Why is GST so high in India?

The concept of GST is to simplify multiple levels of taxation. The simplest way to explain is when you go to a restaurant your Bill breakdown will read like Service tax - 6% (not with hotels though which is exempted up to 60%),  VAT - 14.5℅ levied on liquor, and 5.5% VAT will be levied on food. So for a bill of Rs.100, 60 which consists of liquor and 40 is reserved for food, you will be paying a tax of 16.9.

Here is a lowdown on the details of the bill,
Service tax should read as - 6% of 100 = Rs.6. (With exemption)

Without the exemption,  it should be 15℅ of Rs 100 = Rs. 15.

VAT (value added tax) on alcohol - 14.5℅ of 60 = 8.7

VAT levied on food - 5.5℅ of 40 = 2.2

So, the total tax should read as (with exemption) = 16.9

Total tax should read as (without exemption) = 25.9

Things have changed drastically under the GST regime and it will be taxed at a flat rate of 18-19%, that is, Rs.18/ Rs.19.

So, this example would have you thinking that you might think GST isn't making things any simpler for you but for a great number of products, the cascading taxes will be replaced with a single tax, and it will bring down the tax that you need to pay in some cases.

It is a move hailed by most economists, as the tax compliance will be relatively easier, the cascading effect of taxes will also be reduced and the tax collection and remittance will go up significantly. As a consumer, it is certainly a sign of good things to come. 

This is an assumption that Liquor will come under the purview of GST. Even otherwise, the same concept holds good for another sale of Goods and services provided.

All the political leaders have indeed regarded GST as a positive reform for the Indian economy but GST rates in India are considered to be the highest in the world among the 140 countries that have implemented the taxes so far.

As per the new tax system in India will have four tax slabs: 5%, 12%, 18% and 28% which puts India at the top, on the basis of all countries with the highest GST rate toppling Argentina on the way. European countries have one rate of GST as they don’t have to worry about a huge country like India. Also, a majority of Indian population stays in rural areas and their economic condition is not too great.

India followed in the footsteps of Canada and introduced a dual structure where both Centre and the states have the power to levy and also collect the taxes. 

The key issue why India has such high GST rates is because we tend to rely more on indirect taxes rather than direct taxes.

There are chiefly two ways in which the government can tax you:

1.       Direct Tax or tax on your income 

2.       Indirect tax or tax on your purchase

In developed economies, the tax structure is different as the majority of the tax revenues will be direct. Most pay income taxes barring a few exceptions.

In India, the majority of the tax revenues is not direct mostly it is indirect. Farmers and many others don’t pay income taxes in India and it is less than 3% who pay income tax.

So the government have to earn their revenue from taxing your purchases and that is a little difficult to cheat on. Since the government has to pay a large number of employees, provide subsidy and freebies to everyone and provide infrastructure and other things, high indirect taxes are a reality in India compared to most countries. This has always been the case and the scenario has not changed much. But things are changing and the price of most things are reducing.

One Person Company: Full Step By Step Overview

One Person Company is as the name suggests is a company which has only one member.  Section 3 catogorizes OPC as a Private Company for different legal purposes and with just one member. All the provisions that are linked to the private company are applicable to an OPC unless it is expressly excluded. As far as OPC is concerned it is true that one Person is a sole proprietor and his liability to the debtors of the Company is only restricted to the shareholding of the company and that his personal assets are never linked for the payment of the company’s liability, this only holds true when the Proprietorship never happens.

The Main Features of One Person Company (OPC)

1. It has one shareholder:

 
A person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company.  What does the term "Resident in India" mean? It is a person who has stayed in India for a considerable period of of time, that means not less than 182 days that immediately precedes one calendar year.

2. Nominee for the Shareholder:
One Shareholder shall nominate another person to become the shareholders at times of death or incapacity of the original shareholder.  Such nominee shall give his/her consent for being appointed as the Nominee for being the sole Shareholder.  The only person eligible for being the sole member of a one person company is an Indian citizen.

3. Director: 
The company must then have a minimum of One Director and the sole shareholder can be the Sole Director. The Company may then proceed to have a maximum number of 15 directors.

The Terms and Restrictions of OPC

A person cannot be included more than a One Person Company or even become the nominee in more than one such company.

A minor cannot become a member or be a nominee of the One Person Company or even can hold a share with beneficial interest.

Incorporation and conversion of OPC into a company under Section 8 of the Act cannot be done [Company not for Profit].

It is not possible for an OPC to carry out Non-Banking Financial Investment activities and that includes investment in securities of any body corporate. 

An OPC is unable to voluntarily convert into any kind of company unless at least two years have gone from the date of implementation of One Person Company. The only exception is the threshold limit (paid up share capital) which is increased beyond Rs.50 Lakhs or its average annual turnover exceeds Rs.2 Crores, during the relevant period.  If the paid-up capital of the Company exceeds Rs.50 Lakhs or the average annual turnover at the time exceeds Rs.2 Crores, then the OPC need to invariably file forms with the ROC for conversion into a Private or Public Company, which if it breaches above threshold limits within a period of six months.

How to Incorporate One Person Company (OPC)- A Few Guidelines

•  For the proposed Director(s) one has to obtain digital signature certificate [DSC].
• For the proposed director(s) one has to obtain Director Identification Number (DIN).
• Select a suitable company name, and for the availability of a name, one can make an            application to the Ministry of Corporate Office. 
• Draft both Memorandum of Association (MOA)and Articles of Association ( AOA)
• Sign and file different documents which include MOA & AOA with the Registrar of Companies electronically. 
•  Payment of the requisite fee to Ministry of Corporate Affairs and also for Stamp Duty. 
• A perusal of documents at Registrar of Companies [ROC] with great details.
•  Provide of receipt of a certificate of Registration/Incorporation from ROC.

What is a Compliance Review?

In a business climate states’ are constantly trying to heighten efforts to get additional revenues, and in that particular scenario entities also find themselves facing sales and tax audits. This results in a deficiency assessment. The compliance review can also be known as a pre-audit tool as it can detect potential issues and corrects any material misstatements right before an audit.

A compliance review includes the following things,

• Review the recordkeeping and also the accounting methods.
• Review of the taxability issues that are related to the goods and services which are sold or purchased.
• Review of the sales tax return preparation procedure.
• Recommend few changes, if required to current processes.
• Estimation of the potential sales tax liability exposure which results from an audit.

 In a compliance audit, what will be reviewed will vary greatly depending upon the fact, what kind of organization is it that is, whether an organization is a private or public company, what kind of data is it equipped to handle and how does it transmit sensitive data, whether it transmits or stores important sensitive financial data.

 For example, SOX requirements mean that any particular electronic communication needs to be backed up and secured with a competent disaster recovery infrastructure. Healthcare providers particularly that store or transmit important e-health records, such as personal health information, are subject to HIPAA requirements.

As far as the financial services companies are concerned, that transmit credit card data are, on the other hand, subject to PCI DSS requirements. In each of these cases, the organization should be equipped enough to be able to demonstrate compliance with the help of an audit trail, which is often generated by data coming from event log management software.

By implementing the following basic tips it helps produce a compliance quality system as discussed below, this will ensure that your high standards are accordingly met and maintained:

1. Report the Quality Assurance

One way of maintaining compliance quality is sending the final report to a reviewer before its release.  While it may seem an obvious thing to do getting your report QA checked is your last resort of defence for all your audit reports.  This ensures the following things,

• The report is read again from a fresh perspective to check spelling and other glaring errors, which are easy to overlook when you edit your own work.
• The reviewer can also identify and discuss any contentious issues or statements with the auditor right before the report is released.

2. Peer Review

Another important step which you can implement is peer review.  This is one requirement which periodically has a report reviewed by a different member of the team.  The benefits of the peer review are as follows,

• The reviewer can pick up a new approach or response to a situation.
• There are chances of a potential discovery of an fresh interpretation of a regulation.
• The auditor can consider some of the insights that their colleagues may have about the similar issues, and offer practical solutions on how to improve the report greatly.

3. Board Reporting

Some audit reports, whether good or bad need board scrutiny. It then becomes essential that the board is kept posted about the activities of the compliance function with the help of routine reporting on audit activities and outcomes. The compliance function, and specifically the compliance monitoring, should be front and centre, particularly in today’s board-level oversight activities.  This has a positive impact as it ensures that results are communicated to the highest levels.
By implementing these simple and effective tips to your review process you will persistently be able to deliver a high quality standard of compliance reporting.

What is the Transfer Price Accounting

When a product is sold from one subsidiary to another within a company, it is known as transfer pricing. It influences the purchasing behavior of the subsidiaries and may have an impact on the income tax for the company as a whole

 Transfer prices are usually used when individual entities of a huge multi-entity firm are measured and treated as separately run entities. Another name for transfer price is transferred cost.

Methods of Transfer Pricing

Here are a number of ways which can help you to derive a transfer price:

·         Market rate transfer price- The market price is the simplest and most elegant transfer price. This helps the upstream subsidiary to sell either internally or externally and can earn similar profits. It can also help you earn the highest possible profit, unlike mandated pricing schemes, which are subject to the odd profit vagaries.

·         Adjusted market rate transfer price- If you are unable to get right the market pricing technique then use the general concept, by making some adjustments to the price. For example, you can reduce the market price for the absence of bad debts, since corporate management is likely to intervene and make you pay by force if there is a risk of non-payment.

·         Negotiated transfer pricing-You have to negotiate a transfer price between subsidiaries, without considering any market price as a baseline. The main reason why this kind of situation arises when there is no discernible market price because of two reasons, one the market is very small and the second the goods are highly customized.  The relative negotiating skills of the parties impact the prices.

·         The contribution of margin transfer pricing. If you want to derive a transfer price and there is no market price at all, then substitute it by creating a price based on a component’s contribution margin.

·         Cost-based transfer pricing. Ensure that each subsidiary transfers its products to other subsidiaries, on top of which successive subsidiaries add their costs to the product. Overall it means the final subsidiary that sells the completed goods to a third party will acknowledge the entire profit linked to the product.

·         Cost-plus transfer pricing- If you do not find any market price at all on which you can base a transfer price, you could consider using a system that can create a transfer price depending on the cost of the components, which is being transferred. You can do this by adding a margin onto the cost, where you compose the standard cost of a component, add a standard profit margin, and utilise the result as the transfer price.

More and number of countries have started embracing Transfer Pricing (“TP”) and regulations which includes mandatory documentation, Transfer Pricing has indeed become very complex. In India, with the ongoing enforcement of Transfer pricing regulations in the country and continuous adjustments being made, which focusses on both new and more complicated issues focusses on a reality that TP controversies are the expensive and quite time-consuming thing to deal with and it results in double taxation of income and may lead to uncertainty.

Top 10 Tips for Managing Sales Tax Audits

The sales and tax tips help your business to develop an effective proactive sales tax strategy which helps you to get audit-ready. Businesspersons find it tough to understand how to implement the safeguards and systems, monitor the changing statutory rules, and find the right methods to collect the right sales and use the tax catering to the right jurisdiction at the right time, all this can be difficult to maintain for even the most compliance-minded businessperson. So, we have concocted the following tips to address sales and tax compliance issues.

The Top 10 Sales Tips by the Renowned Auditors in Chennai

These handy sales tips will help you sail through the Tax audits with ease.

•    Stop underestimating sales tax complexity
 As a business grows its sales tax obligations becomes more and more difficult to manage. If you underestimate the complexity of sales tax, you will unwittingly increase your risk of audit.  But in order to keep pace with the vast array of tax requirements, you have to put in intelligence, determination and the right tools.

•    Figure out tax liability by unravelling changing nexus rules
The link between a business and a taxing jurisdiction requires a sales tax collection and remittance, most businesses are unaware of the dramatic changes to the current nexus laws. To change things, review your current nexus and focus on the applicable rule changes.

•    Find out more about products and services which are taxable
 Update sales tax rates for any new products and services to bring about any related jurisdictional changes. Focus on utilities, business services, personal services, professional services and so on. Keep reviewing the taxability matrix to keep yourself updated.

•    Keep a tab on consumer use tax
Consumer use tax is mostly found as the unpaid tax in audits. Learn the main difference between sales and use tax and adopt a written use tax policy. Track and account for withdrawals from the resale inventory.

•    Focus on the changing exemption certificate rules
 Businesses that control a large number of exemption certificates find it difficult when audited to link specific certificates with specific transactions. To fix that you need to create an audit trail specifically for certificates. Quickly generate an exemption certificate summary report.

•    Find out when and where to remit sales and use the tax returns
Some companies who work extra hard to track and update changes, accurately in sales and use tax rules, but still boundaries and rate changes fail to remit their sales tax precisely.  To fix this find out whether your filing schedule has changed in applicable states and whether the states have implemented brand new e-filing or pre-payment needs.

•    Address the compliance hurdles
It is imperative that you avoid practices that may increase your risk of audit and also avoid typical filing errors. The filing errors include late payment or payment to the wrong jurisdictions. Remember to update product and service taxability according to the change in rules.

•    Know more about the applicable sales tax holiday
Get to know about products and services, which are exempt and up to what value within the purview of tax holiday rules.

•    Automate
Automation is really important right from inventory management to finance and sales, automation is what gives the companies flexibility, agility, and efficiency they need in a still-recovering market. To automate you need to identify the manual processes which show the lowest return on investments of time and money.

•    Seek help
Companies valiantly trying to collect, file, and report sales and use taxes find it really difficult to handle everything. To address this issue outsourcing and automating their payroll management can help!
To answer all your queries regarding sales tax, contact tax consultants in Chennai if you are based there and you will be able to manage sales tax without any hiccup.