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 Ministers 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, aviation turbine fuel (ATF), natural gas, crude oil.
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/UTGST. 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 like vehicles, aerated beverages etc. 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 tax 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.
However, with effect from 1 April 2019, threshold for obtaining GST registration by a person, who is engaged in exclusive intra-state supply of goods is INR 4 million (aggregate turnover in a tax year) except in some specified cases.
Further, threshold for obtaining GST registration by a service provider continues to be INR 2 million.
Also, with effect from 1 February 2019 for some special category states making supply of goods/services viz. Arunachal Pradesh, Himachal Pradesh, Meghalaya, Sikkim and Uttrakhand threshold limit has increased from INR 1 million to INR 2 million. For other special category states threshold continues to be INR 1 million.
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 have an option to avail a composition scheme. Under the said scheme, GST at a lower rate (1% of the taxable turnover for manufacturer/traders and 5% in case of restaurants) would apply. The concept of composition scheme is not applicable for services except restaurant services.
With effect from 1 April 2019 threshold for composition scheme has been enhanced to INR 15 million.
In an effort to streamline real estate sector, recently, the Government had issued multiple notifications effective from 1 April 2019 for providing lower rate GST benefit to real estate.
The key aspect of this change was that an option was given to existing under construction projects to either adopt the new rate structure (1% or 5% without ITC) or continue with old GST rate (8% or 12% with ITC). This option was to be exercised till 20 May 2019.
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 Social Welfare Surcharge (upto 10% is also levied on the BCD). BCD and Social Welfare Surcharge 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. For claiming the zero rate on exports, there is a requirement to file bond/Letter of Undertaking (LUT) to the jurisdictional tax authorities. Alternatively, exporter can pay tax on output and claim refund of the same.
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. However, presently along with online refund application, documents need to be filed manually to claim refund claim.
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 (ITC)
Per ITC 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 the 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 (ITC) and utilise the same for payment of output tax liability. However, no ITC 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.
Recently, new rule for setting off of credit has been inserted which provides that IGST credit needs to be first utilised towards payment of output IGST liability. The remaining IGST credit can be utilised to offset CGST/SGST or UTGST output liability as the case may be in any 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). There is an option to file quarterly returns (to be filed by the last day of the succeeding quarter) for supplier whose turnover is in the previous or current tax year less than INR 15 million. File return for ITC (by the fifteenth day of the succeeding month), and a monthly tax return (by the twentieth day of the succeeding month), and one annual return (by 31 December of the succeeding tax year). Also, along with GST annual return suppliers whose turnover exceeds INR 20 million in a tax year are required to file GST Audit Report (by 31 December of the succeeding tax year). The Government has notified the GST Annual Return/Audit Report forms.
The Government has also issued a requirement to file monthly filing (to be filed by the twentieth day of the succeeding month), and such monthly return needs to be filed until September 2019.
Recently, the Government has proposed to implement new GST return system. Presently, prototype of return is available on the GST portal for trial run. It is expected that the new return system will be implemented in a phased manner with effect from October 2019.
The brief about the new return filing process is produced below.
There are three main components to the new return – one main return (FORM GST RET-1) and two annexures (FORM GST ANX-1 [output supplies] and FORM GST ANX-2) [inward supplies].
From October, 2019 onwards, FORM GST ANX-1 shall be made compulsory and FORM GSTR-1 would be replaced by FORM GST ANX-1. The large taxpayers (i.e. those taxpayers whose aggregate annual turnover in the previous tax year was more than INR 50 million) would upload their monthly FORM GST ANX-1 from October, 2019 onwards.
However, the first compulsory quarterly FORM GST ANX-1 to be uploaded by small taxpayers (with aggregate annual turnover in the previous tax year upto INR 50 million) would be due only in January, 2020 for the quarter October to December, 2019.
It may be noted that invoices etc. can be uploaded in FORM GST ANX-1 on a continuous basis both by large and small taxpayers from October, 2019 onwards.
FORM GST ANX2 can be viewed simultaneously during this period but no action shall be allowed on such FORM GST ANX-2.
For October and November, 2019, large taxpayers would continue to file FORM GSTR-3B on monthly basis. They would file their first FORM GST RET-01 for the month of December, 2019 by 20 January 2020.
The small taxpayers would stop filing FORM GSTR-3B and would start filing FORM GST PMT-08 (tax payment return replacement of GSTR 3B) from October, 2019 onwards. They would file their first FORM GST-RET-01 for the quarter October, 2019 to December, 2019.
Concept of e-invoicing under GST
The Government is proposing to introduce an e-invoicing system under GST for B2B transactions with effect from 1 January 2020. Under such system, the Companies would be required to generate an invoice reference number (IRN) for each B2B invoice (including debit/ credit note) over a specified limit. Such IRN needs to be mentioned on the invoice and such an invoice would be treated as valid document for the purpose of claiming credit. The purpose of such system seems to be to curb tax evasion/irregular credit claims as the data generated on such system would be available to the Government on real time basis and the return data would also get automatically populated based on the same.
With effect from 1 October 2018 Government has made tax deducted at source/tax collected at source provisions stipulated under GST laws effective.
Tax deducted at source provisions are applicable on certain specified cases. The notified taxpayer like Government, Public Sector Undertakings etc. are required to deduct 2% tax deducted at source (1% CGST, 1% SGST or 2% IGST) (withholding tax) on payments made to goods/services suppliers in case payment exceeds INR 0.25 million. The tax so collected would be available as credit to the supplier in its electronic cash register, which can be used for set-off against future tax liabilities.
Tax deducted at source provisions are applicable for e-commerce operator. Every e-commerce operator is required to deduct 1% tax collected at source (0.5% CGST, 0.5% SGST or 1% IGST) on net value of supplies provided by suppliers through e-commerce portal.
The due date of filing monthly tax deducted at source return (GSTR 7) for the period October 2018 to December 2018 has been extended upto 31 January 2019. This has been further extended to 31 August 2019.
The due date of filing tax collected at source return (GSTR 8) is tenth of the next month
The recent amendments along with the effective date is mentioned below.
- Specific credit restriction in respect of general insurance, servicing, repairs and maintenance, hiring, leasing etc. in respect of motor vehicle except when used for specified purposes (like used in further supply of vehicles, for transportation of goods/ passengers etc.) – Effective date 1 February 2019.
- ITC of goods and services which are obligatory for an employer to provide to its employees, under any law for the time being in force, will be available – Effective date 1 February 2019.
- Threshold limit for composition dealers to be increased from INR 10 million to INR 15 million – Effective date 1 April 2019.
- Credit of State tax/Union territory tax to be utilised for payment of integrated tax only when the balance of the ITC on account of central tax is not available for payment of integrated tax – Effective from the date when such functionality is available on GST portal. The functionality has been recently made available on the portal.
- Credit of integrated tax to be fully utilised first for payment of integrated tax, central tax or state tax output tax liability – Effective from the date when such functionality is available on GST portal. The functionality has been recently made available on the portal.
- Safeguards, procedure and threshold for suppliers who have defaulted tax payment and such default has continued for more than two months to be prescribed – to be notified. Fungibility of IGST, CGST, SGST/UTGST or cess (GST tax heads) in the electronic cash ledger has been allowed under GST rules. Earlier tax paid inadvertently under wrong GST head could not be transferred to correct GST head. This caused undue hardships to the taxpayers. Now, amendment has been made in the GST Act/ Rules to allow transfer of tax paid between GST heads. In this regard Form PMT -09 has been introduced. However, presently such functionality is presently not available on the portal.
- New provision on procedure for ITC availment – to be applicable with new return filing system.
- For claiming ITC, the recipient would be required to verify, validate, modify or delete the details furnished by suppliers on GST portal - procedure to be notified.
- In case the outward supply is not reported by supplier in his GST return (like return not filed), then recipient can avail maximum credit equivalent to 20% of the ITC available.
- Where credit has been availed basis invoice, the recipient would be liable to pay credit so availed in case where return has not been furnished by the supplier.
- Procedure for recovery of tax amount/credit wrongly availed (for amounts more than INR 1,000) to be notified.
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 (WCO).
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 Social Welfare Surcharge (at 10% are also levied on the BCD). BCD and Social Welfare Surcharge 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.
During April, 2018 Central Board of Indirect Taxes and Customs (CBIC) notified the Pre- Consultation Regulations under customs law. Under the said regulations, before issuance of notice, importer will be informed in writing along with grounds the intention of issuing the notice. The importer within 15 days is expected to respond in writing including the option to be heard in person. In absence of response within the time period specified, the officer will proceed with issuance of notice.
Further, CBIC had recently instructed custom and GST formations to verify the correct availment of ITC by few exporters who are perceived as “risky” on the basis of pre-defined risk parameters.
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 GST registered taxpayer is required to comply with the requirement to issue e-way bill.
With effect from 16 November 2018 new enhancements have been made in the e-way bill system which involves checking of duplicate e-way bills, Complete Knock Down/Semi Knock down movement of goods imported/Exported, shipping address to be mentioned on e-way bill for goods exported out of India etc.
Recently, new rule has been inserted which provides that a person including consignor, consignee, transporter, courier agency or an e-commerce operator who have not filed their GST returns for a consecutive two tax periods would not be allowed to generate e-way bill. The said rule would be made effective from 21 November 2019.
Advance rulings for Customs and GST
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 ITC 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.
Kerala Flood Cess
To compensate the loss arisen due to massive floods occurred in the State of Kerala in August 2018, Kerala Compensation Cess (KFC) at the rate of 1% over and above GST has been imposed in Kerala. KFC is to be levied from 1 August 2019 on intra-state supplies of goods/services to unregistered persons in Kerala. This Cess will be levied for two years in Kerala. In this regard Kerala Flood Cess Rules, 2019 have been notified which provides separate compliance requirement (additional to existing GST compliances) for registration, tax payment, filing of KFC return etc.
Amnesty Scheme under Indirect Tax
Various states viz. Gujarat, Maharashtra, Karnataka, Haryana etc. have introduced amnesty scheme for settlement of past VAT dues with waiver (certain percentage) of tax dues, interest and penalty dues subject to fulfilment of prescribed conditions.
Sabka Vishwas (Legacy Dispute Resolution) Scheme 2019
Recently, similar to state amnesty scheme Central Government with effect from 1 September 2019 has notified one-time amnesty scheme for liquidation of past disputes of Central Excise and Service tax (erstwhile indirect tax laws). The brief about the scheme is produced below.
All person except following can avail benefit of the scheme –
- Whose reply/appeal has been finally heard as on 30 June 2019.
- Who have been convicted for any offence.
- Who have been issued a show cause notice for refund.
- Who have been subject to audit/enquiry/investigation, but the duty has not been quantified as on 30 June 2019.
- Making voluntary disclosure in certain circumstances.
- Who intend to file declaration in respect of tobacco and related products, petroleum, etc.
The benefits of the scheme are produced below.
- Relief for tax dues from 40% to 70% in specified scenarios.
- Complete waiver of interest and penalty.
- Waiver from prosecution.
- Conclusion of proceedings covered under the scheme for the relevant period.
- All proceedings pending below the level of High Court are deemed to be withdrawn.
This onetime dispute resolution scheme is a welcome step towards addressing long-pending litigations. With complete waiver of interest, penalty and prosecution, and part waiver of tax dues, this would be an opportune moment for taxpayers to review their old tax disputes for early closure.
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%], and health and education cess [4%]). This rate is required to be grossed up; consequently, the effective rate of DDT is 20.56%. This tax is payable on declaration, distribution, or payment, whichever is earlier, and it is in addition to the CIT payable on business profits.
Further, the Finance Act 2018, has introduced the levy of DDT on companies (not being company in which the public are substantially interested) for making payment of:
- any sum by way of advance or loan to a shareholder who is the beneficial owner of shares holding not less than ten per cent of the voting power;
- any sum by way of advance or loan to any concern in which such shareholder is a member or a partner and in which he has a substantial interest; or
- any sum by any such company on behalf, or for the individual benefit, of any such shareholder.
In those cases, the advance or loan or the sum of money will be treated as deemed dividend and on which 30% DDT (without gross up) shall be payable. The effective tax rate post clubbing surcharge @12%, and health and education cess @ 4%, is 34.944%.
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. However, the “dividend income” in this paragraph does not include the “deemed dividend income” as mentioned in the preceding paragraph.
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 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 0.001% 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 is 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.
 INR 1 million for some special category States (North-Eastern States)
 Extended to eleventh day of succeeding month for the period July 2018 to March 2019. Further, extended to eleventh day of succeeding month for the period April 2019 to September 2019.