Goods and Service Tax- A Detailed Explanation

India has joined the bandwagon of indirect tax reforms. The Empowered Committee of the State has announced in the first discussion paper on 10.11.2009, that there will be a plan to levy a “Dual GST Scheme” in India, read both the Center and the States will have the power to levy the GST taxes.

The scheme though originally was supposed to be realized from 1st April 2016, several hurdles pushed the date further as the ruling party did not have the majority in the Rajya Sabha back then. Most of the states too expressed their grievances against the tax for one reason or the other. 

Constitutional alteration - While the Center has the power to impose the GST tax services till the production stage, the States have the onus to tax sale of goods. While each of powers cannot be swapped with one another as the States cannot levy a tax on supply of services while the Centre cannot impose a tax on the sale of goods. The Constitution does not put the power baton on any one of them (State or Center) exclusively, to levy a GST tax. Furthermore, the Constitution falls short of empowering the States to levy import taxes. Therefore, the Constitutional Amendments empower the Centre to levy taxes on the sale of goods and States and also to impose both service tax and import tax.

What is Goods and Services taxes?  Goods and Service Tax or (GST) is a comprehensive tax levied on the manufacture, sale, and the consumption of goods and services. The Center and the State governments do away with all the indirect taxes.

GST is levied on goods and services under which it is mandatory for each person to pay tax on his output and is imperative to pay the (ITC) or input tax credit on the tax paid on its inputs and outputs. 

Aims and objectives of GST: The Goods & Service Tax (GST) aims to do away with the double taxation or the cascading effect of taxes on both the production and distribution cost of goods and services. Eradicating the cascading effects of the tax on tax which burdens the final consumers will greatly improve the competitiveness of the ultimate goods and services in the market. This competitiveness has a number of positive repercussions and one of them is certainly a positive impact on the GDP growth of the country.

It goes without saying that the Introductionof a GST substituting the existing multiple tax structures of Centre and State taxes is certainly welcomed with open arms by the consumers. GST will most importantly eliminate the cascading effect on the sale of goods and services. This will impact the cost of goods. The cost of goods shall also decrease chiefly because the tax on tax effect will be done away with, forever. 

GST is transparent and embodies current technology. As most of the activities related to the GST is technology-driven. Activities such as registration, application for refund, filing returns, and response to notice are all completed on the GST Portal. This accelerates the entire process. The GST regime is likely to bring a whole new era in the country and the common people will certainly benefit from it in the long run. 

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Full Overview of Tax Structure in India

India has a well-structured tax system catering to its large population. Taxes are a necessary evil because it is the largest source of income for the government. This money is then utilized for different purposes and projects which then can lead to the development of the nation.

Central and State Governments along with local authorities such as municipal corporations call the shots on taxes. The government is unable to levy any tax unless it is passed as a law.

Here are some of the important features of the taxation system in India:


1.The Important Role of the Central and State Government

There are specific roles for both of the central and state government. The Central Government of India imposes taxes like customs duty, service tax, income tax, and central excise duty.

The state governments, on the other hand, imposes taxes such as professional tax, income tax on agricultural income, value-added tax (VAT), land revenue, state excise duty and stamp duty. The local bodies are also allowed to collect some taxes such as property tax, octroi and some other taxes on different services such as drainage and water supply.


2.Different Types of taxes

Taxes can be categorized under two headings namely direct and indirect taxes. The difference between the two lies in their implementation. Direct taxes are paid by the assessee while indirect taxes are levied on goods and services.

 A) Direct taxes
 Direct taxes are administered to individuals and corporate entities and simply cannot be transferred to others. The plethora of taxes include income tax, gift tax, and wealth tax.

Income tax
According to the Income Tax (IT) Act, 1961 every assessee with total income more than the maximum exempt limit has to pay this tax. Both the tax structure and rates are annually prescribed by the Union Budget. This tax is imposed at the time of each assessment year, starts on 1st April and ends on 31st March.

B) Indirect taxes
Indirect taxes are, as the term denotes, not directly paid by the assessee to the government authorities. These indirect taxes are levied on goods and services and collected by those who sell goods or offer services. Here are the most common indirect taxes in India. Some of the important indirect taxes are value-added tax (VAT), customs duty, octroi, excise duty, service tax and goods and services tax.

3. Revenue Authorities

CBDT or The Central Board of Direct Taxes is an integral part of the Department of Revenue under the Ministry of Finance. This body not only provides inputs for policy but also plans direct taxes in India besides being responsible for the administration of direct tax laws via the Income Tax Department.

CBEC
The CBEC or The Central Board of Excise and Customs is like the CBDT is also an integral part of the Department of Revenue under the Ministry of Finance. It is a nodal national agency whose services include administering central excise duty, customs and service tax in India.

 CBIC
Under the GST regime, the CBIC or the Central Board of Indirect Taxes & Customs provide post-legislative approval. The CBIC would look after all the directorates, field formations and provide assistance to the government in policy making in lieu of GST, continuing with central excise duty levying customs functions.

The Indian taxation system has undergone several modifications over the years. The income tax rates have been standardized providing income tax rates with simpler governing laws helping common people understand the same.

Importance and differences between direct and indirect taxes?

Taxes are enforced by the governments on their citizens, it is an involuntary fee levied on corporations or individuals by a government entity, whether national, regional or local in order to back government activities with finances.

Taxes are a monetary burden laid upon individuals or property owners to lend their support to the government. The taxes are not a voluntary payment rather they are an enforced contribution towards the government.

Taxes collected are utilized by the government for various expenses such as defense, healthcare, education and different infrastructure facilities such as roads, dams, highways and so on.

The Two forms of taxes:

Basically, there are two forms of taxes namely Direct and Indirect taxes. Indirect taxes actually have the ability to shift the burden to the end taxpayer. Direct taxes, on the other hand, allow the government to collect the taxes directly from the consumers. Indirect taxes allow the government to bring in stable and assured returns via the society.

Difference between Direct Tax and Indirect Tax:

There are different implications of direct and indirect taxes on the country. However, both types of taxes are important for the government as taxes include the major part of revenue for the government.

Key differences between Direct and Indirect Tax are:

A direct tax is levied and paid by the individuals, firms, Hindu Undivided Families (HUF), companies etc. whereas the indirect tax is finally paid for by the end-consumer of goods and services.

In case of direct taxes, the burden of tax cannot be shifted while burden can be shifted as far as the indirect taxes are concerned.

• Tax evasion is possible in the collection of direct taxes while tax evasion is not possible as far as the indirect taxes are concerned as the taxes are charged on goods and services.
• A direct tax is instrumental in reducing inflation, whereas indirect tax may increase inflation
• Direct taxes have better allocative effects when compared with indirect taxes as direct taxes put much lesser burden over the collection of indirect taxes. This is where the collection is scattered across the various parties and consumers’ preferences of goods are distorted because of the price variations because of indirect taxes.
• Direct taxes helps in reducing inequalities and are far more progressive than indirect taxes which enhance inequalities and are hence considered to be regressive.
• Indirect taxes involve far lesser administrative costs owing to the stable and convenient collections, while direct taxes include a number of exemptions and also incur higher administrative costs.
• Indirect taxes are veer towards growth and progress as they discourage consumption and help increase savings. Direct taxes, on the other hand, reduce savings and also discourage investments.
• Indirect taxes have a larger coverage as different members of the society are taxed on the sale of goods and services, whereas direct taxes are collected only from specific people in respective tax brackets.
• Additional indirect taxes are levied on detrimental-to-health commodities such as cigarettes, alcohol and so on. This dissuades over-consumption and thereby helps the country in a social context.
• Both the direct and indirect taxes are important for the country as they impact the overall economy.  Direct tax includes income tax, wealth tax, corporation tax etc. Indirect taxes, on the other hand, are applied to the sale and manufacture of goods and services. Both direct taxes and indirect taxes are collected by the central and respective state governments and it depends on the kind of taxes to be levied.

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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.