GST presentation1

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An overview to GST & itsimpact on FMCG Companies

M.D.Sudharsan VP Legal & Secretarial

CavinKare Pvt Ltd

12th June, 2010



What is GST?

A tax reform legislation by a Welfare State;

A logical next step for better indirect taxadministration;

An effort to harmonize and consolidatecentral and state taxes;

A reformative exercise for avoidance of

multiple taxation; A march forward towards globalization.

What is GST?

Background of

GST?

Introduction of

IGST

Introduction of

GST

GST Model

Positive Impact

Negative

Impact

Clarification

Required



Background of GST

CENTRE LEVEL:

A Value Added Tax (MODV A T) for selectcommodities introduced in March 1986;

The same expanded to all commodities in 2002-03;

It was further expanded to cover Service Tax in 2004-05

However: ± CENV A T did not capture entire value chain prior to

manufacture;

± Only selective input credit (sectoral or usage basedcredits) permitted;

± Several central taxes not included in overall CENV A Tframe work.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Background of GST

STATE LEVEL:

States had multiple tax laws, multiple rates, cascading taxesand indulged in rate wars;

In an effort to harmonize State Tax Laws, V A T wasintroduced in April 2005;

Sate V A T brought in uniform floor rates and minimum taxslabs.

However: ± State V A T did not subsume many local taxes;

± Did not avoid cascading effect of taxes (like input CENV A T );

± Also had tax on Service Component of the Goods as part of V A T

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Learnings on VAT

Tax revenue under V A T regime has nearly doubled in five

years.

It is estimated that GST may take the GDP up between

0.7 to 1.7 %

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Introduction of Integrated GST

Centre in consultation with States have formulated an

Integrated GST Model;

The GST to be unified to include both Goods & Services;

GST to address lacunas in CENV A T & State V A T

Regimes;

India to join 150 member country already having GSTimplemented.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Introduction of GST Empowers Centre to levy Tax on Sales;

Empowers States to levy Tax on Services & imports;

Enables Centre and State to jointly levy Tax on both Goods & Services

Centre to levy & administer Inter State GSTs on inter state sales & services;

GST shifts chargeability at consumer / user end;

Subsumes many Central Acts (Excise, Additional Excise, Excise on Medicinal &

Toilet preparations, Service Tax, CVD, S AD, Surcharge and Cess); Subsumes many State Acts ( V A T /Sales Tax, Entertainment Tax, Luxury Tax,

Tax on lottery / betting, State Cess & Surcharge, Entry Tax (not in lieu of

Octroi);

Results in abolition of CST

However,

Treatment of Purchase Tax is to be addressed Alcoholic Beverages & Petroleum Products continue to suffer ED & V A T;

Tobacco products would suffer ED over GST.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



A Brief on GST Model

A Dual GST Structure introduced ² CGST & SGST;

Centre to levy CGST on all Sale of Goods and Services.

States to levy SGST on all Sale of Goods and Services.

Centre to enact legislation for CGST & model legislationfor SGST.

Framework of SGST Acts on definitions, classification, valuation, thresholds, floor rates, number of slabs,taxable events, taxable persons, exemptions etc., to be

uniform as far as possible;

Administration, enforcement, assessment & audit of

CGST by Centre & SGST by States;

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



A Brief on GST Model

Input credit on CGST can be adjusted against CGSTonly

Input credit on SGST can be adjusted against SGST

only

Threshold limit for SGST to be Rs. 10 lacs andCGST Rs. 1.5 Crs; & Appropriate number for Service

Tax;

Small traders and SSI to have compounding option

upto Rs.50 lacs turnover at 0.5% GST; Four indicative rates ² Low Rate for important goods;

Standard Rates for all Goods; Special Rate for Goldand Zero rate on exports.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Positive Impact on FMCG Companies

On FMCG Manufacturing:

A vailability of input credit on entire distribution chain

(including CENV A T, V A T, Service Tax component etc.,)

before manufacture to make input cost cheaper.

Imported Raw Materials may become cheaper in the absence

of CVD, S AD etc., FMCG specific Vexed issue of Tax on Cost Vs MRP (U/s 4

or 4 A ) of Central Excise Act will come to an end;

Harmonious classification of goods will enable avoidance of

multiple definitions and classifications by Central Excise and

Multiple State V A T Acts;

Working Capital may be saved as no periodic outgoes due to

multiple taxes.

Possibility of reduced Administrative cost due to lesser

compliance / lesser number of authorities to be dealt, withreduced resources;

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required




A vailability of e-enabled exchange of data and documentsincluding remitting, adjustment and refunding of taxes wouldmake revolutionary change in compliance.

There may not be need to operate many CF As / Godowns

across various States. This may reduce overall distribution

cost & save time.

Possibility of reduced Litigation cost due to prevalence of lesser number of legislations / authorities and related

interpretation issues like classification, valuation, taxability of products / services etc;

A vailability of adjustment mechanism against input and

output GST to release working capital would ease

compliance and avoids long wait for refunds.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required




Need to deal only with two authorities (CGST and

SGST) in entire FMCG value chain making complianceformalities simpler.

Electronic document management also reduces human

interface and related unethical possibilities.

Overall reduction in taxation to make final products

cheaper for the consumers.

A vailability of additional resources due to overall cost

saving to increase re-investment into the business.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required




On FMCG Selling & Distribution

Enhanced threshold limits at Rs.10 lacs for SGST toencourage Small time traders

Threshold limit at Rs.150 lacs to attract CGST to encourageSmall Traders and SSI.

Enhanced threshold for compounding option at Rs.50 lacsto make compliance by small traders simpler and cheaper.

Liability to suffer GST only on value addition coupled with

e-enabled input/ output adjustment by traders would leavemore cash flow into the small trade.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Negative Impact on FMCG Companies

In case of alcohol based deodorants / perfumes, the lacunae

of inability to adjust input CENV A T under State Excise isnot addressed by GST regime;

Compliance cost of modification of S AP, introduction of

resources to handle electronic handling of CGST, SGST &IGST may increase capital investments;

Levy of GST on Stock Transfers would make additionalinvestments locked in the form of GST outgo, to be adjusted

only upon actual sale of the goods;

Applicability of Central Excise and Sales Tax / V A T on Tobacco, Alcoholic beverage & petroleum products makes

survival of excise and V A T regimes. Instead appropriateadjustments / rates to be put in under GST itself for all

products and Excise and V A T Acts to be repealed.

Non inclusion of Stamp duty under GST mechanism does

not address cascading taxes in property transactions

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Negative Impact on FMCG Companies

Recommendation to set model SGST legislation, to be

adapted by every State would make multiple legislations anddisparities from State to State and from product to product.

Like in V A T regime, States would exceed their brief in theform of more slabs and higher rates. On the contrary, there

should be single SGST legislation with powers to States to

modify by remissions. In the eventuality of surplus / unadjustable SGST / CGST

availability, working capital would still be locked;

States would not prefer manufacturing FMCG companies

whose consumption is not in the home State as SGST is only

to the credit of consuming State.

Introduction of GST Model without publication of the draft

act in full, identifying / indicating the roles of the officials &

training all intermediaries across the value chain may result

increased chaos.

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Clarifications Required to Assess Impact

No clarity as to whether or not Purchase Tax is to besubsumed under GST;

No clarity on how Tax Holiday zone like Uttaranchal etc. would be treated to continue the excise holiday benefits;

Also no clarity as to how Sales Tax deferral and exemption

benefits given by different States would be maintainedseamlessly;

No clarity as to how other input credits will be permitted tobe availed in case of Excise Exempt commodities / Excise

free zone companies;

No clarity as to how SEZ and Export Zone·s products

would be treated as regards input credit and sale underDT A;

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required



Clarifications Required to Assess Impact

Threshold limit for CGST applicability on Service

Component is yet to be announced.

No clarity as to how transitional credit would be given back

/ refunded to companies pending change over to GST

regime; No clarity as to why Octroi and Municipal Taxes cannot be

conveniently clubbed under GST model?

IGST appropriation under clearing house mechanism is not

clearly spelt out;

What is

GST?

Background

of GST?

Introduction

of IGST

Introduction

of GST

GST Model

Positive

Impact

Negative

Impact

Clarification

Required

Documents

GST presentation1