Industry perspective on Indirect taxes Raghuraman Muthukrishnan Controller

Industry perspective on Indirect taxes Raghuraman Muthukrishnan Controller IBM ( India /South Asia)

BIO – Raghuraman Muthukrishnan. Current Position – Controller IBM India / South Asia Please insert Photo here � Career : 29 yrs experience in handling tax and customer fulfillment operations. ( With IBM about 4 yrs ) v Job history ( last 15 years ) � Currently Controller SEZ/STP opns IBM India / South Asia. IBM since Oct 2012 � Country tax manager IBM India / SA 2010 -2012 � Indirect tax Manager for India /SA , IBM - 2009 -2010 � Senior Contracts Manager at DELL INDIA - 2008 -2009. � Head – Commercial and legal at ACER INIDA -2005 to 2008 � Head- Commercial at BPL Ltd 1998 to 2005. Educational background Bachelors in Law ( 1991 ) Masters in Commerce and economics ( 1983 ) Hobbies �Books (philosophy and Management ) �Music ( Indian and western classics ) �Sports (playing Cricket ) �Spending time with family and occasional cooking of south Indian recipes “Individually. we are one drop…Together we are an ocean” ICA 1 presentation 2/19/2021 2

Agenda 1. Introduction 2. Tax environment in India 3. Tax reforms in the pipeline 4. Snap shot on Indirect taxes 5. Newly introduced negative list based taxation 6. Proposed Goods and Services Tax in India 7. Recovery of tax credits 8. Tax administration in India 3 3 ICA 1 presentation 2/19/2021 19 -Feb-21

Indirect tax - A profile § While indirect taxes is collection and remittance it impacts profitability if the taxes are not properly captured and paid as per the law § Delays will impact the above the line results § Business contracts will need to be vetted for right taxes Governance model Profitability Compliance Systems § Robust Compliance is the key for success § Lot of focus by the top management on the compliance since it impacts reputation and profits § IDT personnel are treated as SME for business advisory and Solutioning § System development is the key for seamless deliverables § IDT is the key player and stakeholder IDT revenues contribute to 10 % of GDP of India and therefore it is a collective effort between corporate and Government to have good governance ICA 1 presentation 2/19/2021 4 model in place 4 19 -Feb-21

Legislative shortcomings scenario in India Indirect Taxes in India Key Shortcomings 5 5 ICA 1 presentation Ø Federal and State structure of tax in India Ø CENVAT credit scheme (from 2004) and State VAT (from 2005) introduced as part of tax reforms agenda to reduce the cascading aspect Ø However, current tax base is fragmented between Centre and States Ø Existing tax dual structure has cascading effects due to multiplicity of taxes Ø This acts as a hurdle in creating a free trade/ single market § Multiplicity of taxes paid on inputs not entirely available as credits against supply of good and services resulting in cascading effect and increase in cost burden on the end customer. Key shortcomings : I. VAT paid on goods used for providing services not available as credits II. Cascading burden of excise and service tax for traders dealing with distribution of goods therefore increase in cost to the customer III. Non-inclusion of other indirect taxes (like entry tax) 19 -Feb-21 under VAT IV. Burden of CST under VAT for interstate movement 2/19/2021

India actively pursuing tax reforms - key to its transformation journey § Beginning early 1990 s, in reaction to a severe macro- economic crisis involving high fiscal deficits, the Indian tax system entered a way of reforms § Since then the Indian economy has recorded impressive growth and has transformed into an export-led open economy § Realizing that tax systems in such a growing economy should not only raise revenues but also minimize distortions and adjust to requirements of a market economy, further reforms are proposed to the existing tax structure 6 ICA 1 presentation Goods and Services Tax – Road map to be announced soon § Proposal to implement a comprehensive indirect tax structure, aimed at easier compliance and speedier system of passing credits Direct tax code - likely to be implemented soon § The Direct Taxes Code Bill, 2009, aimed at aligning Indian tax laws with internationally accepted principles and best practices has been unveiled IFRS convergence § Proposed convergence with, which is emerging throughout the world as a single, consistent accounting framework Authority for Advance Ruling to be merged § Proposal to merge the two Authorities' for Advance Rulings on Direct and Indirect Taxes to enhance efficiency in tax administration 2/19/2021

SNAPSHOT OF PRESENT TAX REGIME Central levies State levies § Customs duty - on imports into India § VAT / Local Sales tax - on sale § CENVAT (central excise duty) - on of goods within a particular manufacture of goods state, including works contract § Service tax – based on negative list and lease transactions § Central sales tax (CST) – on inter - § 2/19/2021 7 § Entry tax / octroi - on entry of state sale of goods in the state/ local area R & D Cess – on import of for use, consumption or sale technology § Ancillary taxes – luxury tax, turnover tax, additional tax, surcharge, etc Vision is to introduce National GST soon ICA 1 presentation

ACTIVITIES THAT ATTRACT INDIRECT TAXES v The following activities would typically attract indirect taxes in India: v. Sale or purchase of goods/ moveable property v. Provision of specified taxable services v. Import of goods into India v. Manufacture of goods in India v. Movement of goods between different states for sale, consumption or use within state/ municipal limits 8 ICA 1 presentation 2/19/2021

BASIC CONCEPTS Sales Tax is a tax on sale of goods Sale Basic ingredients • Transfer of property in goods, i. e. transfer of risk, ownership and reward associated with the goods • From one person to another, i. e. there should be two independent parties • For a price, i. e. there should be a consideration in terms of cash, deferred payment or any other valuable consideration 9 ICA 1 presentation Goods • All kinds of movable property Excluding • Newspapers, actionable claims, stocks, shares and securities Including • Intangibles like software, copyrights, trade licenses, etc 2/19/2021

BASIC CONCEPTS … Works contract and lease deemed to be sale Works contracts Lease Basic ingredients • Involve both supply of goods & provision of services • Transfer of right to use goods • Transfer of property in goods to take place during execution of work • Includes both operating and financial leases • Only portion of contract relatable to supply of goods liable to sales tax/Works Contract Tax (‘WCT’) Examples • Annual maintenance contracts, electrical contracts, etc 10 ICA 1 presentation 2/19/2021

KINDS OF SALE AND THEIR TAXABILITY 11 Local sales Goods remain within the same state, pursuant to the sale Taxable under the relevant State legislation Inter-state sales Movement of goods from one State to another, within India, pursuant to the sale Taxable under Central Sales Tax Act, 1956 (‘CST Act’) Export/ Import Goods sent out of or brought into India from outside India, pursuant to sale Exempt from tax as per the Constitution of India In-bond sale Import of goods pursuant to an existing purchase order of customer Exempt from tax as per the Constitution of India read with the CST Act High-sea sale Sale of goods (procured from outside India) by endorsing documents of title while goods in transit & before crossing customs frontiers Exempt from tax as per the Constitution of India read with the CST Act In-transit sale Sale of goods (moving pursuant to an interstate sale) by endorsing documents of title while goods in transit Exempt from tax as per the Constitution of India read with the CST Act ICA 1 presentation 2/19/2021

NEGATIVE LIST OF SERVICES - INTRODUCTION � Introduction of taxation of services based on negative list Negative list of services � Revamp of various provisions of the Finance Act, 1994 � Existing concepts relating to taxability of various revenue streams, classification, valuation, abatements, exemptions, exports, imports and credits scheme would change � Draft Guidance Papers issued towards the following � Definition of service � Negative list of services � Exemptions � Place of Provision of Service Complete overhaul of taxation of services 12 ICA 1 presentation 2/19/2021

Federal and State taxes proposed to be subsumed in GST Central levies to be subsumed State levies to be subsume d 13 �Central Excise Duties including additional excise duties �Additional duties of customs in lieu of excise (“CVD”) and VAT (“ACD”), i. e. . , on imports �Central Sales Tax (“CST”) �Service tax �Cesses and surcharges levied by Union, i. e. . , education cess etc § § § Central GST and State GST VAT or Sales tax Entry tax Entertainment tax Luxury tax, Tax on betting etc Cesses and surcharges levied by States ICA 1 presentation 13

Key features of GST Dual Structure of GST Scope of services Compliance 14 § ‘Dual structure’ consisting of ‘Central GST’ and ‘State GST’ § All the transactions of sale of goods or services would be liable to Central GST as well as State GST § Every state may have different laws for State GST § May widen the scope of the taxable services to cover all sort of services § Certain exemptions could be to essential sectors viz. health and education § PAN based taxpayer identification number to be issued • Periodical returns to be filed with the Central GST Authorities and the State GST Authorities GST to benefit taxpayers in terms of simplified taxation and compliance, uniformity across states, minimal cascading of taxes and reduced tax burden on consumers ICA 1 presentation 2/19/2021 14

Key features of GST…contd… Tax on goods and services § Goods and Services Tax (“GST”) – is a comprehensive value added tax on goods and services § In a GST regime, goods and services are not differentiated as they move through the supply chain Tax on each transaction § Covers levies on a transaction which commences with import/ domestic procurement/ manufacture/ production of goods or provision of services at one end and consumption of goods and services at the other end § Levied on the value added at each stage of sale and purchase Free flow of tax credits § Results in free flow of tax credits without limit or barriers of state boundaries till it reaches the ultimate consumer Tax to be borne by consumer § In a GST environment, different stages of production and distribution are interpreted as a mere pass through § Incidence of tax is borne by the ultimate consumer Subsume all taxes and levies § GST will subsume all transaction taxes and levies that are – primarily in the nature of indirect taxes and – levied on supply of goods or on provision of services 15 ICA 1 presentation 2/19/2021

INDIRECT TAX LEVIES IN INDIA Cenvat Credit scheme Introduction - CENVAT credit Inputs used in/ in relation to manufacture of final product Capital goods used in factory Manufacturer 2/19/2021 1616 Input services used in manufacture and clearance of final products from place of removal ICA 1 presentation Credit allowed of capital goods used in office of service provider or factory of manufacturer Credit allowed even if goods acquired on lease, hire purchase or loan agreement, from a financing company Credit allowed of services used in relation to setting up a factory/ office/ premise Credit allowed of services used in relation to sales promotion, advertisement, procurement, management of business such as accounting, auditing, financing, recruitment & quality control Inputs used for providing output service Capital goods used for providing output service Service Provider Input services received & consumed in relation to providing output service

Tax Administration in India – could take over 10 years to reach finality SUPREME COURT If the tax payer or the Revenue has any grievances with the Order of the High Court, they can prefer an appeal before the Supreme Court of India HIGH COURT If the assessee or the Revenue Authorities have any grievances with the Order of the Tribunal on a question of law, they can prefer an appeal before the High Court TRIBUNAL If the assessee or the Revenue has any grievances with the Order of the Commissioner or Commissioner (Appeals), they can prefer an appeal before the Jurisdictional Tribunal COMMISSIONER (APPEALS) If the assessee or Revenue has any grievances with the Order of the Joint Commissioner, they can prefer an appeal before the Commissioner (Appeals) COMMISSIONER / JOINT COMMISSIONER Based on submissions made by the assessee, an order is passed by the Commissioner (or the Joint Commissioner depending on the amount demanded) JURISDICTIONAL AUTHORITIES 17 ICA 1 presentation The service tax/ VAT/CST compliance are reported to and scrutinized by the jurisdictional authorities. If any issue is disputed, the jurisdictional authorities issue a show cause notice requiring the assessee to defend the tax position adopted. Separately, routine tax audits are conducted and disputed findings are referred to jurisdictional authorities for issuing show cause notices. 2/19/2021

Thanks !! 18 18 ICA 1 presentation 2/19/2021