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Insights Value Added Tax (VAT) Guidelines: India

Value Added Tax (VAT) Guidelines: India

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published on 23 March 2022

 

 

This country summary is part of the comprehensive Focus on VAT Fellows: International Value Added Tax (VAT) Guidelines »



1. VAT Scope, VAT Rates and VAT Exemptions

A significant milestone in the journey of the Indian Taxation Policy was achieved, when the Indian Government rolled out the uniform Goods and Services Tax (“GST”) on 1 July 2017. With the introduction of GST, the Central and the State Governments have pooled in their powers to levy tax on transactions involving supply of goods and services under a common set of legislations to resolve several issues such as tax cascading, double tax­ation, high tax compliance and blockage of input tax credits due to multitude of taxes and splitting of taxation powers between the Central and the State Governments.
 
GST has completely replaced the old regime of indirect taxation subsuming several indirect taxes that existed in the past and has created a uniform tax structure across India. The major existing indirect taxes subsumed under GST are as follows:
 
​Central Level Taxes
​State Level Taxes
​Central Excise Duty on manufacture of goods
 ​Value Added Tax/Central Sales Tax on sale of goods in India
​Service Tax on provision of Services
 ​Entry Tax on entry of goods in city municipal limits
​Additional Customs Duty on import of goods
 ​Octroi/ Local Body Tax on entry of goods in city municipal limits
​Special Additional Customs Duty on import of goods
 ​Luxury Tax on hotels
​Several Cesses such as Swachh Bharat Cess, Krishi Kalyan Cess
 ​Entertainment Tax on events, movies etc.
​Additional Excise Duty on manufacture of specified goods
 ​Purchase Tax on specified goods in some states
 
Taxes which have not been subsumed under GST include Customs duty in the form of Basic Customs Duty (“BCD”) and applicable Cess on import of goods into India and Stamp Duty on registration of immovable pro­perty and legal instruments. Further, GST has not yet replaced existing taxes on electricity, petroleum products and alcoholic liquor for human consumption.
 
Generally speaking, GST would be applicable in India on all “supply” of goods and services. The term “supply” includes all forms of supply of goods or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration in the course or furtherance of business. Apart from this, GST is also applicable on the Import of goods and services in India or certain specified transactions made without a consideration such as disposal of business assets, transactions between principal and agent etc.
 
Further, in a case of the supply of certain notified services, the liability of payment of GST would be transferred from the supplier of services to the recipient of such services. The services notified under the so called “Re­verse Charge Mechanism” are the import of services, services from goods transport agent, services from a lawyer, sponsorship services, services provided by a director of the company to the company etc.

In terms of the structure of the GST law, it consists of 3 major components:
  • Central GST (CGST): Tax collected by the Central Government
  • State GST (SGST)/Union Territory GST (UTGST): Tax collected by the respective State Governments/Union Territories
  • Integrated GST (IGST): Tax on interstate supplies and imports collected by the Central Government and shared with the respective State Governments

 

Which of these three taxes or a combination thereof would apply on a transaction depends on the “place of supply“. Supply of goods and services where the location of supplier and the place of supply are in one State (“Intrastate Supply”) is subject to both CGST and SGST, whereas supply of goods and services where the location of supplier and place of supply are in two different states (“Inter-state Supply”) is subject to IGST. Import of goods and services in India is also subject to IGST. 
 
GST broadly has a four-rate structure, namely 5 percent, 12 percent, 18 percent and 28 percent. While most of the goods and services have been classified under the 18 percent rate bracket, certain essential commodities and services have been classi­fied under the 5 percent and 12 percent rate category while luxury goods and services have been classified under the 28 percent category. 
 
Exemptions from GST can be distinguished between exemption with an input tax credit (so-called zero rated supplies), exemption without an input tax deduction (so-called exempted supplies) and deemed exports (where either the supplier or receiver is entitled to refund of GST paid on specified domestic supplies). 
 
Zero rated supplies, for example, are Export of goods and services from India to a country outside India. Sup­plies exempted from GST without input tax credit, for example, are Goods such as food grains, Milk, Salt, Hearing aids, Newspaper etc.
 
Supplies qualifying as deemed exports, for example, are supply of goods against special licenses (Advance Authorizations and Export Promotion Capital Goods (“EPCG”)) used for procurement of goods for exports. 

Supply of goods and services:
  • Import of goods in India: Apart from BCD and applicable Cess, IGST at prescribed rates also applies at the time of import of goods in India. The GST is levied and collected at the time of import of goods at the values determined based on the relevant provisions of the Indian Customs law. The Customs duty and GST are generally payable by the importer of such goods in India.
  • Export of goods from India: Generally, export of goods from India does not attract GST in India. 
  • Import of services in India: Services provided by service providers located outside India to a recipient located in India are liable to GST in case the place of supply for such services is in India. The place of supply is gene­rally determined based on the location of service receiver. The GST on such services is payable by the service recipient located in India under the reverse charge mechanism in case the supplier of service does not have a fixed establishment in India. 
  • Export of services from India: In case the following conditions are satisfied, the services qualify as export of services on which, no GST is applicable:
    • Provider of service is located in India
    • Recipient of service is located outside India
    • Place of supply of the service is outside India
    • Payment is received by the provider of service in convertible foreign exchange and
    • Transaction is not between a representative office (e.g. branch office) and its head office
 
In general, the place of supply is considered to be the location of the service recipient.

 

2. VAT registration and simplifications

The following persons are required to take registration for payment of taxes and for undertaking other compli­ances:
  • Every person undertaking supply of taxable goods or services in case aggregate turnover in the financial year exceeds INR 2 Million. The registration is required to be obtained in every state from where a taxable supply of goods or services is undertaken. Therefore, entities having multiple business locations in India in different states are required to obtain registration in each state from where taxable supplies are undertaken. 
  • Persons who are liable to pay GST under reverse charge mechanism.
  • Casual taxable persons and non-resident taxable persons undertaking taxable supplies in India.
  • E-Commerce operators, Input Service Distributors and persons liable to deduct taxes.
  • Foreign entities supplying Online Information and Database Access or Retrieval Services to unregistered consumers (“B2C”).
There is no specific procedure for simplification of registration procedure for any person required to take registrations. 

 

3. Declaration requirements and penalty regime

Every person who is registered under the GST law is required to pay the taxes and file periodic declarations (“returns”) within the prescribed due dates:
  • Registered persons are required to make the payment of GST on a monthly basis generally before 20th of subsequent month (e-payment). In some cases, the due date for payment is 22nd and 24th of the subsequent month. 
  • A supplier registered under the Composition Scheme is required to make payments and file returns on a quarterly basis.
  • Every registered person is required to file an annual return in Form GSTR-9 by 31 December of the next financial year. 
 
Delay in payment of taxes beyond the due dates would attract interest under the CGST, SGST, IGST acts at the rate of 18 percent. Further, the penalty provisions are provided under the relevant acts for various non-compliances. Some of the general provisions are as follows:
  • Non-payment of GST with intent to evade payment of duty would attract a penalty as high as equal to the amount of duty evaded. However, a lower amount may be payable if payment is done within a certain time limit as specified in the law.
  • Non-payment of GST in other cases may attract a maximum penalty of 10 percent of the tax or INR 10,000, which­ever is higher. However, in case the tax is paid prior to issuance of the Show Cause Notice, the penalty provisions are not attracted.
 

4. VAT recovery

Every registered person undertaking taxable supplies is allowed to deduct GST paid on the purchase of goods and services used or intended to be used for its own business from the output GST payable on its taxable supplies. The entitlement of credit is governed independently for each location of taxable person in different states and therefore, credit of one location cannot be deducted from the liability of another location. However, the Indian Government is in the process of introducing a system where unutilized input tax credit of one loca­tion can be transferred to another location of the same legal entity having a common Permanent Account Number (“PAN”).
 
For the three components of GST, input tax credit of CGST can be deducted from CGST and IGST liability; input tax credit of SGST can be deducted from SGST and IGST liability while the input tax credit of IGST can be deduc­ted from any of the three components. The credit of IGST is required to be deducted prior to utilization of credit of CGST and SGST. Therefore, in short, the input tax credit of CGST cannot be deducted from SGST liability and vice versa.
 
Purchases on which, the recipient is not allowed to claim input tax credit, are, for example, goods or services used for non-business purposes, goods or services used for exempt supplies or Motor Vehicles unless the same are used for further supply of same goods or other specified purposes (such as training, leasing etc.).

 

5. Invoicing

Every registered person supplying taxable goods is required to issue a tax invoice at the time of removal if supply involves movement of goods or at the time of delivery of goods in any other case. Further, in case of supply of services, an invoice is required to be raised within a period of 30 days from the date of provision of services. 
 
In case of exports, the invoice is also required to contain special declaration specifying that the goods have been exported without payment of GST under a bond/undertaking. 
 
A registered person having a turnover above INR 500 Million in any of the years under the GST era is required to generate so-called e-Invoices or electronic invoices having IRN while issuing an invoice for supply of goods/ services to B2B customer. A registered person having a turnover above INR 5 Billion is required to generate E-Invoices having QR Code embedded with IRN for all supplies including B2C supplies. 
 

6. Others

A VAT grouping rule is not implemented in India at present.

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