GST Impact and Implementation Project Surya Roshni Limited

GST Impact and Implementation Project Surya Roshni Limited

Background • • • Steel M/s Surya Roshni Limited (SRL) founded in 1973 started with its steel division SRL- one of the largest in steel tube industry Manufactures steel pipe products for various industries Lighting SRL started its lighting division later One of the leading brands in the Lighting industry Carved a niche of its in other segments such as Fans & Home Appliances Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

SRL – Business Network Local (Inter, Intra)/Import of Raw Material Manufacturing units of SRL (Lighting- Kashipur, Steel- Malanpur) Customer (Institutional/Industrial) Depots( For customized products) Finished Goods Raw Material Distributor Ghaziabad Hub (Trading) SRL Branches (Various States)

GST - ROADMAP Ø Expected GST roll out date - 1 st July, 2017 Ø Fall-back date – 1 st September, 2017 Ø Preparedness GST compliant IT system Domain knowledge for staff / management GST compliant accounting system Smooth and tax efficient transition strategy Copyright (c) 2017 Lakshmikumaran & Sridharan / Confidential.

GST – SALIENT FEATURES Ø Taxes subsumed under GST: Excise duty, VAT, CST, Service tax, CVD, SAD, Entry tax, etc. Ø Taxes not subsumed: Clean energy cess, Electricity Duty, etc. Ø GST is IT System driven Ø GST is destination based consumption tax (VAT) Ø Rate of tax on goods : 5% / 12% / 18% /28% Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

Supply Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Meaning of Goods Means Every Kind of Movable Property Other than Money and Securities 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

Meaning of Services Servic es Means Anything Other than Goods EXPLANATION Given in Law: Services does not include money and Securities but include following transactions in money: • An activity 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

Taxable Event – Supply GST Bill SUPPLY INCLUDES All forms of supply Made or agreed to be made For a consideration By a Person In the course or furtherance of Business Sale/ Transfer /Barter / Exchange /License / Rental / Lease / Disposal Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential. Malaysia: All forms of Supply, including supply of imported services, done for a consideration Australia: A Supply is any form of Supply whatsoever United Kingdom: includes all forms of supply, but not anything done otherwise than for a consideration

Supply without Consideration q Schedule I (Serial No. 2) to GST Bill “Supply of goods or services between related persons, or between distinct persons as specified in section 25, when made in the course or furtherance of business. ” Gifts by employer to employee in a financial year upto Rs 50, 000 not taxable Section 25 of GST Law “(4) A person who has obtained or is required to obtain more than one registration, whether in one State or more than one State, shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act. (5) A person who has obtained or is required to obtain registration in a State, and any of his other establishments in another State shall be treated as establishments of distinct persons for the purposes of this Act” Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Mixed Supply A supply comprising two or more supplies for more supplies, one a single price shall of which is a be treated as principal supply, supply of that shall be treated as particular supply a supply of such which attracts the Principal Supply principal supply highest of tax A supply constituting the predominant element of arate composite Composite Mixed Supply Composite or Supply supply and to which any other supply is ancillary which does not constitute an aim in itself but a means of better enjoyment. Copyright 2016, Lakshmikumaran & Sridharan / Confidential

CASE STUDY : Composite supply • Major Sales of SRL- FOR basis Ex-Factory sale of goods Transportation service Issues: - Whether composite supply or independent supplies? - What if there is a difference in rates of tax?

CASE STUDY : En-route damage Sale of goods – FOR destination basis En-route damage Issue: - Whether supply? - Time of supply already taken place for the seller?

Taxable Person - Registration Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Taxable Person Liability to pay CGST + SGST or IGST on TAXABLE PERSON. A Supplier liable to be registered in a state (or Union territory) from where he makes a taxable supply of goods or services or both • Person not required to be registered: • Aggregate turnover upto Rs. 20 Lakh (Rs. 10 Lakhs in NE States, Sikkim, J&K, Himachal Pradesh, Uttarakhand) • Person engaged in supply of goods/services not liable t tax or wholly exempt; Copyright 2016, Lakshmikumaran & Sridharan / Confidential

Registration Mandatory • Registration In each state (or Union territory) from where the supplier makes taxable supply Optional of goods and/or services • Registration Separate registration for each business vertical in a state Copyright 2016, Lakshmikumaran & Sridharan / Confidential

MULTIPLE BUSINESS VERTICALS REGISTRATION SRL BUSINESS VERTICALS LIGHTING (Uttrakhand) STEEL (Uttrakhand) Separate registrations for multiple business verticals in a State may be granted [Proviso to Section 25(2)] Copyright 2016, Lakshmikumaran & Sridharan / Confidential

Place of Supply Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Destination Based Consumption Tax • Destination based tax (consumption tax) are levied at places where goods and services are consumed rather than at places were they get manufactured or from where they are supplied i. e. production and the entire revenue relating to the goods or services should accrue in the jurisdiction where they are being ultimately consumed. o dt re r e sf ol n a Tr T Po IGS Uttar Pradesh Central Government Goods and services Consideration Including Taxes IGS Des T Appo tina r tioned t Sta te o Uttarakhand

Nature of Supply : Local / Inter State Situation Inter state Supplies ( Leviable to IGST) Place of Supply • • Intra State Supplies (Leviable to CGST / SGST) If location of supplier and place of supply are in different States. If supply of goods or services is made to SEZ Developer or SEZ Unit. If location of supplier and place of supply are in same State. • Import of Goods and Services Inter State Supply • Export of Goods and Services* Inter State and Zero Rated Supply *Concept of Deemed Export also present under the Revised Model GST Law

Place of Supply : Goods other than import/ export 1 2 3 4 5 When movement involved Place where movement terminates for delivery When movement not involved Location at the time of delivery Bill to Ship to model Person on whom bill raised Supplied on board a conveyance Place where goods taken on board Supply by way of assembly/ installation Place of such assembly/ installation

Place of Supply – Goods imported/ exported Import India The place of supply of goods imported into India shall be the location of the importer The place of supply of goods exported from India shall be location outside India Export

Place of supply of services General Rule Current regime Revised Model Law Location of recipient of service B 2 B supplies: Location of Recipient Location of service provider if the above not available B 2 C supplies: Address on Record exists - Location of Recipient Any other Case- Location of supplier ü “Address on record” defined - address of the recipient as available in the records of the supplier ü Definition of “location of recipient of service” and “location of service provider”

Place of supply of services Nature of service Services directly relating to immovable property GST Bill • • • Place where immovable property is located or intended to be located Location of immovable property is outside India - Location of the Recipient Where property located in more than one state- Proportionate allocation amongst states as per the contract or on reasonable basis Performance based services (Specific services covered such Place of actual performance as supply of restaurant and catering services, health service etc. ) Services in relation to training and performance appraisal- B 2 B supply: location of recipient B 2 C supply: place of performance

Place of Supply of Services – Specific Rules Both Supplier and recipient located in India Service Place of Supply (B 2 B) Place of Supply (B 2 C) Transportation of Goods, including mail or courier Location where service recipient is registered Location where goods are handed over for their transportation Passenger transportation services Location where service recipient is registered Location where passenger embarks on the conveyance for continuous journey Services on Board a Conveyance Location of the first scheduled point of departure Banking and other Financial Services Location of Service recipient on record of supplier of service Location of supplier of services Insurance Services Location where service recipient is registered Location of Service recipient on record of supplier of service Advertisement Services to Central Govt. , State Board or Local Authority Location shall be the recipient states

Place of supply : Bill-to/ Ship-to Model First Supply Vendor Delivery of goods Place of supply Malanpur invoice Kashipur Second Supply First supply: Principal place of business of recipient i. e. Malanpur Second supply: Where delivery terminates i. e. Kashipur

CASE STUDY Mumbai Delhi Annual General Meeting Hotel ABC Company SRL Facts of Case: - SRL has a place of business in Delhi SRL is holding its AGM in a Hotel in Mumbai Hotel has issued an invoice to the company mentioning the address of Delhi No Registration in Mumbai –Loss of SGST credit?

Exports Present Regime • • 5% of total supply = Exports SRL exporting without payment of duty under Rule 19 Duty drawback claimed MEIS benefit claimed GST Regime Export of Goods/Services Option 1: § Export without payment of duty § Claim refund of unutilised tax credits Option 2: § Export on payment of IGST § Claim refund of IGST paid on exports § § Benefits under FTP (E. g: MEIS) to continue ? Duty drawback benefit to continue ?

Input Tax Credit Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Inputs Section 2 (59) : ‘Input’ means any goods, other than capital goods, used or intended to be used by a supplier in the course or furtherance of business. Section 2(60) : ‘Input Service’ means any service used or intended to be used by a supplier in the course or furtherance of business.

Manner of Availing ITC Ø Manner of taking Input tax credit (Section 16) ITC as self-assessed in the return of a taxable person shall be credited to his electronic ledger to be maintained in the GST portal. Ø Credit shall be utilized in the following manner: IGST utilised in the priority specified IGST CGST SGST CGST utilised in the priority specified CGST IGST SGST utilised in the priority specified SGST IGST

Availment of ITC: Conditions 7 No Credit beyond specified period Time Limits (E. g. FY 15 -16) Earliest of: Ø Filing of return for September 2016 (last date: 20 th Oct 2016) Ø Filing of Annual Return for FY 15 -16 (last date: 31 st Dec 2016) 1 6 Monthly returns are filed by 20 th Possession of tax invoice Limiting factors Receipt of Goods/Services ITC on last Lot/ Buyer has filed GST 3/ GST 6 Supplier has Installment paid tax to 5 3 “Appropriate Government” 4 2

Input Tax Credit § Credit of ITC can be provisionally taken by a taxable person in the return, on self-assessment basis. § If a registered taxable person does not furnish a valid return in Form GSTR 3, then he shall not be allowed to utilize such credit till he discharges his self-assessed tax liability. What is a Valid return? Inference from Sec. 2(117) r/w Sec. 37(1): A return filed registered taxable person after duly discharging applicable GST for the purpose of allowing ITC in respect of supplies made by such person. Concept of Cross matching of data is prevalent in Australian GST. = While filing Business Activity Statement (Similar to return), the system cross validates the data of Supplier’s sale vs. Recipient Purchases

Input Tax Credit on Capital Goods: Goods the value of which is capitalized in the books of accounts of the person claiming credit and which are used in the course or furtherance of business Current scenario In the first FY in which capital goods are received, only 50% of the Cenvat credit can be availed GST scenario • 100% credit will be allowed in the year of purchase only • Depreciation not to be claimed on tax amount under IT provision (same position as present continues)

GST: Seamless Credit Flow? • GST Objective : Seamless credit across entire supply chain – There should be no dead credit in the system • GST – No Cross utilization between CGST and SGST – CGST and SGST paid in X state not available as credit in Y state – Negative list under Section 17

Input Tax Credit – Negative List of items SL Negative list Item Exceptions 1 Motor vehicles and other conveyances a. b. c. d. 2 Food & Beverage, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery Providing outward taxable supply of same category 3 Membership of a club, health and fitness center 4 Rent a cab, life insurance, health insurance Except where government notifies services which are obligatory for an employer to provide to his employees under law 5 Works contract services for construction of immovable property other than Plant & Machinery When it is used as an input service for further supply of works contract service Further supply of such vehicles Transportation of passengers Imparting training Transportation of goods

Input Tax Credit – Negative List of items SL Negative list Item 6 Goods or services used in construction of any immovable property on his own account, even if used for business (other than Plant & Machinery) 7 Goods or services or both received by a non- resident taxable person except on goods imported by him 8 Goods and/or services on which tax has been paid under Composition Scheme 9 Goods/services used for personal consumption 10 Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples 11 Taxes if any paid under following circumstances ; i. Wrongful utilization by reason of fraud, willful- misstatement, credits wrongly utilized or availed, erroneously refunded ii. Detention, seizure and release of goods and conveyances in transit iii. Confiscation of goods and/or conveyances and levy of penalty

Issue : Used for personal consumption • ‘goods and/or services used for personal consumption’ – Illustration : LED bulbs manufactured by Kashipur Plant used by the employee of same plant for personal use • Whether ITC available?

Issue : Gifts • 17(4)(h)- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples – Meaning of gift? – Section 122 of Transfer of Property Act, 1882, “Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration – Australian GSTR 2001/ 06 : - Unconditional incentives and promotional giveaways. ………, ‘a non-monetary payment is sometimes made by an entity (such as a manufacturer) to induce another party to make or continue to make purchases from the entity. Where the payment is truly unconditional (that is, a gift), it is not consideration for a supply by that other party.

Issue : Gifts • Credit on the following : – Calendars, Diaries, etc given without condition – Display boards, flyers, etc with conditions but no contractual obligations – Promotional items supplied with the obligation on dealer to perform certain activity in return FOC Supply Vendor Dealer Manufacturer Supply of promotional item Supply of promotional service

Issue : Samples • 17(4)(h)- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples • What is a free sample? – Singapore VAT Law and Malaysian GST Law: “An industrial or commercial sample in a form of good which is given to an actual or potential customer and not ordinarily available for sale to the public” • Sample LED of new model given to customer

Issue : Interest • 17(4)(h)- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. • Interest liability from the date of wrongful availment – Exclusion covers situation based on disposal – Whether it will be considered to be wrongful availment of ITC?

Section 17(4)(h)- Optional? 17(4)(h)- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Schedule I : Transfer or disposal of business assets deemed as Supply even if without consideration when ITC has been availed on such assets • Whether it is optional to avail credit and pay GST on outward supply?

Issues in case of sales return under warranty * Sales return of goods covered under warranty ( 1 year) Current Treatment Credit note Free Replacement GST REGIME § Credit note-Under section 34 of GST Bill § The credit note has to be mentioned in return in the very same month

ILLUSTRATION Defected goods received are scraped Returns Defected Goods Customer New goods are dispatched to customer ITC to be reversed? GST levied? 47

Input Service Distributor • Section 2 (61) : ISD means an office of the supplier of goods and / or services which receives tax invoices issued under Section 23 towards receipt of input services and issues tax invoices for the purpose of distributing credit of CGST / SGST and / or IGST paid on the said services to a supplier of taxable goods and / or services having the same PAN as that of the office referred above. • Manner of distribution prescribed in Draft ITC Rules- Rule 4 Copyright 2016, Lakshmikumaran & Sridharan / Confidential

Seamless Flow of ITC - ISD Location of Supplier Location of Immovable property a. State A b. c. Supplier will charge local SGST and CGST Receiver located in State B cannot take ITC of SGST charged by Supplier in State A Blockage of seamless flow of ITC SOLUTION : Input service distributor? State B Location of Service Receiver Copyright 2016, Lakshmikumaran & Sridharan / Confidential

Transitional Provisions Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Transitional Provisions – Retrospective price increase Malanpur ( Steel Division) Ø Steel Prices are volatile- Upward or downward price variation Ø For upward price revision- GST is payable on such revision Ø Credit Note to be raised within 30 days of price revision What if credit note is not raised within 30 days? Interest payable?

Transitional Provisions : Depots eligibility for credit Manufacturing Depots Ghaziabad Bangalore • Whether credit of eligible duties held in stock will be available? Ø Credit will be available in respect of inputs held in stocks and inputs contained in semi finished goods or finished goods. ( Section 140(3) of the GST Bill)

Valuation Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Consideration for a Supply � Consideration – Inclusive definition � payment by recipient of the supply or any other person � nexus between the payment and the supply � Excise – consideration by buyer only Any payment in money or otherwise � Monetary value of any Act or Forbearance � � ‘in respect of’, a supply � ‘in response to’, a supply � ‘for the inducement of’, a supply. � Deposit – (refundable or not) – Consideration � Deposit vs Advance ? Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential. Supply Consideration

Valuation principle – “Transaction Value” Ø Value of taxable supply- Transactional Value Three conditions Price actually paid or payable Supplier and recipient of the supply are not related Price is the sole consideration for the supply If conditions not met- Resort to Valuation Rules. MRP based valuation- Not applicable under GST. Copyright 2016, Lakshmikumaran & Sridharan / Confidential

Inclusions in value of supply • Any taxes, duties, cesses, fees and charges levied under any other statute, if charged separately • Expenses incurred by recipient of supply for which supplier is liable • Incidental expenses, such as, commission and packing, charged by the supplier to the recipient of a supply • Interest or late fee or penalty for delayed payment of any consideration for any supply • Subsidies directly linked to the price excluding subsidies provided by the Central and State governments

Discounts – Excluded from Transaction Value • Discounts allowed before or at time of supply – duly recorded in invoice • Discounts allowed after supply has been made – established as per agreement – known at or before the supply – specifically linked to invoice – input tax credit reversed by recipient

Draft Valuation Rules Ø Ø Ø Value of supply where consideration is not wholly in money (Rule 1) Value when supply between distinct/related persons, other than through an agent (Rule 2) Value when supply of goods made/received through an agent (Rule 3) Value of supply based on cost (Rule 4) Residual method (Rule 5) Determination of value in case of specific supplies (Rule 6) Copyright 2016, Lakshmikumaran & Sridharan / Confidential Hierarchy of Valuation Rules: Ø Rule 4 to be applied only when value cannot be determined as per Rules 1 to 3. Ø Rule 5 to be applied when value not determinable as per Rule 1 to 4. Ø For determining value of service under Rule 5, Rule 4 can be ignored

Stock Transfer to Depot Bangalore Depot Malanpur Plant (M. P) • • What is value at which tax is to be paid? (Valuation Rules to be referred to) Additional Cash Flow Requirements IGST will be leviable 59

Other Specific Issues Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Status of Exempted Kashipur unit • GST Objective: Create one common market and free flow of credit to supply chain • For achieving objective, exemption scheme may be converted to refund scheme • First Discussion Paper on GST – Conversion of exemption schemes to refund schemes • Whether full refund of CGST or value additions limits to be prescribed for all units availing area based exemption (as existing for North Eastern States & J&K)? • Under Article 279 A of Constitutional Amendment Bill, GST Council to make recommendations on special provisions • GST Bill makes no reference to area based exemptions

Treatment of Advances Ø Time of Supply : Date of receipt of advance Advance for goods paid to SRL Receipt voucher to be issued under Section 31(3) of GST Bill • • Customer In case no supply takes place against advance payment – Refund Voucher • Issues Advance/Deposit Advance –received against identified goods? Rate to be applied for payment of GST on Advances 62

Works Contract PRESENT SCENARIO : • SRL enters into contract for supply & installation of LED lights Issue: Ø Whether works contract? OR Ø Whether composite supply? GST SCENARIO : Ø Works contract = Deemed service Ø Only immovable property covered Copyright (c) 2016. Lakshmikumaran & Sridharan / Confidential.

Job work in GST Scenario – Section 143 • • Principal Job-worker Removal from Principal • Principal • • Customer Interstate ? – permission from 4 authorities ? GST on job charges to be levied as service Job-work procedure allowed without payment of tax Job-workers is allowed to return the goods to any place of business of • Declaration by Principal for jobworkers premises as his ‘additional place of business’ if cleared from his premises Valuation of Goods will be done as per Valuation rules Specific inclusion of intermediate goods in “inputs” (In GST Bill)

GST – Practical Issues • Series of Invoices in same state with same GSTN • Installation services done at place where no registration • Sales order in the name and address of Regional Officesupply to be made from plant • Corporate Guarantee provided to related company • Free issue of material by SRL to distributor • Captive consumption • CSR by way of running schools/hospitals on FOC basis • Perquisite to employees