A recent report put 70 percent of Indian firms as having not yet started their preparation for the rollout of India Goods and Services Tax (GST) on July 1. So it’s little wonder that companies in other countries are also behind the curve. In fact, Avalara is just now starting to hear from our customers outside India regarding the impact of GST on MNCs. This is likely due to the misconception that GST is materially no different from the Value-Added Tax (VAT)/ State GST (SGST) structure that exists in India today. This is very much not the case.
Key change with India GST — destination-based indirect taxation
Today, VAT and SGST are source-based indirect taxes. This means that regardless of the destination of goods — in state or out of country — the taxation is based on the state in which the goods originated.
GST fundamentally changes this by shifting to destination-based taxation, also known as consumption-based. For domestic organizations, this has many ramifications, such as multiplying the number of monthly tax returns required — one for every state. For foreign entities, this has an even more profound impact, as now those organizations are directly subject to GST, specifically Integrated GST (IGST). IGST governs the taxation of all goods and services that cross India state borders, including international shipments.
The destination-based nature of GST essentially flips the indirect taxation of imports and exports. Exports out of India under GST are now zero-rated, so no tax is payable and input tax credits are claimable. However, imports under GST are taxable at the same rate as goods and services supplied from another Indian state, as IGST.
What about all the customs duties already imposed on imports?
With the introduction of GST, Countervailing Duty (CVD — generally 12.5 percent) and Special Additional Duty (SAD — generally 4 percent) are both discontinued. As such, any imports will remain subject to Basic Customs Duty and now also IGST. One key difference for imports vs. other GST transactions is that IGST will be collected by the state at the time of import by customs, rather than as part of the monthly GST returns process. Companies will need to track their import transactions separately to be able to claim the taxes already paid.
Where are the GST import/export benefits?
GST is very much geared to benefit India-based businesses. No GST is levied on exports out of India, again by virtue of it being a destination-based tax. Companies in India buying imported goods and paying IGST at the time of import can claim that IGST as an input tax credit.
Tax credits on imports are claimed one of two ways:
- If the selling company is not registered with GST, the purchasing Indian company that is registered is subject to reverse charge on those imported transactions, meaning the buying company must charge themselves IGST on the value of the imported goods (including the Basic Customs Duty). That company can then immediately claim that IGST as an input tax credit.
- If the selling company is a registered foreign taxpayer with GST, the selling company will collect the tax and document those transactions on their monthly GSTR5 (non-resident, foreign taxable person). This then allows the purchasing company to claim the tax paid as an input tax credit. This is the less common scenario, as the foreign entity must not have a fixed place of business. Such taxpayers are typically providing some form of service – consulting, specialized skills, education, or the like. These taxpayers register under GST for 90 days and must estimate and prepay the GST they expect to collect in that time. Since the taxpayer is physically in India when services are provided, those services will be subject to SGST/CGST, as instrastate transactions. Any goods the taxpayer received from their “home office” outside of India would then also be subject to IGST, which the non-resident taxpayer would pay as a reverse charge and then immediately claim input tax credit for those amounts.
As an importer, what else do I need to be aware of?
The GST laws and rules do a fair job of making sure that any imports are subject to GST. Here are a few things to be aware of as an importer:
- As noted above, any registered taxpayer purchasing from you as an importer is subject to pay IGST on those transactions via reverse charge mechanism.
- The flip side to this first item is that any Indian business purchasing imported goods is required to register as a GST taxpayer regardless of their annual turnover. The 20-lakh rule does not apply here.
- As noted above, if a non-resident without a permanent place of business occasionally comes to India and engages in any kind of transaction (goods or services), they are subject to GST registration.
- The IGST law provides provisions to tax any use within India of online information services, including database access, online gaming, cloud services, digital content, etc. These provisions are complicated enough to be worthy of their own blog post. The important point here is that any company in India making use of internet-based services hosted outside of India needs to expect to pay GST on those services and understand how that will take place prior to July.
Closing thoughts
This post is by no means an exhaustive survey of the new India GST laws. Our only goal here is to bring to the reader’s attention the depth and breadth of the indirect tax law changes as they pertain to a foreign entity. These laws go into effect in India on July 1, 2017, which at the time of this writing is just over 50 days away. They will fundamentally change how businesses in India operate, price their goods, etc. Companies abroad doing business in India must understand what is necessary as an importer to be tax compliant and how these laws will impact their clients.
Avalara is an experienced application service provider (ASP) partnering with licensed GST Suvidha Providers (GSPs). To understand how Avalara India GST can help you with GST compliance in India, contact us through https://www.avalara.com/in/products/gst-returns-filing.
