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Tag: GST

Every government looks to boost exports, because of the economic growth it offers. The current government has taken several initiatives. GST is one of the biggest transitions for India. There have been many debates on it. Our intention is to help exporters understand ‘How to make GST work better for exporters’.

Importer Exporter Code (IEC):

PAN acts as IEC in the GST era commenced on 1st July 2017. GSTIN is the identifier at the transaction level for every import and export. GSTIN would be used for credit flow of IGST paid on import of goods.

refund

Export procedure:

The supply of goods or services or both can be made under bond or Letter of Undertaking (LUT), with or without payment of integrated tax. The exporters can claim the refund of unutilized input tax credit. The exporter must file an application for claiming input tax credit directly through the common electronic portal or through a facilitation center notified by the GST commissioner.

The registered person need not file any application for refund of IGST, paid for the supply of goods. The shipping bill with GST invoice details shall be deemed as the application for refund of IGST. The details of the relevant export invoices contained in FORM GSTR-1 get transmitted through the common portal to customs system and a confirmation of the export get transmitted back to the system, electronically.

The customs system processes the claim for refund, upon receiving the details of export manifest furnished in the return FORM GSTR 3. The amount equal to IGST paid in respect of each shipping bill gets credited to the bank account of the applicant mentioned in the registration.

The existing shipping bill formats are modified to comply with the IGST law. ARE-1 procedure is followed only for the commodities of applied central excise act.

Sealing of containers:

Central Board of Excise and Customs (CBEC), revised the procedure of sealing of the containers to be effective from 01.09.2017. Containers arrive at the port under three categories: containers stuffed at factory/warehouse under self-sealing, stuffed under the supervision of central excise officer, stuffed and sealed at the Inland Container Depot. For ease of doing business and uniformity, the board has decided to do away with the sealing by the CBEC officers. The procedure of self- sealing is simplified as follows:

The exporter should inform the jurisdictional customs officer about the details of the premises (factory or warehouse or any other place) where container stuffing is to be carried out.

Status holders recognized by Directorate General of Foreign Trade (DGFT) can use self-sealing procedure even if they are not registered under GST law. Other exporters are required to register under GST law and will be filing GSTR1 and GSTR2 to use self-sealing procedures. Otherwise, the exports goods are to be stuffed and sealed at ICD.

The exporter, desirous of using this procedure should inform the superintendent ranked customs officer or appraiser of customs at least 15 days before the first consignment from the premise. The officer will inspect the premise regarding the viability of stuffing the container. The officer will submit a report to the Deputy or Assistant Commissioner of Customs within 48 hours, who in turn shall forward the report to the Principal Commissioner of customs. The Commissioner grants permission for self-sealing at the premises.

Every time the self-sealing is carried out at the approved premises, the exporter should furnish details of address, description of export goods and incentives to be claimed at the customs.

In the case of a non-favourable report by the customs officer, the exporter should bring the goods to the ICD for sealing purpose.

Self-sealing permission obtained is valid for exports at all customs station. The Customs Bureau will circulate the permission along with the exporter’s GSTIN to all customs house.

The exporter uses a tamper-proof electronic seal of standard specification, fed with details of the exporter, exports goods, invoice number, authorized signatory name (for affixing the e-seal) and shipping bill, to seal the container before shipment.

The exporter planning to clear export goods without a customs broker can do so, by filing the shipping bill under digital signature.

In transit between approved premises and port of export, arises a possibility of replacing electronic seals with new details. At the port of export, customs officer might verify the integrity of electronic seals and inspect the consignments in self-sealed containers for risk standards using random or intelligent sampling methods.

Export order

Impact on Exports:

Drawback scheme will continue with the options of All Industry Rate (AIR) and Brand Rate. On goods imported for re-export purpose, drawback will continue to compensate customs duties as well as integrated tax and compensation cess. On the other hand, for imported goods and services used as inputs, the drawback is limited to customs duties on imported inputs and central excise duty on items specified in the Fourth Schedule to Central Excise Act 1944, instead of central excise duty, customs duty and service taxes combined.

Since there are limitations in Drawback scheme under GST, the existing duty drawback scheme will continue for a period of 90 days to allow a smooth transition. Exporters planning to claim a higher rate of duty drawback (composite AIR) during this period, should submit a declaration that no input tax credit or refund of IGST paid is claimed and CENVAT credit is not carried forward, along with a certificate from jurisdictional GST officer. This will prevent neutralization of input taxes twice. The exporter can claim brand rate for customs, central excise duties, and service tax during this period.

Exporters also have the option of claiming only the customs portion of AIR and claim refund under GST laws.

MEIS and SEIS are being continued, providing the exporters with duty scrips for the exemption of duties paid for the import of raw materials. The amount of exemption is expressed as a percentage of the total turnover of the exporter.

Concerns of exporters:

During initial days of GST implementation, the non-availing of credit certificate from GST officer may not be available for higher rate duty drawback claims. This prevents shipping bill moving to LEO stage and requires revision of bill to claim lower rate, to avoid delay in exports. Once the certificate is available, an additional claim needs to be filed for balance refund.

Another major concern for exporters is the imposition of five per cent GST on ocean freight which was exempted earlier. This will lock up working capital. Therefore, Refund will be processed within a week for 90% of the duties. Remaining 10 % will be refunded after the verification of accounts by tax authorities.

FIEO organized an Open house session on June 2017 to answer the concerns of exporters and to discuss on measures for FTP. Exporters from various sectors expressed their dissent on the announcement that deemed exports benefits may get discontinued under GST. They insisted on the continuation of all schemes for Indian products to remain competitive in global market and outcry over the method of paying tax and claiming the refund, demanding direct exemptions. Also, exporters were concerned about the regular break down in the icegate server of customs.

Conclusion:

The current GST structure has certain negative effects on the exports. It will be reviewed and the council will ensure the smooth transition to the GST regime.

People from all over India out cried on the announcement of Goods and Services Tax (GST) in India. Is it really going to be a burdening tax to consumers, in the history of India? Or is it the best thing that has happened to the people of India? The most debated hot topic of India over the past few months has been implemented by the Government of India on July 1st, 2017, with the taxes ranging from 0% to 28%. More money is flowing out of customer’s wallet as all manufacturers and service providers started billing in accordance to GST. But the real question, unanswered so far, is whether the populace understands how GST works and avoid being exploited. Let us see.

History of Tax in India

In the pre-GST era, there were n number of terminologies associated with tax in India. Income tax, Wealth Tax, Property Tax, Import and Export duty, Excise duty, Value Added tax, Service tax, Central sales tax, Customs duty and the list goes on… These taxes were levied by both Central and State governments, broadly classified as Direct Tax and Indirect Tax.

Direct tax is what the taxpayer pays to the government, directly out of his pocket. Income tax, Wealth Tax, Property Tax comes under this category. The government collects tax from the manufacturer, retailer for selling a good or service, which is added to the selling price for the consumer. It is called an Indirect tax, as though the amount is collected from manufacturers and retailers, ultimately the consumer ends up paying it.

Application of Indirect tax started as early as the goods move out of manufacturer’s warehouse. The Central government levied excise duty for all manufactured goods. In a case of imported goods, four types of excise duty were applied.  Specific duty is applied for each individual item of imported goods. In other terms, specific duty was levied based on quantity. Ad-valorem duty was charged on the total value of imported goods. Anti-dumping and Countervailing duties were added to them to protect the sales of Indian goods against the sales of imported goods. Excise duties were applied on exports as well, but the exporter can avail rebate once the goods were shipped.

When the manufacturing and consumption of the product or service are within the state, only the taxes of state government were applied. State government tax rates varied from state to state. The Central government received a share of tax in the name of Central Sales Tax only on the sales involving two or more states.

Too many terms used in Indirect tax caused havoc in the minds of people. An ordinary person could not come in terms with the types of tax. A person with less understanding would find it difficult to cope with the types of taxes applicable or not applicable on each item. To avoid any loss, people simply added the tax on top of the entire amount on each step, resulting in cascading of tax. i.e., adding tax for tax amount calculated previously.

The longer the supply chain, a customer had to pay more irrespective of no value addition. In short, the taxes paid by the customer is multiplied by the number of links in the supply chain. To curb the cascading of taxes, VAT and cenVAT were introduced. VAT was applied by state governments and cenVAT by the central government. Though they reduced cascading to some extent, they were not totally effective.

With the implementation of GST, all different types of indirect tax were combined under one roof. Now, there is just one term that needs to be understood.

India

GST

Goods and Service Tax, commonly known as GST, is a consumption based tax. The goods or service is deemed taxable only when it is consumed by others. Through GST, the central government will get half of tax money. The state in which the goods or service is consumed will get the remaining half. State in which they are manufactured, will not get any share of tax.

GST comprises of three components: CGST, SGST, and IGST. In the intra-state sales of the goods and service, where they are manufactured and consumed within the same state, CGST and SGST are applicable. In inter-state sales, where the goods are manufactured in one state and sold to a person from another state, IGST is applicable.

CGST is Central GST, a term used to denote the share that goes to central government and SGST is state GST, the share to state government. IGST is Integrated GST, combined value of CGST and SGST, collected entirely by the central government, half of which is added as input credit to the government of the state, where the goods are consumed.

Government has fixed 5 different tax slabs as Nil GST, 5%, 12%, 18%, 28%. Goods and services that are essential for survival fall under 5% and 12% slabs, while the luxury goods and services are placed in 18% and 28% slabs.

How it works

The goal of GST is to ensure that every person pays their tax properly and to avoid cascading of tax.

The gist of GST is as follows, when the manufacturer sells his product to a wholesaler, will be charging as per GST slab. The wholesaler, while selling the same product to a retailer, should be adding tax only for the difference in the selling price, i.e., the profit margin. The retailer, who in turn sold to the customer, should add tax only for the profit margin. So, the end customer will be paying the tax for the amount that is added at the last stage. In long run, the prices of each good and service will come down.

While filing the tax returns, the retailer must ensure that the wholesaler has filed his returns and wholesaler must ensure that manufacturer has filed his returns, to avoid loss. Thus, the transparency in sales will be confirmed in future.

All these ideas behind GST tax structure will work only when the tax is included in the selling price. If the tax is calculated in addition to the selling price, it results in cascading of tax and yield no benefits to the consumer.

Let us consider below scenario and compare what happens when the tax is included/ not included in selling price:

The manufacturing cost of a product is ₹750, GST slab is 18%. Manufacturer from Tamil Nadu sells to a wholesaler in Tamil Nadu for ₹1003. The wholesaler sells the product to a retailer in Kerala for ₹1150. The retailer sells to a customer in Kerala for ₹1300.

1.Tax is included in Selling price (Idea behind GST):

Manufacturer in Tamil Nadu sells to Wholesaler in Tamil Nadu for ₹1003 inclusive of tax.

The manufacturing cost of the product is ₹750. The manufacturer adds ₹100 as his profit.

Base price of product (cost+ profit) = ₹850

18% tax on ₹850 = ₹153

Total selling price = ₹850 + ₹153 = ₹1003

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹153/2 = ₹76.5

Tamil Nadu Government SGST – 9%: ₹153/2 = ₹76.5

Wholesaler in Tamil Nadu sells to Retailer in Kerala for ₹1150.50 inclusive of tax.

Base price from Manufacturer is ₹850. Wholesaler adds ₹125 as his profit.

New Base price of product = ₹850 + ₹125= ₹975

18% tax on ₹975 = ₹175.5

Total selling price = ₹975 + ₹175.5 = ₹1150.5

Tax amount to be paid by Wholesaler:

If manufacturer filed his tax = ₹175.5 – ₹153 = ₹22.5

If manufacturer did not file his tax = ₹175.5

Tax split up (Inter-state sales):

Central Government (IGST – 18%): ₹22.5

Kerala Government gets ₹11.25 as input credit (half of tax amount)

Total profit for Wholesaler:

If manufacturer pays his tax = ₹125 + ₹153 = ₹278

If manufacturer did not pay his tax = ₹975 – ₹1003 = -₹28

The retailer in Kerala sells to Customer in Kerala for ₹1298 inclusive of tax.

Base price from Wholesaler is ₹975. Retailer adds ₹125 as his profit.

New Base price of product = ₹975 + ₹125 = ₹1100

18% tax on ₹1100 = ₹198

Total selling price = ₹1100 + ₹198 = ₹1298

Tax amount to be paid by Retailer:

If manufacturer and wholesaler filed their taxes = ₹198 – ₹175.5 = ₹22.5

If manufacturer did not pay, wholesaler paid tax = ₹198 – ₹175.5 = ₹22.5

If manufacturer paid tax, wholesaler did not pay = ₹198 – ₹153 = ₹45

If both manufacturer and wholesaler did not pay = ₹198

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹22.5/2 = ₹11.25

Kerala Government SGST – 9%: ₹22.5/2 = ₹11.25

Total profit for Retailer:

If manufacturer and wholesaler paid their tax = ₹125 + ₹175.5 = ₹300.5

If manufacturer did not pay his tax, wholesaler paid = ₹125 + ₹175.5 = ₹300.5

If manufacturer paid and wholesaler did not pay his tax = ₹125 + ₹153 = ₹278

If both manufacturer and wholesaler did not pay their tax = ₹1100 – ₹1150 = -₹50

Since GST is consumption based Tax and the product is only manufactured in Tamil Nadu, but consumed in Kerala, SGST collected in Tamil Nadu will be handed over to Kerala Government by the central government.

Final Tax split up:

Tamil Nadu Government (Manufacturing state) = ₹0

Central Government = ₹76.5 + ₹11.25 + ₹11.25 (after deducting input credit in IGST) = ₹99

Kerala Government = ₹11.25 + ₹76.5 + ₹11.25 (Input credit from IGST) = ₹99

To Sum up,

Manufacturing cost = ₹750

Profit to Manufacturer = ₹100

Profit to Wholesaler = -₹25 to ₹278

Profit to Retailer = -₹50 to ₹300

Tax to Government = ₹198 (State and Central Government)

Cost to consumer = ₹1298

2. Tax not included in Selling price:

Manufacturer in Tamil Nadu sells to Wholesaler in Tamil Nadu for ₹1000 exclusive of tax.

The manufacturing cost of the product is ₹750. Manufacturer’s profit is ₹250.

Base price of product (cost+ profit) = ₹1000

18% tax on ₹1000 = ₹180

Total selling price = ₹1000 + ₹180 = ₹1180

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹180/2 = ₹90

Tamil Nadu Government SGST – 9%: ₹180/2 = ₹90

Since wholesaler paid ₹1180 for the product, he tends to sell at a higher cost to avoid loss. Wholesaler in Tamil Nadu sells to Retailer in Kerala for ₹1300 exclusive of tax.

Base price from Manufacturer is ₹1000. Wholesaler’s profit is ₹120. Tax amount paid by wholesaler = ₹180.

New Base price of product = ₹1000 + ₹120 + ₹180= ₹1300

18% tax on ₹1300 = ₹234

Total selling price = ₹1300 + ₹234 = ₹1534

Tax amount to be paid by Wholesaler:

If manufacturer filed his tax = ₹234 – ₹180 = ₹54

If manufacturer did not file his tax = ₹234

Tax split up (Inter-state sales):

Central Government IGST – 18%: ₹54

Kerala Government: ₹27 as input credit (half of tax amount)

Total profit for Wholesaler:

If manufacturer pays his tax = ₹120 + ₹180 = ₹300

If manufacturer did not pay his tax = ₹1300 – ₹1180 = ₹120

Since retailer paid ₹1534 for the product, Retailer in Kerala sells to Customer in Kerala for ₹1700 exclusive of tax.

Base price from Wholesaler is ₹1300. Retailer’s Profit = ₹166. Tax amount paid by retailer = ₹234

New Base price of product = ₹1300 + ₹166 + ₹234 = ₹1700

18% tax on ₹1700 = ₹306

Total selling price = ₹1700 + ₹306 = ₹2006

Tax amount to be paid by Retailer:

If manufacturer and wholesaler filed their taxes = ₹306 – ₹234 = ₹72

If manufacturer did not pay, wholesaler paid tax = ₹306 – ₹234 = ₹72

If manufacturer paid tax, wholesaler did not pay = ₹306 – ₹180 = ₹126

If both manufacturer and wholesaler did not pay = ₹306

Tax split up (Intra state sales):

Central Government CGST – 9%: ₹72/2 = ₹36

Kerala Government SGST – 9%: ₹72/2 = ₹36

Total profit for Retailer:

If manufacturer and wholesaler paid their tax = ₹166 + ₹234 = ₹400

If manufacturer did not pay, wholesaler paid his tax = ₹166 + ₹234 = ₹400

If manufacturer paid, wholesaler did not pay his tax = ₹166 + ₹180 = ₹346

If both manufacturer and wholesaler did not pay their tax = ₹1700 – ₹1534 = ₹166

Final Tax split up:

Tamil Nadu Government (Manufacturing state) = ₹0

Central Government = ₹90 + ₹36 + ₹27 (after deducting input credit in IGST) = ₹153

Kerala Government = ₹36 + ₹90 + ₹27 (Input credit from IGST) = ₹153

To Sum up,

Manufacturing cost = ₹750

Profit to Manufacturer = ₹250

Profit to Wholesaler = ₹120 to ₹300

Profit to Retailer = ₹166 to ₹400

Tax to Government = ₹306

Cost to consumer = ₹2006

When tax is included in sales price, everyone in the supply chain will get their profit share and consumer would not feel any burden in spending. If the tax is not included, the entire burden falls on the consumer, while all others get more profit. So, the entire responsibility of bringing down the cost lies with the consumer. They need to ensure that maximum retail prices need to be quoted inclusive of taxes.

GST promotes private consumption rate in a state, as state governments will get their share of tax only when the goods or service is consumed in the state. An increase in Private consumption will increase total demand, which in turn will help in the economic growth of India. If properly executed, it will help in tax reduction in future.

Watch out for the part 2 of this post titled “How to make GST work better for Indian exporters” on our website