P7 Intermediate Indirect Taxation Study Notes 2024 (PDF)

INTERMEDIATE Paper 7 INDIRECT TAXATION Study Notes SYLLABUS 2022 The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in First Edition : August 2022 Reprint : Novembe...

INTERMEDIATE Paper 7 INDIRECT TAXATION Study Notes SYLLABUS 2022 The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in First Edition : August 2022 Reprint : November 2022 Reprint : January 2023 Reprint : March 2023 Reprint : June 2023 Reprint : August 2023 Revised Edition : February 2024 Price: ` 600.00 (Direct and Indirect Taxation - 2 Books) Published by : Directorate of Studies The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 [email protected] Printed at : M/s. Infinity Advertising Services Pvt. Ltd. Plot No. 171 & 172, Sector - 58, Faridabad, Haryana - 121 004 Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof. Copyright © 2022 by The Institute of Cost Accountants of India  PAPER 7 : INDIRECT TAXATION SECTION - B Syllabus Structure: The syllabus in this paper comprises the following topics and study weightage: Module No. Module Description Weight Section B: Indirect Taxation 50% 4 Concept of Indirect Taxes 5% 5 Goods and Services Tax (GST) Laws 35% 6 Customs Act & Rules 10%  Learning Environment Subject Title INDIRECT TAXATION (Section - B) Subject Code DITX Paper No. 7 Course This section deals with Goods and Services Tax and Customs Duty. Accordingly, it focuses on explaining the Description legal provisions associated with levy and collection of CGST and IGST, input tax credit and determination of GST liability. It also discusses, in detail, the basic concepts under Customs Duty and procedure for determining the assessable value and duty liability. CMA Course 1. Interpret and appreciate emerging national and global concerns affecting organizations and be in a state Learning of readiness for business management. Objectives (CMLOs) a. Identify emerging national and global forces responsible for enhanced/varied business challenges. b. Assess how far these forces pose threats to the status-quo and creating new opportunities. c. Find out ways and means to convert challenges into opportunities 2. Acquire skill sets for critical thinking, analyses and evaluations, comprehension, syntheses, and applications for optimization of sustainable goals. a. Be equipped with the appropriate tools for analyses of business risks and hurdles. b. Learn to apply tools and systems for evaluation of decision alternatives with a 360-degree approach. c. Develop solutions through critical thinking to optimize sustainable goals. 3. Develop an understanding of strategic, financial, cost and risk-enabled performance management in a dynamic business environment. a. Study the impacts of dynamic business environment on existing business strategies. b. Learn to adopt, adapt and innovate financial, cost and operating strategies to cope up with the dynamic business environment. c. Come up with strategies and tactics that create sustainable competitive advantages. 4. Learn to design the optimal approach for management of legal, institutional, regulatory and ESG frameworks, stakeholders’ dynamics; monitoring, control, and reporting with application-oriented knowledge. a. Develop an understanding of the legal, institutional and regulatory and ESG frameworks within which a firm operates. b. Learn to articulate optimal responses to the changes in the above frameworks. c. Appreciate stakeholders’ dynamics and expectations, and develop appropriate reporting mechanisms to address their concerns.  5. Prepare to adopt an integrated cross functional approach for decision management and execution with cost leadership, optimized value creations and deliveries. a. Acquire knowledge of cross functional tools for decision management. b. Take an industry specific approach towards cost optimization, and control to achieve sustainable cost leadership. c. Attain exclusive knowledge of data science and engineering to analyze and create value. Subject Indirect Taxation Learning Objectives 1. To acquire knowledge of legal provisions enshrined in laws related to GST and Customs Duty and [SLOB(s)] appreciate their applicability in business operations. (CMLO 4a) 2. To gather understanding of legal provisions of said two indirect tax laws about matters of compliance while conducting business operations. (CMLO 4 c) Subject SLOCs: Learning Outcome 1. Students will attain understanding about various provisions of indirect taxation in areas of GST and [SLOC(s)] Customs Duty. and 2. They will be able to ensure compliance of legal provisions related to indirect taxes. Application Skill [APS] APSs: 1. Students will attain skill sets for solving computation related issues that may arise while determining levies of GST and Customs Duty on business transactions 2. Students will be able to ensure compliances of indirect taxation related provisions. Module wise Mapping of SLOB(s) Module Additional Resources (Research Topics and Sub-topics SLOB Mapped No. articles, case studies, blogs) 4 Concept of Indirect Taxes For Bare Acts & Rules, refer www.cbic. 1. To acquire knowledge of legal gov.in provisions enshrined in laws related 5 Goods and Services Tax Refer Chapter III, IV, V, VI, VII, IX & X to GST and Customs Duty and (GST) Laws of the CGST Act, 2017 appreciate their applicability in 6 Customs Act Refer Customs Act, 1962, Customs business operations. Tariff Act, 1975, Customs Valuation 2. To gather understanding of legal (Determination of Value of Imported provisions of said two indirect tax Goods) Rules, 2007 and Customs laws about matters of compliance Valuation (Determination of Value of while conducting business Export Goods) Rules, 2007 operations.  Contents as per Syllabus SECTION B: INDIRECT TAXATION 01 - 282 Module 4. Concept of Indirect Taxes 01 - 16 4.1 Concept and Features of Indirect Taxes 4.2 Difference between Direct and Indirect Taxes 4.3 Background of erstwhile Indirect Taxes (Central Excise, VAT etc.) 4.4 Constitutional Validity of GST Module 5. Goods and Services Tax (GST) Laws 17 - 224 5.1 Introduction to GST Law 5.2 Levy and Collection of CGST and IGST 5.3 Basic concepts of Time, Place and Value of Supply 5.4 Input Tax Credit 5.5 Computation of GST Liability 5.6 Registration 5.7 Tax Invoice – Electronic Way Bill 5.8 Returns and Payment of Taxes Module 6. Customs Act & Rules 225 - 282 6.1 Customs Act-Basic Concepts and Definitions 6.2 Types of Duties 6.3 Valuation Rules 6.4 Computation of Assessable Value and Duties  Concept of Indirect Taxes SECTION - B INDIRECT TAXATION The Institute of Cost Accountants of India 1 Indirect Taxation 2 The Institute of Cost Accountants of India A Concept of Indirect Taxes Concept of Indirect Taxes 4 This Module includes - 4.1 Concept and Features of Indirect Taxes 4.2 Difference Between Direct & Indirect Taxes 4.3 Background of erstwhile Indirect Taxes 4.4 Constitutional Validity of GST The Institute of Cost Accountants of India 1 Indirect Taxation Concept of Indirect Taxes SLOB Mapped against the Module: 1. To acquire knowledge of legal provisions enshrined in laws related to GST and Customs Duty and appreciate their applicability in business operations. 2. To gather understanding of legal provisions of said two indirect tax laws about matters of compliance while conducting business operations. Module Learning Objectives: After studying this module, the students will be able to - Appreciate the difference between direct and indirect taxes Understand the problems in erstwhile indirect taxes 2 The Institute of Cost Accountants of India  Concept of Indirect Taxes Introduction 4 “It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand folds” – Kalidas in Raghuvansh eulogizing King Dalip. In a Welfare State, the Government takes primary responsibility for the welfare of its citizens, as in matters of health care, education, employment, infrastructure, social security and other development needs. To facilitate these, Government needs revenue. Taxation is the primary source of revenue to the Government for incurring such public welfare expenditure. In other words, Government is taking taxes from the public through its one hand and through another hand; it incurs welfare expenditure for public at large. However, no one enjoys handing over his hard-earned money to the government to pay taxes. Thus, taxes are compulsory or enforced contribution to the Government revenue by public. The government may levy taxes on income, business profits or wealth or add it to the cost of some goods, services, and transactions. Basic Reasons to impose taxation  To provide basic facilities for every citizen of the country : Whatever money is received by the government from taxation is spent by it for the welfare of the citizens of the country. Some of the services provided by the government are: health care, electricity, roads, education system, free houses for the poor, water supply, police, firefighters, judiciary system, disaster relief, taking care of bridges and other things of public welfare.  To finance multiple governments : All the local governments of the state like village panchayats, block panchayats and municipal corporations receive funds from the finance commission.  Protection of the life : Taxpayers receive the protection of life and wealth from the government in case of external aggression, internal armed rebellion or any other situation. Administration of Tax Laws The administrative hierarchy of tax law is as follows: Taxpoint :  Both of the Boards have been constituted under the Central Board of Revenue Act, 1963.  CBDT deals with levy and collection of all direct tax whereas matters relating to levy and collection of Central indirect tax are dealt by CBIC. The Institute of Cost Accountants of India 3  Indirect Taxation Concept and Features of Indirect Taxes 4.1 Tax on goods and services : Indirect tax is levied at the time of supply or manufacture or purchase or sale or import or export of goods. Further, it is also levied on supply. Burden : Tax, being indirect tax paid by the seller, shall be recovered by the seller from the buyer. Thus, one can say that burden of indirect tax is shifted from seller to buyer and ultimately borne by consumers of such goods or services. Inflationary in nature : Cost of goods and services increases due to levy of indirect tax thus indirect taxes promote inflation. Social welfare : It is useful tool to promote social welfare by checking the consumption of harmful goods or sin goods through higher rate of tax. Wider Tax Base : Majority of goods and services are liable to indirect tax with very low threshold limits, so tax base is much wider in case of indirect tax in compare to direct tax. Regressive in Nature : All persons (rich or poor) will bear equal wrath of tax on goods or service consumed by them irrespective of their ability. In other words, indirect tax does not create any difference between rich and poor. Poor people are also required to pay equal percentage of tax on certain goods and service of mass consumption. Thus, it may increase the disparities between rich and poor. No pinch : Seller (the person on which indirect tax is levied) does not perceive a direct pinch of tax as it is recovered by him from the buyer and then he is paying to the Government. On the other hand, since it is inbuilt in the price of the goods, the ultimate payer (i.e., buyer) pay it without knowing that he is paying any tax to the Government. 4 The Institute of Cost Accountants of India  Concept of Indirect Taxes Difference Between Direct & Indirect Taxes 4.2 Basis Direct Tax Indirect Tax Meaning Direct tax is referred to as the tax, levied Indirect Tax is referred to as the tax, levied on person’s income and wealth and is paid on a person who consumes the goods directly to the government and services and is paid indirectly to the government. Nature Progressive in nature i.e., higher tax is levied Regressive in nature i.e., all persons will on a person earning higher income and vice bear equal wrath of tax on goods or service versa. consumed by them irrespective of their ability. Incidence and Falls on the same person. Assessee, himself Falls on different person. Tax is recovered Impact bears such taxes. Thus, it pinches the from the assessee, who passes such burden taxpayer. to another person. Thus, it does not pinch the taxpayer. Example Income Tax GST, Custom Duty Evasion Tax evasion is possible Tax evasion is hardly possible because it is included in the price of the goods and services. Inflation Direct tax helps in reducing the inflation. Cost of goods and services increases due to levy of indirect tax thus indirect taxes promote inflation. However, sometimes it is useful tool to promote social welfare by checking the consumption of harmful goods or sin goods through higher rate of tax. Imposition and Imposed on and collected from the same Imposed on and collected from consumers collection person of goods and services but paid and deposited by the assessee. Burden Cannot be shifted Can be shifted Event Taxable income of the assessee Supply of goods and services The Institute of Cost Accountants of India 5 A Indirect Taxation Background of Erstwhile Indirect Taxes 4.3 T he Constitution of India is the supreme law of India. Any tax law, which is not in conformity with the Constitution, is called ultra vires the Constitution and held as illegal and void. Article 246 read with Schedule VII divides subject matter of law made by legislature into three categories : List I Union list (only Central Government has power of legislation on subject matters covered in the list) List II State list (only State Government has power of legislation on subject matters covered in the list) List III Concurrent list (both Central & State Government can pass legislation on subject matters). Following major entries in the respective list enable the legislature to make law on the matter : Union List (List I) State List (List II) Entry 82 - Taxes on income other than agricultural income Entry 54 - Taxes on the sale or purchase of goods i.e. Income-tax other than newspapers, subject to the provisions of entry 92A of List I i.e., State Level VAT Entry 83 - Duties of customs including export duties i.e., Entry 46 - Taxes on agricultural income. Customs Act Entry 84 - Duties of excise on tobacco and other goods Entry 60 - Taxes on professions, trades, callings manufactured or produced in India except: and employments i.e., Professional Tax a. alcoholic liquors for human consumption. b. opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol / opium / Indian hemp / narcotic drugs / narcotics i.e., Central Excise Act Entry 86 - Taxes on the capital value of the assets, exclusive Entry 51 - Duties of excise on the following of agricultural land, of individuals and companies; taxes on goods manufactured or produced in the State the capital of companies i.e., Wealth Tax and countervailing duties at the same or lower Entry 92A - Taxes on the sale or purchase of goods other rates on similar goods manufactured or produced than newspapers, where such sale or purchase takes place elsewhere in India: in the course of inter-State trade or commerce i.e., Central a. alcoholic liquors for human consumption; Sales Tax b. opium, Indian hemp and other narcotic drugs Entry 92C – Tax on services and narcotics, but not including medicinal and Entry 97 - Any other matter not enumerated in List II or toilet preparations containing alcohol/ opium/ List III including any tax not mentioned in either of those Indian hemp/ narcotic drugs / narcotics Lists. 6 The Institute of Cost Accountants of India  Concept of Indirect Taxes To curb all these, Goods and Services Tax (GST) was introduced in the system with the idea of One Nation One Tax. Various indirect tax levied by Central and State Government was subsumed into one tax called GST. Cascading effect of tax (Tax on Tax) In pre-GST regime, when a manufacturer “A” sold goods ₹ 1,00,000 to dealer “B” from Gujarat to Haryana, he is liable to collect pay Excise Duty and Central Sales Tax at the rate of 12% and 2% respectively, being an inter- state sale. Dealer “B” in turn sells it to Dealer “C” in Haryana after adding ₹ 10,000/- and charges VAT on such sale @ 12%. The calculation were as follow : Amount Tax to Government Transaction Particulars (₹) (₹) Transaction Sale price of goods 1,00,000 between “A” and Add: Excise Duty @ 12% 12,000 12,000 “B” 1,12,000 Add: Central Sales Tax 2,240 2,240 Total Invoice Value 1,14,240 Transaction Sale price of goods [₹ 1,14,240 + 1,24,240 between “B” and ₹ 10,000] “C” Add: VAT @ 12% 14,909 14,909 Total Invoice Value 1,39,149 Total 29,149 In this regime, following are the components of the VAT amount : - On actual price ₹ 1,00,000 x 12% = ₹ 12,000 - On Excise Duty ₹ 12,000 x 12% = ₹ 1,440 - On CST ₹ 2,240 x 12% = ₹ 269 - On value added by B ₹ 10,000 x 12% = ₹ 1,200 Total VAT ₹ 14,909 Since credit for excise duty and CST was not available to dealer B, excise duty and CST were considered as a cost. Further, he is liable to pay VAT on tax components also. Such tax on tax is known as cascading effect of tax, which leads to inflation. If the same transactions are executed under GST law and rate of GST is say 12% then calculation would be as under : Amount Tax to Government Transaction Particulars (₹) (₹) Transaction Sale price of goods 1,00,000 between “A” and Add: GST @ 12% 12,000 12,000 “B” Total Invoice Value 1,12,000 The Institute of Cost Accountants of India 7  Indirect Taxation A Amount Tax to Government Transaction Particulars (₹) (₹) Transaction Sale price of goods [₹ 1,00,000 + ₹ 10,000] 1,10,000 between “B” and Add: GST @ 12% 13,200 “C” Total Invoice Value 1,23,200 Amount payable to the Government by “B” [₹ 13,200 – ₹ 12,000] 1,200 Total 13,200 Since credit for GST paid by dealer B to dealer A is available to dealer B, hence the same is not considered as a cost. In this way, GST eliminates the cascading effect of tax and which results in lower prices. 8 The Institute of Cost Accountants of India A Concept of Indirect Taxes Constitutional Validity of GST 4.4 4.4.1 Constitution (One Hundred and First) Amendment Act, 2016 E arlier, fiscal powers between the Centre and the States are clearly demarcated in the Constitution with almost no overlap between the respective domains. The Centre has the powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics etc.) while the States have the powers to levy tax on sale of goods. In case of inter-State sales, the Centre has the power to levy a tax (the Central Sales Tax) but, the tax is collected and retained entirely by the originating States. As for services, it is the Centre alone that is empowered to levy service tax. Since the States are not empowered to levy any tax on the sale or purchase of goods in the course of their importation into or exportation from India, the Centre levies and collects this tax as additional duties of customs, which is in addition to the Basic Customs Duty. This additional duty of customs (commonly known as CVD and SAD) counter balances excise duties, sales tax, State VAT and other taxes levied on the like domestic product. Introduction of GST would require amendments in the Constitution so as to concurrently empower the Centre and the States to levy and collect the GST. Introduction of the GST required amendments in the Constitution so as to simultaneously empower the Centre and the States to levy and collect this tax. The assignment of concurrent jurisdiction to the Centre and the States for the levy of GST would require a unique institutional mechanism that would ensure that decisions about the structure, design and operation of GST are taken jointly by the two. For it to be effective, such a mechanism also needs to have Constitutional force. To address all these and other issues, the Constitution (122nd Amendment) Bill was introduced in the 16th Lok Sabha on 19.12.2014. The Bill provides for a levy of GST on supply of all goods or services except for Alcohol for human consumption. The tax shall be levied as Dual GST separately but concurrently by the Union (central tax - CGST) and the States (including Union Territories with legislatures) (State tax - SGST) / Union territories without legislatures (Union territory tax- UTGST). The Parliament would have exclusive power to levy GST (integrated tax - IGST) on inter-State trade or commerce (including imports) in goods or services. The Central Government will have the power to levy excise duty in addition to the GST on tobacco and tobacco products. The tax on supply of five specified petroleum products namely crude, high speed diesel, petrol, air turbine fuel and natural gas would be levied from a later date on the recommendation of GST Council. A Goods and Services Tax Council (GSTC) shall be constituted comprising the Union Finance Minister, the Minister of State (Revenue) and the State Finance Ministers to recommend on the GST rate, exemption and The Institute of Cost Accountants of India 9  Indirect Taxation thresholds, taxes to be subsumed and other features. This mechanism would ensure some degree of harmonization on different aspects of GST between the Centre and the States as well as across States. One half of the total number of members of GSTC would form quorum in meetings of GSTC. Decision in GSTC would be taken by a majority of not less than three-fourth of weighted votes cast. Centre and minimum of 20 States would be required for majority because Centre would have one-third weightage of the total votes cast and all the States taken together would have two-third of weightage of the total votes cast. The Constitution Amendment Bill was passed by the Lok Sabha in May, 2015. The Bill was referred to the Select Committee of Rajya Sabha on 12.05.2015. The Select Committee had submitted its Report on the Bill on 22.07.2015. The Bill with certain amendments was finally passed in the Rajya Sabha and thereafter by Lok Sabha in August, 2016. Further the bill had been ratified by required number of States and received assent of the President on 8th September, 2016 and has since been enacted as Constitution (101stAmendment) Act, 2016 w.e.f. 16th September, 2016. 10 The Institute of Cost Accountants of India  Concept of Indirect Taxes Exercise  Multiple Choice Questions 1. Who is empowered to make law for matters containing in List II of Schedule VII of the Constitution of India a. State Government b. Central Government c. Both Central and State Government d. None of the above 2. Power to make laws with respect to goods and services tax has been given by the Constitution wide Article a. 279A b. 246A c. 246 d. 365 3. Indirect tax is a. Regressive in nature b. Progressive in nature c. Suppressive in nature d. None of these 4. One of the following is not an example of indirect types a. GST b. Customs Duty c. Income tax d. None of these 5. In case of indirect tax, impact and incidence of tax fall on a. One person b. Different persons c. State Government d. None of these 6. Levy of indirect tax on goods and services may leads to a. Inflation b. Deflation c. Reflection d. None of the above The Institute of Cost Accountants of India 11 Indirect Taxation 7. Levy and collection of Central indirect tax are dealt by a. CBIC b. CBDT c. NIC d. UGS 8. In pre-GST regime, excise duty has been levied by ……….. Government whereas VAT has been levied by …….. State Government on goods a. Central, State b. State, Central c. Central, Central d. State, State 9. Cascading effect of tax means a. Tax on goods b. Tax on services c. Tax on Tax d. None of these 10. Who is empowered to make law for matters containing in List I of Schedule VII of the Constitution of India a. State Government b. Central Government c. Both Central and State Government d. None of the above 11. When did GST come into effect in India? a. 30th June 2017 b. 1st April 2017 c. 1st January 2017 d. 1st July 2017 12. The items which will be taxable both under current Central Excise Law and new GST even after the implementation of the GST Act. a. Motor Spirit b. Alcoholic Liquor for Human Consumption c. Tabacco and Tabacco Products d. Natural Gas 12 The Institute of Cost Accountants of India  Concept of Indirect Taxes 13. Aggregate Turnover Limit for Opting Compounding Scheme a. 50/-Lakhs b. 6/- Lakhs c. 1 Crore d. 1.5 Crore 14. The Tax applicable to interstate supplies will be: a. SGST only b. CGST only c. IGST only d. CGST+IGST 15. The recommendation of the GST Council will be a. Mandatory b. Only Advisory Power c. Mandatory and sometimes Advisory d. Mandatory on State only 16. State various types of Supplies covered under the scope of Supply- a. Supplies made with consideration b. Supplies made without consideration c. Both of the above d. None of the above 17. State factors differentiating Composite Supply & Mixed Supply- a. Nature of bunding i.e artificial or natural b. Existence of Principal Supply c. Both of the above d. None of the above. 18. Whether Alcoholic Liquor for industrial and other usage is taxable under GST? a. No b. Yes c. Exempted d. Non-Taxable 19. Who is the Chairman & Head of the GST Council Meeting? a. Prime Minister b. President The Institute of Cost Accountants of India 13 Indirect Taxation c. Union Finance Minister d. State Finance Minister nominated by GST Council 20. Which one of the following shall not be treated as supply? a. Rental b. Lease c. Actionable claim d. License 21. Which of the following activities shall be treated neither as supply of goods nor supply of services? (i) Permanent transfer of business assets where input tax credit has been availed on such assets (ii) Temporary transfer of intellectual property right (iii) Transportation of the deceased (iv) Services by an employee to the employer in the course of employment a. (i) & (iii) b. (ii) & (iv) c. (i) & (ii) d. (iii) & (iv) 22. Which of the following activities is an supply of services? i. Transfer of right in goods/ undivided share in goods without transfer of title in goods. ii. Transfer of title in goods iii. Transfer of title in goods under an agreement which stipulates that property shall at a future date upon payment of full consideration as agreed. a. (i) b. (iii) c. (i) and (iii) d. (i), (ii) and (iii) 23. Which of the following statement is true under GST law? a. Grand-parents are never considered as related persons to their grand-son/grand-daughter b. Grand-parent are always considered as related persons to their gran-son/grand-daughter c. Grand –parent are considered as related persons to their grand-son/grand-daughter only if they are Wholly dependent on their grand –son/grand-daughter d. Grand-parents are considered as related persons to their grand-son/gran-daughter only if they are not dependent on their grand-son/grand-daughter 24. Alcoholic liquor for human consumption is subjected to a. State excise duty b. Central Sales Tax/Value Added Tax 14 The Institute of Cost Accountants of India  Concept of Indirect Taxes c. Both (a) and (b) d. GST 55. 25. Which of the following is not considered as ‘goods’ under the CGST Act, 2017? (i) Ten-Paisa con having sale value of ₹ 100. (ii) Shares of unlisted company (iii) Lottery tickets a. (i) b. (ii) c. (ii) and (iii) d. (i), (iii) and (iii) [Answer: 1-a; 2-b; 3-a; 4-c; 5-b; 6-a ; 7-a; 8-a; 9-c; 10-b; 11-d; 12-c; 13-a; 14-c; 15-b; 16-c; 17-c; 18-b; 19-c; 20-c; 21-d; 22-a; 23-c; 24-c; 25-b]  Short Essay Type Questions 1. State the features of indirect tax. 2. What are the differences between direct tax and indirect tax? 3. What were the issues in the pre-GST regime, which were addressed by the GST law?  References: https://www.cbic.gov.in/ https://cbic-gst.gov.in/ https://gstcouncil.gov.in/ The Institute of Cost Accountants of India 15 Indirect Taxation 16 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws Goods and Services Tax (GST) Laws 5 This Module includes - 5.1 Introduction to GST Law 5.2 Levy and Collection of CGST and IGST 5.3 Basic concepts of Time, Place and Value of Supply 5.4 Input Tax Credit 5.5 Computation of GST Liability 5.6 Registration 5.7 Tax Invoice – Electronic Way Bill 5.8 Returns and Payment of Taxes The Institute of Cost Accountants of India 17 Indirect Taxation Goods and Services Tax (GST) Laws SLOB Mapped against the Module: 1. To acquire knowledge of legal provisions enshrined in laws related to GST and Customs Duty and appreciate their applicability in business operations. 2. To gather understanding of legal provisions of said two indirect tax laws about matters of compliance while conducting business operations. Module Learning Objectives: After studying this module, the students will be able to - Appreciate the Constitutional Aspects of GST Understand the basic features of Indian model of GST Appreciate the meaning of supply Understand the provision relating to charge, exemption and composition levy Appreciate the provisions relating to time and value of supply Appreciate the concepts of input tax credit and its utilisation Apply the knowledge in computing GST liability Appreciate the various compliance provisions of the GST laws. 18 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws Introduction 5 U nder the earlier taxation system for indirect taxes, number of indirect taxes were being levied and collected at multiple rates both by Central Government and State Governments on different activities undertaken. The international best tax practices in indirect taxes look for, easing out the complications and cumbersome confusing compliances and reduce interaction with different statutory authorities. Similar thought process was started in India to consolidate number of taxes in to one system of taxation uniformly across the country in late 1970s. The idea of moving towards the GST was first mooted by the then Union Finance Minister in his Budget for 2006- 07. Initially, it was proposed that GST would be introduced from 1stApril, 2010. The Empowered Committee of State Finance Ministers (EC) which had formulated the design of State VAT was requested to come up with a roadmap and structure for the GST. Joint Working Groups of officials having representatives of the States as well as the Centre were set up to examine various aspects of the GST and draw up reports specifically on exemptions and thresholds, taxation of services and taxation of inter-State supplies. Based on discussions within and between it and the Central Government, then First Discussion Paper (FDP) was released on GST in November, 2009. This spell out the features of the proposed GST and has formed the basis for discussion between the Centre and the States so far. The Institute of Cost Accountants of India 19 A Indirect Taxation Introduction to GST Law 5.1 T he introduction of Goods and Services Tax (GST) would be a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax, it would mitigate cascading or double taxation in a major way and pave the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods. Introduction of GST would also make Indian products competitive in the domestic and international markets. 5.1.1 Amendments made by the Constitution (101st Amendment) Act, 2016 Constitution of Goods and Services Tax Council [Article 279A] 1. The President shall, within 60 days from the date of commencement of the Constitution (101st Amendment) Act, 2016, by order, constitute a Council to be called the Goods and Services Tax Council. Accordingly, the President has since constituted the GST Council. 2. The GST Council which will be a joint forum of the Centre and the States, shall consist of the following members : a. Union Finance Minister Chairperson b. The Union Minister of State, in-charge of Revenue of finance Member c. The Minister In-charge of finance or taxation or any other Minister nominated by Members each State Government 3. The Members of the Goods and Services Tax Council referred to in clause 2(c) shall, as soon as may be, choose one amongst themselves to be the Vice-Chairperson of the Council for such period as they may decide Special provision with respect to goods and services tax [Article 246A] 1. Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. 2. Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. Taxpoint :  As per Article 366(12A), “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption 20 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws  In case of inter-State supply, Central Government have exclusive power to make law and for intra-State supply, both Central and State government has power to make law.  The provisions of this article, shall, in respect of goods and services tax referred to in Article 279A(5), take effect from the date recommended by the Goods and Services Tax Council (i.e., on this goods: petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel)  Earlier as per Article 246, power to levy various types of indirect tax was distributed between Central Government and State Government. Article 246A empowered both the Government to levy GST. 5.1.2 Levy and collection of goods and services tax in course of inter-State trade or commerce [Article 269A] 1. Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax1 shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council. Taxpoint : Supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce. 2. The amount apportioned (as aforesaid) to a State shall not form part of the Consolidated Fund of India. 3. Where an amount collected as IGST has been used for payment of the SGST (or vice versa), such amount shall not form part of the Consolidated Fund of India. 4. Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. 5.1.3 GST Network (GSTN) A common portal or platform is needed which could act as a clearing house and verify the claims and inform the respective government to transfer the funds. This is possible with the help of a strong IT infrastructure. Accordingly, Government has established common GST Electronic Portal (www.gst.gov.in), a website managed by Goods and Services Network (GSTN) for the tax payer and common IT infrastructure for Central and States. GSTN (a non-profit Government owned organisation) is a Special Purpose Vehicle. The functions of the GSTN would, inter alia, include: a. facilitating registration; b. forwarding the returns to Central and State authorities; c. computation and settlement of IGST; d. matching of tax payment details with banking network; e. providing various MIS reports to the Central and the State Governments based on the tax payer return information; f. providing analysis of tax payers’ profile; and g. running the matching engine for matching, reversal and reclaim of input tax credit. The GSTN is developing a common GST portal and applications for registration, payment, return, assessment and MIS/reports. On registration on the common portal (www.gst.gov.in), each taxpayer will receive 15 alpha numeric PAN based unique Goods and Service Tax Identification Number (GSTIN). 1 This tax is termed as the Integrated Goods and Services Tax (IGST). The Institute of Cost Accountants of India 21  Indirect Taxation Salient features of GSTN  Incorporated in March 2013 as sec. 25 100% government owned company with paid up capital of ₹ 10 crore  To function as a Common Pass-through portal for taxpayers ¾¾ Submit registration application ¾¾ File returns ¾¾ Make tax payments  To develop back-end modules for States  Infosys Ltd. appointed as Managed Service Provider (MSP)  Appointed more than 70 GST Suvidha Providers (GSPs) 5.1.4 Need for GST Under the pre-GST regime, there are various taxes that have to pay at every stage and differently collected by State and Central Government and rates differ from one state to another. Imposing several taxes on goods and services can lead to high cost and inefficient tax structure. Moreover : a. Tax levied by one Government was not available for set off against the tax levied by another Government. Even few taxes levied by the Government was not allowed to be set off with another type of tax levied by the same Government. b. Further, there was cascading effect of taxation (i.e., tax on tax), which leads to inflation. E.g., VAT is levied by the State Government on the excise duty levied by the Central Government. c. Rate of CST was lower than VAT rate which had been used by the business as tax arbitrage. d. Each State has separate VAT law which had divided the nation into various economic states. e. Due to levy of entry tax, octroi, etc. by various State Governments results into a hindrance in free flow of business. 22 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws GST removed the inefficiencies and complexities of the erstwhile archaic taxation system and helped in accelerating growth. GST has been enacted with effect from 01-07-2017 with the following benefits: 1. Tax subsumed in the GST : Following taxes, levied by different Governments, were subsumed in the GST: However, it is to be noted that following taxes are not subsumed into the GST: Central Taxes State Taxes Basic Customs Duty State Excise Duty Research and Development Cess Stamp Duty Export Duty Profession Tax Anti-Dumping Duty Motor Vehicle Tax Safeguard Duty 2. Seamless Flow of Credit : In the GST regime, the buyer (other than ultimate consumer) will take the credit of tax paid2 by him at the time of purchase of goods and services, and he can utilize that credit in discharging his tax liability. GST eliminates the multiplicity and cascading of taxes which results into overall reduction in tax incidence. 3. Competitive prices : GST eliminates all other taxes of indirect nature, and this will effectively mean that the tax amount paid by end consumers will reduce. Lower the prices, more will be demand for that product, which will result in more consumption and will benefit the entities. 4. Increase in revenue : One reason behind the need for GST was also to boost the revenue from the indirect taxes in the nation. GST is easy to understand, and a simple tax structure will bring more taxpayers and in return, it will increase the revenue for the Government. 2 Subject to certain restrictions The Institute of Cost Accountants of India 23  Indirect Taxation 5. Easy and straightforward tax structure : Before GST, taxpayers needed to pay a lot of taxes, but with GST, a single tax system, only one tax needs to be paid, which is comparatively easy and convenient to understand. For accounting, business complexities will reduce and result in less paperwork, saving both money and time. 6. One Nation One Tax : With uniform tax on supplies of goods and services India turned into one market. 5.1.5 Benefits of GST The benefits of GST can be summarized as under : A. For business and industry ¾¾ Easy compliance : A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax-payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent. ¾¾ Uniformity of tax rates and structures : GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business. ¾¾ Removal of cascading : A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business. ¾¾ Improved competitiveness : Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry. ¾¾ Gain to manufacturers and exporters : The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost. B. For Central and State Governments ¾¾ Simple and easy to administer : Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far. ¾¾ Better controls on leakage : GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an inbuilt mechanism in the design of GST that would incentivize tax compliance by traders. ¾¾ Higher revenue efficiency : GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency. ¾¾ Boost to ‘Make in India’ initiative : GST will give major boost to the ‘Make in India’ initiative of government of India by making goods and services produced in India competitive in the national as well as international market. 24 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws C. For the consumer ¾¾ Single and transparent tax proportionate to the value of goods and services : Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer. ¾¾ Relief in overall tax burden : Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers. 5.1.6 Salient Features of GST  Destination Based Tax : GST is a value added destination-based tax on consumption of goods and services. It is levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer. Benefit of tax (STCG/ UTGST) will accrue to the consuming state which will benefit the poor states. Example 1 : If A in Gujarat produces the goods and sells the goods to B in Rajasthan, then in such case the tax should be levied and collected and should accrue to the State of Rajasthan and not to the State of Gujarat3.  One Nation One Tax : GST is levied on supply of goods and services across India (including Jammu and Kashmir). It is a single tax on the supply of goods and services, right from the manufacturer to the consumer.  Dual GST Model : Centre and states will impose tax on goods and services simultaneously. 3 In pre-GST regime which was origin base taxation system, revenue will accrue to the State of Gujarat The Institute of Cost Accountants of India 25  Indirect Taxation a. Intra-State supply of goods and services –– CGST: Payable to Central Government –– SGST/ UTGST: Payable to State Government/ Union Territory (as applicable) where they are consumed b. Inter-States Supply of goods and services –– IGST: Payable to Central Government Centre will levy and administer CGST and IGST while respective States/ UTs will levy and administer SGST/UTGST  Import and Export : Import will be treated as inter-States supply and IGST will be chargeable along with basic Customs duty. However, in GST Export will be treated as Zero rated supplies and no IGST is payable.  Rates of GST : The rates of GST4 are 0.5%, 3%, 5%, 12%, 18% and 28%. In addition, compensation cess will be payable on pan masala, tobacco & tobacco product, coal, lignite, aerated water and motor-cars.  Tax on value of supply : GST will be calculated on value of supply of goods and services, which istransaction value. (subject to some exceptions)  Registration : Under GST, every suppliers who have made taxable supply (subject to certain threshold limits) shall required to get himself registered under GST Law.  Input Tax Credit : A registered person is entitled to take credit (deduction) of input tax paid from the output tax (if any) subject to following restriction: a. Utilisation of IGST: First utilized for the payment of IGST then the balance, if any, shall be utilized towards payment of CGST and SGST/UTGST b. Utilisation of CGST: First utilized for the payment of CGST then the balance, if any, may be utilized towards payment of IGST. c. Utilisation of SGST/UTGST: First utilized for the payment of SGST/UTGST then the balance may be utilized towards payment of IGST.  Acts and Rules: For implementation of the GST, following Acts and major Rules are there : Act Rules The Central Goods and Services Tax Act, 20175 Central Goods and Services Tax Rules, 2017 The Integrated Goods and Services Tax Act, 2017 Integrated Goods and Services Tax Rules, 2017 The Goods and Services Tax (Compensation to States) Goods and Services Tax Compensation Cess Act, 2017 Rules, 2017  Other features a. In specified situation, self-supply is also treated as taxable supply and hence liable for tax 4 These are IGST rates, however where CGST and SGST/UTGST is applicable (i.e., in case of intra-State supply) rate of IGST shall be divided into 2 parts i.e., 50% of rate of IGST shall be treated as rate of CGST and balance 50% shall be treated as SGST/UTGST. E.g. where IGST rate of inter-State supply of goods is 18% then if such goods are supplied in the course of intra-State supply, applicable CGST rate would be 9% (i.e., 50% of 18%) and applicable SGST/UTGST rate would be 9% (i.e., 50% of 18%) 5 Similar law has been made by States and UT 26 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws b. Even in few cases, supply without consideration is also liable for GST c. The law has also notified the list of exempted goods and services d. Alcoholic liquor for human consumption, petroleum crude, high speed diesel, motors spirits (commonly known as petrol), natural gas and aviation turbine fuel has been kept out of the purview of the GST e. Procedure for collection of GST is uniform across the States. f. Common return would serve the purpose of both Centre and State Government. 5.1.7 Goods and Services Tax Compensation Cess  Goods and Services Tax (Compensation to States) Act, 2017 was enacted to levy Compensation cess for providing compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force (01/07/2017), for a period of five years or for such period as may be prescribed on the recommendations of the GST Council6.  Taxable persons selling notified goods are liable to collect and pay GST Cess. Notified goods are: a. Pan masala, b. Tobacco & tobacco product, c. Cigarettes, cigar d. Coal, lignite, e. Aerated water; and f. Motor-cars  Cess shall be computed on the value of taxable supply. Cess is levied in addition to CGST + SGST/UTGST in case of intra-state sales and IGST in case of inter-state sales including import of goods.  Taxpayer can use Input Tax Credit of Cess for payment of Cess liability on outward supply made by him. He cannot use Input Tax Credit of Cess for payment of output CGST, SGST or IGST  Where a taxpayer is registered under composition levy, Cess is not applicable on outward supplies made by him  Cess is not levied on export made from India. The exporter can claim a refund of the input tax credit of cess paid on purchases  The amount of compensation to be distributed to each state shall be calculated as follows: Step 1 : Base revenue = Tax revenue of the State in financial year 2015-16. Step 2 : Assume growth rate as 14% and calculate projected revenue for each financial year. The implication of projected revenue is that this would be the revenue that a state could have earned if GST were not implemented. If the base year revenue for 2015-16 for a concerned State, calculated as per section 5 is one hundred rupees, then the projected revenue for financial year 2018-19 shall be: Projected Revenue for 2018-19=100 (1+14/100)3 6 Extended upto 31/03/2026 The Institute of Cost Accountants of India 27  Indirect Taxation Step 3 : Calculate the Compensation payable for each FY as follows : Projected Revenue for that particular financial year xxx (–) Actual Revenue earned by the State including share in IGST xxx Compensation payable to the State xxx  50% of the amount remaining unutilised in the Fund at the end of the transition period shall be transferred to the Consolidated Fund of India as the share of Centre, and the balance 50% shall be distributed amongst the States in the ratio of their total revenues from the State tax or the Union territory goods and services tax, as the case may be, in the last year of the transition period. FAQ by CBIC on 15-12-2018 Q 1. What is Goods and Services Tax (GST)? Answer : It is a destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer. Q 2. What exactly is the concept of destination based tax on consumption? Answer : The tax would accrue to the taxing authority which has jurisdiction over the place of consumption which is also termed as place of supply. Q 3. Which of the existing taxes are proposed to be subsumed under GST? Answer : The GST would replace the following taxes: i. taxes currently levied and collected by the Centre: a. Central Excise duty b. Duties of Excise (Medicinal and Toilet Preparations) c. Additional Duties of Excise (Goods of Special Importance) d. Additional Duties of Excise (Textiles and Textile Products) e. Additional Duties of Customs (commonly known as CVD) f. Special Additional Duty of Customs (SAD) g. Service Tax h. Central Surcharges and Cesses so far as they relate to supply of goods and services ii. State taxes that would be subsumed under the GST are: a. State VAT b. Central Sales Tax c. Luxury Tax d. Entry Tax (all forms) e. Entertainment and Amusement Tax (except when levied by the local bodies) f. Taxes on advertisements 28 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws g. Purchase Tax h. Taxes on lotteries, betting and gambling i. State Surcharges and Cesses so far as they relate to supply of goods and services The GST Council shall make recommendations to the Union and States on the taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be subsumed in the GST. Q 4. Which are the commodities which have been kept outside the purview of GST? Answer : Article 366(12A) of the Constitution as amended by 101st Constitutional Amendment Act, 2016 defines the Goods and Services tax (GST) as a tax on supply of goods or services or both, except supply of alcoholic liquor for human consumption. So alcohol for human consumption is kept out of GST by way of definition of GST in constitution. Five petroleum products viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel have temporarily been kept out and GST Council shall decide the date from which they shall be included in GST. Q 5. What is the status of Tobacco and Tobacco products under the GST regime? Answer : Tobacco and tobacco products is leviable to GST. In addition, the Centre has the power to levy Central Excise duty on these products. Q 6. What type of GST was implemented? Answer : It would be a dual GST with the Centre and States simultaneously levying it on a common tax base. The GST to be levied by the Centre on intra-State supply of goods and / or services would be called the Central GST (CGST) and that to be levied by the States/ Union territory would be called the State GST (SGST)/ UTGST. Similarly, Integrated GST (IGST) will be levied and administered by Centre on every inter-state supply of goods and services. Q 7. Why is Dual GST required? Answer : India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of Government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will, therefore, be in keeping with the Constitutional requirement of fiscal federalism. Q 8. Which authority will levy and administer GST? Answer : Centre will levy and administer CGST & IGST while respective states /UTs will levy and administer SGST/ UTGST. Q 9. Why was the Constitution of India amended recently in the context of GST? Answer : Currently, the fiscal powers between the Centre and the States are clearly demarcated in the Constitution with almost no overlap between the respective domains. The Centre has the powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics etc.) while the States have the powers to levy tax on the sale of goods. In the case of inter-State sales, the Centre has the power to levy a tax (the Central Sales Tax) but, the tax is collected and retained entirely by the States. As for services, it is the Centre alone that is empowered to levy service tax. Introduction of the GST required amendments in the Constitution so as to simultaneously empower the Centre and the States to levy and collect this tax. The Constitution of India has been amended by the Constitution (one The Institute of Cost Accountants of India 29  Indirect Taxation A hundred and first amendment) Act, 2016 for this purpose. Article 246A of the Constitution empowers the Centre and the States to levy and collect the GST. Q 10. What are the benefits which the Country will accrue from GST? Answer : Introduction of GST would be a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax and allowing set-off of prior-stage taxes, it would mitigate the ill effects of cascading and pave the way for a common national market. For the consumers, the biggest gain would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%. Introduction of GST would also make our products competitive in the domestic and international markets. Studies show that this would instantly spur economic growth. There may also be revenue gain for the Centre and the States due to widening of the tax base, increase in trade volumes and improved tax compliance. Last but not the least, this tax, because of its transparent character, would be easier to administer. Q 11. What is IGST? Answer : Under the GST regime, an Integrated GST (IGST) would be levied and collected by the Centre on inter-State supply of goods and services. Under Article 269A of the Constitution, the GST on supplies in the course of inter- State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council. Q 12. Who will decide rates for levy of GST? Answer : The CGST and SGST would be levied at rates to be jointly decided by the Centre and States. The rates would be notified on the recommendations of the GST Council. Q 13. What would be the role of GST Council? Answer : A GST Council would be constituted comprising the Union Finance Minister (who will be the Chairman of the Council), the Minister of State (Revenue) and the State Finance/Taxation Ministers to make recommendations to the Union and the States on a. the taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be subsumed under GST; b. the goods and services that may be subjected to or exempted from the GST; c. the date on which the GST shall be levied on petroleum crude, high speed diesel, motor sprit (commonly known as petrol), natural gas and aviation turbine fuel; d. model GST laws, principles of levy, apportionment of IGST and the principles that govern the place of supply; e. the threshold limit of turnover below which the goods and services may be exempted from GST; f. the rates including floor rates with bands of GST; g. any special rate or rates for a specified period to raise additional resources during any natural calamity or disaster; h. special provision with respect to the North- East States, J&K, Himachal Pradesh and Uttarakhand; and i. any other matter relating to the GST, as the Council may decide. 30 The Institute of Cost Accountants of India A Goods and Services Tax (GST) Laws Levy and Collection of CGST and IGST 5.2 T 5.2.1 Application of CGST/ IGST Law he introduction of Goods and Services Tax (GST) was a significant reform in the field of indirect taxes in our country. Multiple taxes levied and collected by the Centre and states has been replaced by one tax called Goods and Services Tax (GST). GST is a multi-stage value added tax on consumption of goods or services or both. A “dual GST” model has been adopted in view of the federal structure of our country. A. Intra-State Supply Centre and States will simultaneously levy GST on every supply of goods or services or both which takes place within a State or Union territory. Thus, there shall be two components of GST as under: a. Central tax (CGST): (levied & collected under the authority of CGST Act, 2017 passed by the Parliament) b. State tax (SGST) (levied & collected under the authority of SGST Act, 2017 passed by respective State) B. Inter-State Supply Centre will levy Integrated Goods and Services Tax (IGST) on every supply of goods or services or both. However, the levy shall be shared equally between Central and respective State Government. IGST rate = CGST rate + SGST rate In the GST, it is very important to determine the nature of supply – whether it is inter-state or intra state, as the kind of tax to be paid (IGST or CGST+SGST) depends on that. A brief note to determine nature of supply are as under : Intra-State supply Inter-State supply 1. Supply of goods within the state or union i. Supply of goods from one state or union territory territory. to other state or union territory. 2. Supply of services within the state or union ii. Supply of service from one state or union territory territory to other state or union territory. iii. Import of goods till they cross customs frontier. iv. Import of service. v. Export of goods or service. vi. Supply of goods/services to/by SEZ. vii. Any other supply in the taxable territory which is not intra state supply. The Institute of Cost Accountants of India 31  Indirect Taxation 5.2.2 Concept of Supply including Composite and Mixed Supplies The taxable event in GST is supply of goods or services or both. Various taxable events like manufacture, sale, rendering of service, purchase, entry into a territory of State etc. have been done away with in favour of just one taxable event i.e., supply. Thus, it is very important to understand the meaning of supply. The GST law provides an inclusive definition of “supply”. Supply [Sec. 7(1)] Supply includes : a. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. aa. the activities or transactions, by a person, other than an individual, to its members or constituents or vice- versa, for cash, deferred payment or other valuable consideration. ¾¾ Notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another; b. import of services for a consideration whether or not in the course or furtherance of business. c. the activities specified in Schedule I, made or agreed to be made without a consideration. 32 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws All forms of supply of goods or services or both for a consideration by a person in the course or furtherance of business [Sec. 7(1)(a)]  Supply should be of goods and services. If something else is supplied like money or securities, it is not covered.  Supply includes all forms of supply (goods and/ or services) and includes agreeing to supply when the supply is for a consideration and in the course or furtherance of business. It specifically provides for the inclusion of the following classes of transactions# : a. Sale Sale is a lawful, permanent and absolute transfer of ownership of property in goods for money consideration under a valid contract such that no rights are left behind with the transferor. b. Transfer Transfer is to lawfully convey property from one person to another. Consent of the transferor and capacity of transferee may not be present although all other ingredients of a lawful contract are involved. c. Barter Barter is where the consideration is in the form of goods or services (and not in money) for a sale or transfer. Barter will involve two supplies and not one. d. Exchange The act of giving or taking one thing in return for another. e. License To give permission to enter and use the property (movable or immovable) or permission to act. f. Rental An arrangement to rent something or the amount of money that you pay to rent something. g. Lease To make a legal agreement by which money is paid in order to use land, a building, a vehicle, or a piece of equipment for an agreed period of time. h. Disposal The act of getting rid of something, especially by throwing it away # These are illustrative form of supply.  The supply includes supply of goods or services agreed to made in future. E.g., if Mr. X receives advance payment for providing specific service in future, the Mr. X is required to pay GST at the time of receipt of advance money as here he agrees to provide services in future.  Supply should be made for a consideration (i.e., quid pro quo). Consideration may be money or something else. As per sec. 2(31), consideration in relation to the supply of goods or services or both includes: a. any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; b. the monetary value of any act (doing something) or forbearance (not doing something), in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: However, a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply. It may be monetary or non-monetary. The Institute of Cost Accountants of India 33  Indirect Taxation For a transaction to qualify as ‘supply’, it is essential that the same is ‘in the course’ or ‘furtherance of business’. This implies that only such supplies of goods and/ or services by a business entity would be liable to tax, which are ‘in the course’ or in ‘furtherance of business’. Supplies that are not in the course of business or in furtherance of business will not qualify as ‘supply’ for the purpose of levy of tax. As per sec. 2(52), goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Taxpoint : Actionable Claim other than lottery, betting and gambling is not treated as supply. As per sec. 2(102), services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. It also includes facilitating or arranging transactions in securities; As per sec. 2(107) taxable person means a person who is registered or liable to be registered u/s 22 or sec. 24. Supply should be made by a taxable person. However, recipient of the supply may or may not be a taxable person. As per sec. 2(84), person includes: a. an individual; b. a Hindu Undivided Family; c. a company; d. a firm; e. a Limited Liability Partnership; f. an association of persons or a body of individuals, whether incorporated or not, in India or outside India; g. any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in sec. 2(45) of the Companies Act, 2013; h. any body corporate incorporated by or under the laws of a country outside India; i. a co-operative society registered under any law relating to co-operative societies; j. a local authority; k. Central Government or a State Government; l. society as defined under the Societies Registration Act, 1860; m. trust; and n. every artificial juridical person, not falling within any of the above; As per sec. 2(109), taxable territory means the territory to which the provisions of this Act apply. As per sec. 2(108), taxable supply means a supply of goods or services or both which is leviable to tax under this Act; 34 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws As per sec. 2(17), business includes: a. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; b. any activity or transaction in connection with or incidental or ancillary to sub-clause (a); c. any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction; d. supply or acquisition of goods including capital goods and services in connection with commencement or closure of business; e. provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members; f. admission, for a consideration, of persons to any premises; g. services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation; h. activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and i. any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities; The meaning and scope of supply under GST can be understood in terms of following parameters, which can be adopted to characterize a transaction as supply: Supply of goods or services or both (Supply of anything other than goods or services does not attract GST). Supply should be made for a consideration (subject to certain exceptions). Supply should be made in the course or furtherance of business (subject to certain exceptions). Supply should be a taxable supply. Supply should be made in a taxable territory. Supply is made by as taxable person. Import of service for consideration whether or not in the course or furtherance of business [Sec. 7(1)(b)] The word ‘supply’ includes import of a service (not goods), made for a consideration and whether or not in the course or in furtherance of business. This implies that import of paid services even for personal consumption would qualify as ‘supply’ and, therefore, would be liable to tax. Activities specified in Schedule I, made or agreed to be made without a consideration [Sec. 7(1) (c)] As per schedule I, following activities are to be treated as supply even if made without consideration provided such activities are in course or furtherance of business: The Institute of Cost Accountants of India 35  Indirect Taxation 1. Permanent transfer or disposal of business assets where input tax credit (ITC) has been availed on such asset shall be treated as supply. Taxpoint : Where ITC has not been availed at the time of acquisition of asset, disposal of such asset without consideration is not treated as supply. Example 2 : ¾¾ Mr. Ramesh is engaged in the business of beauty products. Few of items on which he has already availed ITC, taken by him for personal use of his family members. Such transaction shall be treated as supply even though there is no consideration involved. ¾¾ Mr. Kisan purchased furniture on which he has taken ITC. After 2 years, he donated that furniture to an NGO. This donation is treated as supply under the GST law. 2. Supply of goods or services or both between: –– related persons or –– distinct persons as specified in sec. 25, when made in the course or furtherance of business, shall be treated as supply (even though without consideration) Exception : Gifts not exceeding ₹ 50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. Taxpoint : ¾¾ As per explanation to sec. 15(5), persons shall be deemed to be “related persons” if- i. such persons are officers or directors of one another’s businesses; ii. such persons are legally recognised partners in business; iii. such persons are employer and employee; iv. any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them; v. one of them directly or indirectly controls the other; vi. both of them are directly or indirectly controlled by a third person; vii. together they directly or indirectly control a third person; or viii. they are members of the same family ; As per sec. 2(49), family means: a. the spouse and children of the person, and b. the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the said person. 36 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws ¾¾ Though employer-employee are treated as related person but services provided by an employee to his employer in the course of employment is not treated as supply. ¾¾ Distinct person [Sec. 25(4)]: A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons Example 3 : X Ltd. has 3 branches. One at Kolkata, another at Chennai and third one at Mumbai. All these branches are separately registered with GST and treated as distinct persons. Any inter-State transfer (like stock transfer, etc.) among them shall be treated as supply even though there is no consideration. 3. Supply of goods*: a. by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or b. by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. * The clause is applicable in case of Pakka aarhatia (i.e., the agent selling or buying in this own name). Taxpoint : ¾¾ This clause is applicable only in case of supply of goods between principal and agent ¾¾ Transfer of goods between principal and agent shall be treated as supply even though it is without any consideration. ¾¾ As per sec. 2(5), agent means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another. ¾¾ As per sec. 2(88), principal means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both. Example 4 : 1. Mr. Prem, Kolkata, is an agent of Mr. Magan, Mumbai. Mr. Prem is acquiring goods on behalf of Mr. Magan and supply it to Mr. Magan. Here, transaction between Mr. Prem and Mr. Magan is treated as supply even though there is no consideration. 2. Similarly, Mr. Ashok, Surat, is an agent of Mr. Magan, Mumbai. Mr. Magan is sending goods to Mr. Ashok for selling that in Surat. Here, transaction between Mr. Ashok and Mr. Magan is treated as supply even though there is no consideration. 4. Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business. Taxpoint: Import of services for a consideration whether or not in the course or furtherance of business is treated as supply u/s 7(1)(b). However, if services are imported by a person from a related person even though without consideration is treated as supply provided such import is in the course of business or furtherance of business. The Institute of Cost Accountants of India 37  Indirect Taxation Buy one get one free offer [Circular No. 92/11/2019-GST dated 07/03/2019 Sometimes, companies announce offers like ‘Buy One, Get One free”. For example, “buy one soap and get one soap free” or “Get one tooth brush free along with the purchase of tooth paste”. As per sec. 7(1)(a), the goods or services which are supplied free of cost (without any consideration) shall not be treated as ‘supply’ under GST (except in case of activities mentioned in Schedule I). It may appear at first glance that in case of offers like ‘Buy One, Get One Free’, one item is being ‘supplied free of cost’ without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one. Activities or transactions to be treated as supply of goods or supply of services [Sec. 7(1A) with Schedule II] In the earlier tax regime, activities like works contract was treated as both goods and services. Both VAT and service taxes were applicable on it. There were various rates, composition schemes available for works contractors with many complexities thus resulting in litigation. To settle the innumerable complexities and confusion regarding these types of activities, Schedule II is inserted in the GST laws which specifically mention the nature of supply involved in these activities. As per Schedule II, following activities or transactions shall be treated as either supply of goods or supply of service. Nature of supply Particulars Type of activity Supply of Supply of goods services a. any transfer of the title in goods Transfer Example 5 : Roby Collection sells readymade garments to its Yes customers is a supply of goods 38 The Institute of Cost Accountants of India  Goods and Services Tax (GST) Laws Nature of supply Particulars Type of activity Supply of Supply of goods services b. any transfer of right in goods or of undivided share in goods without transfer of title thereof Yes Example 6 : Akhil gives his weaving machine to Rahul on rent for two months is a supply of services c. any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed Yes Example 7 : Narayan supplied car to Kunal with a condition that ownership shall be transferred after full and final payment, is treated as supply of goods. a. any lease, tenancy, easement, licence to occupy land Example 8 : Vikram, owner of a piece of land in Napasar, Yes Bikaner, leases the same land to Murli for one year at an agreed consideration, is a supply of services. Land and Building b. any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly Yes Example 9: Vikash owns a shop in the market area. Such shop is let out by Vikash to Anil, it is treated as supply of services. Treatment or Any treatment or process which is applied to another person’s process goods is a supply of services Yes Example 10 : Job work a. where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets Yes Example 11: Kunal disposes his business asset being old laptop. This transaction is treated as supply of goods. b. where, by or under the direction of a person carrying on a Transfer of business, goods held or used for the purposes of the business business assets are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business. Yes Example 12 : Sonam provides her business laptop to his son Mohak for his full-time study is treated as supply of services. c. where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by The Institute of Cost Accountants of India 39 Indirect Taxation Nature of supply Particulars Type of activity Supply of Supply of goods services him shall be deemed to be supplied by him in the course or furtherance of his business immediately be