Analysis of the GST Law - KPMG

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Analysis of the GST Law: Is your business prepared for the change? Santosh Dalvi Partner and Head Western region – Indirect tax, KPMG in India

30 November 2016 KPMG.com/in

Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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GST rollout – timelines GST Constitution amendment came into effect from 16 September 2016 Constitution of GST Council

Further steps Enactment of GST legislation by Centre and States Commencement of GST regime

(expected by early December 2016) (from April 1, 2017)

This leaves only three months to prepare for GST transition

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Government geared for 1 April 2017 GST roll out Detailed FAQs on the model GST law, vetted by officers of the Central and State Government, released on 21 September 2016 Deliberation on Compensation formula for revenue loss to states

Draft GST Rules approved by GST Council on 30 September 2016

Consensus on the GST rates achieved, NIL, 5%, 12%, 18% and 28% + Cess on demerit goods

Union Budget 2017 – preponed to 1 February 2017 in preparation for GST regime

GST Enrollment of existing taxpayers - GSTN Portal made operational on 8 November 2016

Amended Model GST draft law, sent to States for comments and released in public domain

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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What is changing - taxation structure fundamentals Dual GST structure, with equal power to Centre and State to levy tax on all transactions

Single destination based consumption tax, subsuming multiple taxes

Common and consistent tax structure across India, ease of doing business

Proposed ‘seamless’ credit regime eliminating cascading effect of tax

Ease of compliance with online filing and eliminating physical interaction

Business decisions based on commercial parameters, rather than tax considerations

Widening of tax base with integration of all taxes and interlinking of transactions

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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GST – What is changing Goods

Service Current regime Single registration across India

Separate registration for manufacture and sale of goods

 Tax @ 15%

Total tax applicable @ 27.5% to 32%

Taxes collected and retained by central government

Selling state collects and retains taxes on sale and Central government collects and retains taxes on manufacture GST regime

 Statewise registration for state GST and central GST

 One registration for each state and central GST

 Tax @ 18%

 Total taxes applicable @ 5%, 12%,18%, 28%

 Taxes collected and retained by central government and consuming state

 Taxes collected and retained by central government and consuming state

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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How does it impact -elements determining taxation Supply of goods’ or ‘services’

Taxable event – Supply Place of Supply

(Replaces sale, manufacture, provision of service)

Time of Supply

Valuation

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Supply Services means anything other than goods •

Levy of GST on actionable claims, immovable property



No levy of GST on securities

Free supply of goods/services to attract GST (between related/distinct persons) • • • • • •

Levy of GST on inter-state stock transfer of goods Levy of GST on inter-branch supply of services, cost allocation, reimbursements Movement of equipment / machinery from one state to another Inter-state movement of containers/cylinders for supply of goods or services Importation of services from related persons Permanent transfer/disposal of business assets where ITC has been availed

Tracking, identification and valuation of transaction without consideration is a challenge!!

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Place of Supply

Different place of supply for Import/Export and local freight/courier transactions:

Supply of hotel and convention/events – Place of event/ /Convention/ accommodation –





Place of performance



Destination of goods



Location of recipient



Pick up location

Impact on B2B credit if not registered at such place

Place of supplier of services for •

Intermediary services



Banking/financial services



Hiring of means of transport

Separate place of supply rules where supplier or recipient of services is located outside India •

Negative impact on marketing support services

Difficulty in tracking and mapping differential place of supply

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Classification

Composite Supply / Mixed Supply of services and/or goods Freight, Terminal Handling Charges, Inland Haulage Charges Packaged tour Transportation/insurance along with supply of goods

Impact of classification on Rate of tax Place of supply Time of supply 2 digit and 4 digit HSN code in invoice

Supply of variety of goods/services © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Valuation Invoice value need not necessarily be the transaction value – Several additions to be made

Subsidies provided by government excluded from the taxable value

Valuation of stock transfer of goods and services

Discounts to be allowed as deduction from taxable value – •

If duly recorded in invoice



Post supply discount if preagreed and proportionate credit reversed

Interest or late fee or penalty for delayed payment

Whether GST is payable on the actual sale price to customer or at a landed cost

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Input tax credit Restriction on Input Tax Credit •

Works contract services when supplied for construction of immovable property (other than plant and machinery)



Goods or services received by a taxable person for construction of an immovable property, other than plant and machinery, even when used in the course or furtherance of business  Negative impact on construction of building, malls, commercial/office spaces, industrial construction

Motor vehicles/other conveyances (except when used for specified purpose) Goods/services used for personal consumption Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples Expenses incurred for use by employees such as food and beverage, outdoor catering, insurance Denial of Input Tax Credit on default in payment of tax or non-compliance by supplier Online matching of inward and outward supply for allowing credit Credit needs to be reversed with interest if payment is not made to the supplier of services within 3 months

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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IT and compliance State wise single GST return State-wise registration for State GST and Central GST and rigorous return process Change in tax master, vendor/customer master, item master etc. Transitioning of customer/vendor in the GST regime Reporting and matching of transactions between input and output Reconciliation and closure with vendor and customer on mis-match reports Denial of credit due to mis-match or variation in details State wise annual return alongwith audited copy of annual accounts and reconciliation statements Significant increase in compliance for service companies

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Anti-Profiteering Measure •

Authority to be constituted to ensure Anti-Profiteering •



Objective is to assess whether a reduction in price is commensurate with the benefits on account of lower GST rate and higher Input tax credit

Authorities to assess and levy penalty if price being charged has not been reduced

Provision aimed to control expected rise in inflation on account of GST

Maintaining records to substantiate reduction in price highly cumbersome

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Electronic Commerce Operator Electronic commerce operator liable to Collect tax at Source at the rate of 2% on net value of taxable supplies

For specified categories of services, obligation on the electronic commerce operator to register and discharge GST

Electronic commerce operator responsible to submit details of transactions effected on their portal

Liability to pay GST on digital services provided to unregistered consumers in India by a nonresident service provider

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Impact on manufacturing/trading sector Seamless tax credits and price competitiveness in domestic and export market

Opportunity to drive supply chain efficiencies Network/warehousing optimization

Impact on price/margin Impact of tax rate changes

No provision for credit of closing stock on transition date to a trading company

Supplies to SEZ to be zero rated © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Impact on services sector Compliance requirement multiplies for financial services sector Ambiguity on inter-unit supply valuation

Entertainment tax along with service tax and VAT to get subsumed in GST – thereby reducing tax cost for Media and entertainment sector

Tax on actionable claims negative impact Litigation around dual taxation resolved for IT sector

Possible cash flow impact due to conversion of exemption into cash refund scheme

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Multi-dimensional impact on business Cash Flows

Fiscal / P&L impact

Business Processes

Pricing GST – Business and fiscal impact Supply chain

Accounting

Marketing

IT systems

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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GST: A business transformation opportunity Optimise distribution network by consolidation of warehouse and revisit procurement pattern

Renegotiate vendor contracts

Revisit inventory norms, pricing, distributor margin, competitive benchmarking

Rejig IT systems to meet elaborate reporting and compliance requirements

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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What do I need to do and how much time do I have? 6. Post implementation

1. Set up a core GST team within the co.

— GST payments, filings and returns

— Senior member from HO

— Resolve transition related issues

— Representatives from tax, supply chain, IT

06

01

5. SOP and training — Operation-wise SOP — Training to operational staff

05 4. Implementation

Being GST ready

— Make changes to business processes — Make changes to IT systems

04

03

2. Impact analysis — Tax, information technology, supply chain

02

— Pricing, topline and bottom-line — Specific business aspects — Systems and business processes — Implementation plan

— Implement pricing and cost changes

3. Issues to represent

— Communicate with vendors, customers

— Identify issues for representation

— Obtain statutory registers, records, and returns

— Engage with policy makers

Representation to government if the industry requires additional time to be GST ready

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Need for a spotlight on India by overseas HQ India business decisions can be global based on commercial parameters Opportunity to preserve / enhance stakeholder value

Cross border free supply transactions comes under tax

Seamless data interchange between corporate tax, TP and GST Global control through robust automated compliance processes – Investments into people and IT platform Enhanced opportunities for Investments – Digital India, Make in India, Smart cities, ease of doing business

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Contact us Rishi Chugh Leader- US-India Corridor KPMG LLP Charlotte, NC T: +1 704-335-5397 M: +1 704-975-2595 E: [email protected]

Santosh Dalvi Partner and Head, West India Indirect Tax KPMG in India T: +91 22 3090 2685 M: +91 98200 88389 E: [email protected]

Himanshu Mandavia Lead- India Center of Excellence KPMG LLP New York City T: +1 212 954 6348 M: +1 917 969 0475 E: [email protected]

Follow us on: kpmg.com/in/socialmedia

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Roopal Bhargava Senior Manager SALT - India Centre of Excellence KPMG LLP, Los Angeles T: +1 213 593 6328 M: +1 424 653 4630 E: [email protected]

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Analysis of the GST Law - KPMG

Analysis of the GST Law: Is your business prepared for the change? Santosh Dalvi Partner and Head Western region – Indirect tax, KPMG in India 30 Nov...

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