GST India: A Business Case

Global Energy Systems India Pvt Ltd.,

Global Energy Systems is a Bangalore, Karnataka based manufacturer of turnkey Gas 

turbine solutions for power generation. The products are widely used by industries

like cement manufacturers, paper, iron/steel plants, auto spare parts manufacturers, forging units etc.

Global Energy systems also provides project planning, feasibility studies, installation, training and maintenance (AMC) services to its clients.

Global Energy is involved in a mix of local, interstate and export/import transactions for both sales and purchase as given below. For this scenario, for simplicity it is assumed all interstate sales are made to Maharashtra and all interstate purchases are made from Tamil Nadu.

Business Profile:

Purchase Account
Local Purchase	47%
Interstate Purchase	50%
Imports	3%

Sales Account
Local Sale	1%
Interstate Sale	58%
Exports	41%

The turnover details for FY 2015-16 are given below: (All Values in Lakhs)

Current Indirect Tax Regime:

Sales Account:

Sales Account			Assessable Value	Excise @ 12.5%	ST @ 14.5%	CST @ 2%	CST @ 14.5%	VAT @ 14.5%	VAT @ 5%	Total
Sale of Products	Project Sales	CST Project Sales @ 2%	4119.00	514.88		92.68				4726.55
		CST Project Sales @ 14.5%	15.00	1.88			2.45			19.32
		VAT Project Sales @ 14.5%	20.00	2.50				3.26		25.76
	Spares Sale	CST Spares Sales @ 2%	214.00	26.75		4.82				245.57
		CST Spares Sales @ 14.5%	2.00	0.25			0.33			2.58
		VAT Spares Sales @ 14.5%	9.00	1.13				1.47		11.59
		VAT Scrap Sales @ 5%	3.50	0.44					0.20	4.13
	Export Sales	Export Project Sales @ 0%	3386.00							3386.00
Sale of Services	Labour Charges		33.00		4.79					37.79
	Service Charges (AMC)		340.00		49.30					389.30
Total			8141.50	547.81	54.09	97.49	2.77	4.73	0.20	8848.59

Purchase Account:

Purchase Account			Assessable Value	Excise @ 12.5%	ST @ 14.5%	CST @ 2%	CST @ 14.5%	VAT @ 14.5%	VAT @ 5%	Total
Cost of Material	Components	Components @14.5%	1657.00	207.13				270.30		2134.42
		Components @5%	124.00	15.50					6.98	146.48
		Imports	157.00							157.00
		Interstate Purchase @ 2%	1779.00	222.38		40.03				2041.40
		Interstate Purchase @ 14.5%	4.00	0.50			0.65			5.15
	Consumables	Consumables @ 14.5%	90.00	11.25				14.68		115.93
		Consumables @ 5%	95.00	11.88					5.34	112.22
		Interstate Consumables @ 2%	46.00	5.75		1.04				52.79
		Interstate Consumables @ 14.5%	35.00	4.38			5.71			45.08
	Raw Material	Raw Material @ 14.5%	104	13				16.965		133.97
		Raw Material @ 5%	12	1.5					0.675	14.18
		Interstate Purchase @ 2%	254	31.75		5.715				291.47
	Packing Material	Local Purchase @ 5%	12.00						0.60	12.60
		Local Purchase @ 14.5%	30.00					4.35		34.35
Job Work	Local job work		422.00							422.00
Services	Commissioning	Erection Service @ 14.5%	54.00		7.83					61.83
	Others	Training/Commissioning	66.00		9.57					75.57
Total			4941.00	525.00	17.40	46.78	6.36	306.29	13.59	5856.43

Summary:

	Sale (output)	Purchase (Input)	Difference (Liability)
Excise @ 12.5%	547.81	525.00	22.81
ST @ 12.36%	54.09	17.40	36.69
CST @ 2%	97.49	46.78	97.49
CST @ 14.5%	2.77	6.36	2.77
VAT @ 5%	0.20	13.59	-13.40
VAT @ 14.5%	4.73	306.29	-301.56
Exports	3386

Revenue Share:

	Centre (Excise + ST)	State (VAT)	Total
Revenue	59.5	-214.7	-155.2

Highlights:

The centre is gaining under the current indirect tax regime as it earns Excise and Service tax revenue from manufacturing activities done in India. Due to zero rating of exports, neither state nor centre are earning any revenue. However, exports bring in the much needed foreign currency and help the country in reducing trade deficit.

The state is losing revenue as the company is purchasing components/raw material locally (input is availed @ 14.5%) and selling interstate (@ meagre 2%) and exports (0% rate). Although CST is levied by centre, revenue is fully shared with state from where the interstate sale has originated (in this case Karnataka). However, the company is selling gas turbines to interstate customers against C Form at concessional rate of 2% while the input availed is at 14.5%. This is leading to refund situation and the state is losing out on revenue.

For a similar situation under GST regime:

Outward Supply:

Sales Account			Assessable Value	CGST @ 9%	SGST @ 9%	IGST @ 18%	CGST @ 6%	SGST @ 6%	Total
Sale of Products	Project Sales	Interstate Project Sales @ 18%	4134.00			744.12			4878.12
		Local Project Sales @ 18%	20.00	1.80	1.80				23.60
	Spares Sale	Interstate Spares Sales @ 18%	216.00			38.88			254.88
		Local Spares Sales @ 18%	9.00	0.81	0.81				10.62
		Local Scrap Sales @ 12%	3.50				0.21	0.21	3.92
	Export Sales	Export Project Sales @ 0%	3386.00						3386.00
Sale of Services	Interstate Labour Charges @ 18%		33.00			5.94			38.94
	Interstate Service Charges (AMC) @ 18%		340.00			61.20			401.20
Total			8141.50	2.61	2.61	850.14	0.21	0.21	8997.28

Inward Supply:

Purchase Account			Assessable Value	CGST @ 9%	SGST @ 9%	IGST @ 18%	CGST @ 6%	SGST @ 6%	Total
Cost of Material	Components	Local Purchase of Components @18%	1657.00	149.13	149.13				1955.26
		Local Purchase of Components @12%	124.00				7.44	7.44	138.88
		Imports	157.00			28.26			185.26
		Interstate Purchase @ 18%	1783.00			320.94			2103.94
	Consumables	Local Purchase of Consumables @18%	90.00	8.10	8.10				106.20
		Local Purchase of Consumables @12%	95.00				5.70	5.70	106.40
		Interstate Purchase of Consumables @ 18%	81.00			14.58			95.58
	Raw Material	Local Purchase of Raw material @18%	104	9.36	9.36				122.72
		Local Purchase of Raw material @12%	12				0.72	0.72	13.44
		Interstate Purchase of Raw Materials @ 18%	254			45.72			299.72
	Packing Material	Local Purchase @ 18%	30.00	2.70	2.70				35.40
		Local Purchase @ 12%	12.00				0.72	0.72	13.44
Job Work	Local job work		422.00						422.00
Services	Commissioning	Interstate Erection Service @ 18%	54.00			9.72			63.72
	Others	Interstate Training/Commissioning @ 18%	66.00			11.88			77.88
Total			4941.00	169.29	169.29	431.10	14.58	14.58	5739.84

 Summary:

	Outward Supply	Inward Supply	Difference
CGST	2.82	183.87	-181.05
SGST	2.82	183.87	-181.05
IGST	425.07 (Centre)	215.55 (Centre)	209.52
	425.07 (Maharashtra)	215.55 (Karnataka)

Revenue Share:

	Centre (Net)	Karnataka State (Net)	Maharashtra State (Net)
Revenue	28.47	34.5	425.07

Comparison:

	GST Regime				Current Indirect Tax Regime
	Centre	State (Karnataka)	Total		Centre	State (Karnataka)	Total
Revenue	28.47	34.5	62.97		59.5	-214.7	-155.2
Percentage Share	45%	55%	100%

Highlights:

The revenue of the centre has fallen in GST regime by 31 Crores (~52%) but due to the sharing of Excise and service tax revenue with state, the Karnataka state revenue has dramatically improved from -214.7 crore to 34.5 Cr. As a consuming state, Karnataka also benefitted from the state’s share of IGST (on interstate purchase and imports) as the company is buying majority of components from outside the state or outside the country. In this example, assuming all sales are to Maharashtra, the consuming state of Maharashtra is benefitting immensely by getting 425.07 Crore from consumption.

This illustration proves that under GST regime the state governments of producing states will not lose out on revenue as the share of Excise/Service tax and state share of IGST on interstate raw material consumption will over compensate for losses resulting from sharing VAT revenue with centre.

Impact on Business:

Imports will become expensive due to applicability of IGST, however full credit is available. As local and interstate purchases becomes tax neutral, company may buy inputs from anywhere in India whichever is cost efficient. Exports would continue to be zero rated under GST. Major compliance issue related to issuing and obtaining C-Forms (interstate purchase/sale) and H Forms (deemed exports) would get resolved as requirement for all statutory forms would get eliminated.

(Views expressed are strictly personal)