Are you ready to implement GST?

In view of likely implementation of GST w.e.f. 1-4-2016 or after some time later, various activities are to be undertaken for smooth transition from the existing tax system to the GST Regime. A team is to be formed allocating the specific areas to be attended by them. Create awareness within the organization about the changes and modifications in roles/responsibilities of concerned personnel. Communicate the GST requirements through training, circulars etc to the concerned. The important task of the team is to review the impact of new tax on-

  • Contracts which under progress or completed or tendering stage with the Clients considering the present taxation terms and conditions or clauses
  • Purchase Orders for supply of goods which are under progress / quotation stage with vendors
  • Work Orders for procurement of services which are under progress / completed / quotation stage
  • Agreements for professional services
  • Carry forward of Credit
  • Pending Assessments / Appeals
  • Changes to Information Technology / EDP System

Difference between the present Taxes and proposed GST

  • VAT is not applicable on job work charges whereas GST is applicable on the same.
  • VAT is not payable on stock transfer of goods whereas GST is applicable on such goods.
  • A major defect under the State VAT is that the State is charging VAT on the excise duty paid to the Central Government, which goes against the principle of not levying tax on taxes.
  • CST is not available for input credit whereas the Central GST / IGST is available for setoff.
  • The present system of issue of ‘C’ Forms or ‘EI/EII” will be dispensed with in view of levy of IGST and availment of IGST setoff.
  • Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.

Works Contract Tax concept under present VAT Law and under GST

VAT is payable on Works Contract which is a contract to carry out any work such as building, processing or manufacturing. Such work may be for purposes of repairing or fabricating things and materials. The intention may be manifest when the prices for the goods to be used in the works contract and the charges for work / labour are given in lump sum. With the introduction of GST the concept of deemed sale of goods under works contract will become irrelevant. The elaborate scheme of reductions such as labour etc from the gross sale value will not be required since GST will have a simple structure and goods as well as services will be taxed on a uniform rate based on destination place principle.

Some of the specific issues relevant to Works Contract are given below:

i. Tax on Materials supplied by the client or employer

Under the present VAT Law the value of materials supplied by the client to the contractor or by the contractor to the sub-contractor at free cost is not taxable, since there is no sale in such transaction, whereas the value of materials supplied for a price would be treated as a sale. Under Service Tax Law even the value of free issue of materials by the client to the main contractor or by the main contractor to the subcontractor is required to be included for levy of service tax under the Works Contract Composition Scheme. Under the GST the question of inclusion of free issue of materials does not arise since the goods as well as services would be taxed on a uniform rate and the concept of composition scheme will become redundant.

ii. Works Contract Tax (WCT) Deducted at Source under present VAT Law

Under the present system WCT is to be deducted by the client from the payment to the contractors and by the contractor from the payment to the sub-contractor at appropriate rate as may be prescribed in State VAT Laws and to be deposited to the Government. Similarly under Service Tax Law, service receiver has to remit Service Tax under Reverse Charge Mechanism (RCM) in respect of certain services and specified service providers. It is not clear from the “Discussion Paper on GST” that whether the TDS provisions existing under the present State VAT Laws or the RCM under Service Tax Law will be retained or not. In case the provisions for TDS or RCM are not retained, then a suitable mechanism is to be evolved by the Government to give GST credit to the buyer immediately based on the remittance or discharge of tax by the seller in similar to the system like Income Tax TDS credit gets reflected in Form 26AS.

iii. Discharge of VAT liability either by main contractor or subcontractor under present VAT Law

Under the present VAT Law, in most of the States, either the main contractor or subcontractor can discharge the VAT liability in respect of transfer of property in goods involved in execution of the works contract. Under Delhi VAT Law both the main contractor and subcontractor have to pay VAT and main contractor has to claim VAT ITC based on Tax Invoice raised by subcontractor. Similarly under Service Tax Law also both the main contractor and subcontractor have to pay Service Tax and main contractor has to claim Cenvat credit based on invoice raised by subcontractor. Under GST also both the main contractor and subcontractor may have to pay tax on their turnover value and the main contractor has to avail input tax credit based on tax invoice of the subcontractor.

  1. Review of Contracts with Clients
  1. List out the contracts in progress and closed project sites
  2. In respect of contracts with closed sites, it is to be reviewed as to whether disputes are existing against amount of sale value or escalation pending and impact of GST on realisation of such disputed amount.
  3. In respect of contracts in progress, to review the work pending in terms of value and quantity to assess the impact of GST liability.
  4. Tax clauses or conditions are to be reviewed as to whether the price is inclusive of taxes or exclusive of taxes.
  5. Calculate the expected additional tax liability under GST if taxes are inclusive. General clause can be used for claiming of the above tax by submitting a letter to the client and follow up action is to be taken till obtaining a confirmation from him for such claim.
  6. Modify the invoicing and other systems with required Information Technology Support to make them GST compliant.
  7. Review the supplies pending under the Contract in respect of E-1 Sales and calculate the expected additional tax liability under GST for such Sales. Submit a letter to the client claiming the above tax and follow up action is to be taken till obtaining a confirmation from him.
  8. Review the Contracts with VAT Composition Scheme which was specified by the Client in the contract and calculate the expected additional tax liability under GST for the pending work. Submit a letter to the client claiming the above tax and follow up action is to be taken till obtaining a confirmation from him.
  9. Review the Service Tax applicability on Contracts and arrive the additional tax cost under GST considering the following components and initiate necessary action for collection of it:

Service Tax Applicability Price is inclusive or Exclusive Regular Method or Composition Method
Applicable Inclusive Regular
Applicable Inclusive Composition
Applicable Exclusive Regular
Applicable Exclusive Composition
Exemption claimed but disputed by the Dept Check whether exemption clause is specified or not in the contract Exemption claim disputed by the Dept
Exemption  claim without any dispute Exempted
  1. In case of un-invoiced services, the same to be taxed at the rate of Service Tax prevailing prior to GST for the service completed before implementation of GST. In case of continuous services, the portion completed before GST implementation to be taxed at the Service Tax rate and the services provided thereafter to be taxed at the Rate of GST.
  1. Study the implications of the changes due to GST on the organizational cash flows.
  1. Review of Contracts for which VAT Composition Scheme opted 

Review the contracts for which Composite Scheme has been opted under existing State VAT Laws and avail Credit of VAT or CST or Entry Tax paid on available stock under transitional provisions as on the date of GST implementation.

iii. Review of Contracts for which Regular Scheme opted

Review the contracts for which Regular Scheme has been opted under existing State VAT Laws and avail Credit of VAT or CST or Entry Tax paid on available stock of non eligible items such as consumable items, maintenance materials, lease rentals etc., on which VAT Input Credit was not availed as on the date of GST implementation.

  1. Review of Purchase Orders with Vendors
  1. To verify whether the vendor is Registered Dealer or not.
  2. Purchase Orders are to be reviewed for the supplies pending and quantify the supplies to be made before GST period and after the GST period.
  3. Tax Clauses or conditions to be reviewed as to whether price is inclusive or exclusive of taxes and in case of inclusive of taxes the rate is to be revised considering the GST.
  4. A clause is to be inserted for issue of valid GST invoice in order to avail GST Credit irrespective of the vendor whether local or from out side the State.
  5. A clause is also to be inserted for recovery of GST amount in case of mismatch of GST Credit with the Return filed by the vendor.
  6. Review of Purchase Orders placed for Supplies under E-1 Sales, High Sea Sales and other exempted Sales such as SEZ etc., and revise those Purchase Orders considering impact of GST.
  7. Review of Purchase Orders placed for procurement of Capital Goods

  1. Review of Work Orders with Subcontractors

  1. To verify whether the Subcontractor is a Registered Dealer or not.
  2. In case of Un-Registered dealer necessary steps are to be take for obtaining GST Registration if exceeded the exemption value.
  3. Work Orders are to be reviewed for the work pending in terms of quantity as well as value and whether with material or without material.
  4. Tax Clauses or conditions to be reviewed as to whether price is inclusive or exclusive of taxes and in case of inclusive of taxes the rate is to be revised considering the GST.
  5. A clause is to be inserted for issue of valid GST invoice in order to avail GST Credit.
  6. A clause is also to be inserted for recovery of GST in case of mismatch with the Return filed by the Subcontractor.
  7. Review of Piece Rate Work Contracts as to whether inclusive of taxes or exclusive taxes and necessary amendments are to be made for tax clauses.

  1. Review of Agreements with Professionals

  1. To verify whether the Professional is a Registered dealer or not.
  2. In case of Un-Registered dealer, necessary steps are to be take for obtaining GST Registration if exceeded the exemption value.
  3. Agreements are to be reviewed for the job pending value.
  4. Tax Clauses or conditions to be reviewed as to whether fees is inclusive or exclusive of taxes and in case of inclusive of taxes the rate is to be revised considering the GST.
  5. A clause is to be inserted for issue of valid GST invoice in order to avail GST Credit.
  6. A clause is also to be inserted that in case of mismatch of GST Credit with the Return filed by them the GST amount will be recovered from them.

           vii.     Carry forward of existing Cenvat / State VAT Credits

Credit availed but not utilised may be allowed to carry forward. Similarly the tax or duty paid on stock of goods as on the date of implementation of GST may be allowed to take as cenvat / input credit. Hence the following steps are to be taken:

      Carry forward the existing Credit under VAT, Service Tax, Central Excise as per the books of accounts to GST Credit Account depending upon the provisions specified in the GST Law.

      The Credit of Duty / Tax paid on stocks of goods available in raw material, work in process or finished stage which was not taken or partially taken due to disallowance or restrictions on admissibility in earlier periods. Such credit of Duty / Tax on those items can be allowed to avail under GST Regime. This could be:

  CST which was not allowed as credit on goods procured.

  VAT which was not availed / allowed as credit on goods procured.

  Entry Tax which was not availed / allowed as credit on entry of goods into the State.

  Central excise duty which was not availed / allowed as cenvat on goods procured.

  Service Tax which was not availed / allowed as credit on services.

      The Duty / Tax paid on capital goods on which credit has not been availed due to disallowance or restrictions on admissibility in earlier periods. Such credit of Duty / Tax on those items may be allowed to avail if GST applicable for output services / goods. This could be:

 CST which was not allowed as credit on goods procured.

 VAT which was not availed / allowed as credit on goods procured.

 Entry Tax which was not availed / allowed as credit on entry of goods into the State.

 Central excise duty which was not availed / allowed as cenvat on goods procured.

 Service Tax which was not availed / allowed as credit on services.

      Additional duties of excise credit for imported goods have not been availed due to disallowance or restrictions on admissibility in earlier periods by certain dealers. Such credit of Duty / Tax on those items can be allowed to avail if GST applicable for output services / goods. This could be:

 VAT credit not availed by service providers.

 All taxes on those who were not liable or exempted in earlier regime.

viii. Other requirements in relation to input credit

The following other requirements are also to be fulfilled before implementation of GST-

  1. Steps to be taken for availment of Credit on Stock 

As on the date of transition the stocks in the nature of raw material, packing material, consumables, stores, fuels, semi-processed goods, finished goods and capital goods may be physically available at various places / sites. The said stocks including capital goods may be subjected to GST after implementation. GST laws may provide one time facility for availment of credit pertaining to pre GST period say within the three months or six months period from the date of implementation of GST. Hence necessary steps are to be taken for availing credit of the tax / duty paid on such stocks as given below:

  1. The quantitative confirmation of stocks in hand as on date of transition would be required.
  2. Chalking out a plan for physical verification of the stocks in all the sites / places where they exist. This would cover the goods for resale, job work and the capital goods.
  3. The duty/ tax paying documents of stocks are to be collected and preserved for specified period.
  4. The proportionate credit of stocks based on above stocks is to be claimed.
  5. In case tax quantum is not available in the documents, then the rules are to be referred on how and to what extent credit could be claimed.
  6. The entitlement to carry forward may be subject to fulfilment of certain conditions such as transitional credit to be provided only in respect of goods that have suffered appropriate tax and in respect of which the stock records are maintained on day-to-day basis etc., or as required under the law of the appropriate State.
  7. The burden of proving that such goods have suffered tax would be on the dealer. Hence, purchase invoices along with appropriate stock records must be shown as evidence for tax paid on such inventory.
  8. The details of carry forward credit are to be provided in the declaration/ claim forms or statements as prescribed under GST Law. The declaration may require to specify the complete details of inventory or goods lying in the stock and to be filed before the jurisdictional tax officer in the prescribed manner. The Prescribed Officer on satisfaction of the claim would issue a certificate which will entitle the dealer to avail the Credit under GST and carry forward the appropriate credit.

  1. Credit on goods lying at job-workers or third party or client premises

As on the date of implementation of GST, it may be possible that the goods are lying with job-worker or third party or client. Ensure that transitional provisions are followed for availing credit of appropriate tax paid on goods lying in stock with the Job-worker. The possible situations with respect to goods lying at job-worker’s premises are:

  1. a) The goods after being processed are lying at job-worker’s premises on the implementation date and would be returned back to the principal.
  2. b) The goods are being used by the job-worker for further processing.
  3. c) The goods are in the nature of capital goods.

  1. Partial credit taken prior to GST for tax paid on capital goods 

Normally cenvat credit / input tax credit on capital goods would be available in instalments or in proportionate for the specified periods. The entitlement to credit is conditional and it is possible that certain conditions are yet to be fulfilled on the date of implementation of GST. Ensure that Transitional provisions are followed for availing credit of appropriate tax paid on capital goods.

  1. Tax paid on sale of goods in transit or pending for certification / approval 

The Goods procured in the current regime may be in transit before delivery to customer and may be received by the said customer post implementation of GST or may be pending with customer for approval. Transition provisions are to be followed to avail transitional credit on tax / duty paid on those goods in transit or pending for approval.

  1. Ensure for proper Accounting of Goods or Services procured 

As the Central Excise duty, Service Tax, CST & VAT paid on stocks in hand, semi finished goods, finished goods & capital goods may be allowed to avail as credit. Hence, the Goods or Services procured in pre GST period are to be accounted properly in the books of accounts as on the date of GST implementation. The unaccounted stocks or stocks not represented by valid duty/ tax paid invoices would not be entitled to avail credit.

  1. Sales/ Service Exempt at present but taxable under GST 

In case a product or service becoming liable for GST for first time, the credit for the goods in stock on which taxes or duties such as CST, Central Excise , VAT, CVD, SAD or Entry Tax paid or service tax paid for services for the work in progress would be eligible for availing credit. Hence proper records are to be maintained in case of exempted sales or services in order to entitle for transitional credit on those goods or services.

  1. Review of Assessments pending

Review the Assessments pending now and initiate necessary action for completion of VAT Assessments up to the latest Financial Year. The claim for refund of credit as per Returns can be made wherever possible instead of carry forward. In case refund is not materialised through Assessments then carry forward the same. Under the current taxation system, a claim might have been filed for refund which may be pending before the Assessing Authority or Adjudicating Authority for disposal. Transition provisions are to be applied for protection of pending refund claims. Similarly Credit of VAT TDS under the existing VAT Act or payment of service tax under RCM can be taken under GST Returns if remitted in transition period.

xii. Review of Tax Disputes / Appeals / Cases 

Review the Disputes / Appeals or Cases for which credit has been reversed but pending before various Authorities or Courts. The reversed credit under protest in pre GST period can be availed in GST period if settled favourably. Also the tax / duty paid under old laws may be entitled as credit under GST if those goods / services are subjected to GST.

xiii. Changes to Information Technology / EDP System

As maintenance of records is essential under GST Regime in order to comply with the provisions, necessary changes are to be made in the EDP System as given below:

  1. Insertion of New Accounting Codes for GST Expenditure in the Accounting Package and for transfer of existing Tax Receivable Accounts to GST Receivable Accounts wherever required.
  2. Insertion of New GST Rate Master i.e., SGST, CGST & IGST Rates in the Tax System
  3. Development of various Reports as per the Formats to facilitate for filing of GST Returns as given below:
  • Purchase Statement with the details of Site Name, Division Name, Description of Material, Vendor Name, Address, GST Registration Number, PO Number & Date, MRN No & Date, Invoice No & Date, Value, GST Rate, GST Amount, Payment Voucher No & Date
  • GST Credit Report for Services with the details of Site Name, Division Name, Type of Service, Service Provider’s Name, Address, GST Registration Number, WO Number & Date, particulars of input service, Invoice No & Date, Value, GST Rate, GST Amount, Service Receiver Portion for Payment under RCM, Service Provider Portion for Payment under RCM, Payment Voucher No & Date.
  • Project Site wise, Division Wise and State wise GST Receivables / Payables Reports
  • Report of output services showing the Site Name, Division Name, Type of Service, Client / Service Receiver’s Name & Address, ST Registration Number, Contract / Agreement Number & Date, Particulars of output service, RA Bill / Invoice No & Date, Date of Completion of Service, Certification Date, Value, GST Rate, GST Amount, Receipt Voucher No & Date
  • Project Site wise, Division wise and State wise GST Turnover Details.

Conclusion

The present multiplicity of rates in goods or services in India is leading to complexity in interpretation as well as in implementations. The initiation of the Government to introduce GST is a revolutionary step to ease the present complexities in indirect taxes. It brings further tax reforms in the process of economic liberalization, privatization and globalization. This process should be continued and the proposed dual GST system is to be replaced by a single unified GST system applicable to the whole country in future. It is expected to have a simple tax structure by elimination of distinction between goods & services and in turn avoids cascading / multiple tax effect on works contracts. GST should provide a clear definition to the concept of goods, services, manufacture, sale, works contract, valuation and taxable event though the relevance of those components is low under the proposed GST. It is also expected to frame simplified procedures, rules and regulations in administering the GST and enable for smooth transition from the existing system to proposed GST Regime.

 

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