GST Impact of GST on manufacturing sector N

GST Impact of GST on manufacturing sector N. MATHIVANAN Principal Partner NEW DELHI - MUMBAI - BENGALURU - CHENNAI - HYDERABAD - AHMEDABAD – PUNE KOLKATA - CHANDIGARH - GURGAON – ALLAHABAD - LONDON Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

AGENDA § Introduction to CGST, IGST, Compensation Cess, UTGST Act, 2017 § Registration § Taxable event – supply § Valuation § Input Tax Credit § Transition Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 2 2

Introduction to CGST, IGST, Compensation Cess & UTGST Acts Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

What is GST? � Goods and Services Tax (GST) is a comprehensive tax on all Goods and Services � � Multi-stage Tax Destination-based consumption Tax Value Added Tax Seamless credit across entire supply chain – Foundation of the GST System Taxes subsumed: Central Excise Duty Additional Customs Duty (CVD) Special Additional Duty (SAD) State VAT / Central Sales Tax Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. Octroi and Entry Tax Service Tax State and Central Cesses 4

Various Taxes Contemplated under GST IGST CGST SGST/UTGST Compensation Cess Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 5

Applicability – CGST, SGST, UTGST and IGST Transaction CGST+SGST Transaction CGST + UTGST Transaction C B A Location of Supplier A Place of Supply Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. A Andhra Pradesh B Telangana C Chandigarh 6

Applicability of CGST, SGST, UTGST and IGST Inter – State Supply Local Supply Export Supplier Consumer IGST (Goods) Consumer IGST (Services) IGST CGST + SGST/ UTGST Import International Border Consumer Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. State Border § § Central Government : CGST & IGST State Government : SGST Dual Control One Registration (per state) 7

Compensation Cess Why ? Central Government has agreed to compensate states for any revenue loss arising out of implementation of GST for a period of 5 years and thus compensation cess was proposed to be levied on “SPECIFIC GOODS” to raise money Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. On what and how much ? Pan Masala Tobacco and Tobacco products 135% Ad Valorem Max of Rs 4, 170 per 1000 sticks + 290% Ad Valorem Coal Rs 400 per tonne Aerated Waters 15% Ad Valorem Motor Cars and Vehicles (Entry Number 8703) 15% Ad Valorem Any other supplies 15% Ad Valorem 8

Impact on manufacturing sector Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

Registration Existing • Premises based • LTU Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. GST • • State wise Option – Business Verticals 10

Taxable Event Existing • Manufacturing Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. GST • Supply 11

Taxable Event – Supply (Inclusive Definition) Natural Meaning Supply as understood in common parlance 1. A word of widest import 2. To furnish or to serve Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. Specific Inclusions/ Exclusions 1. Supplies for consideration 2. Import of services for a consideration 3. Supplies without consideration (Schedule I) 4. Supply of Goods or Supply of Services covered in Schedule II to be treated as supply. 5. Activities not to be treated as Supply (Schedule III) 6. Activities undertaken by Central/ State Govt/ Local authority as may be notified - not to be treated as Supply 12

Schedule I - Supply without a consideration Schedule I Permanent transfer/ disposal of business assets where input tax has been availed on such assets Supply between related persons or distinct persons specified in section 25, when made in the course or furtherance of business Gift not exceeding fifty thousand rupees in value in a financial year by an employer to employee to not to be treated a supply of good or services or both Supply of goods 1. By principal to agent where agent undertakes to supply such goods on behalf of the principal 2. By agent to principal where agent undertakes to receive goods on behalf of principal Importation of services by taxable person from related person or any of his establishments outside India, in the course or furtherance of business Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 13

Normal Supply Chain – Manufacturing Sector Foreign supplier Contract Manufacturer/ Job Worker Warehouse/Regional Distribution Centre (Brand Owner) Manufacturer (Brand Owner) Retailer Raw Material Distributor Customer Finished Goods Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 14

Supply GST on supply made by manufacturer With consideration Sale of manufactured goods Trading of goods Inter-state stock transfers Without consideration Shared services Free supplies Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 15

VALUATION § Consideration § Valuation principle – “Transaction value” § Inclusions / Exclusions - Transaction value § When to refer to Valuation Rules? § GST Valuation Rules Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

Valuation principle – “Transaction Value” � Contract based levy – Service Tax and Sales Tax � Intrinsic value of goods – Excise and Customs � GST – Sec. 15 (2) Intrinsic value ? Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 17

Valuation Principle – “Transaction Value” Value of taxable supply of goods and/services Transaction value is • Transaction value • The price actually paid or payable for the said supply of goods and/or services • Where the supplier and the recipient of the supply are not related and • Price is the sole consideration for the supply. ü No MRP based Valuation Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 18

Inclusions in Value of Supply � Amount incurred by recipient of supply for which supplier is liable � Contract for construction including all materials � Steel supplied by the recipient � Amount paid to the supplier reduced � Interest/Late Fee/Penalty for delayed payment of any consideration � Penalty for any other purpose? � Subsidies directly linked to the price � Excludes subsidies provided by Central/State Govt. Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 19

Discounts - Transaction Value � Discounts allowed before or at the time of the supply � duly recorded in invoice � Discounts after the supply has been made established as per agreement � entered into at or before the supply � specifically linked to invoice � ITC attributable to the discount has been reversed � Year end discount/ Turnover discount /Volume discount ? Unjust enrichment ? Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 20

Inclusions in Value of Supply � � � Incidental expenses charged by supplier � At the time or before the delivery. � Inclusion of freight till customer premises? Ex Works supply? Taxes other than CGST, SGST, UTGST and GST(Compensation to States) Act � GST on Excise Duty paid on Tobacco and petroleum products � Custom Duty on imported goods � Tax on tax? CGST, SGST/UTGST excluded from transaction value? Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 21

When to refer to GST Valuation Rules? � Valuation Rules to be referred when: Price is not the sole consideration � Related party transactions � Specific type of business transactions � � Money changer, insurer, air travel agent, dealer of second hand goods , pure agent etc Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 22

When to refer to GST Valuation Rules? � GST Valuation Rules � � � � Supplies without consideration – Schedule I Supplies between the Head Office – Branch? Cost allocation of shared services? Captive consumption? Stock transfer? Related parties? Principal – Agent? Barter / Exchange Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 23

Draft Valuation Rule 1: Consideration not wholly in money Value of supply shall be : OMV – Open Market Value Consideration in Money + Equivalent Value of Consideration not in money* Where OMV is not available and amount is known at the time of supply -- Where such value is not determinable -- Value of supply of like kind and quality Where such value is not determinable -- Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. Consideration in Money + Rule 4 or 5 24

Draft Valuation Rule 2: Valuation of supplies to distinct or related person Value of supply shall be : Where full credit is Any Invoice value (proviso Rule 2) available -- Where full credit is not available -- OMV – Open Market Value Where OMV is not available -- Value of supply of like kind and quality Where such value is not determinable -- 110% of cost of production /acquisition/manufacture etc. (Rule 4) Where such value is not determinable -- • Rule 4 can be bypassed in case of services Residual Value (Rule 5) Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 25

Job work Scenario Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

Job Work - Definition “Job work” means undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression “job worker” shall be construed accordingly; Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 30

Job work in GST Scenario Job-worker Principal Removal from Job-worker � 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 Removal from Principal of business of Principal � Declaration by Principal for job-workers premises as his ‘additional place of business’ if cleared from his premises � Valuation of Goods after expiry of 1/3 years? Depot Removal From depot Customer Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 31

Input Tax Credit Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

Job work in GST Scenario Job-worker Principal Removal from Job-worker � 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 Removal from Principal of business of Principal � Declaration by Principal for job-workers premises as his ‘additional place of business’ if cleared from his premises � Valuation of Goods after expiry of 1/3 years? Depot Removal From depot Customer Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 33

Credit Mechanism – Intrastate / Interstate Supply Output Supply Inputs & Input Services Local Supply (CGST+SGST)* CGST+SGST Local Purchases (Goods & Services) CGST SGST IGST/CGST/SGST CGST SGST Inter-State Purchases (Goods &Services) *No cross utilization across the states Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. * No cross utilization between CGST and SGST Inter State Supply (IGST) IGST CGST SGST IGST 34

Input Tax Credit Mechanism under GST ITC for: Can be utilized to pay for: ITC for: IGST * CGST SGST Can be utilized to pay for: ITC for: IGST CGST * CGST Can be utilized to pay for: SGST * SGST CGST SGST Credit available *Caveat: Input GST of one state registration cannot be utilized to pay output GST for another state registration Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. Credit Not available 35

Conditions for availing credit 7 1 • Invoice Matching • Supplier has paid tax • Compliance rating of supplier No Credit beyond specified period Valid document 6 Monthly returns are filed by 20 th Limiting factors 2 ITC on last Lot / Installment Buyer has filed GST Return 5 Receipt of Goods / Services Supplier has paid tax 3 4 Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 36

Transition to GST §Transitional Provisions Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential.

A Few Situations. . Carry forward of credit lying in returns Change in price after the appointed day Carry forward of unavailed capital goods credit ITC of inputs held in stock ITC of goods/services in transit Goods lying with Job worker Pending litigation refund claims Pending litigation demands Treatment of long term contracts Impact of levy of earlier taxes on transactions Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 38

Carry Forward of Credit Lying in Returns � Carry Forward of Excise Duty/Service Tax Credit � q q � Carry Forward of VAT/Entry Tax � � Conditions: Tax is not paid under composition scheme under GST Such credit is admissible as ITC under GST Act Registered person has furnished all the returns in the previous 6 months before appointed day Said credit does not relate to goods manufactured and cleared under exemption notification Similar provision is expected in the final State GST Acts as per Model law These credits can be utilized against outward supplies made under GST regime. • Whether credit in relation to inverted duty structure has been restricted? • Meaning of goods cleared under exemption notification? Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 39

ITC of Inputs Held in Stock (1/3) � The following persons are eligible to avail the ITC of eligible duties in respect of input and inputs contained in SFG and FG as on appointed day: Persons who were not liable to be registered under the earlier law � Persons engaged in the manufacturing of exempted goods or provision of exempted services � Persons who were providing work contract services and availing of the benefits of Notification 26/2012 � First stage dealers/Second stage dealers/Registered importers � � Depot of a manufacturer Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 40

ITC of Inputs Held in Stock (2/3) � Invoice or prescribed documents based credit � Invoice not be older than 12 months � Non-invoice based credit (Deemed) to traders with a condition to pass on benefit of reduced prices Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 41

ITC of Inputs Held in Stock (3/3) Issues � Invoice older than 12 months? � What is prescribed documents? � Supplier of service-cum-trader? Whether covered under deemed credit proviso? � How appropriate is 40% deemed credit? � Whether inter-state supplies are eligible under deemed credit proviso? Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 42

Inputs/Semi-finished goods lying with job worker � To be returned/supplied within six+two months from the appointed date � To be declared by the manufacturer & Job worker Copyright (c) 2017. Lakshmikumaran & Sridharan / Confidential. 43

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