As a Global VP of Finance in a multinational corporation (MNC) with subsidiaries in India, you are well aware of the complexities involved in managing the financial operations of a global organization. One of the critical aspects of financial management in India is understanding the Goods and Services Tax (GST) regime. In this article, we will delve into the details of India’s GST regime, its implications for MNCs, and how outsourcing to experts like Finsmart Accounting can support you in navigating these complexities.
Understanding India’s GST Regime
India’s GST regime was introduced in July 2017, replacing the existing multiple indirect tax levies. These indirect tax levies included Central Taxes such as Additional Duties of Excise, Central Excise Duty, and Service Tax .
Additionally, GST subsumed State Taxes like State VAT/Sales Tax, Purchase Tax, Entertainment Tax, Luxury Tax, and Entry Tax . The GST is a consumption-based tax, levied on the supply of goods and services. The GST regime is designed to simplify the indirect tax structure in India, reduce compliance costs, and increase tax efficiency.
The GST regime in India is governed by the Central Goods and Services Tax Act, 2017, and the Integrated Goods and Services Tax Act, 2017. The GST Council, comprising representatives from the central government and state governments, is responsible for making recommendations on GST rates, exemptions, and compliance requirements.
Implications of GST for MNCs
The GST regime in India has significant implications for MNCs with subsidiaries in India. Some of the key implications include:
GST Registration: Understanding the Threshold Limit and Registration Process
The GST registration threshold in India is actually based on the type of business activity. For businesses dealing in goods, the threshold limit is INR 40 lakhs, while for businesses providing services, the threshold limit is INR 20 lakhs.
Additionally, certain categories of businesses, such as e-commerce operators, interstate suppliers, and non-resident taxable persons, are required to register for GST regardless of their turnover
The GST registration process involves obtaining a unique GST identification number (GSTIN) from the GST authorities. To register for GST, MNCs must provide detailed information about their business, including their business name, address, and tax identification number.
It is essential for MNCs to understand the GST registration process and the threshold limit to ensure compliance with GST regulations. Failure to register for GST can result in penalties and fines.
GST Compliance: Understanding the Filing Requirements and Record-Keeping Obligations
GST compliance refers to the adherence to regulations and requirements set forth under the Goods and Services Tax (GST) regime. It encompasses timely and accurate filing of GST returns, maintaining proper records, and ensuring that the business meets all legal obligations related to GST. Compliance is vital for businesses to avoid penalties, maintain credibility, and ensure seamless operations.
Compliance ensures that businesses operate within the legal framework, avoiding substantial fines and legal repercussions. It also facilitates transparency and trust with stakeholders. By ensuring compliance, businesses can benefit from input tax credits, reduce tax liabilities, and enhance their overall financial health.
Key Components of GST Compliance:
To achieve GST compliance, businesses must focus on several key components:
- Registration: Every business exceeding the prescribed turnover threshold must register under GST. Understanding the registration process and its requirements is the first step towards compliance.
- Invoicing: Issuing correct invoices as per GST rules is crucial. Invoices must contain all mandatory details, such as GSTIN, HSN code, and taxable value.
- Filing Returns: Timely filing of GST returns (GSTR-1, GSTR-3B, etc.) is mandatory. Accurate reporting of sales, purchases, and tax liabilities ensures compliance and smooth reconciliation.
- Payment of Taxes: Ensuring timely payment of GST is vital. Businesses must calculate their tax liabilities accurately and pay the dues within the stipulated time to avoid interest and penalties.
- Maintaining Records: Proper maintenance of books of accounts and records is essential for compliance. Businesses must keep records of all transactions, invoices, and tax payments.These records must be maintained for a minimum period of six years from the end of the relevant financial year.
By focusing on these key components, businesses can ensure GST compliance, avoid penalties, and optimize their financial performance.
GST Rates: Understanding the Tax Rates and Exemptions
MNCs must understand the GST rates applicable to their goods and services, as GST rates vary depending on the type of goods or services. The GST rates in India range from 0% to 28%, with four tax slabs: 5%, 12%, 18%, and 28%.
MNCs must also understand the GST exemptions and concessions available to them. For example, certain goods and services, such as healthcare and education services, are exempt from GST.
Input Tax Credit: Understanding the Concept and Eligibility Criteria
In the context of GST, Input Tax Credit (ITC) refers to a tax credit available to GST-registered entities that have paid taxes on goods and services purchased as inputs for their business. This tax credit can be deducted from the GST applicable to the final supply made to the end user, thereby reducing the overall GST liability of the registered GST entity.
To illustrate this concept, let’s consider an example from a service company perspective. Suppose a software development company, ABC Infotech, purchases IT consulting services from another company, DEF Consultants, for Rs. 100,000 plus GST of Rs. 18,000. ABC Infotech uses these consulting services to develop software for its clients. The software developed by ABC Infotech is subject to GST at the rate of 18%. The total GST payable by ABC Infotech on the software developed is Rs. 36,000.
However, ABC Infotech can claim an input tax credit of Rs. 18,000, which is the GST paid on the IT consulting services purchased from DEF Consultants. This input tax credit can be deducted from the total GST payable by ABC Infotech, resulting in a net GST liability of Rs. 18,000.
Objective of Input Tax Credit Mechanism
The primary objective of the input tax credit mechanism is to reduce the tax burden on a single GST-registered entity and reduce the possibility of double taxation. By allowing businesses to claim input tax credits, the GST regime ensures that different entities involved in the supply of goods and services pay GST at applicable rates, thereby distributing the overall GST burden.
Eligibility Criteria for Availing Input Tax Credit in GST
To avail the benefit of input tax credit, the following eligibility criteria must be fulfilled:
- The entity seeking GST benefit must be registered under GST.
- The GST amount paid must be shown by the invoice provided by the registered supplier.
- The receipt of goods and/or services must be completed.
- The GST-registered supplier needs to have submitted the due GST to tax authorities and filed the applicable tax returns.
- If ITC has not already been included in the cost of capital goods and no depreciation on such tax has been claimed.
- The maximum time to claim input tax credit under GST has not passed.
Documents Required for Availing Input Tax Credit
To avail the benefit of input tax credit, the following documents are required:
- Valid invoices issued by suppliers.
- Valid ITC entry must be visible in GSTR-2B submitted by the buyer/recipient.
- Bill of entry.
- Valid bill of supply issued by the supplier as per applicable GST invoice rules.
- Invoice/Credit Note issued by Input Service Distributor as per GST invoice rules.
The above list of documents is for illustrative purposes only, and there may be other documents that can be used for the purpose of availing input tax credit on a case-by-case basis. The applicable document(s) need to be submitted at the time of filing GSTR-2 to avail the benefit of ITC under GST
GST Audit and Assessment: Understanding the Audit Process and Assessment Procedure
As a multinational corporation (MNC) operating in India, it is essential to understand the GST audit and assessment process. The GST audit is a critical component of the GST framework, aimed at verifying the correctness of turnover declared, taxes paid, refund claimed, and input tax credit availed.
Types of Assessment under GST
- Self-Assessment: This is the primary method of assessment, where taxpayers calculate and pay their own tax liability and file returns accordingly.
- Provisional Assessment: This type of assessment is resorted to when the taxpayer is unable to determine the value of supply or the rate of tax.
- Scrutiny Assessment: This assessment is conducted by tax authorities to verify the correctness of returns filed by taxpayers.
- Best Judgment Assessment: This assessment is done when the taxpayer fails to furnish returns, and the tax authorities assess the tax liability based on available information.
- Assessment of Unregistered Persons: This assessment is conducted when a taxable person fails to obtain registration or whose registration has been cancelled.
- Assessment of Non-Filers of Returns: This assessment is conducted when a taxable person fails to file returns.
- Summary Assessment: This assessment is conducted in special cases, such as when tax authorities believe that the taxpayer is trying to evade tax or when there is a threat to revenue.
Implications for MNCs
As an MNC operating in India, it is crucial to understand the GST audit and assessment process to ensure compliance and avoid penalties. The GST audit process can be complex, and MNCs must ensure that they maintain accurate records and documentation to support their GST returns.
To ensure compliance with GST regulations, MNCs can consider the following:
- Maintain accurate and detailed records of GST transactions.
- Ensure timely filing of GST returns.
- Conduct regular audits to ensure compliance with GST regulations.
- Seek professional advice from GST experts to ensure compliance with GST regulations.
Challenges in GST Compliance for MNCs
While the GST regime in India offers several benefits, including simplified tax compliance and reduced tax rates, MNCs with subsidiaries in India face several challenges in GST compliance. As seen so far, GST can become complex and since it is dependent on the GST Council, rules and regulations can change frequently. This complexity and uncertainty can pose significant challenges for MNCs with subsidiaries in India. Some of the key challenges include:
- Complexity of GST Laws: The GST laws in India are complex, and MNCs must understand the nuances of GST laws to ensure compliance. The GST laws are constantly evolving, with frequent changes to rates, rules, and regulations. This complexity can make it difficult for MNCs to ensure compliance, especially if they do not have a dedicated GST team.
- GST Return Filing: MNCs must file GST returns on a monthly or quarterly basis, depending on their turnover. The GST return filing process can be time-consuming and requires accurate and detailed information. MNCs must ensure that they have a robust system in place to capture and report GST-related data accurately.
- GST Payment and Refund: MNCs must pay GST on time and claim refunds, if eligible. The GST payment and refund process can be complex, and MNCs must ensure that they understand the rules and regulations surrounding GST payments and refunds.
- GST Audit and Assessment: MNCs must be prepared for GST audits and assessments, which can be time-consuming and costly. The GST audit and assessment process can be complex, and MNCs must ensure that they have a robust system in place to capture and report GST-related data accurately.
- Change in GST Rates and Rules: The GST rates and rules can change frequently, and MNCs must ensure that they are aware of these changes and comply with them. This can be a challenge, especially for MNCs that do not have a dedicated GST team.
- Lack of Standardization: The GST laws and regulations can vary across different states in India, and MNCs must ensure that they comply with these variations. This can be a challenge, especially for MNCs that operate in multiple states in India.
How Outsourcing to Experts like Finsmart Accounting Can Support You
Managing the financial operations of an MNC with subsidiaries in India can be a complex and time-consuming task, especially when it comes to navigating the complexities of India’s GST regime. Outsourcing to experts like Finsmart Accounting can provide you with the support and guidance you need to ensure compliance with GST regulations, optimize your tax strategy, and minimize your tax liability.
Finsmart Accounting is a leading provider of accounting and tax services to MNCs with subsidiaries in India. Our team of experts has a deep understanding of the GST regime in India, including the concepts of GST registration, GST compliance, GST rates, input tax credit, and GST audit and assessment.
By outsourcing to Finsmart Accounting, you can:
- Gain a deeper understanding of the GST regime in India: Our team of experts can provide you with a detailed analysis of the GST regime in India and its implications for your business.
- Ensure compliance with GST regulations: We can assist you in ensuring compliance with GST regulations, including GST registration, GST return filing, and GST payment.
- Optimize your tax strategy: Our team of experts can assist you in optimizing your tax strategy, including the use of input tax credit to minimize your tax liability.
- Mitigate the risk of GST audit and assessment: We can assist you in preparing for GST audits and assessments, including maintaining accurate records and documentation.
To learn more about how Finsmart Accounting can support you in navigating the complexities of India’s GST regime, schedule a consultation with our team of experts today.
Book a consultation today: https://calendly.com/finsmart_accounting/30min
India Business Head
Mrs. Dipali Phadke is a qualified Chartered Accountant with more than 20+ years of experience in the field of Accounting, Taxation and Payroll. She is the backbone of Company’s Operations and heads India Business at Finsmart Accounting
