GST Our Analysis

GOODS AND SERVICES TAX (GST) Operational Impacts and Concerns

GST: OPERATIONAL IMPACTS & CONCERNS

Table of Contents INTRODUCTION: ........................................................................................................... 4 GOODS AND SERVICES TAX: A CLOSER LOOK .................................................................. 5 I. Dual GST Model: .............................................................................................................................. 5 II. Taxes to be subsumed: ..................................................................................................................... 6 III. GST Rates: ....................................................................................................................................... 7 IV. GST Thresholds: ............................................................................................................................... 7 V. Integrated GST (IGST): ..................................................................................................................... 7 VI. GST Input Credit (ITC) Mechanism: .................................................................................................. 8 VII. GST Administration: .......................................................................................................................... 8 VIII. GST: IT Strategy ............................................................................................................................... 9 GST : IMPACTS ON INDUSTRY...................................................................................... 11 A. Manufaturing Industry .........................................................................................................................11 B. Service Industry ..................................................................................................................................14 GST: OPERATIONAL IMPACTS AND CONCERNS: ............................................................. 18 A. REGISTRATION: A TAX ENTITY .......................................................................................................18 B. PROCUREMENT OF GOODS & SERVICES ......................................................................................22 I. Domestic Intrastate Procurement – Goods (Raw Material)................................................................22 II. Domestic Interstate Procurement – Goods (Raw Material)................................................................25 III. Domestic Procurement : Capital goods.............................................................................................29 IV. Domestic Procurement – Services ...................................................................................................31 V. Import Procurement – Goods (Raw Material)....................................................................................34 C. SALE OF GOODS & SERVICES ........................................................................................................38 I. Domestic Intrastate Sale – Goods (Raw Material).............................................................................38 II. Domestic Interstate Sale – Goods (Raw Material).............................................................................41 III. Domestic Sale – Services ................................................................................................................45 IV. Export Sale – Goods (Raw Material) ................................................................................................48 D. STOCK TRANSFERS.........................................................................................................................51 E. SUBCONTRACTING ..........................................................................................................................54 F. DEPOT OPERATIONS .......................................................................................................................57 I. Depot Procurement – Goods ............................................................................................................57 II. Depot Sales – Goods .......................................................................................................................58 G. LEGAL REPORTING ..........................................................................................................................61 ANNEXURE – I : ACCOUNTING TREATMENT FOR BUSINES SCENARIOS....................... 63 I. Domestic Intrastate Procurement : Goods (Raw Material).................................................................63 II. Domestic Interstate Procurement : Goods (Raw Material).................................................................63 III. Domestic Procurement : Capital Goods ............................................................................................64 IV. Domestic Procurement : Services ....................................................................................................64 V. Import Procurement : Goods (Raw Material).....................................................................................65 VI. Domestic Intrastate Sale : Goods (Raw Material) .............................................................................66 VII. Domestic Interstate Sale : Goods (Raw Material) .............................................................................66 VIII. Domestic Sale : Service ...................................................................................................................67 IX. Export Sale : Goods (Raw Material) .................................................................................................67 X. Stock Transfers................................................................................................................................68 XI. Subcontracting .................................................................................................................................68 XII. Depot Procurements ........................................................................................................................69 XIII. Depot Sales .....................................................................................................................................69

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GST: OPERATIONAL IMPACTS & CONCERNS

GLOSSARY: Acronym

Meaning

A/C

Account

BED

Basic Excise Duty

CG

Capital Goods

CGST

Central Goods and Service Tax

CST

Central Sales Tax

CVD

Countervailing Duty

DEPB

Duty Entitlement Pass Book

ECess

Education Cess

EOU

Export Oriented Unit

EPCG

Export Promotion Capital Goods

GST

Goods and Service Tax

IGST

Interstate Goods and Service Tax

ISD

Input Service Distributor

LTU

Large Taxpayer Unit

PLA

Personal Ledger Account

RM

Raw Material

SAD

Special Additional Duty

SED

Special Excise Duty

SEZ

Special Economic Zone

SGST

State Goods and Service Tax

SSI

Small Scale Industries

VAT

Value Added Tax

GSTN

Goods and Services Tax Network

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GST: OPERATIONAL IMPACTS & CONCERNS

Note: Structural Overview Starting from section "GST: Operational Impacts & Concerns“, each subsection takes a closer look at each of the impacted business processes, starting with an introduction to the existing business process followed by the process flow diagram and process overview of the existing scenario with the current prevalent indirect taxation structure. This is followed by the GST scenario which covers the impact that the introduction of GST will have on the same business process, along with an example scenario and a diagrammatic representation of the business process in the GST era (wherever possible). In addition, finally the subsection is ended with the list of clarifications sought by business software providers in order to be able to have complete clarity on the process flow in the GST era so as to be able to implement the new business process and the related taxation requirements in time for the GST changeover date. Annexure – I highlights the accounting schemas for different business processes covered, as per the current tax system inplace.

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GST: OPERATIONAL IMPACTS & CONCERNS

INTRODUCTION: The introduction of Goods and Service tax (GST) in India by April 2012 promises to be one of the biggest and most impactful changes in the history of Indian indirect taxation. This whitepaper focuses on the proposed GST model for India and its impact on the manufacturing and services industry. At present the tax structure in India is federal in nature with the power to levy taxes and duties distributed among the Union Governments and the State Governments. The Goods and Service tax (GST) being introduced in 2012 will replace the existing indirect taxes on consumption. GST will be applicable on both goods and services. In respect of goods, the levy will be destination based whereas in respect of service tax, the levy will be consumption based. GST will be charged and collected at each stage of the production/ processing / trading on the value added during that stage. GST proposes set-off of tax paid on inputs / capital goods and services. GST can be defined as a tax on goods and services, which is levied at each point of sale or provision of service, in which, at the time of sale of goods or providing the services, the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service. The GST introduction will have impact on Tax Structure, Tax Incidence, Tax Computation, Utilization and Reporting leading to a complete overhaul of the current indirect tax system. At the organizations end, it would mean change to business processes to align to the new tax regime, update of the various software solutions across all locations to meet the proposed structure, training of all personnel to use the new process and in addition ensuring smooth transition from the old regime. GST will have a significant impact on almost all aspects of businesses operating in the country, including the supply chain, sourcing and distribution decisions, inventory costs and cash flows, pricing policy, accounting and and transactions management. Application Systems act as a backbone support for the complex business structure and enable it to function smoothly and seamlessly. As of today almost all the businesses, small or big, uses Application Software in some form or the other to efficiently carry out their operations. Any changes to the business operations has a direct impact on the software infrasturcture which has to be re-aligned to accomodate such changes. GST being the structural change by nature, will of-course call for a significant re-structuring at the supporting application sofware infrastructure at the business organization. Hence planning and execution of such a transitional task is of utmost impartance for the organization’s management at this moment as we move closer to GST implamentation. First and foremost step in this direction is to completely understand the depth and impact analysis of such a change with greater levels of clarity. The intention of this whitepaper is to take a closer look at the impact of GST on business processes from a systems’ prospective and also highlight the areas where further clarity is required in order to effect a smooth and efficient transition to the GST era.

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GST: OPERATIONAL IMPACTS & CONCERNS

GOODS AND SERVICES TAX: A CLOSER LOOK A. What is GST ? Goods and Services Tax (GST), is a comprehensive tax levy on manufacture, sale and consumption of goods and services with comprehensive chain of set-off benefits from the producer’s point and service provider’s point upto the retailer’s level. While the taxable event is ‘supply of goods’ and ‘supply of services’, GST is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. In a GST regime, goods and services are not differentiated as they move through the supply chain. Being a destination based consumption tax, GST is usually levied on import of goods and services with export transactions being zero rated under the GST scheme.

B. GST Model: As proposed for INDIA I.

Dual GST Model: The proposed Goods and Services Tax will be a destination based tax measure, with tax set offs available across the production value-chain. Consistent with the federal structure of the country GST structure is expected to have two components: one levied by the Centre, Central GST (CGST) and the other levied by the State, State GST (SGST). Both components would be applicable on all taxable transactions of goods and services. The Centre and the States would have concurrent jurisdiction for the entire value chain for all tax-payers on the basis of thresholds for goods and services prescribed for the States and the Centre. The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of CENVAT. It is also proposed that an Integrated GST model (“IGST”) model be adopted for taxation of interstate transactions of goods and services.

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GST: OPERATIONAL IMPACTS & CONCERNS

II.

Taxes to be subsumed: The current indirect system in India imposes multiple levies on sale and purchase of Goods and Services within its jurisdiction. With an attempt to simplify this tax structure for the benefit of both trade and consumers, following are the taxes, proposed to be subsumed under the dual component structure GST.

CGST will subsume: Central Excise Duty Additional Excise Duties The Excise Duty levied under the Medicinal and Toiletries Preparation Act Service Tax Additional Customs Duty, commonly known as Countervailing Duty (CVD) Special Additional Duty of Customs – 4% (SAD) Surcharges and Cesses.

SGST will subsume: VAT / Sales tax Entertainment tax (unless it is levied by the local bodies). Luxury tax Taxes on lottery, betting and gambling. State Cesses and Surcharges in so far as they relate to supply of goods and services. Entry tax not in lieu of Octroi.

Exclusions: Basic Customs Duty, Octroi, Stamp Duty and Electricity duty may be kept outside the GST. Levies like the toll tax, environment tax and road tax will be outside the GST ambit, as these are user charges. A basket of petroleum products and natural gas likely to be charged with GST and an additional levy by both the Central and States. No input credit would be available against on the additional levy. A similar treatment might be provided to alcohol and tobacco.

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GST: OPERATIONAL IMPACTS & CONCERNS

III.

GST Rates: The Empowered Committee has decided to adopt a two-rate structure –a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. First discussion paper on GST did not specify any GST rate. Currently, the standard Cenvat, VAT, CST and Service Tax rates are 8%, 12.5 %, 2% and 10% respectively. The Task Force on GST of Thirteenth Finance Commission (TFC) has worked out a Revenue-Neutral Rate (RNR) of 12% (5% CGST and 7% SGST) assuming there is a single GST rate and stamp duty & electricity duty are also subsumed in the GST. With dual GST in place, this RNR is going to change. The exact value of the SGST and CGST rates, including the rate for services, will be made known duly in course of appropriate legislative actions.

IV.

GST Thresholds: A dual threshold is proposed by EC for CGST and SGST. For CGST, the basic exemption for goods would remain at rupees 1.5 Crores and for services a similar exemption would be provided later. For SGST, the basic exemption for goods and services would be rupees 10 Lakhs. Department of Revenue has expressed concerns in having two different thresholds and has proposed a uniform threshold for goods and services for both SGST and CGST. Also, a threshold of rupees 50 Lakhs has been proposed under the composition scheme for small taxpayers. The threshold exemption might not apply to persons engaged in inter-State business. Further there would be a compounding/composition scheme for the small tax payers similar to the one under VAT system. As per the First Discussion Paper, there would be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for persons with turnover below the compounding cut-off.

V.

Integrated GST (IGST): Centre would levy Integrated GST (IGST) which would be CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provisions for consignment or stock transfers. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. There will be a Central IGST authority for facilitating this. The existing CST will be abrogated.

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VI.

GST Input Credit (ITC) Mechanism: A definite set of rules are proposed for treating Input Tax Credit and its utilitization for discharge of tax liabilities, with respect to Central GST , State GST and Integrated GST as described below: Central GST and State GST are proposed to be treated separately for the purposes of availing input tax credit (‘ITC’). Cross utilization of ITC between Central GST and State GST is not proposed to be allowed. Utilization of ITC would be as under: Input Central GST to be utilized against output Central GST and IGST; Input State GST to be utilized against output State GST and IGST; and Input IGST to be utilized against output IGST, Central GST and State GST. Further, it appears that the protocol for utilizing credit against output IGST would be in the order of input IGST, input Central GST and input State GST. It is proposed to align the rules for availment and utilization of ITC for both Central GST and State GST; and Taxpayers (including exporters) may be required to maintain separate books of account for utilization and refund of ITC. There is an in principle assurance that refund/ adjustment of accumulated ITC would be granted/ completed in a time bound manner in certain cases; however how this will get implemented is yet open for debate.

VII.

GST Administration: It proposed that, to the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST. The administration of the Central GST would be with the Centre and for State GST with the States. The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities. Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department. Keeping in mind the need of tax payers convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.

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GST: OPERATIONAL IMPACTS & CONCERNS

VIII.

GST: IT Strategy On the IT front, there has been consensus that there will be a common portal providing three core services (registration, returns and payments). The broad services framework of the portal has been discussed with the Sub Working group for IT. Empowered Group on IT Infrastructure on GST has recommended setting up Goods and Services Tax Network (GSTN), for managing the IT systems for GST implementation, including the Common GST Portal. GSTN will perform the following functions: Provide common infrastructure and services to Central and State Governments Ensure integration of the Common GST Portal with existing tax administration systems of Central and State Governments Build efficient and convenient interfaces with tax payers and tax administrators Facilitate, implement and set standards for providing common GST services to the Central and State Governments Carry out research, study global best practices and provide training to the stakeholders. The GSTN solution architecture for information flow is designed to ensure timely delivery of information through the Common GST Portal, and timely delivery of funds directly through the banking system.

GSTN : Proposed Information Flows

Source: TAGUP_Report , By Mr. Nandan Nilekani

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GST: OPERATIONAL IMPACTS & CONCERNS

The Common GST Portal is simply a pass-through device for information, while enhancing it with intelligence to plug leakages. The taxpayer sends the return with GSTN, which keeps a copy of the return for analysis, and forwards it in near real-time to the respective State and CBEC. The taxpayer pays the actual duty in the bank, which uploads only the challan details into the GSTN. Actual funds never pass through the GSTN. The Common GST Portal reconciles the returns and the challans. In addition to its pass-through role, the portal would also play two other critical roles: 1. It would act as a tax booster, matching the input tax credits in the returns to detect tax evasion. It can also integrate with various other systems at MCA and CBDT for verification of PAN or other corporate information and perform data mining and pattern detection to detect tax fraud. It would send this information as alerts/ reports to the respective tax authorities. 2. It would also compute inter-State settlement, netting IGST across States.

The Ministry of Finance, with the concurrence of the Empowered Committee of State Finance Ministers, has set up an Empowered Group on IT Infrastructure for GST with, inter alia, the mandate of approving the Solution architecture of the Common GST portal to be set up, Suggesting the modalities for setting up of a GSTN and evaluating the suitability of the existing infrastructure namely NSDL & NPCL for incubating the GSTN. The ‘Empowered Group on IT Infrastructure for GST’ in its first meeting evaluated the feasibility of incubating the GSTN under NSDL and came to the conclusion that NSDL is well suited for this purpose. The scope of the project and implementation strategy is being worked out with the NSDL. Note: For further details on GSTN, please refer http://www.finmin.nic.in/GST/IT_Strategy_GST.asp .

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GST: OPERATIONAL IMPACTS & CONCERNS

GST : IMPACTS ON INDUSTRY The indirect taxation revenue for the 2010 fiscal year was approximately INR 2.4 trillion and Indian government forecasts the revenue to grow by 29% to INR 3.5 trillion during this fiscal year. (Source: http://www.cainindia.org/news/4_2010/india_official_last_fiscal_year_indirect_tax_revenue.html) Collection of such magnitude is only possible if industries comply to the indirect taxation laws prevalent in the country. In order for industries to be compliant, it is necessary that the taxation regulations are simple and cost of being compliant isn’t high. Change in the indirect taxation structure will impact all industry sectors. Starting from the taxes paid on raw materials by a manufacturer to the invoices raised by a retailer for an end consumer of a good – all steps of the value change will experience a change in how taxation takes place. Let us take a closer look at the different sectors and how they are impacted by the introduction of GST.

A. Manufacturing Industry Manufacturing sector in India is a highly taxed sector. Despite of low manufacturing cost of products in India, multistage taxation i.e. customs duty on imports, central excise duty on manufacture, central sales tax (CST) / value added tax (VAT) on sale of goods, service tax on provision of services and levies such as entry tax, octroi and cess by the State or local municipal corporations add to the cost of the product. Introduction of GST will reduce the disadvantage of the complex and high taxation structure in India which is currently increasing the cost of the products and sometimes even rendering them as uncompetitive in the international market. Manufacturers produce goods – production might be completely in-house wherein production of raw materials and the building of the final product is carried out by the manufacturer itself or else the process might involve sourcing of raw materials externally or subcontracting of job works in order to carry out the final assembling and building a product. Goods which are manufactured in India attract the indirect tax: Central Excise Duty. This tax is collected by the central government and the duty collections are managed by the ‘Central Board of Excise and Customs’ functioning under Ministry of Finance, Department of Revenue. The manufacturer collects excise duty from the buyer and remits this duty to government. Goods can be removed from their place of manufacture only while being accompanied with an excise invoice, while contains information about the excise rate and duty applicable of the goods being moved.

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GST: OPERATIONAL IMPACTS & CONCERNS

Tax Incidence: The manufacturer is liable to pay the excise duty to the government as soon as the excise invoice has been issued and can avail input credit of excise duties once the goods and excise invoice has been received in his premise. (a) Input Credit at Excise Invoice Posting after Receipt of Goods (b) Output Tax Payable on Excise Invoice Generation at Billing

GST impacts: With the introduction of GST, the Central Excise duty will no longer be applicable (except on Petroleum products and alcoholic products). The manufactured products will attract CGST and an SGST component. For example, in the existing tax regime, a company producing furniture will be charged with excise duty by the Central Government at the time of dispatching the goods from their premise. However, when a retailer sells the end products to consumers, the goods attract VAT governed by the laws of the state where the goods are being sold. VAT rates differ from state to state adding to the complexity and making certain product more attractive to procure in certain states compared to others. Also the retailer will not be able to avail any input credit against the incoming excise duty paid by him earlier on the purchase of the goods. In such a case, the incoming excise duty will be added on to the cost of the product making it more expensive for the end consumer. Let us now consider the same scenario in the GST regime. GST (central and state component) will be collected at each point of sale irrespective of the nature of transaction – be it from a manufacturer to a retailer or from a retailer to the end user. GST will be levied on the transaction cost and in the case of sale from manufacturer to retailer, the CGST and SGST levied will be available as input credit for the retailer while selling the goods to the end user. This means that the retailer will be liable to pay tax only to the extent of the value added by him to the goods value. This in turn will mean reduced burden of taxes on the end consumer due to avoiding of double taxation on the goods.

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GST: OPERATIONAL IMPACTS & CONCERNS

The above illustration demonstrates the tax levy, collection and set off mechanism in the existing tax regime, wherein input excise duty can’t be set off against output VAT and hence the excise duty adds to the product cost during the value change and burdens the product cost for the end consumer. In the GST era however since each of the above transactions will attract CGST and SGST component which will be set off against the output CGST and SGST component, the product will be taxed only on the value addition carried out at each step of the value change.Hence, double taxation of the product will be avoided, thereby reducing the taxation burden on the end consumer.

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GST: OPERATIONAL IMPACTS & CONCERNS

B. Service Industry Services covers a wide gamut of activities like trading, banking & finance, infotainment, real estate, transportation, security, management & technical consultancy among several others. The various sectors that combine together to constitute service industry in India are: Trade Hotels and Restaurants Railways Other Transport & Storage Communication (Post, Telecom) Banking Insurance Dwellings, Real Estate Business Services Public Administration; Defence Personal Services Community Services Other Services There was marked acceleration in services sector growth in the past two decades, with the growth being the fastest in communications, banking, hotels and restaurants, community services, trade and business services. Service Tax is a form of indirect tax imposed on specified services called "taxable services". Service tax cannot be levied on any service which is not included in the list of taxable services. Service Tax was first brought into force with effect from 1 July 1994. Over the past few years, service tax been expanded to cover new services. The objective behind levying service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. In the current tax regime, service tax is applicable on the sale of taxable services. The service provider is liable to pay the output service tax to the government while the customer can use the input service tax credit to pay off his output service tax liability or output excise duty payable. Service tax credit can be used to pay off output excise duty payable and vice versa.

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GST: OPERATIONAL IMPACTS & CONCERNS

In cases of manufacturers having different units spread over various parts of the country, invoice for input services can be received by the head office (or corporate office/ registered office), while the services are actually rendered in the factories or premises of the service provider. Similarly, in the case of services which are not specific for any particular factory or premises, such as advertising, market research, management consultancy, the invoices may be received directly at the head office. The head office will then need to distribute or transfer the service tax credit availabed to its manufacturing locations and/or other taxable service providing units.. Such offices of the manufacturer or service provider are designated as ‘input service distributor’ (ISD) under rule 2(m).

Service provider

Value : 1000 Ser. Tax:12% + 120

ISD Customer Ser. Tax: 20

Value : 200 Ser. Tax:12% + 24

Ser. Tax: 100 Value : 2000 Ser. Tax:12% + 240

Mfg Plant

Mfg Plant with O/P Services

Periodic Utilization and Tax Payment

Tax Incidence: A service provider is liable to pay service tax to the government as soon as he receives payment from customer (in part or full) whereas the input credit is available to a service receiver as soon as he makes payment to the vendor to the extent of amount paid. (a) Input Credit on full payment of vendor invoice (b) Output Tax payable on part / full receipt from Customer

This was true till the Union budget announcement of 2011- 2012 wherein a change in the service tax rules was made. With the introduction of the amendments to the service tax regulations, from 1st April 2011, the point of taxation for service tax and availability of service tax credit will be determined in the following manner:

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GST: OPERATIONAL IMPACTS & CONCERNS

Point of Taxation: Rule 3 has been amended to provide that the point of taxation shall be whichever is earlier from the following: (a) Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service. (b) Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above. Illustration of applicability of this rule:

S.No.

Date of completion of service

Date of invoice

Payment Receipt Date

Point of Taxation

1

10-Apr-11

20-Apr-11

30-Apr-11

20-Apr-11

Invoice issued in 14 days and before receipt of payment

2

10-Apr-11

26-Apr-11

30-Apr-11

10-Apr-11

Invoice not issued within 14 days and payment received after completion of service

3

10-Apr-11

20-Apr-11

15-Apr-11

15-Apr-11

Invoice issued in 14 days but payment received before invoice

26-Apr-11

April 5, 2011 (part) and April 25, 2011 (remaining)

April 5, 2011 and April 10, 2011 for respective amounts

Invoice not issued in 14 days. Part payment before completion, remaining later

4

10-Apr-11

Remarks

In case of Continuous Supply of Services, the Rule 6 relating to continuous supply of service has been aligned with the revised rule 3 and the date of completion of continuous service has been defined within the rule. This date shall be the date of completion of the specified event stated in the contract which obligates payment in part or whole for the contract. For example, in the case of construction services if the payments are linked to stage-by-stage completion of construction, the provision of service shall be deemed to be completed in part when each such stage of construction is completed. Moreover, it has been provided that this rule will have primacy over rules 3, 4 and 8. While the rules shall come into force from 01.04.2011, an option has been given in rule 9 to pay tax on payment basis, as at present, till 30.06.2011.

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GST: OPERATIONAL IMPACTS & CONCERNS

CENVAT Credit: The CENVAT credit on input services can be availed on receipt of invoice. However, the payment has to be made within three months. If the payment is not made within three months, then the credit availed has to be reversed/paid. However the same can be taken back as credit on making payment. In case of service tax paid by the recipient of service on reverse charge basis, the credit can be taken on making payment of the value of service to the service provider and service tax to the Government. This is effective from 01.04.2011 irrespective of the fact that the service provider may continue to pay service tax on receipt basis.

GST impacts: The proposed Goods and Service Tax will lead to the evolutoin of an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the Central and State level. Successful integration of goods and service tax, would give India a world-class tax system and will bring in improved tax collection. It will also end the long standing distortions of differential treatments to the manufacturing and service sectors. For example, after the introduction of GST, a retailer can set off the input credit of CGST and SGST on procurement of services like rentals, freight, advertisement, which currently attract service tax, against the output tax levied on the sales of goods from his premise. Currently such services attract service tax and this input service tax credit can’t be used to pay off output tax such as VAT. Since in the current tax regime, output VAT can be only be set off by utilising the input VAT, the input service tax becomes a cost in the system and results in increased cost for the end products being sold to consumers. With the introduction of GST, the issue of inability to offset the input taxes should get resolved.

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GST: OPERATIONAL IMPACTS & CONCERNS

GST: OPERATIONAL IMPACTS AND CONCERNS: Business Operations currently involves various processes with diverse complexity levels. Taxation has a direct effect on the way the operations are modeled and carried out in order to maintain profitability and growth. GST will bring out a revolutionary change in the Indian Taxation system and thereby will force business organizations to rethink and rework their operational strategy and planning.

At the same time going deeper into the operational ends of the business processes, the impact on application systems being the backbone can’t be ignored. In other words, GST will also bring in a significant change in the application systems‘ design and modeling, which will be required in order to sustain the existing business processes and enable the changes brought in.

In the context, here’s an attempt to highlight some of the Impact areas and concerns with respect to GST as shared by the organizations having operations in that area. The subsequent sections look at the different areas of impact for industries / businesses.

A. REGISTRATION: A TAX ENTITY At present each business unit of an organization is governed by specific legislation in force with respect to taxation based on the nature of operation carried out. For example, a business unit carrying out the process of manufacturing commonly known as a “Plant” comes under the purview of Excise Laws and on the other hand a business unit primarily acting as a service provider is governed by Service Tax Laws. Similarly the operations related to sales are governed by VAT laws of the state. Now for the purpose of monitoring the transactions with respect to Taxation, each business unit is required to obtain a Registration No. from the Tax authority based on nature of operation carried out and governing law. For example, manufacturing units are required to have Excise Registration No., a warehouse / Depot is required to have “Depot Excise Registration No.”, a Service provider unit is required to have “Service Tax Registration No.” and lastly a commercial unit carrying out sales and invoicing activities is required to have “VAT Registration No.”. Hence there are multiple levels of Tax registrations that exist as of today which are needed to be correlated with each commercial transaction carried out by the organization based on its nature and scope. In the GST regime, these taxes will get subsumed into GST and their registrations will no longer hold value. There will be a need for a new registration number which will uniquely identify the GST tax payer.

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Registration Applicability: In the GST regime, all business entities with annual aggregate turnover of goods and services exceeding Rs.10 lakh (excluding CGST and SGST) need to mandatorily register and obtain a GST registration number. Small dealers (including service providers) and manufacturers should be exempted from the purview of both CGST and SGST if their annual aggregate turnover (excluding both CGST and SGST) of all goods and services does not exceed Rs.10 lakh. Those below the threshold limit may voluntarily opt to register.

The 13th Finance commission has recommended that the threshold exemption limit should be uniform for both CGST and SGST and across states. At present as well, there’s a separate threshold for services (Rs. 10 lakh) and goods (Rs. 1.5 crore) for Service Tax and CENVAT and also the VAT thresholds vary from state to state.

GST Registration Number: The discussion paper on GST proposed that each GST taxpayer will be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax, facilitating data exchange and taxpayer compliance. However, the recommendation from the 13th Finance commission committee was that the GST registration number should be a twelve digit alpha numeric number, wherein the first ten digits should be the alphanumeric Permanent Account Number (PAN) followed by a space and two more digits indicating the state code. This number should be self-generated after obtaining a PAN.

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GST: OPERATIONAL IMPACTS & CONCERNS

Illustration of proposal of GST Registration Number:

A

D

V

K

P

4

2

5

6

E

K

A

The last two digits in the illustration “KA” denote the state code for Karnataka. The GST registration number for a person having operations in multiple states will have the same prefix of the PAN number which is unique for the person and for each state where he has operations and needs to remit SGST, the GST registration number will be suffixed with the respective state code.

The unit of taxation for the purposes of GST should be persons as defined under the Income Tax Act. Consequently, for the purposes of CGST, all production units/branches of a person located anywhere in the country will be treated as a single taxable entity eligible for CGST input credit across units/branches. Similarly, for the purposes of SGST, all production units/branches of a person located anywhere within the State will be treated as a single taxable entity eligible for SGST input credit across units/branches in that State.

From application software prospective, this would also mean that there is a need to uniquely identify the entity at the transaction level so that the reporting can be done appropriately. The system should have the capability to distinguish the origin and destination state during each business process (like procurement, sales, stock transfer etc) so that at the time of reporting, it is able to classify under which GST registration number this transaction needs to be reported.

For example, in case of a sale of a goods within Karnataka, the application software used to generating invoices and reporting purpose, must be able to determine and capture the state to which the SGST is to be remitted and accordingly while reporting for the GST registration number corresponding to the Karnataka state, it should report this sales of goods.

* Rates are only for illustration. Final GST rates have not yet been fixed by the government

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Clarifications sought: 1. Has the recommendation from the 13th Finance commission of having a 12 digit alpha numeric GST registration number which is suffixed with a 2 digit state specific code been accepted? 2. Will Small Scale Industries (SSI) exemptions continue to exist? 3. How will Large Taxpayer Units (LTU) be handled? For large units under LTU, would there be a single registration for all the states as well as for CGST? 4. How will the treatment of procurement and sales vary if it’s from a non GST registered vendor or to a non GST registered customer? 5. Will the accumulation of input credits and payables be at the Registration level? Will all reporting be at the Registration level? 6. Will all the entities belonging to a company in a state have the same GST registration number? For example, if a company has a plant, a depot and a retailing outlet in the same state, will the same GST registration number be applicable for each of these entities. Will the GST credit accumulation and the returns be required to be filed at the entity level or at the GST registration level at the state level?

Need from software application vendors: The government is currently developing the GSTN (GST network), which is a portal for handling registrations, filling of returns and payments for GST. This portal will be launched for 11 pilot states by June 2011. There is a need from software application vendors for the availability of a ‘Test’ (dummy) registration on the Portal for testing handling of Registrations, Payments and Returns process for GST. This will help software vendors to deliver the right software to businesses in time. Such practices are widely followed in many other countries and also in India. Some illustrations of such provisions from Governments in other areas/ Countries are: India – File Validation Utility for TDS Quarterly Returns (Form 24Q) UK – Test URL for Software providers to test & validate year end Payroll Returns format

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GST: OPERATIONAL IMPACTS & CONCERNS

B. PROCUREMENT OF GOODS & SERVICES I.

Domestic Intrastate Procurement – Goods (Raw Material) Intrastate procurement of Goods / Materials refers to the process of purchase of goods by a business organization (Manufacturing entity, Dealer, Depot etc.), wherein Buyer and the Selling organizations reside in the same State (Region). Any such transactional movement of excisable goods is levied with Excise tax as per the central excise legislation. On the other hand Value Added Tax (VAT) is a consumption tax levied on the commercial distribution of goods.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Purchase order with Non- exempt Vendor for Excisable Raw Material and Tax-Code for Excise Tax + VAT. b) Goods are delivered at buyer’s premises and Goods receipt is carried. This will update the RM stock and RG23A – Part -1 register with quantity of material receipt accepted. c) Excise Invoice is then captured in the system either with GR or explicitly, depending on the configuration. RG23A Part -2 register will also get updated with Input Excise Credit booked for each duty component. d) Supplier invoice received is then captured, booking the vendor payable clearing the Cenvat Account and booking VAT credit. e) Vendor due payment is done to clear the account payables.

GST Scenario: Under GST era, in case of domestic procurement of goods within the same state, the applicable indirect taxes will be CGST and SGST. The vendor will issue an invoice charging the CGST and SGST components as tax. The purchaser will claim credit of the CGST and SGST paid to the vendor by him. Let us consider an example of sales of raw material used in manufacturing: A factory in Karnataka raises an order of 100 pieces of steel rods used for manufacturing from a vendor in the same state. The vendor receives the order and dispatches the steel rods to the factory. He then issues an invoice for the steel rods. Invoice details: Steel Rods @ Rs 550 per piece = Rs 55, 000 for 100 pieces CGST @ 8 %* = Rs 4400 / SGST @ 6%* = Rs 3300 Final invoice amount = Rs 62,700/* Rates are only for illustration. Final GST rates have not yet been fixed by the government

The purchaser will have to pay the vendor Rs 62,700/- towards the goods and taxes. He will get the following CGST and SGST credit: CGST credit = Rs 4400 SGST credit = Rs 3300 The vendor will have a CGST payable of Rs 4400 and SGST payable of Rs 3300 to the government. However, he will actually pay a CGST and SGST payable only on the value addition after adjusting the CGST and SGST credits he received on the input side.

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GST: OPERATIONAL IMPACTS & CONCERNS

Clarifications sought: 1. It needs to be clarified at what point the purchaser become eligible for the credit of CGST and SGST. Would the purchaser be allowed to take the CGST and SGST credit once he receives the GST invoice from the vendor (as is the case with CENVAT currently) or will it be at the time of making the payments to the vendor (deferred tax concept which existed for service tax). 2. Proof of credit: Would commercial invoices act as proof of Input tax credit. Or would there be a separate tax invoice like excise invoice? Will Excise Invoice continue? 3. Would the purchaser need to maintain registers for tracking the CGST and SGST credit, similar to the RG23 registers maintained for CENVAT credit? 4. Does the purchaser need to record SGST credit accumulated from different states in different registers since the SGST will be state specific? 5. Would the CGST and SGST collected by the vendor have to be paid to a common tax authority present in the state or would this have to be remitted to different authorities – one specific to the state and one central authority? 6. Will there be any difference in treatment of raw material, capital goods and finished goods in the procurement process or reporting process? 7. For capital goods, will the rule of only 50% of credit being available in the first year of purchase still hold good for CGST and SGST? 8. Will Daily Stock Account (RG1) and RG23 Registers still be valid? 9. Will input credit be available for First Stage Dealers? 10. Evaluated Receipt Settlements: In this case invoices are not raised by the vendor. How can this be addressed?

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GST: OPERATIONAL IMPACTS & CONCERNS

II.

Domestic Interstate Procurement – Goods (Raw Material) Interstate procurement of Goods / Materials refers to the process of purchase of goods by a business organization (Manufacturing entity, Dealer, Depot etc.), wherein Buyer and the Selling organizations reside in different State (Region). Any such transactional movement of excisable goods is levied with Excise tax as per the central excise legislation and is subject to Central Sales Tax (CST) w.r.t commercial distribution of goods. CST paid cannot be used as tax credit and will be added to the cost of the Material.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Purchase order with Non- exempt Vendor for Excisable Raw Material and Tax-Code for Excise Tax + CST. b) Goods are delivered at buyer’s premises and Goods receipt is carried out. This will update the RM stock and RG23A – Part -1 register with quantity of material receipt accepted. c) Excise Invoice is then captured in the system either with GR or explicitly, depending on the configuration. RG23A Part -2 register will also get updated with Input Excise Credit booked for each duty component. d) Supplier invoice received is then captured, booking the vendor payable clearing the Cenvat Account. e) Vendor due payment is done to clear the account payables.

GST Scenario: In case of inter-state domestic procurement of goods the IGST model for taxation will be applicable. As per the IGST model, the center will levy IGST on all inter-State transactions of taxable goods and services. IGST will be computed as CGST plus the SGST component of the destination state.

The IGST model will work in the following way: The Centre will levy an IGST (rated at the combined Central GST plus State GST rates) on all inter-state transactions of goods and/or services with ‘appropriate provisions’ to be made for consignment or stock transfer of goods Inter-state vendor would levy the IGST (CGST + SGST) on inter-state transactions involving sale of goods The exporting vendor will have to pay IGST on value addition after adjusting available input tax credit of IGST, CGST, and SGST. Exporting State will transfer to the Central Government the amount of SGST credit utilized by the inter-state vendor to discharge output IGST liability in that State; Importing purchaser will claim the input tax credit of the IGST in his own state by adjusting this credit against his output liability Central Government would accordingly transfer the amount of IGST used in payment of SGST to the account of importing State; and

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GST: OPERATIONAL IMPACTS & CONCERNS

Central agency will act as clearing house mechanism and be responsible for monitoring and verifying credit movements and accordingly inform respective Government authorities to transfer funds.

Let us consider an example of sales of raw material used in manufacturing: A factory in Karnataka raises an order of 100 pieces of steel rods used for manufacturing from a vendor in Madhya Pradesh. The vendor receives the order and dispatches the steel rods to the factory. He then issues an invoice for the steel rods. Invoice details: Steel Rods @ Rs 550 per piece = Rs 55, 000 for 100 pieces IGST = CGST + SGST = Rs 7700 / (CGST @ 8 %* = Rs 4400 and SGST @ 6%* = Rs 3300) Final invoice amount = Rs 62,700/* Rates are only for illustration. Final GST rates have not yet been fixed by the government

The purchaser will have to pay the vendor Rs 62,700/- towards the goods and taxes. He will get the following IGST credit in Karnataka: IGST credit = Rs 7700 The purchaser can use this IGST to set off his output tax liability in Karnataka. The vendor will have a IGST payable of Rs 7700 to the Center. However, he will actually pay a IGST payable only on the value addition after adjusting the IGST, CGST and SGST credits he received on the input side.

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GST: OPERATIONAL IMPACTS & CONCERNS

Clarifications sought: 1. Would the IGST rate differ from state to state based on the destination state regulations or would there be a common IGST rate defined for goods / services which will be applicable in case of any inter-state transactions? 2. What is the information required to be submitted by any organization to ensure that IGST credit can be taken and at what frequency? 3. When would the purchaser in the importing state be availing the input credit on the IGST paid? 4. Will the procedure related to road permits/ way bills be discontinued? 5. Would C forms / F forms no longer be applicable? 6. Would there be an introduction of a centralized tool which will allow for tracking of IGST credit transfer between states? Would there be a provision for end-users to track the status of credit transfer in case of inter-state transactions through such a tool? Would the document submission for this tool be in the form of a e-file? 7.

In case of a inter-state transaction, would the vendor selling out of state need to maintain a separate register for such transactions? Would the inter-state transactions need to be reported separately by the vendors and would there be any difference in the IGST payment to the tax authority from the normal SGST payment?

8. Would separate reporting / book keeping for inter-state transactions (New register)be required? 9. Can SGST Input credit be used to utilize IGST payable? 10. Destination plant/customer takes full credit of IGST. If he does not have output IGST, can this be utilized against SGST payable? 11. If all states do not move to the GST regime, how will inter state sales/transfer between GST and Non GST states be managed?

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GST: OPERATIONAL IMPACTS & CONCERNS

III.

Domestic Procurement : Capital goods Capital Goods are procured by the organizations and treated as Fixed Assets in the books. Tax Credit with respect to such procurement of capital goods received in a factory at any point of time in a given financial year shall be taken only for an amount not exceeding a certain percentage (as defined by the state legislation) of the duty paid on such capital goods in the same financial year. The balance of credit may be taken in any financial year subsequent to the financial year in which the capital goods were received in the factory of the manufacturer, if the capital goods, are in the possession of the manufacturer of final products.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Purchase order with Non- exempt Vendor for Excisable Capital and Tax-Code for Excise Tax (CG). b) Goods are delivered at buyer’s premises and Goods receipt is carried out. This will update the CG stock and RG23C – Part -1 register with quantity of material receipt accepted. c) Excise Invoice is then captured in the system either with GR . RG23C Part -2 register will also get updated with x% Input Excise Credit booked for each duty component. Whereas the balance x% Credit will be posted to Cenvat on Hold A/c and will not be available for set-off in the current financial yr. d) Supplier invoice received is then captured, booking the vendor payable and clearing the Cenvat Account. e) Vendor due payment is done to clear the account payables. f)

Subsequent Credit can be availed in the next financial year. This will transfer the x% credit on hold to input credit A/c.

GST Scenario: Under GST era, in case of domestic procurement of capital goods, the applicable indirect taxes will be CGST and SGST, in case of intrastate procurement and IGST, in case of interstate procurement. The CENVAT credit rules in case of capital goods state that the purchaser can avail only upto 50% of the input credit during the first year of purchase of the capital good. The remaining credit can only be availed in the next year onwards. The 13th Finance commission however recommends that there should be no difference between the treatment of raw material and capital goods in terms of the input credit in the GST regime.

Clarifications Sought: 1. Will input credit arising out of capital goods be treated the same as the input credit from raw material, i.e., the entire input credit can be used for setoff during the first year of purchase itself? 2. Will there be no need to maintain separate registers for raw material and capital goods stock and credit account like the existing RG23A/ RG23C Part 1 and RG23A/ RG23C Part 2 registers?

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GST: OPERATIONAL IMPACTS & CONCERNS

IV.

Domestic Procurement – Services Service Tax is an indirect levy and is applicable to certain services specified as per the Finance Act 1994 as amended. This tax is levied on the gross amount received by the service provider for taxable services rendered. Service tax credit can be availed only after the payment to the service provider for the amount of services provided.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Purchase order with Non- exempt Vendor for Service Material and Tax-Code for Service Tax. b) Services are rendered at buyers premises and Service Receipt is carried out . This will book the service expense with the amount of service accepted. c) Service Invoice is then received for the service s rendered and will be captured in the system, debiting the Service tax applicable to an interim a/c and SR/IR Clg a/c . Vendor payable are also credited for payment. d) Vendor due payment is done to clear the account payables. e) After the service payment only service tax paid will be transferred from interim a/c to service tax final a/c and made available as input credit. ST credit will not be transferred unless full payment is done to the service provider

GST Scenario: In the GST regime, the applicable taxes on the procurement of services will be CGST and SGST instead of the prevalent Service tax. In the case of inter-state procurement of services, IGST (CGST + SGST) will be applicable and in case of imports of services, CGST and SGST will be applicable. The vendor will issue an invoice charging the CGST and SGST components as tax and the purchaser will claim credit of the CGST and SGST paid to the vendor by him. Let us consider an example of a domestic intrastate provision of services: A company in Karnataka requests for auditing services from a Chartered Accountancy firm. The audit is a onetime service which the accountancy firm will be providing to the company. The firm provides the service and raises an invoice for the same Invoice details: Auditing Service @ Rs 5000 per hour = Rs 50, 000 for 10 hours CGST @ 8 %* = Rs 4000 SGST @ 6%* = Rs 3000 Final invoice amount = Rs 57,000/* Rates are only for illustration. Final GST rates have not yet been fixed by the government

The purchaser will have to pay the vendor Rs 57,000/- towards the provision of the service. He will get the following CGST and SGST credit: CGST credit = Rs 4000 SGST credit = Rs 3000 The vendor will have a CGST payable of Rs 4000 and SGST payable of Rs 3000 to the government. He can however adjust the input tax credit of CGST and SGST against his output tax liability.

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GST: OPERATIONAL IMPACTS & CONCERNS

Clarifications Sought: Determination of origin and destination state in case of provision of Service: 1. In case of a scenario where the service provider and recipient are from the same state but service provider engages 3rd party from a state. Will this be deemed as an inter-state transaction? How would the credit distribution happen? 2. Consider the following scenarios extending to the example mentioned above: 3. If the company is in Karnataka and the Chartered Accountancy firm is also Karnataka, however the CA firm hires external consultants from Maharashtra to complete the service. In such a case, will this transaction be an inter-state transaction? 4. If the company is headquartered in Karnataka and the Chartered Accountancy firm is in Andhra Pradesh, however the CA firm hires external consultants from Maharashtra to complete the service. Which of the two states, Andhra Pradesh or Maharashtra, will be considered as the origin state?

5. In case of agreement contracts for services, will the SGST be from the state where the agreement was executed or from the state where the services will be provided, in case the two states are different? 6. Consider the following scenarios extending to the example mentioned above: 7. If the company is headquartered in Karnataka and the Chartered Accountancy firm is also Karnataka, but the service is required to be provided in the company’s office in Kerala. Considering that the payment is being made from the headquarters in Karnataka, will this be considered as an inter-state or intra-state transaction? 8. If the company is headquartered in Karnataka and the Chartered Accountancy firm is in Maharashtra, but the service is provided by the firm’s external consultants situated in Kerala to the company’s office in Kerala. Considering that the payment is being made from the headquarters in Karnataka, which of these states will be origin state and which will be the destination-state?

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GST: OPERATIONAL IMPACTS & CONCERNS

V.

Import Procurement – Goods (Raw Material) Import procurement of Goods / Materials refers to the process of purchase of goods by a business organization (Manufacturing entity, Dealer, Depot etc.), wherein the Selling organization reside in a different Country. Any such transactional movement of excisable goods is levied with Customs Duty (CD) paid at the port of entry into the Buyer Country and Countervailing (CVD) Duty which is equivalent to Excise duty and eligible as Input Tax Credit.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Purchase order with Non- exempt Vendor for Excisable Raw Material and Tax-Code for Excise Tax. b) Custom Duty needs to be paid on Goods Arrival before the goods receipt at the premises. Commercial Invoice is captured in system for such customs duty payment to authorities, debiting the CD and CVD Clg a/c against custom Duty payable A/c . Such payable gets cleared when the payment is done by the buyer. c) Goods are delivered at buyer’s premises and Goods receipt is carried out. This will update the RM stock and RG23A – Part -1 register with quantity of material receipt accepted. The customs duty paid will be inventorized. d) Excise Invoice is then captured in the system either with GR. RG23A Part -2 register will also get updated with Input CVD Credit booked. e) Supplier invoice received is then captured, booking the vendor payable and clearing the Cenvat Account. f)

Vendor due payment is done to clear the account payables.

GST Scenario: All goods imported into India have to pass through the procedure of Customs clearance as they cross Indian border. The goods are examined, appraised, assessed, evaluated and then allowed to be taken out of charge of the Customs for use by the importer at the port of entry. In the GST regime, both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services. The importer will need to pay the CGST and SGST components as tax and he will be able to avail input credit on the entire CGST and SGST paid. Let us consider an example of import of microchips from Korea to India: An importer in Karnataka raises an order of 100 pieces of microchips from a foreign vendor in Korea. The foreign vendor receives the order and dispatches the microchips to India via ship. The port of entry into India is Bombay in Maharashtra state. The foreign vendor issues an invoice of the following amount: Invoice details: Microchips @ USD 20 per piece = USD 2000 for 100 pieces Final invoice amount = USD 2000/At the port of entry, the following duties are charged by Indian government as imports duty: CGST @ 8 % of goods value = Rs 8000 (exchange rate at Rs 50 per USD)

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GST: OPERATIONAL IMPACTS & CONCERNS

SGST @ 6% of goods value = Rs 6000 * Rates are only for illustration. Final GST rates have not yet been fixed by the government

The purchaser will have to pay the vendor USD 2000 towards the payment of the goods and Rs 14,000 as imports duty to the Indian government. He will get the following CGST and SGST credit: CGST credit = Rs 8000 SGST credit = Rs 6000

The importer will get the credit of Rs 6000 as input credit in the state of Karnataka since the SGST is collected by Karnataka which is the state where the goods are finally consumed and not in Maharashtra where the goods are received into India.

Clarifications sought: 1. Would the basic duty of customs (BCD) still remain? Would the Education Cess and Secondary and Higher Education Cess applicable in case of imports still exist separately on the CGST and SGST or would these be included in the CGST and SGST? 2. What will happen to the imports processes such as DEPB, EPCG? Will there be provision of advance licenses like the ones existing for exempting CVD and SAD? 3. Import of Services: Will Reverse charge continue for Imports?

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GST: OPERATIONAL IMPACTS & CONCERNS

4. Would the appropriate state for collecting SGST on imports be the state where the goods are cleared or the state where the goods are consigned for ultimate use or trading? 5. Would there be a case where SGST would be applicable based on the state of the port and then IGST will be applicable in the transfer between the state of the port and the final destination state? 6. What will be the reporting requirements specific for imports process? 7. Will the importer need to maintain a separate register/ books for imports? 8. What will be the proof for taking credit for CGST and SGST? Will there be a GST invoice issued by the customs department or will there be any other document issued in case of imports with reference to which the credit of CGST and SGST can be taken?

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GST: OPERATIONAL IMPACTS & CONCERNS

C. SALE OF GOODS & SERVICES I.

Domestic Intrastate Sale – Goods (Raw Material) Intrastate Sale of Goods / Materials refers to the process of sale of goods by a business organization (Manufacturing entity, Dealer, Depot etc.), wherein Buyer and the Selling organizations reside in the same State (Region). Any such transactional movement of excisable goods is levied with Excise tax as per the central excise legislation. On the other hand Value Added Tax (VAT) is a consumption tax levied on the commercial distribution of goods.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Sales order with Non- exempt Customer for Excisable Raw Material and Tax-Code for Excise Tax + VAT. b) Goods are delivered from buyer’s premises and Goods Issue is carried out. This will update the RM stock and RG23A – Part -1 register with quantity of material Issued. c) Customer invoice is then created, booking the Sales Revenue , Customer receivable and VAT and Excise Payable. Excise Invoice can be posted in background or explicitly. RG23A Part -2 register will also get updated with Excise Credit (immediate utilization). d) Customer Receivable gets cleared on receipt of payment from customer.

GST Scenario: In case of domestic sales of goods within the same state, the applicable indirect taxes will be CGST and SGST. The vendor will issue an invoice charging the CGST and SGST components as tax. The vendor will be liable to pay the CGST and SGST collected. The SGST must be remitted to the same state as the origin and destination state are the same. Let us consider an example of sales of raw material used in manufacturing: A vendor in Karnataka receives an order of 100 pieces of steel rods used for manufacturing from a factory in the same state. The vendor receives the order and dispatches the steel rods to the factory. He then issues an invoice for the steel rods. Invoice details: Steel Rods @ Rs 550 per piece = Rs 55, 000 for 100 pieces CGST @ 8 %* = Rs 4400 SGST @ 6%* = Rs 3300 Final invoice amount = Rs 62,700/* Rates are only for illustration. Final GST rates have not yet been fixed by the government

The vendor will have a CGST payable of Rs 4400 and SGST payable of Rs 3300 to the government. However, he will actually pay a CGST and SGST payable only on the value addition after adjusting the CGST and SGST credits he received on the input side. Assuming he had bought raw material (steel) to make the steel rods and had the following input credit: CGST credit = Rs 1000 SGST credit = Rs 750 Hence after carrying out the input credit setoff, he would pay the government: CGST payable = Rs 4400 – Rs 1000 = Rs 3300 SGST payable = Rs 3300 – Rs 750 = Rs 2550

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GST: OPERATIONAL IMPACTS & CONCERNS

Clarifications Sought: 1. Would the CGST and SGST payable be due for payment once the invoice has been generated? 2. Would the tax payment be monthly? 3. Would there be a need to maintain a PLA register for payment of excessive payable amounts in case of insufficient input credits available for set-off? 4. Will TR6C challan still be required? If not, what would be the new mode of payment? 5. Document Numbering- Would there be multiple document numbers required for CGST and SGST or would it be a single document number? 6. VAT Numbering: What would be the new numbering rules for Intra State and inter state transactions?

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GST: OPERATIONAL IMPACTS & CONCERNS

II.

Domestic Interstate Sale – Goods (Raw Material) Interstate Sale of Goods / Materials refers to the process of sale of goods by a business organization (Manufacturing entity, Dealer, Depot etc.), wherein Buyer and the Selling organizations reside in different States (Region). Any such transactional movement of excisable goods is levied with Excise tax as per the central excise legislation. On the other hand Central Sales Tax (CST) is a consumption tax levied on the commercial distribution of goods.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Sales order with Non- exempt Customer for Excisable Raw Material. b) Goods are delivered from buyer’s premises and Goods Issue is carried out. This will update the RM stock and RG23A – Part -1 register with quantity of material Issued. c) Customer invoice is then created, booking the Sales Revenue , Customer receivable and VAT and Excise Payable. Excise Invoice can be posted in background or explicitly. RG23A Part -2 register will also get updated with Excise Credit (immediate utilization). d) Customer Receivable gets cleared on receipt of payment from customer.

GST Scenario: In case of inter-state domestic sales of goods the IGST model for taxation will be applicable. As per the IGST model, the center will levy IGST on all inter-State transactions of taxable goods and services. IGST will be computed as CGST plus the SGST component of the destination state. The IGST model will work in the following way: The Centre will levy an IGST (rated at the combined Central GST plus State GST rates) on all interstate transactions of goods and/or services with ‘appropriate provisions’ to be made for consignment or stock transfer of goods. Inter-state vendor would levy the IGST (CGST + SGST) on inter-state transactions involving sale of goods The exporting vendor will have to pay IGST on value addition after adjusting available input tax credit of IGST, CGST, and SGST. Exporting State will transfer to the Central Government the amount of SGST credit utilized by the inter-state vendor to discharge output IGST liability in that State. Importing purchaser will claim the input tax credit of the IGST in his own state by adjusting this credit against his output liability. Central Government would accordingly transfer the amount of IGST used in payment of SGST to the account of importing State; and Central agency will act as clearing house mechanism and be responsible for monitoring and verifying credit movements and accordingly inform respective Government authorities to transfer funds. Let us consider an example of sales of raw material used in manufacturing: A vendor in Madhya Pradesh receives an order of 100 pieces of steel rods used for manufacturing from a factory in Karnataka. The vendor receives the order and dispatches the steel rods to the factory. He then issues an invoice for the steel rods.

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GST: OPERATIONAL IMPACTS & CONCERNS

Invoice details: Steel Rods @ Rs 550 per piece = Rs 55, 000 for 100 pieces IGST = CGST + SGST = Rs 7700 (CGST @ 8 %* = Rs 4400 and SGST @ 6%* = Rs 3300) Final invoice amount = Rs 62,700/* Rates are only for illustration. Final GST rates have not yet been fixed by the government

The vendor will have a IGST payable of Rs 7700 to the Center. However, he will actually pay IGST payable only on the value addition after adjusting the IGST, CGST and SGST credits he received on the input side. Assuming he had bought raw material (steel) to made the steel rods and had the following input credit: CGST credit = Rs 1000, SGST credit = Rs 750 Hence after carrying out the input credit setoff, he would pay the government: IGST payable = Rs 7700 – Rs 1750 = Rs 5950 The SGST payable equivalent will be transferred to the destination state, i.e., Karnataka by the Center / clearing house.

Clarifications Sought: 1. Would there be an introduction of a centralized tool which will allow for tracking of IGST credit transfer between states? Would there be a provision for end-users to track the status of credit transfer in case of inter-state transactions through such a tool? 2. Would the document submission for this tool be in the form of a e-file?

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GST: OPERATIONAL IMPACTS & CONCERNS

3. In case of a inter-state transaction, would the vendor selling out of state need to maintain a separate register for such transactions? Would the inter-state transactions need to be reported separately by the vendors and would there be any difference in the IGST payment to the tax authority from the normal SGST payment? 4. Can SGST Input credit be used to utilize IGST payable? 5. Would separate reporting / book keeping for inter-state transactions (New register)be required? 6. Destination customer takes full credit of IGST. If he does not have output IGST, can this be utilized against SGST payable? 7. If all states do not move to the GST regime, how will inter state sales between GST and Non GST states be managed? 8. Will Sales return also have IGST as applicable?

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GST: OPERATIONAL IMPACTS & CONCERNS

III.

Domestic Sale – Services Service Tax is an indirect levy and is applicable to certain services specified as per the Finance Act 1994 as amended. This tax is levied on the gross amount received by the service provider for taxable services rendered.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Sales order for Service Material and Tax-Code for Service Tax. b) Services are rendered at buyers premises and Service acceptance is carried out. c) Service Invoice is then raised for the service s rendered. This books the Service revenue and Service tax payable. d) Customer Receivable gets cleared on receipt of payment from customer.

GST Scenario: In the GST regime, the applicable taxes on the sale of services will be CGST and SGST instead of the prevalent Service tax. In the case of inter-state sale of services, IGST (CGST + SGST) will be applicable and in case of exports of services, GST will be zero-rated. The vendor will issue an invoice charging the CGST and SGST components as tax and the purchaser will claim credit of the CGST and SGST paid to the vendor by him. Let us consider an example of a domestic intrastate sale of services: A Chartered Accountancy firm in Karnataka receives a request for auditing services from a company. The audit is a onetime service which the accountancy firm will be providing to the company. The firm provides the service and raises an invoice for the same. Invoice details: Auditing Service @ Rs 5000 per hour = Rs 50, 000 for 10 hours CGST @ 8 %* = Rs 4000 SGST @ 6%* = Rs 3000 Final invoice amount = Rs 57,000/* Rates are only for illustration. Final GST rates have not yet been fixed by the government

The vendor will have a CGST payable of Rs 4000 and SGST payable of Rs 3000 to the government. He can however adjust the input tax credit of CGST and SGST against his output tax liability.

Clarifications Sought: Point of Taxation: 1. Point of Taxation is defined as the point at which the service tax payable liability is to be created. At present, the point of taxation for service tax is defined as the following: 2. Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service.

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GST: OPERATIONAL IMPACTS & CONCERNS

3. Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above. 4. In the GST regime, what will be the point of taxation during the sales of services? 5. Will the point of taxation for goods and services differ? 6. Will it be mandatory for service providers to record the date of provision of service for audit purpose? Will there be a need for a separate register to track the provision of service? 7. What will be the reporting requirements for sale of service?

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GST: OPERATIONAL IMPACTS & CONCERNS

IV.

Export Sale – Goods (Raw Material)

Export Sale of Goods / Materials refers to the process of sale of goods by a business organization (Manufacturing entity, Depot etc.), wherein buying organization reside in different Country. Any such transactional movement of excisable goods is levied with Excise tax.

However Manufacturing plants are entitled not to pay any basic excise duty on export sales, as long as the goods are accompanied by required documentation (ARE forms linked to Excise Bonds issued by Excise Authorities) as per the central excise legislation. An excise bond covers a fixed amount of excise duty. The excise duty of the goods exported under bond cannot exceed the bond value.

If the Excise Bond cannot be obtained, the any excise duty liable when removing goods from your premises for export must be paid. However, manufactured can claim a rebate for the excise duty once you have completed the export if you fill out an ARE-1 to go with the export. In order to qualify for a rebate on the excise duty, all exports must be accompanied by the appropriate paperwork, including an ARE-1 document, and you must complete the export within the export period.

A sale of goods, in India, to a company that qualifies as an export-oriented unit or is located in one of the following: Export processing zone Electronic hardware technology park Software technology park is termed as Deemed Export. Such companies export most of their goods; and so any goods that you sell them are liable to be used in the production of goods for export, hence the term "deemed export." Under the terms of the deemed exports scheme, these companies can obtain licenses that exempt them from payment of basic excise duty on certain input materials. In order to qualify for an exemption from excise duty, all deemed exports must be accompanied by the appropriate paperwork, including an ARE-3 document, and you must complete the deemed export within the re-warehousing period.

Let’s take the scenario of Exports under Excise Bond, wherein Excise duties to the extent of Bond are not payable to the authorities for an export sale.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) An Excise Bond is obtained from the Excise Authorities and Entered into the System for the purpose of tracking and monitoring of the Export sales under the same. b) Create a Sales Order with excisable material and with customer abroad (Ship to party outside the country). c) Good Delivery is carried out, with appropriate treatment to stock. ARE -1 document is then created with the details of goods being delivered and corresponding reference to the Bond created in step (a) is given.

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GST: OPERATIONAL IMPACTS & CONCERNS

d) Once ARE-1 document is posted corresponding Bond value get reduced by the export value. e) An Excise invoice is also created and posted with type “Under Bond” with the details on goods exported and the duties involved. Exports under bond are not subject to excise duty and thus do not attract any excise taxes. Even though the excise duty is zero, when you print the excise invoice, the system calculates the duty for the purposes of printing. f)

Commercial Invoice / Billing document is then posted booking the Account receivables.

g) Receivables get cleared once the payment is received from the customer.

GST Scenario: In the GST regime, all goods and services exported out of India will be zero-rated, i.e., no tax would apply on exports, and the input credit relatable to such export supplies would be allowed to be used against other domestic liabilities or refunded. Treatment of SEZs: The discussion paper stated that supply of goods and provision of services, to processing zones in a Special Economic Zone (‘SEZ’) would be zero rated. However, sales of goods and provision of services by a SEZ to Domestic Tariff Area will be liable to GST. The 13th Finance commission however recommends that there should be no such exemptions in SEZs.

Clarification Sought: 1. How will the SEZs currently having exemptions from central excise, CST, service tax and VAT be treated in terms of GST applicability? What will be the status of all the exemption schemes available for exports? 2. Would there no longer be exemptions for SEZs and EOUs? Will there be a refund process applicable in these scenarios? 3. In case of taxes paid on exports will be refunded, what will be the refund mechanism? Will there be a report which needs to be filed specifically for export transactions? 4. What will happen to the credit availed on GST paid on inputs for deemed export supplies? 5. Would ARE1 and ARE3 continue? 6. Would IGST be applicable for deemed exports? 7. Since exports will be zero-rated, will the concept of bond cease to exist in the GST regime?

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GST: OPERATIONAL IMPACTS & CONCERNS

D. STOCK TRANSFERS Whenever there is movement of excisable goods excise duty needs to be paid to the kitty of the Government. To facilitate the payment of Excise Tax, calculation and determination of Excise Tax needs to be carried out. Stock transfers from one Manufacturing Location (Plant 1) to another (Plant 2) involve movement of goods and is subject to excise tax payment. The same is passed to the receiving plant and can be utilized as input credit.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Stock Transfer order with respect to transfer of Excisable Raw Material, from Plant 1 to Plant 2. b) Goods Issue is carried out at Plant 1 debiting the stock at Plant 1 and crediting the same at Plant 2 stock. Part-1 register is also updated with the quantity of stock transferred. c) Excise Invoice is then issued for the Stock transfer posting the Cenvat payable RG23A Part -2 register will also get updated with Excise tax applicable. d) Excise taxes are duly paid clearing the Cenvat Payable A/c. e) Goods are then received at Plant- 2, with no accounting doc posted. Part -1 register gets updated with Qty received. f)

Incoming Excise Invoice gets captured, Part – 2 register also gets updated with Input credit booked.

GST Scenario: In case of domestic transfer of goods within the same state, the applicable indirect taxes will be CGST and SGST. The transferring plant will issue an invoice charging the CGST and SGST components as tax. The transferring plant will be liable to pay the CGST and SGST collected. The receiving plant will receive the input credit for the CGST and SGST paid. In case of inter-state transfer of goods, the IGST model for taxation will be applicable. IGST will be computed as CGST plus the SGST component of the destination state. Let us consider an example of transfer of raw material used in manufacturing from a plant A in Karnataka to plant B also in Karnataka: Plant A in Karnataka receives an stock transfer order of 100 pieces of steel rods used for manufacturing from plant B in the same state. GST Computation: Assessable value of Steel Rods @ Rs 550 per piece** = Rs 55, 000 for 100 pieces CGST @ 8 %* = Rs 4400 SGST @ 6%* = Rs 3300 * Rates are only for illustration. Final GST rates have not yet been fixed by the government

** Our assumption is that in case of Stock Transfer, CGST and SGST will be computed on the assessable value of the goods however this needs to be confirmed. The transferring plant will have a CGST payable of Rs 4400 and SGST payable of Rs 3300 to the government. However, he will actually pay a CGST and SGST payable only on the value addition after adjusting the CGST and SGST credits he received on the input side. The receiving plant will receive an input CGST credit of Rs 4400 and SGST credit of Rs 3300.

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GST: OPERATIONAL IMPACTS & CONCERNS

Clarifications Sought: 1. In case of stock transfer, on what base would the tax be computed on? Would it be on the assessable value? 2. Will an invoice need to be generated from the transferring plant in case of stock transfer? Will there be a fixed format for this invoice? (like excise invoice, would there be a GST invoice?) 3. Document Numbering- Would there be multiple document numbers required for CGST and SGST or would it be a single document number? Would invoice numbering be valid even for stock transfers? 4. Destination plant/customer takes full credit of IGST. If he does not have output IGST, can this be utilized against SGST payable? 5. If all states do not move to the GST regime, how will inter state sales/transfer between GST and Non GST states be managed? 6. Will Stock returns or Sales return also have IGST as applicable?

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GST: OPERATIONAL IMPACTS & CONCERNS

E. SUBCONTRACTING Subcontracting refers to the process wherein Raw materials or components are sent out to a subcontractor for processing and receiving them back. There are two main parties involved in the process an Mfg Plant and a Subcontractor. Since this process involves the movement of goods from manufacturing premises, it attracts the excise tax provisions under Cenvat rules. However, Under Excise law, when you send materials to a subcontractor for processing, Excise duty payment is not required, even though the materials have left the premises. However, if the materials have not been returned back within a given length of time specified by the law (180 days), Excise Credit posted at the time of purchase of such goods have to be reversed . A Re-Credit can be taken if the material is returned later against the pending-challan.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Purchase order with Non- exempt Vendor for Excisable Raw Material and Tax-Code . Excise tax applicable will be a condition type at the order. b) Subcontracting Goods are then transferred from RM stock to Subcontracting stock, with reference to PO created at step a.. c) Excise Invoice is then created and posted with reference to Transfer posting doc created at step b. RG23A register will be updated with the Duties and qty of RM transferred to subcontractor. d) ON receiving the goods from Subcontractor, Excise invoice is then captured w.r.t Subcontracting PO. This will generate the Excise invoice no. e) Goods Receipt is then carried out w.r.t the subcontracting PO and excise invoice no. is saved along with material doc. This will also update the RM stock with the Material received. RG23A Part 1 is also updated. f)

Excise Invoice captured at step (d) is then posted with the duties involved. Part II register gets updated with the Duties and the credit is available.

g) Subcontractors invoice is captured and posted

GST Scenario: The discussion paper on GST does not explicitly describe how the subcontracting process will be impacted in the GST era. Our assumption is that the existing subcontracting process, wherein a 57F4 challan is sent along with the goods to the subcontractor and then the goods are reconciled against the challan upon receipt, will no longer continue. In the GST era, since CGST and SGST will be applicable for each transfer/ sale of goods, we assume that the same will be applicable on subcontracting of goods. However this needs to be confirmed with the authorities.

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GST: OPERATIONAL IMPACTS & CONCERNS

Clarifications Sought: 1. Will the 57F4 challan for subcontracting still be required to be sent along with the subcontracted goods? 2. Will there be any specific report required for tracking of subcontracted goods? 3. Will the outgoing process from factory to subcontractor be treated as sales from factory with SGST and CGST applicable? 4. Will the incoming process from subcontractor to factory be treated as procurement from vendor with SGST and CGST applicable?

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GST: OPERATIONAL IMPACTS & CONCERNS

F. DEPOT OPERATIONS I.

Depot Procurement – Goods At times the manufacturing organization requires to do procurement at its Depot for various business needs. Any such transactional movement of excisable goods is levied with Excise tax as per the central excise legislation. On the other hand Value Added Tax (VAT) is a consumption tax levied on the commercial distribution of goods.

Process Overview: a) Create Purchase order with Non- exempt Vendor for Excisable Raw Material and Tax-Code for Excise Tax. b) Goods are delivered at buyers Depot and Goods receipt is carried out.

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GST: OPERATIONAL IMPACTS & CONCERNS

c) Excise Invoice is then captured in the system updating RG23D register with Input Excise Credit booked for each duty component. d) Supplier invoice received is then captured, booking the vendor payable and clearing the Cenvat Account. e) Vendor due payment is done to clear the account payables.

II.

Depot Sales – Goods At times the manufacturing organization first ships the Goods to at its Depot and sells it from therefore various business needs. Any such transactional movement of excisable goods is levied with Excise tax as per the central excise legislation. However Sales from depots are handled differently from sales from factories because of excise law: Excise duty is payable when you send the goods from the factory to the depot, but it is not levied again when you sell the goods. Sometimes when you make a final sale of goods from a depot, price escalations could have happened with retrospective effect. In such scenarios you need to pay the extra excise duty at the factory using an A Certificate. You need to register the A certificate details in the RG 23D register and the excise recovered from the customer.

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GST: OPERATIONAL IMPACTS & CONCERNS

Process Overview: a) Create Sales order with Non- exempt Customer for Excisable Raw Material. b) Goods are delivered from buyer’s premises and Goods Issue is carried out. This will update the FG stock and RG23A – Part -1 register with quantity of material Issued. c) Assign Excise Invoices to the O/b Delivery. RG23D Part -2 register will also get updated with Excise Credit. d) Customer invoice is then created, booking the Sales Revenue , Customer receivable and VAT and Excise Payable. e) Customer Receivable gets cleared on receipt of payment from customer

GST Scenario: The discussion paper on GST does not explicitly describe how the depot operations will be impacted in the GST era. However, since in the GST era, CGST and SGST will be applicable for each transfer/ sale of goods, we assume that the same will be applicable on case of transfer or sale to depots. However this needs to be confirmed with the authorities.

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GST: OPERATIONAL IMPACTS & CONCERNS

Clarifications Sought: 1. Will the depot concept (being tax neutral) still exist post-GST since GST will be applicable at each step of consumption and will not differ based on manufacturing or trading activity? 2. In case the depot concept will not continue, will a warehouse/ depot be treated in the same manner as a factory? 3. Can credit be passed on to depot and utilized henceforth? 4. Will there be a need to maintain a register similar to the RG23D register which tracks the stock in the depot? 5. Will there be a need to link the depot excise invoices to the mother excise invoices received from factories? 6. In case of price escalations at the factory, would the process of A certificate issue to depot still hold good? 7. In case of inter-state stock transfer from factory to depot, would IGST be applicable instead of SGST?

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GST: OPERATIONAL IMPACTS & CONCERNS

G. LEGAL REPORTING Tax Reporting is an integral part of the business operations with respect to leagl compliance. As of today following are few of the Legal Reports (Tax Returns) required to be submitted to the Tax Authorities or kept for by organizations for audit purposes, as mentioned below: ER1 return (vide Notification No.71/ 2003-Central Excise (N.T.) ) ST3 for service tax RG23 Register Reports (RG23A/C Part 1 and Part 2, PLA, RG23D, RG1) Proforma Register under Rule 9(5) of Cenvat Credit Rules 2004 VAT Returns (state-specific) Depot Stock Register Exports related reports: Proforma of Running Bond Account Statement regarding Export of Excisable Goods Bond Summary Report Deemed Export License Summary Ageing Analysis for ARE documents

Clarifications Sought: 1. Since these reports are applicable under the Cenvat Credit Rules, would these reports still be applicable in the GST regime? 2. Which reports will be legally required by the tax authorities in the GST regime? Will there be different reports for the central tax authority and for the states? 3. Will there be different state specific formats for State reports? 4. Will there be a need to report different business processes such as inter-state transactions attracting IGST, import transaction, exports transactions etc, separately?

GST Returns E-Filing Similar to the existing applications for E-filing of ER1, Service Tax and Dealers Returns, there is a need for efiling of GST Returns. This return would report details of all incoming and outgoing transactions attracting GST. The understanding is that GST registered individuals will be able to file GST returns on the GST portal (GST Network).

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Clarifications Sought: 1. Who will be eligible to file GST returns online? 2. Will there be a common Return for central GST and state GST or will there be separate returns for each state? 3. Will all different business processes need to be reported separately while filing the return?(e.g. would imports and exports have to be reported differently from domestic procurement and sales?) 4. Will there be separate filing required for business processes attracting IGST, SGST? 5. At what level will the filing be done? Will it be at the central registration number for an enterprise having cross-state operations or would it be at each state level registration? 6. Will an acknowledgement be generated once the Return is successfully filed? 7. Will e-payment also be possible for the payable CGST, SGST to the government?

Need for Software Vendors: a) We understand that GST returns will have to be uploaded by customers on the GST Portal (GST Network) which is being built by the government. Can the format of the return be shared with software vendors so we can work on providing an automated solution for industries to fil this return. b) Different applications for e-filing returns expect different input – either by the means of upload of files of a specified format or else manual input of each detail by the assesse in the online mode. However, in case the assesse is expected to enter the values of each section of the report manually in the online mode, this leads to risk of mistakes during entry. This can be avoided if the application expects a file to be uploaded which contains all the information required for the return and this in turn is interpreted by the application and the report is generated accordingly. The assesse can use their ERP software like SAP to generate the file in the specified format containing all the details related to the transactions carried out during the reporting period. c) It would help to have a validation utility tool which will check the file for mandatory fields, incorrect file format etc prior to the upload of the file into the E-filing interface. This will reduce the chances of having files rejected by the tax authority due to incorrect format or missing data. d) Our assumption is that the government will also provide interfaces for assesses to file GST Returns on the GST Portal. In order to be compatible with the interface, SAP would require more information on the E-filing tool being developed for GST Returns and on the file to be uploaded into the interface. Important information like the format of the file (XML or txt file), whether a utility will be provided to validate the return being uploaded and the information content required to be put in the file would be needed by SAP in order to aid assesses with the e-filing process for GST Returns.

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ANNEXURE – I : ACCOUNTING TREATMENT FOR BUSINES SCENARIOS I.

Domestic Intrastate Procurement : Goods (Raw Material) Example: A PO is raised on Vendor for Material for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%., VAT @ 10%. Accounting scheme: Sr.No. Particulars Goods Receipt 1. Raw Material Stock A/c 2. GR/IR Clearing A/c Excise Invoice Capture 1. RG23 A A/c 4. Cenvat Clearing A/c Supplier Invoice Verification 1. Cenvat Clearing A/c 4. Input VAT Credit A/c 5. GR/IR Clearing A/c 6. Supplier Payable A/c Supplier Payment 1. Supplier Payable A/c 2. Bank A/c

II.

Debit

Credit

1000 1000 204 204 204 120 1000 1324 1324 1324

Domestic Interstate Procurement : Goods (Raw Material) Example: A PO is raised on Vendor for Material for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%., CST @ 4%. Accounting scheme: Sr.No. Particulars Goods Receipt 1. Raw Material Stock A/c 2. GR/IR Clearing A/c Excise Invoice Capture 1. RG23 A A/c 4. Cenvat Clearing A/c Supplier Invoice Verification 1. Cenvat Clearing A/c 5. GR/IR Clearing A/c 6. Supplier Payable A/c Supplier Payment 1. Supplier Payable A/c 2. Bank A/c

Debit

Credit

1048 1048 204 204 204 1048 1252 1252 1252

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GST: OPERATIONAL IMPACTS & CONCERNS

III.

Domestic Procurement : Capital Goods Example: A PO is raised on Vendor for Material for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%, VAT 10%. Accounting scheme: Sr.No. Particulars Goods Receipt 1. RM Stock A/c 2. GR/IR Clearing A/c Excise Invoice Capture 1. Cenvat on Hold A/c (x %) 2. RG23 C A/c (x %) 3. Cenvat Clearing A/c Supplier Invoice Verification 1. Cenvat Clearing A/c 2. GR/IR Clearing A/c 3. Input VAT A/c (x %) 4. Cenvat on Hold A/c (x %) 5. Vendor Payable A/c Supplier Payment 1. Supplier Payable A/c 2. Bank A/c Subsequent Credit 1. Input Credit A/c 2. Cenvat on Hold A/c

IV.

Debit

Credit

1000 1000 102 102 204 204 1000 60 60 1324 1324 1324 162 162

Domestic Procurement : Services Example: A PO is raised on Vendor for Service for Qty = 10 PC, at the rate of Rs.1000 per Pc, with applicable ST @ of 12% , ECess @ 2%. Accounting scheme: Sr.No. Particulars Services Receipt 1. Service purchase A/c 2. SR/IR Clearing A/c Service Invoice Capture 1. SR/IR Clearing A/c 2. ST Clearing A/c 3. ECess on ST Clearing A/c 4. Supplier Payable A/c Supplier Payment 1. Supplier Payable A/c 2. Bank A/c

Debit

Credit

10000 10000 10000 1200 24 11224 11224 11224

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GST: OPERATIONAL IMPACTS & CONCERNS

Service Tax Credit Transfer 1. Input ST Credit A/c 2. Input ECess ST Credit A/c 3. ST Clearing A/c 4. ECess on ST Clearing A/c

V.

1200 24 1200 24

Import Procurement : Goods (Raw Material) Example: A PO is raised on Vendor for Material for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable CD @ of 30%, CVD @ 10%. Accounting scheme: S.No. Particulars Customs/ Commercial Invoice Capture 1. CD Clg. A/c 2. CVD Clg. A/c 3. Customs payable A/c Customs Payment 1. Customs Payable A/c 2. Bank A/c Goods Receipt 1. RM Stock A/c 2. GR/IR Clg A/c 3. CD Clg A/c Excise Invoice Capture 1. RG23 A – CVD A/c 2. CVD Clg A/c Supplier Invoice Verification 1. GR/IR Clearing A/c 2. Vendor Payable A/c Supplier Payment 1. Supplier Payable A/c 2. Bank A/c

Debit

Credit

300 130 430 430 430 1300 1000 300 130 130 1000 1000 1000 1000

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GST: OPERATIONAL IMPACTS & CONCERNS

VI.

Domestic Intrastate Sale : Goods (Raw Material) Example:

A Sales Order is raised for Material A for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%., VAT @ 10%.

Accounting scheme: Sr.No. Particulars Goods Issue 1. FG Stock A/c 2. COGS A/c Excise Invoice 1. Cenvat Clearing A/c 4. Cenvat Payable A/c Customer Invoice / Billing 1. Cenvat Clearing A/c 4. VAT Payable A/c 5. Sales Rev A/c 6. Customer A/c Customer Receipt 1. Customer A/c 2. Bank A/c

VII.

Debit

Credit 1000

1000 204 204 204 120 1000 1324 1324 1324

Domestic Interstate Sale : Goods (Raw Material) Example: A Sales Order is raised for Material A for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%., CST @ 4%. Accounting scheme: Sr.No. Particulars Goods Issue 1. FG Stock A/c 2. COGS A/c Excise Invoice 1. Cenvat Clearing A/c 4. Cenvat Payable A/c Customer Invoice / Billing 1. Cenvat Clearing A/c 4. CST Payable A/c 5. Sales Rev A/c 6. Customer A/c Customer Receipt 1. Customer A/c 2. Bank A/c

Debit

Credit 1000

1000 204 204 204 48 1000 1252 1252 1252

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GST: OPERATIONAL IMPACTS & CONCERNS

VIII.

Domestic Sale : Service Example: A sales order is raised for Service for Qty = 10 PC, at the rate of Rs.100 per Pc, with applicable ST @ of 12%, ECess @ 2%.

Accounting scheme: Sr.No. Service 1. 2. 3. Receipt 1. 2.

IX.

Particulars Invoice Customer A/c Service Tax Payable A/c Sales Revenue A/c Customer A/c Bank A/c

Debit

Credit

1122 122 1000 1122 1122

Export Sale : Goods (Raw Material) Example: A sales order is raised for material for Qty = 10 PC, at the rate of Rs.100 per Pc, with applicable BED @ of 12%, ECess @ 2%.

Accounting scheme: Sr.No. Particulars Invoicing 1. Customer A/c 2. CENVAT A/c 3. Sales Revenue A/c Receipt 1. Customer A/c 2. Bank A/c

Debit

Credit

1000 0 1000 1000 1000

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GST: OPERATIONAL IMPACTS & CONCERNS

X.

Stock Transfers Example: STO (treated as sale) is raised for Material for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%. Accounting scheme: Sr.No. Particulars Goods Issue @ plant 1 1. Plant 2 RM Stock A/c 2. Plant 1 RM Stock A/c Excise Invoice Issue 1. Cenvat Clearing A/c(BED+SED+Cess) 2. Cenvat Payable A/c Excise Payment 1. Cenvat Payable 5. Bank A/c Excise Capture at Plant - 2 1. RG 23A Plant 2 A/c 4. Cenvat Clearing A/c(BED+SED+Cess)

XI.

Debit

Credit

1000 1000 204 204 204 204 204 204

Subcontracting Example: A Sub-Con PO is raised on Vendor for Material for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%. Accounting scheme: Sr.No. Particulars Transfer Posting 1. Subcontracting Stock A/c 2. RM Stock A/c Excise Invoice Create and Post 1. Cenvat Clearing A/c 2. Cenvat Payable A/c Goods Receipt 1. RM Stock A/c 2. GR/IR Clg A/c Capture and Post Subcontractors Excise Invoice 1. Cenvat RG23A A/c 2. Cenvat Clg A/c Subcontractors Invoice Verification 1. GR/IR Clg A/c 2 Cenvat Clg A/c 3 Vendor Payable

Debit

Credit

1000 1000 204 204 1000 1000 204 204 1000 204 1204

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GST: OPERATIONAL IMPACTS & CONCERNS

XII.

Depot Procurements Example: A PO is raised on Vendor for Material for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%. Accounting scheme: Sr.No. Particulars Goods Receipt 1. RM Stock A/c 2. GR/IR Clearing A/c Excise Invoice Capture 1. RG23 D – BED A/c 2. RG23D – SED A/c 3. RG23D – ECess A/c 4. Cenvat Clearing – BED A/c 5. Cenvat Clearing – SED A/c 6. Cenvat Clearing – ECess A/c Supplier Invoice Verification 1. Cenvat Clearing – BED A/c 2. Cenvat Clearing – SED A/c 3. Cenvat Clearing – ECess A/c 4. GR/IR Clearing A/c 5. Supplier Payable A/c Supplier Payment 1. Supplier Payable A/c 2. Bank A/c

XIII.

Debit

Credit 1000 1000 160 40 4 160 40 4 160 40 4 1000 1204 1204 1204

Depot Sales

Example: A Sales Order is raised for Material A for Qty = 1 PC, at the rate of Rs.1000 per Pc, with applicable BED @ of 16%, SED @ 4% and ECess @ 2%., VAT @ 10%.

Accounting scheme: Sr.No. Particulars Goods Issue 1. FG Stock A/c 2. COGS A/c Customer Invoice / Billing 1. Cenvat Clearing A/c 4. VAT Payable A/c 5. Sales Rev A/c 6. Customer A/c Customer Receipt 1. Customer A/c 2. Bank A/c

Debit

Credit 1000

1000 204 120 1000 1324 1324 1324

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