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1.1.1 Why is Goods and Services Tax so Important? ........................................ 5
1.1.2 Example ................................................................................................... 6
1.1.3 Present Indirect Tax Structure of India ..................................................... 9
1.1.4 Proposed Indirect Tax Structure ............................................................... 9
1.1.5 Subsuming of Existing Taxes ................................................................. 10
1.1.6 Taxes that may or may not be subsumed............................................... 10
2 Features of Proposed GST............................................................................ 11
2.1.1 Critical Components -Model GST Law ................................................... 12
2.1.2 GST applicable on ‘supply’ ..................................................................... 12
2.1.3 GST payable as per time of supply ........................................................ 12
2.1.4 Determining Place of Supply could be the key ....................................... 13
2.1.5 Valuation in GST .................................................................................... 13
2.1.6 Input tax credit in GST ............................................................................ 14
2.1.7 Inter-State supply of goods for consideration to attract additional tax .... 14
2.1.8 Rate of GST ........................................................................................... 14
2.1.9 GST Rates on Services .......................................................................... 14
2.1.10 Time of supply ........................................................................................ 14
3 Procedural aspects ........................................................................................ 16
3.1.1 Registration ............................................................................................ 16
3.1.2 Returns ................................................................................................... 16
4 Impact of GST- An Approach in SAP ........................................................... 18
4.1.1 Mandatory System Pre-requisites .......................................................... 18
4.1.2 Implementation Approach....................................................................... 18
4.1.3 Areas of Impact ...................................................................................... 18
4.1.4 GST Registration .................................................................................... 19
4.1.5 Assigning Business Place to Plant ......................................................... 20
4.1.6 Tax Registration- Proposed Solution ...................................................... 20
4.1.7 Vendor GST Registration ....................................................................... 21
5 Master Data .................................................................................................... 22
5.1.1 HSN and SAC Codes ............................................................................. 22
5.1.2 GST Accounts ........................................................................................ 23
Page 1 of 33 Draft GST document
5.1.3 Material Master....................................................................................... 23
5.1.4 Service Master ....................................................................................... 24
5.1.5 Vendor Master ........................................................................................ 25
5.1.6 Tax and Pricing Procedure ..................................................................... 26
5.1.7 Access Sequence ................................................................................... 27
5.1.8 Account Keys ......................................................................................... 28
5.1.9 Tax Procedure (TAXINN) ....................................................................... 28
5.1.10 Tax Accounts.......................................................................................... 28
5.1.11 GST Tax Postings .................................................................................. 29
5.1.12 Summary of GST Impact ........................................................................ 29
6 Business Processes ...................................................................................... 30
6.1.1 Domestic Purchase-Invoicing ................................................................. 30
6.1.2 Invoice Verification ................................................................................. 31
6.1.3 MIRO Transaction .................................................................................. 32
6.1.4 Changes in Financial Transactions ........................................................ 32
Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will
be levied on every value addition.
To understand this, we need to understand the concepts under this definition. Let us start
with the term ‘Multi-stage’. Now, there are multiple steps an item goes through from
manufacture or production to the final sale. Buying of raw materials is the first stage. The
second stage is production or manufacture. Then, there is the warehousing of materials.
Next, comes the sale of the product to the retailer. And in the final stage, the retailer sells
you – the end consumer – the product, completing its life cycle.
So, if we had to look at a pictorial description of the various stages, it would look like
Goods and Services Tax will be levied on each of these stages, which make it a multi-stage
tax. How? We will see that shortly, but before that, let us talk about ‘Value Addition’.
Let us assume that a manufacturer wants to make a shirt. For this he must buy yarn. This
gets turned into a shirt after manufacture. So, the value of the yarn is increased when it gets
woven into a shirt. Then, the manufacturer sells it to the warehousing agent who attaches
labels and tags to each shirt. That is another addition of value after which the warehouse
sells it to the retailer who packages each shirt separately and invests in marketing of the
shirt thus increasing its value.
Currently, the Indian tax structure is divided into two – Direct and Indirect Taxes. Direct
Taxes are levies where the liability cannot be passed on to someone else. An example of
this is Income Tax where you earn the income and you alone are liable to pay the tax on it.
In the case of Indirect Taxes, the liability of the tax can be passed on to someone else. This
means that when the shopkeeper must pay VAT on his sale, he can pass on the liability to
the customer. So, in effect, the customer pays the price of the item as well as the VAT on it
so the shopkeeper can deposit the VAT to the government. This means that the customer
must pay not just the price of the product, but he also pays the tax liability, and therefore, he
has a higher outlay when he buys an item.
This happens because the shopkeeper has paid a tax when he bought the item from the
wholesaler. To recover that amount, as well as to make up for the VAT he must pay to the
government, he passes the liability to the customer who has to pay the additional amount.
There is currently no other way for the shopkeeper to recover whatever he pays from his
own pocket during transactions and therefore, he has no choice but to pass on the liability to
the customer.
Goods and Services Tax will address this issue after it is implemented. It has a system of
Input Tax Credit which will allow sellers to claim the tax already paid, so that the final liability
on the end consumer is decreased.
Sale within the CGST + VAT + Central Revenue will now be shared
state SGST Excise/Service tax between the Centre and the State
Sale to another IGST Central Sales Tax + There will only be one type of tax
State Excise/Service Tax (central) now in case of inter-state
sales.
1.1.2 Example
A dealer in Maharashtra sold goods to a consumer in Maharashtra worth Rs.10, 000. The
Goods and Services Tax rate is 18% comprising CGST rate of 9% and SGST rate of 9%. In
such cases the dealer collects Rs.1800 and of this amount, Rs.900 will go to the central
government and Rs.900 will go to the Maharashtra government.
Now, let us assume the dealer in Maharashtra had sold goods to a dealer in Gujarat worth
Rs.10, 000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In
such case the dealer has to charge Rs.1800 as IGST. This IGST will go to the Centre. There
will no longer be any need to pay CGST and SGST.
To understand this, let us first understand what Input Tax Credit is. It is the credit an
individual receives for the tax paid on the inputs used in manufacturing the product. So, if
there is a 10% tax that the individual must submit to the government, he can subtract the
amount he has paid in taxes at the time of purchase and submit the balance amount to the
government.
At the next stage, the wholesaler buys the shirt from the manufacturer at Rs.110, and adds
labels to it. When he is adding labels, he is adding value. Therefore, his cost increases by
Now, the retailer pays Rs.165 to buy the shirt from the wholesaler because the tax liability
had passed on to him. He has to package the shirt, and when he does that, he is adding
value again. This time, let’s say his value add is Rs. 30. Now when he sells the shirt, he
adds this value (plus the VAT he has to pay the government) to the final cost. So, the cost of
the shirt becomes Rs. 214.5 Let us see a breakup for this:
Cost = Rs.165 + Value add = Rs.30 + 10% tax = Rs.195 + Rs.19.5 = Rs.214.5
So, the customer pays Rs.214.5 for a shirt the cost price of which was basically only Rs.170
(Rs.110 + Rs.40 + Rs.30). Along the way the tax liability was passed on at every stage of
transaction and the final liability comes to rest with the customer. This is called
the Cascading Effect of Taxes where a tax is paid on tax and the value of the item keeps
increasing every time this happens.
In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring
input. What happens in this case is, the individual who has paid a tax already can claim
credit for this tax when he submits his taxes.
In our example, when the wholesaler buys from the manufacturer, he pays a 10% tax on his
cost price because the liability has been passed on to him. Then he adds value of Rs.40 on
his cost price of Rs.100 and this brings up his cost to Rs.140. Now he has to pay 10% of this
When he pays Rs.4 to the government, he can pass on its liability to the retailer. So, the
retailer pays Rs. (140+14=) 154 to him to buy the shirt. At the next stage, the retailer adds
value of Rs.30 to his cost price and has to pay a 10% tax on it to the government. When he
adds value, his price becomes Rs.170. Now, if he had to pay 10% tax on it, he would pass
on the liability to the customer. But he already has input credit because he has paid Rs.14 to
the wholesaler as the latter’s tax. So, now he reduces Rs.14 from his tax liability of Rs. (10%
of 170=) 17 and has to pay only Rs.3 to the government. And therefore, he can now sell the
shirt for Rs. (140+30+17) 187 to the customer.
In the end, every time an individual was able to claim input tax credit, the sale price for him
reduced and the cost price for the person buying his product reduced because of a lower tax
liability. The final value of the shirt also therefore reduced from Rs.214.5 to Rs.187, thus
reducing the tax burden on the final customer.
So essentially, Goods & Services Tax is going to have a two-pronged benefit. One, it will
reduce the cascading effect of taxes, and second, by allowing input tax credit, it will reduce
the burden of taxes and, hopefully, prices.
Purchase tax
Stamp Duty
Vehicle Tax
Electricity Duty
Other Entry taxes and Octroi
Apply to all taxable supplies of goods or services (as against manufacture, sale or
provision of service) made for a consideration except –
IGST applicable to
Additional Tax of 1% on Inter State Taxable supply of Goods by State of Origin and
non CENVATABLE
In GST regime, all ‘supply’ such as sale, transfer, barter, lease, import of services etc of
goods and/ or Services made for a consideration will attract CGST (to be levied by Centre)
and SGST (to be levied by State). As GST will be applicable on ‘supply’ the erstwhile taxable
events such as ‘manufacture’, ‘sale’, ‘provision of services’ etc. will lose their relevance.
Further, certain supplies, even if made without consideration, such as permanent transfer
of business assets, self-supply of goods or services, assets retained after deregistration etc
will attract GST.
The liability to pay CGST / SGST will arise at the time of supply as determined for goods and
services. In this regard, separate provisions prescribe what will time of supply for goods and
services. The Provisions contemplate payment of GST at the earliest for
At present inter-State supply of goods attract Central Sales Tax. Now, it provides that an
inter-State supply of goods and/ or services will attract IGST ((i.e. CGST plus SGST). Thus,
it would be crucial to determine whether a transaction is an ‘intra-State’ or ‘Inter-State’ as
taxes will be applicable accordingly. In this regard, the draft GST law provides separate
provisions which will help in determining the place of supply for goods and services.
Typically for ‘goods’ the place of supply would be location where the good are delivered.
Whereas for ‘services’ the place of supply would be location of recipient. However, there
are multiple scenarios such as supply of services in relation to immovable property etc
wherein this generic principle will not be applicable and specific rule will determine the pace
of supply. Thus, the business will have to scroll through all the place of supply provisions
before determining the place of supply.
GST would be payable on the ‘transaction value’. Transaction value is the price actually
paid or payable for the said supply of goods and/or services between un-related parties.
The transaction value is also said to include all expenses in relation to sale such as packing,
commission etc. Even subsidies linked to supply will be includable. As regards discounts/
incentives, it will form part of ‘transaction value’ if it is allowed after supply is affected.
However, discounts/ incentives given before or at the time of supply will be permissible as
deduction from transaction value.
The law also provides for Valuation Rules to help determine value in certain cases. The
Valuation Rules appear to be drafted by taking few provisions from current Valuation
provisions in vague in Excise (for e.g. concept of ‘transaction value’), Service Tax (for e.g.
concept of ‘pure agent’) and Customs (for e.g. concept of ‘goods of like kind and quality’).
Current CENVAT Credit regime disallows CENVAT Credit on various services such as motor
vehicle related services, catering services, employee insurance, construction of civil
structure etc. Similarly, State VAT laws restrict input tax credit in respect of construction,
motor vehicle etc. Current, this denial of credits leads to un-necessary cost burden on
assesse.
Draft GST law provides that an additional tax up to 1% will be levied by Centre on inter-State
supply of goods (and not on services) made for consideration. Thus, effectively inter-State
branch transfers will not attract this 1% additional Tax. This additional tax will be assigned to
States from where the supply of goods originates. This additional tax will be applicable for a
period of two years and could be extended further by GST Council.
All services have been fitted into four different rates, which are 5%, 12%, the standard 18%
and the luxury rate of 28%
In addition to the above, there are provisions to determine the date of supply in case of
continuous supply of goods/ services.
3.1.1 Registration
Any person having aggregate turnover of Rs. 20 lacks (Rs.10 lacks for person carrying out
business in the north-east) across all locations in India will need to obtain registration in the
States from where they make a supply. In addition, the following persons would be required
to obtain GST registration irrespective of turnover:
e-commerce operator
It is envisaged that in each State, one registration would be obtained, unless the
taxpayer chooses to obtain separate registrations for its different business verticals in
the State.
3.1.2 Returns
For each month, a person who has not opted for composition is required to file the returns,
Separately for outward supplies made, inward supplies received, and monthly return. In
addition to these returns, separate returns are required to be filed by input service
distributors and by a person deducting tax at source. An annual return is also required to be
filed.
The taxpayers having turnover exceeding the prescribed limit will also be required to get
their accounts audited by a Chartered Accountant or a Cost Accountant, and submit a copy
Every business is required to declare list of goods they are dealing into. This declaration is
required along with the HSN code of such commodity. System will automatically pick tax rate
under GST regime based on these HSN codes. Thus it is of utmost importance to mention
correct HSN codes at the time of enrolment or registration under GST
SAC stands for Service Accounting Codes which are adopted by the Central Board of Excise
and Customs (CBEC) for identification of the services. HSN stands for Harmonized System
of Nomenclature which is internationally accepted product coding system used to maintain
uniformity in classification of goods.
As per the model law issued by Government of India, tax applicability will be as follows in
GST regime
Intra-state transactions will attract CGST and SGST
Inter-state/Import transactions will attract IGST
Export transactions will be zero rated
Intra-state transactions
CGST and SGST applicable
Inter-state/Import transactions
IGST applicable
In order to achieve proposed tax structure, required changes need to be made in tax
procedure
This will lead to introduction of new condition types, access sequence and account
determination
GS Partner selected flows in the Goods Receipt document, which will then be passed on to
invoice verification to identify their GST Partner region and delivery address region, and then
taxes are calculated accordingly.
Purchase Scenario
In the GST regime, for domestic procurement of goods within the same state, the
applicable indirect taxes will be CGST and SGST. The vendor will issue an invoice
charging the CGST and SGST components as tax.
In case of inter-state domestic procurement of goods, the IGST model for taxation
will be applicable. As per the IGST model, the Centre/Central Government will levy
IGST on all inter-state transactions of taxable goods and services. IGST will be
computed as CGST plus the SGST components of the destination state.
Example-2
While creating a purchase order, vendor informed the plant (in Maharashtra) that the
partner (in Maharashtra) is going to deliver the product
Based on this information, purchasing department creates a purchase order and the SAP
system calculates intra-state GST (CGST, SGST). The system also considers the vendor
(In Maharashtra) as a GST partner and posts the goods receipt.
At the time of invoice creation, if the captured GST partner differs from the purchase order
goods supplier, the user can change the GST Partner in the relevant invoice verification
(MIRO) transaction
To do so, SAP has proposed to introduce a new editable field (called GST Partner) in the
header data under Basic data tab. This new field will default the goods supplier partner
vendor that you select in the purchase order. If the user wants to change this, there is a
provision to search for the correct vendor code in the field help search.
Affected Transactions
FB70-Customer Invoice
FB75-Customer Credit Memo
FB60-Vendor Invoice
FB65-Vendor Credit Memo
FV60-Park Incoming Invoices
FV65- Park Incoming Credit Memos
FV70-Enter Outgoing Invoice
FV75-Park Outgoing Credit Notes
Fields to be added in the above transactions
GST Partner
Place of Supply
HSN/SAC Codes