST - REGISTRATION
Introduction:
The Goods & Service Tax regime is most likely to become a reality from April
2017. The Government of India has been taking a number of steps at unbelievable
speed to implement the new regime. Following the Model Law, the Draft Rules
for registration, payment, invoice, returns and refunds were released. The
Government has also released an FAQ on GST.
Trade and industry will have to gear up to this massive change in indirect tax laws
and the first step namely registration is discussed here. The analysis is based on
the various documents made available in the public domain by the Government.
Who needs to take registration?
(i) Every supplier requires registration in respect of taxable supply of goods and
/ or services if his aggregate turnover in a financial year exceeds Rs.9 lakhs.
(ii) The limit is Rs.4 lakhs for North Eastern States including Sikkim.
(iii) Every person who is registered or holds a licence under the earlier law before
the appointed day.
(iv) The transferee or the successor - where a registered taxable person transfers
his business.
(v) In case of amalgamation, demerger by an order of High Court - the transferee
(vi) Persons though not liable under the Act can still obtain registration
voluntarily.
(vii) Specialized agency of the UNO or Any Multilateral Financial Institution and
Organization notified under United Nations (Privileges and Immunities) Act,
1947, Consulate or Embassy of foreign countries or other persons notified by
the Board/ Commissioner.
(viii) A person having multiple business verticals in a State may obtain separate
registration for each business. ‘Business vertical’ means ‘business segment’
as per AS17 issued by the ICAI.

What is the meaning of aggregate turnover?
Aggregate turnover is the value of all taxable and non-taxable supplies, exempt
supplies and exports of goods and / or services of a person having the same PAN to
be computed on all India basis and excludes taxes if any charged under the CGST
Act, SGST Act and IGST Act.
It does not include value of supply on which tax is levied on reverse charge basis
and value of inward supplies.
Who are the persons requiring mandatory registration irrespective of
threshold limits?
(i) Person making inter-state taxable supply
(ii) Casual Taxable Person.
(iii) Person required to pay tax under reverse charge mechanism
(iv) Non-resident taxable person.
(v) Person required to deduct tax at source under Section 37
(vi) Person who effect supply on behalf of other registered taxable person
whether as agent or otherwise.
(vii) Input service distributor
(viii) Persons who supply goods and / or services other than branded services
through e-commerce operator.
(ix) Electronic commerce operator
(x) An aggregator who supplies services under his brand name/ trade name.
(xi) Such other persons as may be notified by the Central or State Government
on the recommendation of the GST Council.
Is registration required in every State?
Every person who is liable to be registered under Schedule-III of the Act shall
apply for registration in every such State in which he is so liable within 30 days

from the date on which he becomes liable to registration in the manner and subject
to conditions prescribed – Section 19(1), Model GST Law.
When is registration not required?
No registration required if the supply of goods and/ or services is not liable to tax
as per the Act unless it falls in the mandatory list.
What is the procedure for fresh registration?
The Draft Rules provide that before applying for registration certain information
has to be declared in the prescribed form on the common portal either directly or
through facilitation center notified by the Board or Commissioner. This would be
verified and rest of the procedures would follow. A flow chart detailing the
procedures is given below:-
DECLARATION - PAN, Mobile & Email
Verification
Generation of Application Reference Number
E-filing of application with prescribed documents
Generation of Acknowledgment Number
Verification of details furnished
Clarification in Case of
Deficiency
Grant of Certificate of
Registration with GSTIN
Rejection of application for
reasons recorded in writing if the
officer is not satisfied with the
clarification or information.

Is there a mechanism for existing Assessees to migrate into GST?
Section 142 of the Model GST Law deals with migration of existing tax payers to
GST and contemplates issue of certificate of registration on a provisional basis in
such form and manner as may be prescribed. This provisional registration would
be valid for 6 months from the date of issue and within that period, the person has
to furnish such information as may be prescribed. On furnishing of such
information, the registration would be granted on a final basis.
Every person who is registered under an earlier law and having a valid PAN shall
be granted registration on a provisional basis. Subsequently, prescribed
information has to be provided along with an application electronically on the
common portal. Registration would be granted or rejected in case the information
or clarification is not provided.
The process for migration would be facilitated through the portal and the details
such as login id and password would be communicated to the assessees soon.
Whether digital signature would be required?
All applications, reply to the notices, returns, appeals or any other documents are
required to be submitted electronically at the common portal duly authenticated
using Digital Signature Certificate (DSC) or through E- Signature as specified
under the Information Technology Act, 2000 or through any other mode of
signature notified by the Board / Commissioner in this behalf.
Who is a non-resident taxable person?
A non-resident taxable person is a taxable person who occasionally undertakes
transaction involving supply of goods and / or services whether as principal or
agent or in any other capacity but who has no fixed place of business in India.
Who is a casual taxable person?
A casual taxable person is a person who occasionally undertakes transactions
involving supply of goods and / or services in the course or furtherance of business
whether as principal, agent or in any other capacity in a taxable territory where he
has no fixed place of business.

Who is an electronic commerce operator?
E-commerce operator includes every person who directly or indirectly, owns,
operates or manages an electronic platform that is engaged in facilitating the
supply of any goods and / or services or in providing any information or any other
services incidental to or in connection therewith but shall not include persons
engaged in supply of such goods and / or services on their own behalf.
GST – IMPACT ON MANUFACTURING SECTOR
Significant inter-State sales
Currently, where a manufacturer from one State effects sale of goods to a customer
in another State, he would charge CST at the rate of 2% subject to issue of C-
Forms by the buyer. In the GST regime, the taxable event would be supply and an
inter-Supply of goods would attract IGST in terms of Section 4(1) of the Model
IGST Law.
The buyer in the other State would be in a position to avail input tax credit of the
IGST charged as against the CST 2% which forms part of the cost in the current
regime.
Better pricing
Currently non-availability of CST credit has worked as a stumbling block in
product pricing. When IGST is available as a credit, there is a possibility of price
discovery.
Review of Depots
In the current regime when there is an inter-State stock transfer by a manufacturer,
the excise duty charged forms part of the cost in case the Depot sells to a dealer
who cannot avail cenvat credit. While the stock transfer does not attract CST it also
results in loss of some element of input tax credit due to proportionate reversal.
In the GST regime if the inter-state stock transfers are taxed, the depot would be
entitled to IGST credit and can set it off against the CGST and SGST payable
when the depot supplies the goods. Where the turnaround time of the depot is fast
then the depots would continue if business needs such a depot. On the other hand if
the business does not warrant many depots or the turnaround time is quite slow,

then the manufacturer could very well scale down the depot and examine direct
supplies to the dealers in the other State.
Freedom of sourcing
In the current regime, many manufacturers source locally on account of VAT
credits and avoid CST purchases unless it is material or there is a price advantage.
GST will open up the sourcing segment and the manufacturer will have the
ultimate freedom to procure from any location since credit availability would no
longer be a restraining factor.
Increased Credit on services
Currently the CENVAT credit for a manufacturer is restricted since in some cases
some services may not meet the test of the definition of input service. Once the
concept of manufacture is eliminated in the GST regime, credit availability should
increase and this would bring down cost.
Elimination of cascading effect
The biggest advantage of GST would be the elimination of cascading effect of
taxes. VAT is charged after excise duty. Excise duty charged by the manufacturer
is not available as credit to the dealer. When GST is introduced, the GST charged
by the manufacturer would qualify as a credit in the hands of the dealer and the
cost would come down in the hands of the dealer. While this would bring down
prices to some extent depending upon the GST rates, manufacturers may not prefer
the entire profits on account of cost savings to flow to the dealer and this would
reflect in review of supply chain as well as price review.
While there are significant positive aspects for the manufacturer, if the rates are
very high, the benefits would be completely lost. Further, manufacturers will have
to plan for huge cash outflow in the initial period as well as under GST due to
higher rates of tax on procurements; GST on advances; GST by way of reverse
charge on certain supply of goods. But overall the manufacturers should gain in
the GST regime.

GST – THE RATE OF TAX DEBATE
Press Reports indicate that various options have been debated at the GST Council
with reference to GST rates and there is a possibility of a multi-rate structure
which could range from 6% to 26%. This is without considering the exempt and
zero rated segments.
The issue largely has arisen out of marketing and product mismatch. The
marketing of GST with the slogan ‘one nation – one tax’ was very effective and
the public at large and even large businesses believed that there would be one GST
rate, which unfortunately is not practical. It is impossible to implement GST with
one rate, given the vagaries in the rates under Central Excise and VAT Laws.
The following table brings out the general key differences in existing rates between
Central and State levies:
Product Excise Duty VAT
Cooked food items Exempt Taxable
Tea including tea waste Exempt Taxable
Preparation for infant use in unit containers Exempt Taxable
Biscuits where RSP does not exceed Rs.100/- per kg. Exempt Taxable
Tractor Exempt Taxable
Ice-cream and non-alcoholic beverages prepared and
dispensed by vending machine
Exempt Taxable
Sweetmeats, mixtures and similar edible preparations Exempt Taxable
Concrete Mix or RMC at site Exempt Taxable
Supplies against ICB Exempt Taxable
Supplies for power projects Exempt Taxable
Newsprint in reels Exempt Taxable

Special purpose motor vehicles Exempt Taxable
Vehicles designed for transport of more than 6
persons excluding driver
Exempt Taxable
Vehicles designed for transport of compressed or
liquefied gases falling under 8704
Exempt Taxable
Three wheeled motor vehicles Exempt Taxable
Customized software, audio cassettes Exempt Taxable
*The position is different in some States.
The challenges are broadly as under:-
Pruning of Exemptions:
(i) The list of goods exempted by the State for the purpose of VAT is much
lower than the list of goods that are exempted by the Centre for the purpose
of excise duty and hence if the Central Government list of exemption has to
be pruned down to the State List, a massive set of goods would come into the
ambit of GST and hence the rate at which they are taxed is a critical
decision.
(ii) Even though major attempts were made in 2011 to bring in a concept of 2%
excise duty without cenvat, for many items, excise law still deals with a
number of exemptions.
(iii) In 2004, excise duty was withdrawn on tractors on the premise that the
withdrawal of duty would benefit the farmers. On the contrary, the prices of
tractors went up due to non-availability of cenvat credit benefit. Most States
levy VAT on tractors. Similarly, wind energy items are exempt from excise
but are liable to VAT. Would the Centre levy GST on these items like the
States or convince the States to exempt these items?

Bullion and Jewellery:
(i) The VAT rate on bullion and jewellery is at 1% except Kerala which levies a
higher rate. Only now the Central Government has imposed excise duty on
jewellery and that too at a rate of 1%.
(ii) If this sector is sought to be taxed at say 6% or 4%, it is not something
which would be so easily accepted given the fact that even a 1% levy of
excise duty could not be implemented without a paradigm shift from
‘removal’ to ‘sale’ and a manifold increase in the threshold limits for SSI
exemption. In a GST regime the threshold of exemption is likely to be Rs.20
lakhs.
Luxury Goods:
(i) The VAT regime had the peak rate as a residual category. The standard rate
of excise duty did not have any link to the concept of luxury or elitist
consumption. India would be seen in poor light globally if an abnormal rate
of GST at 26% is contemplated on the so called ‘luxury goods’
(ii) When the entire country had more or less concluded that the peak rate could
be 18% and some believed that it could be slightly more, reports indicating
that nearly 25% of the products may attract 26% is worrying. The benefits
of GST through simplification, lower rates, higher compliance, equitable
distribution of taxes and increase in tax base are all likely to be lost if the
number of items in the 26% rate is higher and is based on the concept of
‘luxury’.
Goods Vs. Services:
(i) Multiple rates and that too 6% / 12% / 18% / 26% would also mean that as a
natural corollary, there would be difference in rates between goods and
services.
(ii) When the consumer is unhappy with the existing 15% (service tax + SBC +
KKC) on services and is dreading a rate of 18%, it is unlikely that the GST
Council would even think of a 26% rate on services. Even if services are at
say 18% and some goods are at 6% / 12% / 26%, the distinction between
goods and services and the eternal debate would be back in full form.
(iii) One had hoped that the fight between goods and services would get over on
implementation of GST, but if the 26% list goes up beyond the so called

known ‘sin products’, classification disputes between goods and services
would arise. The definition of ‘goods’ and ‘services’ in the Model Law are
likely to complicate the issue further. Different set of rules for place of
supply of goods and place of supply of services with a rate of tax distinction
would only add to the misery.
Issues for States:
(i) It would also be a challenge politically for a State to justify say 12% or 18%
on hotels and restaurants. Currently, Tamil Nadu levies VAT at the rate of
2% on hotels and restaurants. Karnataka has a compounding rate of 5% for
restaurants which do not serve liquor. Most States have similarly lower rates
for hotels.
(ii) It would be politically a very big challenge for a State to impose 12% or
18% on hotels and restaurants which would indicate a steep tax rate hike.
The argument that restaurants pay service tax at 6% in addition to VAT, is
only relevant for air-conditioned restaurants and even in that segment, the
effective rate jumps from say 8% to 12% or 18%.
(iii) Apart from general product exemptions, some States have exemption for
specific products linked with turnover limits. (Tamil Nadu exempts chilies,
chili powder, coriander, coriander powder, turmeric, turmeric powder, etc.
where the total turnover of a dealer does not exceed Rs. 300 crores; pulses
and grams where the turnover of the dealer does not exceed Rs. 500 crores;)
Other States have different types of exemptions and politically it would not
be easy to tax these items given the fact that input tax credit is irrelevant for
these sectors.
Cess to fund Compensation:
(i) The idea to impose cess over and above the 26% GST rate to fund
compensation needs to be rejected outright. When States expressed their fear
of losses on account of GST, the Centre gave multiple assurances and
walked the extra mile to guarantee compensation through the Constitution
itself.
(ii) Section 18 of the 101st
Constitution Amendment Act, 2016 provides that
Parliament shall by law on the recommendation of the GST Council provide
for compensation to the States for loss of revenue arising on account of GST
implementation.

(iii) The GST Council itself can recommend only GST rates and the cesses that
may be subsumed in the GST. The Council cannot recommend a levy of cess
over and above GST to fund compensation.
(iv) It is presumed that the Centre had done its calculations and based on the
confidence of increased revenue and taking a lead role in implementing a
major tax reform, the Centre assured the States on compensation. This
presumption is based on the fact that the CGST would be comprehensive in
its scope; SSI exemption would be scaled down and the Centre would tax
every person in the supply chain as against only manufacturers. If this
presumption was the basis for the assurance, it is quite surprising that cess
should even be contemplated as a levy over and above GST for funding
compensation. When the Centre is confident that there would not be a
necessity for compensation and the claim may be restricted to few States, the
Centre should use available resources and budgetary support for
compensation as against a levy of cess over and above GST.
Conclusion
It would not be economically feasible to have a single rate for GST. However,
having too many rates would only complicate the issue. A delicate balance has to
be struck. The fact that the meeting of the Council on rates was inconclusive and
clarity would emerge in November indicates that a healthy debate has indeed
commenced and various options are being considered. Industry Associations have
slowly understood the ramifications and the next few weeks would usher in
representations for exemptions and lower rates. It may not be easy to outright
reject the representations on lower rates and exemptions since it is the business
community which understands the market and the impact of tax rates. The GST
benefits would take time to translate and one cannot expect prices of goods to fall
immediately whereas the prices of services would go up immediately.
*****

***
Disclaimer:- Tax Quest is only for the purpose of information and does not constitute or purport to be an advise
or opinion in any manner. The information provided is not intended to create an attorney-client relationship and is
not for advertising or soliciting. K.Vaitheeswaran & Co. do not intend in any manner to solicit work through this
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K.Vaitheeswaran & Co. is not responsible for any error or mistake or omission in this Newsletter or for any action
taken or not taken based on the contents of the Newsletter.
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Tax Quest - November 2016 - GST Special

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Tax Quest - November 2016 - GST Special