Gst industry - impact on different sectors

K.VAITHEESWARAN
ADVOCATE &TAX CONSULTANT
Flat No.3, First Floor,
No.9, Thanikachalam Road,
T. Nagar,
Chennai - 600 017, India
Tel.: 044 + 2433 1029 / 4048
402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bangalore – 560 001, India
Tel : 080 22244854/ 41120804
Mobile: 98400-96876
E-mail : vaithilegal@yahoo.co.in / vaithilegal@gmail.com
www.vaithilegal.com

 Passed by the Lok Sabha on 06.05.2015
 Select Committee Report released
 The Bill has to be passed by the Rajya Sabha.
 In terms of Article 368, the amendment requires
2/3rd majority and since List in the Seventh Schedule
are being amended, the amendment has to be
ratified by legislatures of not less than one half of
the States.
K.Vaitheeswaran - AllCopyrights Reserved

 Path breaking tax reform
 Harmonization of taxes
 Elimination of tax as a cost
 Possible elimination of unwanted business structures
 Long way to go
 Too many compromises
 Complex legal structure
 Cascading effect continues
 Not a simple law
 Huge potential for conflict

 Both Government and industry are keen to implement GST.
 Governments are looking at increasing the tax base and tax
collections through GST.
 State is looking at GST as a window for taxing services.
 Centre is looking at GST to go beyond the point of
manufacture.
 Industry wants GST to eliminate the cascading effect of
taxes.
 Industry considers GST as a path breaking tax reform in the
field of indirect taxes.

 GST is a tax on both goods and services across the supply
chain.
 It is levied at every stage of supply.
 GST is a levy which commences from the manufacturer /
producer / trader and goes upto the retailer .
 An effective and efficient GST system would provide for
elimination of the cascading effect of taxes.
 The GST on inputs is generally available as a credit for set off
against the GST on the output supply. There could be
restrictions which would however defeat the concept of GST.
K.Vaitheeswaran

 Implementation of GST in a federal structure has its
own complications.
 The Federal, State and even the Municipality have
their own powers and sources of revenue.
 122nd Constitutional Amendment provides for dual
GST as well as an IGST.
 Instead of one GST that exists in most countries,
India would have three GSTs namely CGST, SGST
and IGST.
K.Vaitheeswaran

 Excise Duty
 Countervailing Duty
 Customs Duty
 Duty of 4% under Section 3(5) of the CustomsTariff
 ServiceTax
 Products specific cess
 Research and Development cess

 VAT
 CST by originating State
 Entry tax
 Octroi by Municipality
 Entertainment tax
 Luxury tax
 Stamp duty and Registration fee

 GST Report on payment processes.
 GST Report on refund process.
 GST Report on registration.
 Order given to Infosys for building and maintaining
technology network crucial for implementing GST system
across the country for five years (Rs. 1,380 crores).

 Excise duty charged by the manufacturer forms part of
the price in the supply chain.
 Since the cenvat credit is linked with manufacture, the dealer
cannot set off the excise duty against any other tax.
 CST purchases form part of cost as there is noVAT credit.
 VAT has a cascading effect since sale price includes excise,
customs, CVD.
 Cost savings on account of GST due to elimination of
cascading effect.
 Understanding of one’s own business; supplier’s business;
customer; and understanding the changes that GST would
bring about in all three segments.

• Multiple rates
• Different rates in different States
• Different definitions
• Multiple forms
• Cascading effect due to CST purchases
• Deviations
• Refunds

 Origin based tax
 No credit on CST purchases leading to
cascading effect
 Exempt stock transfer related distortions
 Complex law on stock transfer and transit
sales
 CSTVs.VAT

 CGST would be a levy by the Central Government through
law made by the Parliament.
 SGST would be a levy by each State through law made by
State Legislature.
 IGST would be a levy by the Centre through law made by the
Parliament on the supply of any goods and / or services in the
course of inter-State trade or commerce.
 IGST would also apply on a supply of goods and / or services
in the course of import into the territory of India.

• Assuming an IGST rate of 20%, the tax calculations would be as under
when a manufacturer sells goods fromTamil Nadu to Karnataka.
• Prices increases
• Sale price assumed to be constant.
• Cenvat Credit not factored as GST credit would be available on raw materials .
• Only possible savings in cost would be non-vatable CST of 2% becoming non-vatable new
additional tax of 1%.
• The savings in cost on account of restructuring of the business or alteration of the
supply chain and the impact in terms of price reduction has not been factored.
Existing System Proposed System
Sale Price 1,00,000 Sale Price 1,00,000
Excise Duty @ 12.5% 12,500 Excise Duty Nil
CST @ 2% 2,250 New AdditionalTax @ 1% 1,000
IGST @ 20% 20,000
Inclusive Price 1,14,750 1,21,000

Purchase Price
including ED and CST
taken as cost
1,14,750 Purchase Price excluding
IGST but including new
additional tax.
1,01,000
Credit Nil Credit – IGST 20,000
Cash flow saving Nil Cash flow saving 20,000

Purchase Price
including ED and CST
taken as cost
1,14,750 Purchase Price excluding
IGST but including new
additional tax.
1,01,000
Credit Nil Credit – IGST 20,000
Cash flow saving Nil Cash flow saving 20,000
Profit @ 10% on cost 11,475 Profit @ 10% on cost 10,100
Sale Price 1,26,225 Sale Price 1,11,100
KVAT @ 14.5% 18,302 CGST (assumed @ 7%) 7,777
SGST (assumed @ 13%) 14,443
Inclusive price 1,44,527 Inclusive Price 1,33,320
No credit for KVAT
payment
IGST Credit of 20,000 is
available for payment of
CGST of 7,777 and SGST
of 14,443

 In the current system stock transfers are
exempted under Section 6A of the CST Act.
 Input tax reversal.
 Excise duty is payable on stock transfer.
 Depots and godowns have been created for
non-business reasons.
 Restructuring of business would involve
closure of many godowns / branches / depots
and business would drive such structures.

 Inter-State stock transfers would attract IGST.
 Currently manufacturers pay excise duty on stock
transfers but do not pay CST.
 Currently traders doing stock transfer do not pay
any excise duty or CST.

 Since the depot is part of the same organisation huge cash outflows
on stock transfers.
 Impact for a couple of months after introduction of GST.
 Even though depot can avail IGST credit, the set off can happen only on
sale which may not be immediate.
 Dealers ability or willingness to hold stock.
 Relevance of depot / godowns / C&F.
 Assuming goods are sold directly to customer without stock transfer
IGST and 1% new tax would be recovered from the customer within a
normal credit period.
 The 1% levy is still an issue in the Parliament and may be dropped .
 Zero CST Vs. IGST

 Explanation to Article 269A provides that supply of goods or
of services or both in the course of import into the territory
of India shall be deemed to be a supply of goods or services
or both in the course of inter-State trade or commerce.
 Parliament by law may formulate principles for determining
when a supply of goods or of services or both takes place
in the course of inter-State trade or commerce.
 When goods are imported from abroad into Tamil Nadu
(Chennai Port), the importer apart from customs duty will
now be required to pay IGST to the Centre.
 The IGST paid by the importer would qualify as credit.
 Impact on make in India.

Assessable value 100 Assessable value 100
BCD 10% 10 BCD 10% 10
Value 110 Value 110
CVD 12% 13.2 IGST (assumed @ 20% with a
cascade on BCD)
22
Education cess on CVD Nil
S&HE Cess 1% Nil
Customs Duty for cess 23.2
Customs EducationCess 2% 0.46
Customs S&HE Cess 1% 0.23
Value for SAD 123.89
SAD @ 4% 4.96
Total Duty 28.85 Total Duty 32

 Trader can avail credit of IGST and set it off against CGST / SGST on
local supply or against IGST on inter-State supply.
 Increased competition from traders who import and sell – through
pricing.
 Additional duty of 1% would apply on inter-State supply of goods but
not on imports.
Landed cost
including BCD, CVD
& SAD
128.85 Landed cost including BCD 110
No credit IGST credit 22

 Will dealers be willing to hold stock
 If limited stock is held by dealers due to huge IGST
outflow, depots would not disappear and huge cash
outflows for the manufacturer would be inevitable.
 Zero CSTVs. 20% IGST
 In stock transfers there is upfront outflow of IGST whereas
the turn around time for sale could be higher.
 If customer cannot take credit, IGST is prohibitive.
 Assuming hospitals are not in GST, IGST rates charged
would be extremely high.
 Government as a buyer will have to pay more compared to
the current rates.

 Inter-unit movement
 Job work transactions

 CGST would be a tax on supply of goods or services
or both except taxes on the supply of alcohol for
human consumption.
 It would be levied and collected by the Centre.
 CGST would be levied across the value chain.
 CGST rate

 Price of the manufacturer may reduce only marginally to the extent of 3% to 4%.
 Credits not factored since existing law as well as proposed law allows credits.
 Tax collections to State would come down from 16,313 to 13,000.
 The savings in cost on account of restructuring of the business or alteration of
the supply chain and the impact in terms of price reduction has not been
factored.
EXISTING PROPOSED
Sale price 1,00,000 Sale price 1,00,000
Excise duty @ 12.5% 12,500 SGST (assumed @ 13%) 13,000
Value forVAT 1,12,500 CGST (assumed @ 7%) 7,000
VAT @ 14.5% 16,313
Inclusive price 1,28,813 Inclusive price 1,20,000
Total tax outflow on
transaction
28,813 Total tax outflow on
transaction
20,000

EXISTING PROPOSED
Purchase price 1,12,500 Purchase price 1,00,000
VAT credit 16,313 SGST credit 13,000
Profit @ 10% of cost 11,250 CGST credit 7,000
Sale price 1,23,750 Profit @ 10% of cost 10,000
VAT @ 14.5% 17,943 Sale price 1,10,000
VAT credit 16,313 SGST @ 13% 14,300
NetVAT outflow 1,630 CGST @ 7% 7,700
Net SGST outflow 1,300
Net CGST outflow 700
Price to customer 1,41,693 Price to customer 1,32,000
 Tax collections to State would come down from 1,630 to 1,300

 Currently, service tax is paid to the Centre at the rate of 14%
with an additional SBC of 0.5%.
 Currently, a PAN India Organisation generally pays service
tax at one location.
 New Law makes a distinction between supply of services
within a State and supply of services in the course of inter-
State trade or commerce.
 Parliament would make law for determining when a supply
of goods or of services or both takes place in the course of
inter-State trade or commerce.
 An IGST rate of say 18% or 20% would be prohibitive and
much higher than existing rates.

 Higher rates
 Disadvantage for an existing player compared to a new
player
 Possible tax outflow incase the current Rule 3 of POP is not
retained and place of supply rules provide for service receiver
to be registered
 Increase in compliance cost
 Refund claims in multiple States
 B2C
 Issues with reference to accumulation of credit at corporate
office or head office
 Telecom, insurance and banking

 Significant inter-State sales.
 CST charged has been a cost to the customer and a factor in price
negotiation.
 Better pricing due to availability of credit for the buyer.
 Review of depots and godowns created across the country and possible
scaling down of such depots.
 Major savings on CST purchases since IGST would qualify as a credit as
against CST 2% which is a cost.
 Increased credit on services due to elimination of the concept of
manufacture.
 Elimination of cascading effect (except to the extent of the 1% duty).
 Cost savings on account of business review.
 Cash outflow on account of transactions coming into the tax net (job
work).

 FMCG companies have a mix of own manufacturing plants; manufacture
through job workers.
 Excise duty for most products are on MRP basis with abatement.
 Job worker pays excise duty based on the selling price of the principal
manufacturer.
 NoVAT on job worker.
 No service tax on job worker as the activity is manufacture.
 FMCG sector has a long supply chain involving manufacturers – depots –
wholesale distributor – sub-distributor – dealer – retailer.
 Major business decisions will have to taken in the context of dealers / C&F /
depots / job workers.
 GST would initiate a leaner supply chain.
 Huge cost saving on account of savings in inventory cost insurance,
transport, rentals, security, employee costs, local compliance, etc.
 Savings on account of elimination of cascading effect of VAT on excise duty;
elimination of entry tax and octroi; elimination of CST cost.
 ManufactureVs. Import

• Jewellery exempted from excise duty.
• Attempted levy on branded jewellery in 2005.
• Branded jewellery completely exempted in 2009.
• Another round of attempted levy from 01.03.2011.
• VAT on jewellery at 1%.
• In the GST regime, would jewellery qualify for a
special rate?

 Significant inter-State sales.
 CST charged has been a cost to the customer and a factor in price
negotiation.
 Better pricing due to availability of credit for the buyer.
 Review of depots and godowns created across the country and possible
scaling down of such depots.
 Major savings on CST purchases since IGST would qualify as a credit as
against CST 2% which is a cost.
 Increased credit on services due to elimination of the concept of
manufacture.
 Elimination of cascading effect except to the extent of the 1% duty.
 Cost savings on account of business review.
 Cash outflow on account of transactions coming into the tax net (job
work).

 GST as against exemption from excise duty.
 Complex chain of manufacture with multiple job
workers working in sequence.
 GST rate could be higher than existing VAT rates.
 Inter-State supply would involve savings in cost
since CST would be eliminated and IGST would
qualify for credit.
 Cost savings on account of GST credits on rentals /
insurance / security / infrastructure relevant to
outlets.
 ManufactureVs. Imports.

 ED which is a cost and forming part of the purchase price
would be eliminated.
 Savings on account of elimination of cascading effect of VAT,
CST and ED.
 Whatever GST that is charged by the vendor would qualify as
credit.
 Possibility of cost savings on account of credit in respect of
other purchases by a retailer subject to legislation.
 Service tax on renting, insurance, maintenance, support,
consultancy, currently a cost and in future GST on these
services can be set off against GST on supply by retail
outlet.
 Impact on e-commerce.

 Business impact
 Lean supply chain
 Relevance of multiple depots and warehouses.
 Impact on sourcing – freedom to source intra as well
as inter State
 Withdrawal of exemptions.
 Optimization of credits.
 Repeal of CST Act and consequent withdrawal of
high sea sales and transit sales.
 Working capital management with huge demands
for tax outflow in the initial months

 Lead time
 IT systems of companies
 Long term contracts
 Quoting for projects
 Transition

 Make or Buy ?
 Can the supply chain be scaled down and
whether there would be a social cost to such
an exercise?
 Can sourcing be centralized ?
 Multiple warehouses or centralized
warehouse?
 Relevance of depots?
 Relevance of intermediaries?
 Market share as against profits

 Date of coming into force of GST
 Technology
 Rate
 Industry preparedness
 Training
 Learning and unlearning

 Constitution AmendmentAct
 Constitution of GST Council
 IGST Model Law
 CGST Law
 SGST Laws
 Place of Supply Rules
 Procedure for registration, refunds, returns
and payments.

K.VAITHEESWARAN
ADVOCATE &TAX CONSULTANT
Flat No.3, First Floor,
No.9, Thanikachalam Road,
T. Nagar,
Chennai - 600 017, India
Tel.: 044 + 2433 1029 / 4048
402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bangalore – 560 001, India
Tel : 080 22244854/ 41120804
Mobile: 98400-96876
E-mail : vaithilegal@yahoo.co.in vaithilegal@gmail.com

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