GST Input Tax Credit - ITC Utilization in SAP

Topic: GST Input Tax Credit(ITC) &
Utilization - Proposed Guidelines and Recommended Practice
Hiral Raja
Chief Manager – Taxation
Asian Paints Limited
Satish V M
Product Expert, SAP Labs India

© 2015 SAP SE or an SAP affiliate company. All rights reserved. 2Public
Agenda
Present Input Tax Credit Scheme and its Drawback
Input Tax Credit under GST
Treatment of Additional Tax Proposed on Inter State
Transactions
Open Issues
Maximise Input Tax Credit Availment (under GST)

Allowed
on input and input services
against manufacture of taxable
goods or provision of taxable
services
on inputs at factory level and in
case of service providers
depending on their registration
status
on input services allowed
subject to a negative list –
gives rise to interpretational
issues
on capital goods allowed 50%
in first year and remaining in
second year
 on inputs not used directly in
manufacturing viz. Sales
promotion items,
advertisement materials
 with respect to trading of
goods
Disallowed
 Distribution of input services
thru ISD model - without
flexibility to distribute the
credits to any units
 Does not have mechanism
for refund of accumulated
credits (except in case of
exporters)
Other Challenges
CENVAT CREDIT

Allowed
Input tax credit allowed
subject to a retention rate
for stock transfers outside
the state (burnout)
 Varying rate of retention in
various states
on inputs of exempt sectors
viz. service sector,
agriculture, etc
with respect to trading of
goods
on CST paid on purchases
on Luxury Tax
on Entry Tax
Disallowed
Certain States allow ITC on
all business purchases and
certain states allow ITC
only on purchases in
relation to manufacturing of
goods or reselling of goods
Varying list of negative list
across the states
Other Challenges
VALUE ADDED TAX (VAT), CENTRAL SALES TAX (CST) & OTHERS

 Cascading effect of taxes/increased cost of doing business:
 Inability to avail credit of all taxes paid on sourcing/business expenditures
 Accumulation of credits leading to blockage of funds
o Comprehensive Credit Mechanism under GST
o Smooth pass-through of all credits to pass incidence of
tax to the consumer without any cascading effect

Input tax credit under GST
CGST:
 Central Excise Duty
• Additional Excise Duties
• Excise Duty levied under the Medicinal
and Toiletries Preparation Act
• Service Tax
• Additional Customs Duty - (CVD)
• Special Additional Duty of Customs - 4%
(SAD)
• Surcharges and Cesses
SGST:
 VAT / Sales tax
 Entertainment tax (unless it is levied by
the local bodies).
 Purchase tax
 Luxury tax
 Taxes on lottery, betting and gambling
 Octroi and Entry Tax
 State Cesses and Surcharges in so far as
they relate to supply of goods and
services
Centre would levy IGST which would be CGST plus SGST on all inter-State
transactions of supply of taxable goods and services

Transaction Intra State Inter State
Purchase of
Goods
CGST+SGST IGST
Receipt of
Services
CGST+SGST IGST
Imports IGST
Separate accounts for each state need to be maintained for CGST,
SGST and IGST credits received

Credit of
Can be utilized against
Liability of
CGST CGST and IGST
SGST SGST and IGST
IGST IGST,CGST and SGST
 Cross utilization between SGST of one state and SGST of another state not
allowed
 Credit of taxes paid on petroleum products not available (since it is not a part
of GST)
 Refund/adjustment in case of exports, purchase of capital goods, inverted duty
structure on output tax to be completed in timely manner

 Illustrative list of Input tax credits currently not available (that might be
available under GST):
 Credit on inter state purchases/supply of goods
 Burnouts on stock transfers and negative list of goods under each state
 Service tax credit on freight from the place of removal to the customer and
other service tax credits currently not available
 Excise credits for all business purchase expenses viz. Sales promotion
items, gifts, etc
 Luxury tax paid in Hotels
 Service tax credits on trading of goods
 CVD and SAD on imported goods procured for trading of goods/sales
promotion
 Tax credits on purchase of hardware and software

Treatment of additional tax proposed on inter-state
transactions
 States allowed to collect additional tax (not exceeding 1%) on supply of goods in
course of inter state trade
 No clarity on availability of input tax credit as well as mechanism for this
additional tax
 Hon’ble Finance Minister in Lok Sabha has assured that 1% additional tax
levied in the course of interstate supply of goods shall have no cascading effect
 Additional tax will have to be captured separately at each state level

Open issues
 Will ISD Mechanism Continue?
 What is the future of LTU Facility ?
 Whether any burnouts/negative list would be there under GST ?
 Would Input Tax Credit be available on :
 All business purchases – Free Samples, Gifts, Sales promotion,etc
 Damages/Shortages, etc
 In cases wherein sale price is lower than the purchase price
 What are the transitional provisions from pre-GST to GST regime?

Maximise Input Tax Credit Availment (under GST)
 Identify the tax cost (with respect to taxes that are supposed to merged into GST)
in the profit and loss account and start capturing the same so as to enable the
business to understand the impact of GST
 Identify the existing contracts/PO’s wherein contracts will have to be renegotiated
on account of availability of the input tax credit to the vendor as well as the
Company and include clauses for facilitation of renegotiating on implementation of
GST
 Review the current operations/distribution models and evaluate the need for any
changes in the operation/distribution models on account of :
 Availability of full credit under GST system; and
 Impact of additional tax payable on the supply of goods in course of inter state trade

Input Tax Credit Utilization - Solution Approach
• Each GSTN registration to be created as a Business
Place
• Each Tax Component (CGST, SGST etc.) to be
configured as Transaction Key
• GL accounts can configured for each GST Registration &
Tax Component i.e. Business Place & Transaction
Key
Configuration Approach Goals
Tax Credit can be accumulated
at each registration by tax
component
• New Transaction to perform utilization
• Comparison of tax credits available vs. payables by GL
Account aggregation
Utilization Transaction
To enable control &
transparency in utilization

GST Input Tax Credit - ITC Utilization in SAP

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