Taxation laws have laid down the taxes applicable on import and export of goods and services. In the current tax regime, laws of Customs duty, Excise, Service Tax and VAT lay down the tax treatment of imports and exports. In the GST regime, Excise, Service Tax and VAT will be subsumed into GST and customs duty will continue to be levied separately. Let us understand the tax implication on imports and exports under GST in comparison to the current regime.

Current Regime

Import of goods

In the current regime, a person who imports goods has to pay customs duty, countervailing duty (CVD), and special additional duty (SAD). CVD is levied at a rate equivalent to the rate of Excise on such goods, if they had been manufactured in India. SAD is equivalent to VAT on the goods in India. CVD and SAD are imposed to bring the imported product’s price to its true market price in India. If the importer uses the imported goods to manufacture dutiable goods in India or provide taxable services, CVD paid on inputs is available as tax credit. If the importer is just a trader, CVD on imports is not available as credit. SAD paid on import is eligible for refund, subject to conditions. However, no credit is given on customs duty paid and it becomes a cost for the importer.

Let us see an example to understand the levy of import duties in case of import of goods in the current regime.

Example: Manoj Apparel in Bangalore, Karnataka purchases apparel from a supplier, Oz Designs, in Sydney, Australia.

Tax calculation

* Exchange rate taken is 0.021 AUD = 1 Rupee

Import of services

A person who imports services has to pay Service Tax on the imported service at the Service tax rate applicable in India. The importer can claim tax credit of the Service Tax paid on imports.

For example: Rajesh Apparels in Hyderabad, Telengana, avails fashion designing services of Rs. 50,00,000 from Kaushi Designs in Colombo, Sri Lanka.

Tax calculation

Exports

In the current regime, export of goods and services is zero rated, i.e. rate of tax on exports is 0%. An exporter can also claim refund of the tax paid on inputs used to manufacture/purchase/provide the exported goods or services.

GST Regime

Import of goods

In the GST regime, a person who imports goods has to pay customs duty and IGST. The difference here is that CVD and SAD levied on imports in the current regime will be replaced by IGST under GST. IGST will be levied at the rate applicable to the imported goods in India. An importer can claim full tax credit of IGST paid on imports. Hence, importers who were unable to claim credit of CVD or SAD in the current regime can now claim full tax credit of the IGST paid on imports. However, no tax credit will be given on customs duty paid and it remains a cost for the importer under GST also.

Let us take an example to understand the levy of import duties in case of import of goods in the GST regime.

Example: Manoj Apparel in Bangalore, Karnataka purchases apparel from a supplier, Oz Designs, in Sydney, Australia.

Tax calculation

* Exchange rate taken is 0.021 AUD = 1 Rupee
**Assuming GST rate of 18% on apparel.

Import of Services

Under GST, a supply will be considered as an import of service when-

1. The supplier of the service is located outside India.
2. The recipient of the service is located in India and
3. The place of supply of the service is in India.

For example: Rajesh Apparels in Hyderabad, Telengana, avails fashion designing services of INR 50,00,000 from Kaushi Designs in Colombo, Sri Lanka

Location of supplier: Colombo, Sri Lanka

Location of recipient: Hyderabad, Telengana

Place of supply: Place of supply will be the location of the recipient, i.e. Hyderabad, Telengana.

Hence, this supply is an import.

Tax calculation

* Assuming GST rate of 18% on fashion designing services

Exports

Under GST, exports will be zero rated, similar to the current regime. An exporter can also claim refund of the tax paid on inputs used to manufacture/purchase/provide the exported goods or services.

Export of services

Specific conditions have been laid down for a supply to be considered an export of service under GST. These are:

1. The supplier of the service is located in India.
2. The recipient of the service is located outside India.
3. The place of supply of the service is outside India
4. The payment for the service has been received by the supplier in convertible foreign exchange and
5. The supplier and recipient are not establishments of the same person.

For example: Rohan Consultants in Mumbai, Maharashtra, provides business consultancy services to Abey’s Engineering in Singapore. The payment for the service has been received in Singapore Dollars.

Here,

Location of supplier: Mumbai, Maharashtra

Location of recipient: Singapore

Place of supply: Place of supply will be the location of the recipient, i.e. Singapore.

Payment for the service: Payment for the service has been received in convertible foreign exchange, i.e. Singapore Dollars.

Relationship between the supplier and recipient: The supplier and recipient are distinct persons.

Hence, this supply qualifies as an export of service. Rate of tax on the supply will be 0%.

The levy of taxes and treatment of taxes in case of imports and exports largely remain the same under GST in comparison with the existing laws. In case of an importer, full input credit will be available on the IGST paid on imports and additional input credit will be available on the GST paid on all types of inputs used or intended to be used in the course of or for the furtherance of business. Similarly, in the case of an exporter, refund will be given on the tax paid on all inputs used in the course of business. Overall, costs of import and export are expected to reduce under GST and compliance is expected to become easier with the convergence of multiple tax laws into one law.

Accounts and records are the primary source of data for any organization’s financial reporting. Every law of Direct and Indirect Tax in our country also mandates that information in a prescribed manner has to be captured and preserved for a certain period of time. These accounts and records form the basis for returns filed by tax payers under each law.

Current regime

In the current indirect tax regime, every tax law mandates certain accounts and records of transactions to be maintained for a specific period of time, apart from the regular books of accounts.

Under Excise, the general records to be maintained are the RG-1 register (Daily stock account of excisable goods), Form IV register (Register of receipt or issue of raw material), invoice book and job work register

Under Service Tax, the suggested records include the bill register, receipt register, debit/credit notes register, CENVAT credit register, etc

Under VAT, the records to be maintained include purchase records, sales records, stock records, VAT account containing details of input and output tax, works contract account, etc

These records are required to be retained for at least 5 years from the end of the financial year in which they were effected.

GST regime

Under GST, the activities of manufacture, provision of taxable service and sale of goods will have a common law and hence, businesses can now maintain consolidated information which was maintained separately earlier.

Under GST, every registered taxable person is required to maintain correct accounts of the following details at the principal place of business specified in the registration certificate: –

1. Manufacture of goods
2. Inward and outward supply of goods and/or services
3. Stock of goods
4. Input tax credit availed
5. Output tax payable and paid

If more than one place of business is specified in the registration certificate, accounts relating to each place of business must be kept at the respective places.

Maintaining books and records in electronic form will be ideal and convenient for accurate and timely compliance under GST.

Persons whose turnover during the financial year exceeds Rs. 1 crore

In addition to maintaining the accounts specified above, a registered person whose turnover during the financial year exceeds Rs. 1 crore is required to,

• Get the accounts audited by a Chartered Accountant or Cost Accountant and
• Submit a copy of the audited annual accounts and a reconciliation statement in Form GSTR- 9B while filing the annual return in Form GSTR-9.

In the reconciliation statement, the Chartered Accountant or Cost Accountant is required to certify that the value of supplies declared in the annual return reconciles with the audited annual financial statement.

Persons owning or operating a warehouse or godown

An owner or operator of a warehouse or godown or any other place used for storage of goods, irrespective of whether he is registered or not, is required to maintain records of the consignor, consignee and other details which are yet to be prescribed in the law.

How long should accounts and records be retained?

Every registered person is required to retain accounts and records for 5 years from the due date of filing of annual return for the year to which the accounts and records pertain.

For example: For accounts and records pertaining to Financial Year ’17-’18, annual return must be filed by 31^st December ’18. These accounts and records must be retained till 31^st December ’23.

The first and foremost task for you, as a business registered under the current law, is transiting to GST (Goods and Services Tax). While it is important to know the fundamentals of GST, it is also very critical for you to understand GST transition provisions available, and take necessary actions to ensure a smooth transition to GST and leverage on transition benefits.

You will need to review your accounting and reporting procedures, procurement, logistic decisions, and so on in advance to avail the appropriate GST input tax credit.

For better and ease of understanding, we have categorised GST transition provisions for each of the below business types:

• GST for Manufacturer
• GST for Trader
• GST for Service Provider

GST for Manufacturers

Some questions you may have:

• What will happen to the balance input tax credit available on the last day, before GST to be implemented?
• What will happen to the input tax credit on capital goods which is yet be availed?

Today, the manufacturing and sales activity is governed by a separate indirect tax system. Manufacturing activity is covered by Central Excise and Sales is covered under State VAT/CST. Typically, a manufacturer should be registered under Excise as well as State VAT/CST.

As a manufacturer, you need a thorough understanding about the related provisions, and very importantly, you need to know the answer to “what should I do today for tomorrow’s GST readiness?”

Scenario 1: Availed CENVAT and Input VAT Credit

The balance CENVAT and input VAT credit available on the last day, prior to date on which GST is implemented, can be carried forward as Input credit.

What does this mean?

• The closing balance of CENVAT and input VAT credit should be reflected in the last return filed by you
• The credit as reflecting in the return should be allowed as CENVAT and input VAT under current law, and
• It should also be allowed as input tax credit under GST

Today, a manufacturer other than the Small Scale Industries (SSI- whose turnover does not exceed Rs 4 crores) should file their monthly returns in Form ER-1, and  SSI quarterly returns in Form ER-3. They also need to file monthly or quarterly VAT return forms, as prescribed by their respective states. The amount of CENVAT carried forward in Form ER-1 or Form ER-3 as on the last day i.e., the day before GST is implemented will be allowed to be carried forward as CGST (Central GST) input tax credit. The input VAT credit in VAT return forms will be carried forward as SGST (State GST) input tax credit.

Let’s understand this with an example –

Super Cars Pvt Ltd, a car manufacturer located in Karnataka is registered under Excise and Karnataka VAT. As on 31st March, 2017, the Form ER-1 and VAT Form 100 (monthly return form for Karnataka) of Super Cars Pvt Ltd is as given below:

 

As per Form ER-1 and VAT Form 100 of March 2017, Super Cars Pvt Ltd has a closing CENVAT balance of Rs 25,000 and input VAT credit of Rs 5,000. Can Super Cars Pvt Ltd. carry forward the CENVAT and input VAT credit?

Yes, the closing CENVAT balance of Rs 25,000 and Input VAT of Rs 5,000 are fully eligible for Super Cars Pvt Ltd to carry forward. This is because Super Cars Pvt Ltd. satisfies all the 3 conditions explained below:

• The CENVAT of Rs 25,000 and input VAT of Rs 5,000 are carried forwarded in the return.
• Under the current statute, CENVAT and Input VAT are allowed as Input Tax Credit.
• In GST, the same is allowed as Input Tax Credit.

Now, for Super Cars Pvt Ltd, CENVAT will be a CGST credit, and Input VAT will be carried forwarded as SGST credit. This can be utilized to set-off the liabilities in the order as prescribed.

Scenario 2: Unavailed CENVAT credit and Input VAT on capital goods

Currently, under Central Excise, CENVAT credit should be availed to the extent of 50% in the current year, and the remaining in the subsequent year. Similarly, VAT paid on purchase of capital goods will not be fully available as Input VAT immediately. Depending upon the state VAT laws and the type of capital goods purchased, the Input VAT can be availed,

• In instalments spread over different financial years
• As credit after commencement of commercial production
• At reduction value, and so on.

Due to this prevailing restriction for availing CENVAT credit on capital goods, there could be some unavailed CENVAT and Input VAT on the date of transitioning to GST.

Let us discuss with an example to understand better

Super Cars Pvt Ltd purchased machinery on 1st February, 2017. The details of the transaction are shown below:

As per the current CENVAT provisions, Super Cars Pvt Ltd is allowed to avail CENVAT up to 50% in the current year, and the remaining during the subsequent years. Also, according to the VAT provisions of Karnataka, input VAT credit can be availed only after commencement of commercial production. Let’s assume that commercial production was to begin in the month of June’17.

Considering the scenario – Super Cars Pvt Ltd availed

• 50% CENVAT i.e. Rs 6,250 in the current year (2016-17).
• Remaining CENVAT of Rs 6,250 in subsequent year (2017-18).
• Input VAT credit after commencement of commercial production, eligible in 2017-18.

Will Super Cars Pvt Ltd be allowed to carry forward the unavailed CENVAT of Rs 6,250 and input VAT credit of Rs 16,313 on transition to GST?

Yes, Super Cars Pvt Ltd is allowed to carry forward the unavailed CENVAT credit on capital goods, provided these conditions are satisfied:

• Under the current statute, CENVAT and input VAT are allowed as input tax credit.
• It is admissible as input tax credit in GST.

Super Cars Pvt Ltd satisfies all the conditions, and they are eligible to carry forward the CENVAT and input VAT credit.

The current state indirect tax regime has provided a simpler compliance for small dealers known as the Composition Scheme. Under this scheme you,

• Pay taxes only at a certain percentage of turnover
• File periodic returns only (usually on a quarterly basis)
• Have an option of not having to maintain detailed records or follow tax invoicing rules
• Are not allowed to take Input Tax Credit (ITC)
• Are not allowed to collect tax on sales

Thus for smaller businesses, it is simpler to calculate tax liability. This saves time and energy involved in maintaining detailed records.

Let us understand how the composition scheme is different with the following example:

Composition Levy in the GST Regime

Similarly, the same benefit is provided under the GST regime. Small dealers and businesses could opt for the composition scheme known as Composition Levy. Under this scheme, a Composite Tax Payer pays tax only at a certain percentage of his turnover.

Threshold Limit

• NE Including Sikkim – Aggregate turnover of the person having same PAN of above Rs 10 lakhs during the financial year but does not exceed Rs 50 lakhs.
• Rest of India – Aggregate turnover of the person having same PAN of above Rs 20 lakhs during the financial year but does not exceed Rs 50 lakhs.

Rate of Levy

• Rate of levy is yet be notified
• Rate of levy will not be less than 1%

Conditions for a Composite Tax Payer

Apart from the threshold limit, the following conditions are applicable for a composite tax payer:

• No Interstate supplies – A composite tax payer should not engage in interstate supply of goods and / or services and imports.
• Payment of composition tax – If the composite tax payer is in the trade of supplying goods and services, then composition levy will be applicable for both supply of goods and supply of services.
• Does not have to collect tax – The composite tax payer does not have to collect tax on all his outward supply of goods and / or services.
• Applicable for all business verticals under the same PAN – Composition levy will be applicable for all business verticals operating within state or interstate under the same pan.
  What does this mean?
  An individual with different business verticals, like:
  • Mobiles & Accessories
  • Stationery
  • Franchisee

  In the above scenario, the composition scheme will be applicable for all three business verticals. The dealer cannot opt for any one business vertical to fall under the composition scheme.  For example, if the business vertical’s place of business is in Karnataka & Kerala for a single PAN, each of the business vertical in that particular state should have only ‘Intra-State(within state)’ supplies.

• Cannot claim Input Tax Credit – The composite tax payer is not eligible to claim input tax credit on all his inward supply of goods and / or services.
  What does this mean?
  If a dealer chooses to be a composite tax payer, he cannot claim input tax credit even if he makes taxable purchases from a regular taxable dealer. Ideally, the taxable amount would be added to the composite tax payer’s cost.

Return Forms for a Composite Tax Payer

A composite tax payer is required to file quarterly return and annual return. Types of returns and details to be furnished are explained below:

In the current composition scheme, a composite dealer has to declare only the aggregate turnover of sales. He is not required to declare invoice wise details. In GST, the composite tax payer will file his returns with the invoice wise details of inward supplies which is auto-populated based on Form GSTR-1 filed by his supplier along with the aggregate turnover of outward supplies.