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Sector Specific Studies on

Construction

Information Technology

Tourism

Service

Trader

Manufacturer

Virtual Certificate Course on GST

Organised by: IDT Committee of ICAI

23 of June 2017

HIGHLIGHTS OF THE GST LAW

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“Supply”

Taxable event to be ‘supply.’

Current indirect tax regime -

‘manufacture’, ‘sale of goods’ or ‘provision of

service’.

Rate structure

Rate structure

3%, 5%, 12%, 18% & 28%,

apart from zero-rated and

exempt supplies

Registration

No concept of centralised registration

Persons making taxable supplies from a State

liable to obtain registration in every such State, where all-India turnover crosses threshold of 20 lakhs

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HIGHLIGHTS OF THE GST LAW

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Input Tax Credit ITC allowed on all inward supplies of goods and services (other than

those specifically restricted), including inter-State supplies when used or intended to be used in the course of furtherance of business

Credit on goods purchased could seamlessly be utilised to set-off

output tax liability on services and vice versa

Concept of matching of ITC introduced

Anti-profiteering

To ensure that benefits of ITC and reduction in rates of tax are passed onto end

consumers

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GOODS AND SERVICES TAX

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Construction

STAKEHOLDERS

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Developer

Sub-Contractor

Supplier

Land owner

Customer

ANALYSIS

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• Includes all forms of supply of goods or services or both such as

• sale

• transfer

• barter

• exchange

• license

• rental

• lease or

• disposal

• made or agreed to be made for a consideration by a person in the course or furtherance of business

Supply

MEANING OF WORKS CONTRACT

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•“A tax on sale or purchase of goods includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract”

Article 366(29-A)(b)

•“A contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract”

Sec 2(119) The CGST Act, 2017

•Activity of works contract as defined under Sec 2(119) being a composite supply SHALL BE TREATED AS SUPPLY OF SERVICES

Entry 6 of Schedule II to the CGST Act, 2017

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WORKS CONTRACT

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•“construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.”

Schedule II – Entry 5(b)

•“works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service”

Sec 17(5)(c) of The CGST Act, 2017 – Restricted credit

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All other works contract relatable to movables would

be treated as composite supplies - Sec 8(a) r/w Sec

2(30) of CGST Act

• A contractor engaged in fabrication, say railings or gates;

• Repair contract of plant and machinery;

• Extraction, testing and commissioning contract involving goods and services

Examples:

NATURE OF SUPPLY

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CURRENT TAX STRUCTURE

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Service Tax

• “Construction of a complex, building, civil structure or a part thereof…”

• ST @ 15% (30% of value)

• “Service portion in the execution of works contract”

• ST @ 15% (Value – value of property in goods transferred or 40%/70% of value)

• Construction activities

• 14.5% (Value exclusive of land – labour and other like charges, sub-contractor payments, etc.)

• Composition scheme for works contracts

• 4% (Value exclusive of land – sub-contractor payments)

VAT

TAX STRUCTURE UNDER GST

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GST

• Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly

• GST @ 12% (Value inclusive of land) With Full ITC but no refund of overflow of ITC – Entry 19

• “Works contract for building, construction, fabrication, completion, erection, installation…”

• GST @ 18% (Value exclusive of land) – Residual entry “All other services not specified elsewhere” – Entry 36

ISSUES TO BE ADDRESSED

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• Sale of constructed flats to land owner – treated as barter?

• “Barter” covered in scope of supply under GST

• Sale of flats to customers and land owners will have to be classified into works contract and construction services

Classification of Services

• Re-look at applicability of L&T decisionApplicability of L&T

• Right to immovable property or actionable claim – not liable to GSTTaxation of TDR

• Flats constructed for land owner, differential pricing to customers – price is not the sole consideration –valued as per valuation rules

Valuation

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ISSUES IN TIME OF SUPPLY

Implication of tax on the following would have to be examined:

Booking advance received;

Full consideration received but no agreement executed;

Invoice raised – monies not received or short received;

Demand note raised but not an invoice;

Payment received but no invoice or demand note raised;

Transfer / Assignment / Exchange / Cancellation of flats;

Free issue of material, Deduction from RA Bills

Revision in prices;

Modification charges received at the time of settlement;

Retention money and defect liability period 13

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TRANSITIONAL ISSUES

Implication of tax on the following would have to be examined:

Contract entered before AD, Supplies after AD;

Excess carry forward of sub-contractor payments;

Inputs held in stock – Credit available

Capital goods held in stock – Credit not available

Goods-in-transit; Capital goods in transit not covered;

Labour and other like charges – No more deductions under GST

Switching over from Composition Scheme to Regular

Running projects – Rate of tax to be applied?

*AD –

Appointed

day 14

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IMPACT AREAS

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• Activities undertaken by contractors like civil works contractors, electrical works contractors etc., -regarded as ‘composite supply’ of services taxed at 18%

Activities of contractors

• All purchases and services

• Received from unregistered persons liable to tax on RCM basis

RCM/ URD

• Reduction in cost of projects due to additional credits being available under GST

• Clarification issued by Ministry of Finance on reduced liability of tax on complex, building flat, etc.

Anti-profiteering

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GOODS AND SERVICES TAX

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Information Technology

STAKEHOLDERS

IT/ITES Companies

Holding Companies

CustomersSubsidiary Companies

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TYPES OF SOFTWARE

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Customised Software

• Created as per customer’s specifications

Packaged / Canned Software

• Off the shelf, readily available – no customization required

CURRENT TAX STRUCTURE

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Service tax

• “Development, design programming, customisation…”

• ST @ 15% (gross value charged by service provider)

• “Service portion in the execution of works contract” – Software maintenance activities treated as works contracts

• ST @ 15% (Value – value of property in goods transferred)

VAT

• “IT products including telecommunication equipment...”

• KVAT @ 5.5%

• Service and maintenance of IT products – works contract

• KVAT @ 5.5%

ISSUES

Does the confusion still continue on classification of software?

Is software goods or service?

Would GST end the dual levy on software?

Whether the SC judgement in the case of TCS v State of Andhra

Pradesh [2004] 137 STC 620 (SC) hold good under the GST regime?

What would be the taxability of cross charges / reimbursements of

expenses under GST?

What would be the taxability of cloud computing under GST?

Would it be OIDAR or would it be information technology software?

Will classification of services under Service Tax continue under GST?

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TAXATION UNDER GST

Sec 2(102) – Definition of services

• Services means anything other than goods, money and securities but

• includes activities relating to the use of money or its conversion by cash or by any other mode, ……………

• for which a separate consideration is charged;

Schedule II – Activities to be treated as supply of service

• Temporary transfer or permitting the use or enjoyment of any intellectual property right – Entry 5(c)

• Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software -Entry 5(d)

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PRACTICE OF INDUSTRY

Domestic Tariff Area

• Inter-State / Intra-State

• Taxable as service

• ITC available

Software Technology park

(exporting units)

• Export of software

• Zero rated

• Refund available

Special Economic Zones

• Inter-State Supply

• Zero rated

• Refund available

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IMPACT AREA

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• Re-look at nature

• of outward supplies

(Ex: On-site IT consulting would qualify as manpower services and not IT services)

Pan-India customer base

Service tax is a central levy, the need for determination of

place of supply did not arise.

Under GST, Place of supply will have to be determined for each supply

IT services whose delivery is via online modes would be taxed as supply of OIDAR services

Currently, software maintenance activities are liable to ST on 70% of the value & VAT on 75% of the value (i.e., 145% of the value is taxed). Under GST

laws – classified as supply of services

Double taxation

Accessing ERP/

software of HO/

branches

Grouping of Income

Place of

Supply

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IMPACT AREA

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• Concept of ISD

set to gain relevance since no concept of centralised registration

Cross charges and cost allocations between units to be treated as supply

Valuation – as per valuation rules

Availability of ITC on inputs like computers, software packages, etc

• No upfront exemptions in GST

• STPI units are likely to face working capital issues Refund

and working capital

Input Tax

Credit

Input Service

Distributor

Cross charge

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Software Transaction Taxes Applicable Remarks

Import of packaged

software (physical)

BCD + IGST Physical import of goods requires to be

assessed by Customs by section 5 of

IGST Act

Import of packaged

software (non-physical)

IGST Non-physical import of software liable to

payment of IGST on reverse charge basis

by section 7 of IGST

Export of packaged

software

Zero-rated No IGST payable by section 16 of IGST

Act

Export of software

services

Zero-rated Same as above. Export of services

conditions to be satisfied

Supply of packaged

software (within India)

CGST-SGST or

IGST

Taxable as goods; right-to-use is involved

in all goods supplied

Brief of tax on transactions involving software

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Software Transaction Taxes Applicable Remarks

Supply of services of development

of software

CGST-SGST or

IGST

Taxable as services (entry 5(d),

sch II)

Customization of software

already developed and supplied

separately

CGST-SGST or

IGST

Taxable as services (entry 5(d),

sch II)

Installation of software already

supplied

CGST-SGST or

IGST

Taxable as services (entry 5(d),

sch II)

Captive delivery center in another

State for software development

project in different State

CGST-SGST or

IGST

Inter-branch supply of services

under 7(1)(c) of CGST Act r/w

entry 3, sch I

Brief of tax on transactions involving software

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GOODS AND SERVICES TAX

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Tourism

TAX STRUCTURE – A GLANCE

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*Note: Abatements have been provided in case of services in relation to packaged tour,

services of solely arranging/ booking accommodation, etc.

Tour Operator

ST @ 15%*

GST @ 5% (No ITC)

Hotels

ST @ 15% (60% of value)

VAT @ 5.5%/14.5% or 4% COT

Excise Duty @ 6%/ 12.5%

Luxury Tax, as per slab rates

• No GST if tariff < Rs. 1,000

• GST @ 12% if tariff Rs. 1,000 –Rs. 2,500

• GST @ 18% if tariff Rs. 2,500 –Rs. 7,500

• GST @ 28% if tariff Rs. 7500 or higher and 5 star rating

Restaurants

ST @ 15% (40% of value)

VAT @ 5.5%/ 14.5% or 4% - COT

Excise Duty @ 6%/ 12.5%

GST @ 18%

GST @ 18% - AC restaurants with rating

of 5 star and above

IMPACT AREA

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Hotel/ restaurant chains operating across India currently have a single centralised registration. Under GST, separate State-

wise registrations will have to be obtained. Corresponding compliances w.r.t filing of returns etc., would also

multiply

Concerns w.r.t valuations likely to arise in view of

industry practice of membership offers, discounts

etc.

ITC cannot be claimed on inputs used for construction/ renovation

undertaken on own account

Perceived Challenges

Alcohol and

cooking fuel like

natural gas are

currently outside the purview of

GST. Credit cannot be claimed

on tax paid. Suitable bifurcations

are to be maintained

GOODS AND SERVICES TAX

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Trade, Manufacture & Service

TAXES TO BE SUBSUMED UNDER GST

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VATExcept tax on liquor for human consumptionLuxury Tax

Central Excise

Except tax on liquor for human consumption

Entertainment tax

Service TaxEntry Tax

Supply chain under current indirect tax regime suffers multiple levies of taxation

Adds to the cost of the product which is ultimately borne by the end-consumer.

Ex: If a trader purchases goods from a manufacturer, the excise duty component

paid by trader is included in the cost on such goods since this excise duty cannot

be utilized by him.

Various other levies like CST/VAT, entry tax, Octroi, were being added to the cost

of the final product

Race horsing and betting

tax

CASCADING EFFECT UNDER CURRENT

LAWS & IMPACT OF GST

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The supply chain is structured in such a way that the multiple levels of taxation are ultimately borne by the end-consumer.

Current Laws

• GST will remove the cascading effect of taxes and the seamless flow of input credit will rule out the possibility of taxes turning into costs.

• An anti-profiteering clause has been introduced to ensure that the benefits under GST are passed onto end-customers

GST

GST would enable businesses to take decisions on the basis of economic considerations instead of tax considerations.

Business Decisions

COMPOSITION LEVY

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Conditions to be satisfied

• Aggregate turnover does not exceed 75lakhs

• Not engaged in supply of services other than composite supplies of food & drink as specified in para 6 of Sch. II

• Not engaged in supply of non-taxable goods, inter-State supplies

• Not supplying through e-comm operator required to collect TCS

• Not a manufacturer of notified goods

Particulars Rate of tax

Manufacturers 2%

Persons engaged in composite supplies of food &

drink specified in para 6 of Sch. II

5%

Other suppliers 1%

The composition scheme under GST laws is open to manufacturers

and traders and to service providers in the hotel/ restaurant industry

DEEMED SERVICES – SCHEDULE II

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1. Transfer of right in goods or of undivided share in goods without the transfer of title

2. Transfer of business assets

3. Job work Transactions

4. Construction of a complex, building, civil structure or a part thereof

5. Transfer of the right to use any goods for any purpose (whether or not for a specified period)

6. Supply of goods being food or any drink (other than alcoholic liquor for human consumption)

Transactions involving goods

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DEEMED SERVICES – SCHEDULE II

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1. Any lease, tenancy, easement, licence to occupy land

2. Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce

3. Renting of immovable property

4. Temporary transfer or permitting the use or enjoyment of any intellectual property right (IPR)

5. Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software

6. Agreement, Refrainment and Tolerance to an act or a situation

7. Works contract as defined in section 2(119)

Transactions involving services

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DEEMED SERVICES – SCHEDULE II

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• Effectively, Sch II sets out guidelines for classification and taxation of activities either

as supply of goods or as supply of services

Ex: Execution of works contracts will be treated as a supply of services under GST.

Accordingly, when determining the time and place of supply of a works contract, the

time and place of supply rules applicable to services would be applicable, instead of

those applicable to supply of goods.

IMPACT AREAS

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TraderTax paid on input services, imports and capital goods which were hitherto not available or only partially available

Manufacturer

• Reorganisation of supply chain – movements to and from suppliers, job workers & customers

• Mitigate impacts on working capital due to locked-up credits

Service Provider

• Tax paid on inputs could seamlessly be utilised for discharging tax liability on outward supply of services

• State-wise registration would be mandatory (major impact on entities operation across India – Banks, IT companies, etc.)

Thank you

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