Systems of GST / VAT

Internationally, there are three systems of Goods & Services Tax (GST) / Value Added Tax (VAT) in vogue in different countries, viz,

  1. Invoice System
  2. Payment System
  3. Hybrid System

Invoice System: In the invoice system, the GST (Input) is claimed on the basis of invoice and it is claimed when the invoice is received, it is immaterial whether payment is made or not. Further the GST (Output) is accounted for when invoice is raised. Here also the time of receipt of payment is immaterial. One may treat it as mercantile system of accounting. In India the present system of sales tax on goods is an invoice system of VAT and here it is immaterial whether the taxpayer is following the cash basis of accounting or mercantile basis of accounting. The advantage of invoice system is that the input credit can be claimed without making the payment. The disadvantage of the invoice system is that the GST has to be paid without receiving the payment.

Payment System: In the payment system of GST, the GST (Input) is claimed when the payment for purchases is made and the GST (Output) is accounted for when the payment is made. In this system, it is immaterial whether the assessee is maintaining the accounts on cash basis or not. The advantage of cash invoice system is that the Tax (output) need not be deposited until the payment for the goods and/or services is received. The disadvantage of the payment system is that the GST (input) cannot be claimed without making the payment. The Taxes on services in India are based on this payment system since service tax is payable on receipt basis and further Cenvat credit is only allowable when payment of the service is made. In some countries, this system is also adopted for small traders to keep them away from the complexities of the Invoice system, which is purely a mercantile system.

Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and GST (Output) is accounted for on the basis of payment, if allowed by the law. In some countries the dealers have to put their option for this system or for a reversal of this system before adopting the same.

GST and Present System of VAT

In principle, there is no difference between present tax structure under VAT and GST as far as the tax on goods is concerned because GST is also a form of VAT on Goods and services. Here at present the sales tax, with an exception of CST, is a VAT system and in case of service tax the system also has the Cenvat credit system hence both sales tax and service tax are under VAT system in our country. At present, the goods and services are taxed separately but in GST, this difference will not exist and all goods and services shall be taxed alike as per the provisions of law.

All the states have their own VAT Laws comprising VAT acts and VAT rules and these acts and rules are formulated on the basis of “White Paper on VAT” issued by the empowered committee of states’ Finance Ministers on VAT.

Due to the fact that the taxpayers are already using the Vatable sales tax and service tax system there may be a possibility that GST will be a matter of settlement between the Centre and the states and like VAT, the possibility of any resistance from the tax payers is somewhat less.

The Constitution of India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and international imports are with the Union and post- production levies rest with the states. The Centre levies duties of excise on manufactures and import/countervailing duties on international imports apart from levying a tax on services under various taxing and the residuary entry in the Union List. The states levy VAT on goods sold or entering in the state under various entries of the state list.

A harmonized integrated and fully fledged GST calls for the following concerns for its successful implementation in India. Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. In the current scenario, it is difficult to visualize constitutional amendments of such far reaching implications going through, more so in view of the fact that sharing of legislative powers is such an essential element of our federal polity. Another issue concerned is the appropriate designing and structuring of GST in India. The issue involved includes, how the issue of inter-state movement of goods and services may be addressed, taxes on services originating in one state and being consumed in other state etc. Another contentious issue that is bound to crop up in this regard is the manner of sharing of resources between the Centre and the states. Finally, apart from all these, there has to be a robust and integrated Management Information System dedicated to the task of tracking flow of goods and services across the country and rendering accurate accounting of levies associated with such flow of goods and services.

(To be continued ……….)

By: Dr. Sanjiv Agarwal February 13, 2016


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