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KEY FEATURES OF DRAFT MODEL GST LAW

By Sundeep Gupta, FCA, DISA(ICA) Partner-Compliance

M/s ASA & Associates LLP

The efforts of the present Government seem to be paying off. The Empowered Committee of State Finance Ministers have cleared the draft Model GST law and the Government has released it for public opinion on June 14, 2016. GST is meant to be a game-changer for the Indian economy as it envisages to replace various indirect taxes viz. Excise, CVD and SAD portion of Customs, CST, VAT, Service Tax, Entry Tax, Octroi, Luxury Tax, Entertainment Tax with only one single tax to be called “Goods and Services Tax”. The draft law comprises of:

1. Draft Goods and Services Tax Act, 2016 covering both Central and State law on GST. This has 25 Chapters under various headings, 4 Schedules on certain matters and 1 Rule for GST Valuation.

2. Draft Integrated Goods and Services Tax Act, 2016. This has 11 Chapters under various headings.

The key features of the draft law are:

1. GST – KEY PRINCIPLES a) Central GST (CGST) and State GST (SGST) shall be levied on intra-state supply and

Integrated GST (IGST) shall be levied on inter-state supply of goods and/or services. b) The draft Integrated Goods and Services Tax Act, 2016 (IGST Law) lays down the

process of determination of inter-state supply. c) Sections 5 and 6 of the draft IGST Law lay down the methodology, in detail, for

determination of place of supply of goods and services respectively. d) Import of goods and/or services shall be considered as Inter-state supply. e) Exports shall be zero rated.

2. REGISTRATION (Chapter VI and Schedule III)

a) If the aggregate turnover consists only of goods and/or services which are not liable to tax, then registration is not required.

b) Registration requirement based on threshold of aggregate turnover i. Registration will be required by every person in each State from which taxable

supply of goods and/or services is made if the aggregate turnover in a financial year exceeds INR 9 lakhs. This threshold is lower at INR 4 lakhs for any of the North East States including Sikkim.

ii. Registration to be taken within 30 days from the date when registration is required.

iii. Income Tax PAN mandatory for registration iv. If registered under any previous law, separate procedure as may be prescribed

is to be followed for registration. This does not apply to an Input service distributor.

v. If a business is transferred by a taxable person, the transferee will require registration from the date of transfer.

vi. In case of a registered job worker, value of goods supplied after completion of job work will not be included in aggregate turnover.

vii. Aggregate turnover shall include all supplies made on own account or as an agent or otherwise on behalf of his principals.

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c) Registration requirement irrespective of threshold of aggregate turnover The following persons shall require registration irrespective of threshold limit of aggregate turnover:

i. person making inter-state taxable supply of goods and/or services ii. casual taxable persons – these are persons who occasionally undertake

transactions of supply of goods and/or services in a taxable territory without having a fixed place of business

iii. persons who are required to pay tax under reverse charge as recipient of goods and/or services

iv. non-resident taxable persons – these are taxable persons who occasionally undertake transactions of supply of goods and/or services in a taxable territory without having a fixed place of business in India

v. persons who are required to deduct tax at source under the GST law vi. persons who supply goods and/or services on behalf of other registered persons vii. input service distributors viii. persons who supply goods and/or services, other than branded services,

through e-commerce operator ix. every e-commerce operator x. aggregators who supply services under his own brand or trade name xi. any other person as may be notified by Government

d) Voluntary registration is also permitted. e) Separate registrations are permitted for a person having multiple business verticals

in the same State, subject to conditions as may be prescribed. f) Registration of casual taxable person or non-resident taxable person

The registration certification issued to casual taxable person or non-resident taxable person shall be valid for a period for 90 days. This may be extended. Further there is a requirement for advance payment of tax at the time of making application for registration, equal to the estimated tax liability.

3. TAXABLE PERSON (Section 9)

Persons who will be considered as taxable persons and will be required to pay tax under the GST law shall be: a) persons carrying on business at any place in India and who is registered or required to

be registered under Schedule III, subject to: i. Agriculturists will not be considered as a taxable person ii. Any person requiring registration under Schedule III will be considered as a

taxable person only if the aggregate turnover in a financial year exceeds INR 10 lakhs. This threshold is INR 5 lakhs for persons conducting business in North East States including Sikkim.

b) Central or State Government, any local authority in respect of activities or transactions as public authorities excluding those activities or transactions specified in Schedule IV.

c) The following shall not be considered as taxable persons: i. Employees providing services in relation to their employment ii. persons who are exclusively supplying goods and/or services not liable to tax iii. persons liable to pay tax on reverse charge receiving services of a value (to be

specified later) for personal use. 4. COMPOSITION LEVY (Section 8)

The Government may permit a registered taxable person to pay a lower rate rate of tax instead of the tax payable by him if his aggregate turnover in a financial year does not

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exceed INR 50 lakhs. Such lower rate cannot be less than 1 per cent. However, this will not be applicable to a person engaged in Inter-state supply of goods and/or services. A person so permitted will not collect any tax from the recipient of supply made by him and also will not be entitled to input tax credit.

5. TIME AND VALUE OF SUPPLY (Chapter IV) The liability to pay tax will arise at the time of supply of goods and/or services. This is determined as below.

I. Time of supply of goods: a. Shall be the earlier of

i. date on which the goods are removed by the supplier for supply to recipient ii. if the goods are not required to be removed, then the date the goods are

made available to (placed at the disposal of) the recipient iii. date of issue of invoice iv. date of receipt of payment v. date on which the recipient shows the receipt of goods in his books of

account b. In case of continuous supply of goods, it shall be the earlier of

i. where successive statements of account or payments are involved, the date of expiry of the period to which such statement or payment relates

ii. in other cases, the date of issue of invoice or payment whichever is earlier c. In case of reverse charge, the earlier of

i. date of receipt of goods ii. date of payment iii. date of receipt of invoice iv. date of debit in books of account

d. if goods are removed on approval or sale or return or similar terms and at that time it is not known whether the supply will take place or not, then the earlier of i. date when it is known that supply has taken place ii. 6 months from date of removal

e. if it is not possible to determine the time of supply as above, then i. where periodical return is to be filed, the date when such return is to be filed ii. in any other case, the date on which tax is paid

II. Time of supply of services

a. If invoice issued within prescribed period, the earlier of i. date of invoice ii. date of payment

b. If invoice not issued within prescribed period, the earlier of i. date of completion of service ii. date of payment

c. In other cases, the date on which the recipient of service shows the receipt of service in his books of account

d. In case of continuous supply of service i. if the due date of payment is known from the contract, such date, even if

the invoice is not issued ii. if the due date of payment is not known from the contract, the date of

payment or date of invoice, whichever is earlier

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iii. where payment is linked to completion of an event, the time of completion of the event

Continuous supply means supply of services continuously or on recurrent basis under a contract for period exceeding 3 months with periodic payment obligations, or any other supply as notified by Government.

e. In case of reverse charge, the earlier of i. date of receipt of service ii. date of payment iii. date of receipt of invoice iv. date of debit in books of account

f. Where supply of service ceases before completion, the time when the supply ceases

g. if it is not possible to determine the time of supply as above, then i. where periodical return is to be filed, the date when such return is to be filed ii. in any other case, the date on which tax is paid

III. Change in rate of tax for supply of services

If there is a change in the effective rate of tax in respect of services, the determination of the applicable rate shall be done on the following basis. a) if the taxable service has been provided before the change in effective rate of

tax: i. where both the invoice has been issued and payment received after the

date of change, the applicable rate would be the rate on the date of issue of invoice or receipt of payment whichever is earlier

ii. where the invoice is issued prior to the change but payment is received after, the applicable rate would be as on the date of the invoice

iii. where payment is received before the change but invoice is issued after, the applicable rate would be as on the date of receipt of payment

b) if the taxable service has been provided after the change in effective rate of tax:

i. where both the invoice has been issued and payment received before the date of change, the applicable rate would be the rate on the date of issue of invoice or receipt of payment whichever is earlier

ii. where payment is received after the change but invoice is issued prior, the applicable rate would be as on the date of receipt of payment

iii. where the invoice is issued after the change but payment is received prior, the applicable rate would be as on the date of the invoice

The date of payment shall be the date of credit the the bank account only when such credit is after 4 working days from the date of change in effective rate of tax.

IV. Value of taxable supply of goods and/or services

a. The value for tax purposes shall be the transaction value where the parties are not related and the price is the sole consideration for the supply.

b. The transaction value shall include: i. any amount paid by the recipient but liable to be paid by the supplier in

relation to such supply ii. the value of such goods and/or services supplied directly or indirectly by

the recipient free of charge or at reduced cost for use in connection with the supply

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iii. royalty and licence fees related to the supply that the recipient must pay directly or indirectly as a condition of the supply

iv. any taxes, duties, fees and charges levied under any other law v. incidental expenses charged by the supplier including any amount charged

for anything done by the supplier before the delivery of the goods or supply of services

vi. subsidies linked to the supply vii. any reimbursable expenses or cost incurred by or on behalf of supplier in

relation to the supply viii. any discount or incentive allowed after the supply is effected, excluding

any discount in terms of agreement known before the supply c. Discount allowed in the course of normal trade practice and recorded in the

invoice prior to supply shall not be included in transaction value. d. If the value of supply cannot be valued as above in the following situations,

the value shall be determined as prescribed in the Rules: i. the consideration is not money, fully or partially ii. the parties are related iii. there is reason to doubt the truth or accuracy of the transaction value

declared by supplier iv. business transactions undertaken by pure agent, money changer, insurer,

air travel agent and distributor or selling agent of lottery v. such other supplies as notified by the Government

e. The rules made in relation to above are the draft GST Valuation (Determination of the Value of Supply of Goods and Services) Rules, 2016, which prescribe Comparison method, Computed Value method, Residual method of valuation.

6. INPUT TAX CREDIT (Chapter V)

The significant advantage of bringing in GST is having an input tax credit system to eliminate tax cascading. The methodology laid down under the draft law is as below. a) Credit of input tax on inputs held in stock, semi-finished or finished goods in stock

on the day preceding the day when the person becomes liable for registration. b) However, the credit will be allowed only before the expiry of 1 year from the date of

tax invoice of such purchase of inputs. c) Tax credit will be permitted only to the extent of use for purposes of business.

Further, if a person is also engaged in providing exempt or non-taxable supplies, the credit will be restricted to the amount attributable to taxable supplies. In this case, zero-rated supplies will be aggregated with taxable supplies. The calculation methodology will be as notified by the Government.

d) Unutilized tax credit will be permitted to be transferred in case of sale, merger, demerger, amalgamations, leasing or business transfer in the manner prescribed by the Government.

e) Exclusions for tax credit The input tax credit will not be available in respect of the following:

i. Motor vehicles, except when they are supplied in the usual course of business or are used for providing the taxable services in the nature of transportation of passengers or goods or imparting training on motor driving skills

ii. Goods and/or services provided to employees for their personal use in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, club membership, health and fitness centre, life insurance, health insurance and travel benefits for vacation

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iii. Goods acquired and/or services taken by the principal in execution of works contract for construction of immovable property, other than plant and machinery

iv. Goods acquired by the principal used in construction of immovable property, other than plant and machinery, if the property in such goods is not transferred, whether as goods or in some other form

v. Goods and/or services where tax has been paid under Composition Levy provisions

vi. Goods and/or services used for private or personal consumption to the extent consumed

vii. Tax component of the cost of capital goods if depreciation claimed thereon f) Conditions for taking input tax credit

The following conditions are necessary to claim input tax credit: i. There should be a tax invoice, debit note, supplementary invoice or any other

document as may be prescribed, issued by the registered person ii. The goods and/or services must have been received iii. Tax charged in respect of the goods and/or services has been paid to the

appropriate Government iv. Prescribed return has been furnished v. Where goods against an invoice are received in lots, only upon receipt of the

last lot g) Input tax credit in case of job work

i. Where inputs are sent out on job work, tax credit may be taken if the inputs are received back after completion of job work within 180 days. This limit is 2 years in case capital goods are sent out on job work

ii. If the above time period lapses, the tax credit so taken will need to be paid to the Government with interest. The tax and interest so paid may be reclaimed when inputs or capital goods are received back

h) Input service distributor The law lays down the manner of distribution of credit by Input service distributor to recipient of credit in the following situations:

i. Where the Distributor and recipient of credit are located in different States: a. Credit of CGST may be distributed as IGST b. Credit of IGST may be distributed as IGST c. Credit of SGST may be distributed as IGST

ii. Where the Distributor and recipient of credit being a business vertical are located in same State:

a. Credit of CGST may be distributed as CGST b. Credit of IGST may be distributed as CGST c. Credit of SGST may be distributed as SGST d. Credit of IGST may be distributed as SGST

7. RETURNS TO BE FILED (Chapter VIII)

a) Every taxable person will be required to file the following returns: i. Monthly return of outward supplies – by the 10th of the following month. (Not

required by an input service distributor and a person paying tax under Composition Levy or under Tax deduction at Source)

ii. Monthly return of inward supplies – by the 15th of the following month. (Not required by an input service distributor and a person paying tax under Composition Levy or under Tax deduction at Source)

iii. Monthly return – by the 20th of the following month.

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iv. Quarterly return by persons opting for Composition Levy – by the 18th of the month following the quarter

v. Monthly return by persons covered under Tax Deduction at Source – by the 10th of the following month

vi. Monthly return by Input Service Distributor – by the 13th of the following month

vii. Annual return – by December 31 following the end of each financial year viii. Final return – within 3 months of the date of cancellation of registration

b) All due taxes must be paid on or before filing of the return. In case taxes are due, no input tax credit will be allowed and the return shall be considered invalid to such extent.

c) For returns other than Annual return, late fee is prescribed at INR 100 per day subject to a maximum of INR 5,000.

d) For Annual return, late fee is prescribed at INR 100 per day subject to a maximum of quarter per cent of aggregate turnover.

8. PAYMENT OF TAX (Chapter IX)

a) Tax is to be paid electronically after utilizing the input tax credit. b) The input tax credit is to be utilized in the following manner:

i. credit of IGST to be first utilized towards payment of IGST and the balance towards CGST and SGST in that order

ii. credit of CGST to be first utilized towards payment of CGST and the balance towards IGST

iii. credit of SGST to be first utilized towards payment of SGST and the balance towards IGST

iv. credit of CGST cannot be utilized towards payment of SGST or vice-versa c) TAX DEDUCTION AT SOURCE

i. The Government may require any person to deduct tax at source from the payment due to the supplier of taxable goods and/or services where the total value of the supply under a contract exceeds INR 10 lakhs.

ii. The rate of deduction shall be 1 per cent. iii. The tax so deducted must be paid to the Government by 10th of the following

month. iv. A certificate of tax deduction shall be provided to the supplier

9. REFUNDS (Chapter X) a) Application for refund may be made before expiry of 2 years from the relevant date,

except where tax has been paid under protest. b) Refund of unutilized tax credit shall be permitted only in case of exports or where the

credit accumulation is on account of tax rate on inputs being higher than the tax rate on outputs. Where the exports are subject to export duty, no such refund shall be allowed.

c) Documentary evidence as may be prescribed shall not be required where the claim of refund is less than INR 5 lakhs. In such cases, a declaration is to be submitted certifying that the tax being claimed as refund has not been passed on to any other person.

d) The order for refund is to be made by the appropriate authority within 90 days of the application for refund.

10. ELECTRONIC COMMERCE

a) Special provisions have been introduced for e-commerce operators and aggregators. b) Tax collection at source (TCS) provisions require collection of an amount out of the

amount payable to the supplier on the notified rate.

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c) Such TCS amount to be paid to the Government 10th of the following month. d) A separate return has to be filed in the prescribed format by the 10th of the following

month.

11. TRANSITIONAL PROVISIONS a) Migration of existing taxpayers to GST

i. A person who is registered under any of the existing laws shall be issued a provisional certificate of registration which will be valid for 6 months.

ii. On submission of the prescribed information, the provisional certificate shall be granted on a final basis, subject to the registration requirements under the GST law.

b) Input tax credit carried forward in a return i. CENVAT / VAT credit shall be permitted to be allowed as input tax credit

under GST law if it was admissible under the previous laws, as well as the new GST law, and was carried forward in the return filed under the previous laws.

c) Unavailed CENVAT credit on capital goods not carried forward in a return i. Such CENVAT credit on capital goods which was not carried forward in a

return shall be allowed in certain situations. ii. Such credit shall be permitted to be allowed as input tax credit under GST law

if it was admissible under the previous laws, as well as the new GST law. d) Credit of eligible duties and taxes in respect of inputs held in stock

i. These provisions cover persons who were not liable for registration under the previous laws or were engaged in the manufacture of exempted goods which are now liable to tax under the new GST law.

ii. Such persons will be entitled to take input credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock if they are used for making taxable supplies under the new law.

iii. Such person is eligible for input tax credit under the new law. e) Various other transitional provisions

The draft GST law also lays down provisions in relation to various other transitional issues in great detail.

12. MISCELLANEOUS PROVISONS

Separate provisions have been made for Compliance Ratings, Assessments, Audit, Demands and Recovery, Offences and Penalties, Search and Seizure, Prosecution, Appeals and Advance Rulings etc.

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