Goods and services tax (GST)
The government of India took a landmark step and implemented the GST with effect from 1 July 2017. GST is an indirect tax, which is a transaction-based taxation regime.
For smooth GST implementation, the government has formed a GST Council. The Council consists of the State Finance Minister’s representing their states. The GST Council provides recommendations to the government on various aspects of GST law, such as rate revisions and amendments in GST rules, etc.
Prior to GST, there were multiple indirect taxes leviable on various transactions at each stage separately by the Union Government and the states at varying rates. Such taxes included excise duty, service tax, value added tax (VAT)/central sales tax (CST), entertainment tax, luxury tax, lottery taxes, state cesses and surcharges, etc. All such taxes (except customs duty) have been subsumed under GST, and there is one single tax applicable on supply of goods and services. However, there are a few products that continue to be outside the ambit of GST, like petrol, diesel, ATF, natural gas, crude oil, etc.
GST is a comprehensive ‘consumption tax’ levied on the supply of all goods and services. Indian GST is a dual model:
- Central GST (CGST), levied by the Central Government.
- State GST (SGST)/Union Territory GST (UTGST), levied by the State Government/Union Territories.
In case of intra-state supply of goods and services, CGST+SGST/UTGST would become applicable, and in case of inter-state supply of goods and services, Integrated GST (IGST) would become applicable. IGST is a sum of CGST and SGST. The rate of GST varies from 5% to 28% depending upon the category of goods and services, the general rate of tax being 18%. Additionally, some category of goods/services notified by the government are subject to Compensation Cess under GST.
The threshold limit for the purpose of obtaining GST registration is INR 2 million (aggregate turnover in a financial year). For the purpose of the threshold, aggregate turnover shall be computed on an all India basis. For some specific categories of supplies and suppliers, the registration requirement is mandatory.
Similar to previous VAT laws, there is a concept of composition scheme under GST for small traders. Small traders having turnover of INR 10 million (limit proposed to be revised to INR 20 million in the 23rd GST Council meeting) have an option to avail a composition scheme. Under the said scheme, GST at a lower rate (1% of the taxable turnover) would apply.
Import of goods and services
The import of goods under the GST regime will be subject to IGST and Compensation Cess (if applicable), along with Basic Custom Duty (BCD) and Customs Cess (education cess at 2% and secondary and higher education cess at 1% are also levied on the BCD). BCD and Customs Cess paid at the time of imports are not available as credit under GST; consequently, they will always be a cost to the importer.
Similar to erstwhile service tax laws, on import of service, service recipient would be liable to pay IGST under reverse charge. Also, there are specified categories of goods and services notified by the government on which GST needs to be paid by the recipient under reverse charge.
Zero-rated supplies/Export of goods and services
Export of goods and services are zero rated under GST. Exporters can claim refund of input tax credit of inputs/input services used in export of goods/services, subject to fulfilment of prescribed conditions. Per GST laws, exporters will be provided provisional refund within seven days from the date of acknowledgement.
Also, the supplies to an SEZ for authorised operations have been made zero rated under GST. Unlike the erstwhile indirect tax regime, which involved a lot of paperwork for claiming export refund claims, a simplified online process for claiming refund of exports has been specified under GST.
The online refund process has not yet started, and the government is expected to release guidelines on the same.
To facilitate trade for small exporters, the concept of 'merchant exporter' has been introduced under GST. Accordingly, the merchant exporters will now have to pay nominal GST of 0.1% for procuring goods from domestic suppliers for export, subject to conditions specified in the notification.
Input tax credit
Per input tax credit provisions stipulated under GST law, a registered taxable person is eligible to claim input credit of such goods and services that are used or intended to be used in the course or furtherance of business. However, there is a specified list of goods and services mentioned below where credit will not be available under GST:
- Personal use of goods and services procured.
- Goods and services being used for effecting exempt supplies.
- Supply of following goods and services:
- Motor vehicles (credit available in certain cases where used for transportation business).
- Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward taxable supply of the same category of goods or services.
- Membership of a club, health, and fitness centre.
- Rent-a-cab, life insurance, health insurance, except where the government notifies the services that are obligatory for an employer to provide to its employees under any law for the time being in force.
- Travel benefits extended to employees on vacation, such as leave or home travel concession.
- Works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service.
- Goods or services received by a taxable person for construction of an immovable property on one's own account, other than plant and machinery, even when used in the course or furtherance of business to the extend capitalised.
- Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
Under GST, taxpayers are allowed to take credit of taxes paid on inputs (input tax credit) and utilise the same for payment of output tax. However, no input tax credit on account of CGST can be utilised towards payment of SGST/UTGST and vice versa. The credit of IGST is permitted to be utilised for payment of IGST, CGST, and SGST/UTGST in that order. Also, it is pertinent to note that the credit pool is state-specific (i.e. IGST, CGST, and SGST of one state cannot be used to offset output of IGST, CGST, and SGST liability of another state).
There are three monthly returns for a normal taxpayer under GST viz. GSTR 1 for output (to be filed by the tenth day of the succeeding month), GSTR 2 for input tax credit (by the 15th day of the succeeding month), and GSTR 3 a monthly tax return (by the 20th day of the succeeding month), and one annual return (by 31 December of the succeeding financial year). The government has also issued a requirement to file monthly GSTR 3B (to be filed by the 20th day of the succeeding month), and such monthly return needs to be filed till March 2018.
Also, a new calendar has been introduced for filing of various returns till 31 March 2018, to lessen the burden on traders from a compliance perspective for initial periods:
- Small taxpayers and registered persons having no tax liability will have a simplified return wherein returns will be filed only in two-to-three steps.
- In the current year, only GSTR 1 will be required to be filed along with GSTR 3B filing. The filing of GSTR 2 and 3 have been deferred.
Recently, in the 23rd GST Council meeting, it has been decided to reduce the GST rate on various goods. Amendments in the composition scheme and taxation of restaurants has been recommended.
For GSTR 2 and 3 for the current year, a committee has been set up by the GST Council, who will be required to look into the compliance requirement and suggest a way forward with an intent to simplify GSTR 2 and 3.
Further, the penalties for late filing of returns has been reduced as follows:
- In case of 'nil' liability: INR 20 per day.
- In all other cases: INR 50 per day (earlier the penalty was INR 200 per day).
Customs duty is levied by the Central Government on goods imported into, and exported from, India. The rate of customs duty applicable to a product imported or exported depends upon its classification under the Customs Tariff Act, 1975. With regard to exports from India, customs duty is levied only on a very limited list of goods.
The Customs Tariff is aligned with the internationally recognised Harmonised System of Nomenclature (HSN) provided by the World Customs Organisation.
Customs duty is levied on the transaction value of the imported or exported goods. According to section 14 of the Customs Act, 1962 (CA), the concept of transaction value is the sole basis for valuation for the purpose of import and export of goods. While the general principles adopted for valuation of goods in India are in conformity with the World Trade Organisation (WTO) agreement on customs valuation, the Central Government has framed independent Customs Valuation Rules that apply to the export and import of goods.
The customs duty applicable to any product is composed of a number of components, which are as follows:
- The import of goods under the GST regime will be subject to IGST and Compensation Cess (if applicable)
- BCD is the basic component of customs duty levied at the effective rate under the First Schedule to the Customs Tariff Act (CTA) and applied to the landed value of the goods (i.e. the cost, insurance, and freight [CIF] value of the goods). The peak rate of BCD is 10%.
- BCD and Customs Cess (education cess at 2% and secondary and higher education cess at 1% are also levied on the BCD). BCD and Customs Cess paid at the time of imports are not available as credit under GST; consequently, they will always be a cost to the importer.
The duty incidence arising on account of the IGST may be set off or refunded, subject to prescribed conditions. Where goods are imported, the Indian supplier may take credit of the IGST paid at the time of import for offset against the output IGST, CGST, and SGST liability. Also, the Central Government provides exemption from payment of BCD and IGST on import of certain specified goods, subject to fulfilment of prescribed conditions. For example, goods imported for petroleum operations are exempt from BCD.
The e-way bill is an electronic bill that will be required for the movement of goods in case the value of the consignment is above INR 50,000. The movement of goods may be (i) in relation to supply, (ii) for reasons other than supply, or (iii) due to inward supply from unregistered persons.
The bill can be generated from the GSTN portal, and every registered taxpayer must require this e-way bill along with the goods transferred. Though the draft e-way bills were introduced by the government, the same is under re-consideration. This requirement of furnishing the e-way bill has been deferred till March 2018 under GST.
Advance rulings for customs, excise, and service tax
To enable foreign investors to ascertain their indirect tax liabilities arising from proposed business ventures in India, the Central Government has constituted the Authority for Advance Rulings (AAR) as a high-level, quasi-judicial body. The functions of the AAR consist of giving advance rulings on a specific set of facts relating to specified matters under customs and GST.
Advance rulings may be sought by any resident/non-resident investor entering into a joint venture in India in collaboration with another non-resident or resident of India, or by a resident setting up a joint venture in India in collaboration with a non-resident. Through the Finance Act 2005, this facility has also been made available to existing joint ventures in India. The Central Government is also empowered to include any other class or category of persons as eligible for the benefit of an advance ruling. Under the customs law, the Central Government has allowed a ‘resident public limited company’ to be eligible for an advance ruling. Under the erstwhile excise and service tax regime, advance rulings could be given only on a proposed transaction, whereas under GST, advance rulings can be obtained on a proposed transaction as well as a transaction being undertaken by the appellant.
In terms of GST provisions, the following matters/questions specified can be sought before the AAR:
- Classification of any goods or services or both.
- Applicability of a notification issued under the provisions of the CGST Act.
- Determination of time and value of supply of goods or services or both.
- Admissibility of input tax credit of tax paid or deemed to have been paid.
- Determination of the liability to pay tax on any goods or services or both.
- Whether applicant is required to be registered.
- Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.
The comprehensive provision for advance rulings is provided under GST to ensure that disputes are minimal. Timelines are also given within which the ruling is to be given by the concerned authority. The aim is to provide certainty to the taxpayer with respect to one's obligations under the GST Act and an expeditious ruling, so that the relationship between the taxpayer and administration is smooth and transparent and avoids unnecessary litigation.
Property tax is levied by the governing authority of the jurisdiction in which the property is located. The rate of tax levied varies from city to city in India, and is generally related to the prevailing market prices for property in each locality.
Stamp duty is a government tax that is levied on all legal property transactions. Stamp duty is a tax that is paid as evidence for any purchase or sale of a property between two or more parties. Stamp papers, which are bought either in the name of the buyer or seller, are valid for six months, provided the stamp duty is paid without any delay. No document that has not been duly stamped can be introduced as evidence in any court proceedings. Stamp duty is charged at both central and state levels. State level stamp duties vary from state to state, and on the document type. Stamp duty should be paid in full without any delay, failing which, a penalty is levied. Stamp duty has to be paid prior to execution (signature by an individual’s party) of a given document, the next day, or on the day of document execution. Stamp duty is paid by a buyer in most cases. However, both the seller and the buyer have to bear the burden of stamp duty for property exchange cases. Stamp duty rates differ in various states across the country as stamp duty in India is a state subject. However, the central government fixes the stamp duty rates of specific instruments.
Dividend distribution tax (DDT)
Indian companies distributing or declaring dividends are liable to pay DDT at 15% (plus surcharge [12%], education cess, and secondary and higher education cess [3%]). This rate is required to be grossed up; consequently, the effective rate of DDT is 20.36%. This tax is payable on declaration, distribution, or payment, whichever is earlier, and it is in addition to the CIT payable on business profits. Dividend income on which DDT is paid by the Indian company is exempt from tax in the hands of the recipient. However, non-corporate resident taxpayers earning more than INR 1 million of dividend are to pay tax at 10% (plus applicable surcharge and education cess) on the dividend income earned over and above INR 1 million in addition to the DDT paid by the company.
A holding company does not have to pay DDT on dividends paid to its shareholders to the extent that it has received dividends from its Indian or foreign subsidiary company on which DDT has been paid by the respective subsidiary, subject to fulfilment of certain conditions.
Further, no tax will be chargeable/payable by a company located in an International Financial Service Centre, deriving income solely in convertible foreign exchange on profits distributed from the total profits, for any tax year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after 1 April 2017 out of its current income, either in the hands of the company or the person receiving such dividend.
Securities transaction tax (STT)
STT is applicable to transactions involving the purchase/sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange, or the purchase/sale of a unit of an equity-oriented fund to any mutual fund. The STT leviable in respect of such transactions varies for each kind of instrument, whether delivery based or non-delivery based. Rate of STT varies from 0.01% to 0.125%, depending upon the nature of securities. However, securities transacted by any person on a recognised stock exchange located in an International Financial Services Centre where the consideration for such transaction is paid or payable in foreign currency are not subject to STT.
Payroll taxes and social security payments
Contributions representing 8.33% of the employees’ pay needs to be remitted by the employer to the Employees’ Pension Fund in respect of all Indian nationals working in an establishment covered under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, within 15 days of the close of every month. A ‘foreign worker’ holding a passport of a country with which India has signed a social security agreement is required to contribute to the social security system 12% of one's salary. A similar 12% of salary is contributed by resident employees’ for the Employees’ Provident Fund and Employees’ Pension Fund. However, foreign workers can detach themselves from the scheme under a special provision on obtaining a ‘detachment/coverage certificate’ issued by an appropriate social security institution indicating the period of employment in India being less than the maximum period of detachment agreed in the agreement.