Brief Intro: Introduction of Goods and Services Tax (GST) will indeed be an important perfection and the next logical step towards a widespread indirect tax reforms in India. As per, First Discussion Paper released by the Empowered Committee of the State Finance Ministers on 10.11.2009, it has been made clear that there would be a “Dual GST” in India, i.e. taxation power lies with both by the Centre and the State to levy the taxes on the Goods and Services.
The scheme was supposed to be implemented in India from 1st April 2016, however it may get delayed since the NDA government does not have majority in Rajya sabha (‘The upper house of parliament’ or ‘the house of states’).
Further, Punjab and Haryana were reluctant to give up purchase tax, Maharashtra was unwilling to give up octroi, and all states wanted to keep petroleum and alcohol out of the ambit of GST. Gujarat and Maharashtra want the additional one per cent levy extended beyond the proposed two years, and raised to two per cent. Punjab wants purchase tax outside GST.
Constitutional Amendment: While the Centre is empowered to tax services and goods upto the production stage, the States have the power to tax sale of goods. The States do not have the powers to levy a tax on supply of services while the Centre does not have power to levy tax on the sale of goods. Thus, the Constitution does not vest express power either in the Central or State Government to levy a tax on the ‘supply of goods and services’. Moreover, the Constitution also does not empower the States to impose tax on imports. Therefore, it is essential to have Constitutional Amendments for empowering the Centre to levy tax on sale of goods and States for levy of service tax and tax on imports and other consequential issue.
What is GST?
‘G’ – Goods
‘S’ – Services
‘T’ – Tax
“Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and service at a national level under which no distinction is made between goods and services for levying of tax. It will mostly substitute all indirect taxes levied on goods and services by the Central and State governments in India.
GST is a tax on goods and services under which every person is liable to pay tax on his output and is entitled to get input tax credit (ITC) on the tax paid on its inputs(therefore a tax on value addition only) and ultimately the final consumer shall bear the tax”.
OBJECTIVES OF GST: One of the main objective of Goods & Service Tax(GST) would be to eliminate the doubly taxation i.e. cascading effects of taxes on production and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle.
France was the first country to introduce GST in 1954. Worldwide, Almost 150 countries have introduced GST in one or the other form since now. Most of the countries have a unified GST system. Brazil and Canada follow a dual system vis-à-vis India is going to introduce. In China, GST applies only to goods and the provision of repairs, replacement and processing services. GST rates of some countries are given below:-
|Country||Rate of GST|
Rate of GST:
There would be two-rate structure –a lower rate for necessary items and items of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For goods in general, government is considering pegging the rate of GST from 20% to 23% that is well above the global average rate of 16.4% for similar taxes, however below the revenue neutral rate of 27%.
Model of GST with example:
- The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST). Rates for Central GST and State GST would beapproved appropriately, reflecting revenue considerations and acceptability.
- The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services.
- Cross utilization of ITC both in case of Inputs and capital goods between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services (i.e. IGST).
- The Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.
Example: 1 (Comprehensive Comparison)
|Comparison between Multiple Indirect tax laws and proposed one law|
|Particulars||Without GST||With GST|
|Manufacture to Wholesaler|
|Cost of Production||5,000.00||5,000.00|
|Add: Profit Margin||2,000.00||2,000.00|
|Add: Excise Duty @ 12%||840.00||–|
|Add: VAT @ 12.5%||980.00||–|
|Add: CGST @ 12%||–||840.00|
|Add: SGST @ 12%||–||840.00|
|Wholesaler to Retailer|
|COG to Wholesaler(a)||7,840.00||7,000.00|
|Add: Profit [email protected]%||784.00||700.00|
|Add: VAT @ 12.5%||1,078.00||–|
|Add: CGST @ 12%||–||924.00|
|Add: SGST @ 12%||–||924.00|
|Retailer to Consumer:|
|COG to Retailer (b)||8,624.00||7,700.00|
|Add: Profit Margin||862.40||770.00|
|Add: VAT @ 12.5%||1,185.80||–|
|Add: CGST @ 12%||–||1,016.40|
|Add: SGST @ 12%||–||1,016.40|
|Total Price to the Final consumer||10,672.20||10,502.80|
|Cost saving to consumer||–||169.40|
|% Cost Saving||–||1.59|
|Notes:· Input tax credit available to wholesaler is Rs.980 and Rs.1,680 in case of without GST and with GST respectively.|
|· Likewise Input tax credit available to Retailer is Rs.1,078 and Rs.1,848 in case of without GST and with GST respectively.|
|· In case, VAT rate is also considered to be 12%, the saving to consumer would be 1.15%.|
IGST Model (Inter-State Transactions of Goods & Services) and Input tax credit (ITC) with example:
- Existing CST (Central state tax, tax on interstate movement of goods) shall be discontinued.
- Center would levy IGST (cumulative rate for CGST and SGST)on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.
- The ITC of SGST, CGST shall be allowed as applicable.
- Since ITC of SGST shall be allowed, the Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his SGST liability (while selling the goods in state itself). Thereafter, the Centre will transfer to the importing State the credit of IGST used in payment of SGST. (Please see example 4 & 5)
- The relevant information shall be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective state governments or central government to transfer the funds.
- Advantage of IGST:
- No refund claim in exporting State, as ITC is used up while paying the tax.
- Maintenance of uninterrupted ITC chain on inter-State transactions.
- No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.
Example –2 (Input Tax Credit)
Shiva, a registered dealer had input tax credit for CGST and SGST Rs.750/- and Rs.1,050/- respectively in respect of purchase of inputs and capital goods. He manufactured 1800 liters of finished products. 200 liters was normal loss in the process. The final product was sold at uniform price of Rs.10 per liter as follows:-
Goods sold within State – 800 liter.
Finished product sold in inter-State sale – 650 liter.
Goods sent on stock transfer to consignment agents outside the State – 350 liter.
Further, CGST and SGST rate on the finished product of dealer is 5% and 7% respectively. Further IGST rate is 12%.Calculate tax liability of SGST and CGST to be paid after tax credit.
Output Tax Calculation
|Particulars||Sales Within State||Stock Transfer Outside State||Inter State Sales||Total|
|Price per unit||10||10||10|
|Value of Goods Sold||8,000||3,500||6,500||18,000|
|Tax Amount – CGST(5%)||400||–||–||400|
|Tax Amount – SGST(7%)||560||–||–||560|
|Tax Amount – IGST(12%)||–||420||780||1,200|
Calculation of Tax Payable
|Tax Payable Amount||400||560||1200|
|Less: Input Tax Credit|
- There would be no treatment for normal loss.
- Input tax credit of CGST and SGST of Rs. 750 and Rs. 1050 are paid on inputs. This input tax credit should first be utilized for payment of CGST and SGST, respectively, and balance is to be used for payment of IGST. Thus, balance available for payment of IGST is Rs. 350 of CGST and Rs. 490 of SGST and he is liable to pay balance amount of IGST of Rs. 360 by cash (1200-350-490 = 360). Since credit of SGST of Rs.490 has been utilized for payment of IGST, the State Government will get debit of Rs. 490 from the Central Government.
Example –3 (Input Tax Credit)
Now, continuing with the above example 2, suppose the dealer purchases goods interstate and have input tax credit of IGST available is Rs.2,000/-. Compute the tax payable.
Calculation of Tax Payable
|Tax Payable Amount||400||560||1,200|
|Less: Input Tax Credit|
Note: Input tax credit of Rs.2000, IGST is available. This input tax credit should first be utilized for payment of IGST and balance is to be used first for payment of CGST and remaining for SGST. Likewise in this case Rs.400 and balance Rs.400 are utilized for CGST and SGST respectively. He is liable to pay balance amount of SGST of Rs.160 by cash.(2000-1200-400-560 = 160).
Some Specific points for specific products (being high revenue generating products)
- This tax does not apply to alcohol and petroleum products. They will be continued to be taxed as per the existing practices.
- Tax on Tobacco products will be subject to GST. But government can levy the extra tax percent over and above GST rate.
Other key points:
- Manufacturing state (the state in India in which the goods are manufactured) will be allowed to levy an additional tax percent (say 1%) on supply of goods.
- PAN based identification number will be allowed to each taxpayer to have integration of GST withDirect Tax.
- The taxpayer would need to submit periodical returns, in common format as far as possible, to both the CGST authority and to the concerned SGST authorities.
Exemption/Composition Scheme under GST:
- The Small Taxpayer: The small taxpayers whose gross annual turnover is less than 1.5 Crore will not be covered by GST law and no need to pay tax.
- Scope of composition and compounding scheme under GST to be provided for this purpose, an upper ceiling on gross annual turnover (say Rs.50 Lacs) and a floor tax rate (say 0.5%) with respect to gross annual turnover should be provided.
- Treatment for goods exempt under one state and taxable under the other to be provided.
- List of exempt items which shall be outside the purview of GST shall be provided.
GST on Export & Import with example:
- GST on export would be zero rated
- Both CGST and SGST will be levied on import of goods and services into India. The incidence of tax will follow thedestination principle i.e. SGST goes to the state where it is consumed. Complete set-off will be available on the GST paid on import on goods and services.
Shri Shiva imported goods for Rs. 10,000/- and incurred expenses to produce final saleable goods. BCD @ 10 % was chargeable on imported goods. These manufactured goods were sold within the state at Rs. 45,000 plus applicable GST. Rate of CGST and SGST is 5% and 7% respectively. Compute Cost, Sale value and tax payable for the transaction.
Solution: Calculation of Net cost of imported goods
|Cost of Goods imported||10,000|
|Add: Basic Customs Duty @ 10%||1,000|
|Cost of imported goods (including BCD)||11,000|
|Add: CGST on Import @ 5%||550|
|Add: SGST on Import @ 7%||770|
|Cost of imported goods (including BCD & GST) (Note below)||12,320|
Calculation of Sale value after import
|Sale Value (before tax)||45,000|
|Add: CGST on Import @ 5%||2,250|
|Add: SGST on Import @ 7%||3,150|
Tax Payable Calculation
|Less: Input tax credit||–||–|
|Net tax payable||1,700||2,380|
Note: Please note that GST shall be levied including Basic Customs Duty considering.
Now continuing with the above example 4, suppose the same good is exported after 1 year of use after adding margin and modification amounting Rs.10,000/- and use factor of 1 year for refund calculation is 0.20. Therefore the refund will be 0.80 of Duty amount. Compute Export Value and Refund Value.
Solution: Export Value calculation
|Cost of Imported Goods(from above example)||50,400|
|Add: Margin and Modification Amt.||10,000|
|Add: CGST on Export @ 5%||–|
|Add: SGST on Export @ 7%||–|
|Basic Customs Duty(BCD, from above example)||1,000.00|
|Refund amount of BDC||800.00|
|Add: CGST(from above example)||550.00|
|Add: SGST(from above example)||770.00|
|Total Refund amount||2,120.00|
The above example withstand two basic principles of Taxation Laws i.e. Exports are zero rated and the incidence of tax will follow the destination principle (The taxes will remain with the state where the goods are used, however use factor can be prescribed by the law)
Indirect taxes that will be included under GST:-
State taxes which will be subsumed in SGST
- VAT/Sales Tax
- Entertainment Tax (unless it is levied by local bodies)
- Luxury Tax
- Taxes on lottery, betting and gambling.
- State cess and surcharges to the extent related to supply of goods and services.
- Entry tax not on in lieu of octroi.
Central Taxes which will be subsumed in CGST
- Central Excise Duty.
- Additional Excise Duty.
- The Excise Duty levied under the medical and Toiletries Preparation Act
- Service Tax.
- Additional Customs Duty, commonly known as countervailing Duty (CVD)
- Special Additional duty of customs(SAD)
- Education Cess
Taxes that may or may not be subsumed due to no consensus between the Central and State Governments:
- Stamp Duty
- Vehicle Tax
- Electricity Duty
- Other Entry taxes and Octroi
- Entertainment Tax (levied by local bodies)
- Basic customs duty and safeguard duties on import of goods into India
Other Benefits of GST apart from discussed in first 2-3 paragraph of this article:
- Reduces transaction costs and unnecessary wastages:A single registration and a single compliance will suffice for both SGST and CGST provided government produces effective IT infrastructure and integration of states level with the union.
- Eliminates the multiplicity of taxation: The reduction in the number of taxation applicable in a chain of transaction will help to reduce the paper work and clean up the current mess that is brought by existing indirect taxation laws.
- One Point Single Tax: They would be focus on business rather than worrying about their taxation that may crop at later stages. This will help the business community to decide their supply chain, pricing modalities and in the long run helps the consumers being goods competitive as price will no longer be the function of tax components but function of sheer business intelligence and innovation.
- Reduces average tax burdens:- The cost of tax that consumers have to bear will be certain and it is expected that GST would reduce the average tax burdens on the consumers.
- Reduces the corruption:-As the no. of taxes reduces so does the no of visits to multiple department reducesand hence the reduction in corruption.
- In all cases except a few products and states, there would be uniformity of tax rates across the states.
General points on Various Business Sectors that arise after GST implementation:-
- Real Estate Industry: Construction and Housing sector need to be included in the GST tax base being high tax revenue generating sector and for reduction in no. of tax legislations involved.
- FMCG Sector:.Implementation of proposed GST and opening of Foreign Direct Investment (F.D.I.) are expected to fuel the growth and raise industry’s size.
- Rail Sector:There have been suggestions for including the rail sector under the GST umbrella to bring about significant tax gains and widen the tax net so as to keep overall GST rate low. This will have the added benefit of ensuring that all inter–state transportation of goods can be tracked through the proposed Information technology (IT) network.
- Information Technology enabled services:At present, if the software is transferred through electronic form, it should be considered as Intellectual Property and regarded as a service and if the software is transmitted on media or any other tangible property, then it should be treated as goods and this classification is full of litigation. As GST will have uniform rate for Goods and Services and no concept of state revenue being VAT or central revenue being service tax and hence, the reduction in litigation.
- Transport Sector: Truck drivers spend more than half of their time while negotiating check post and tolls. At present there are more than 600 check points and more than ton types of taxes in road sector.
After the introduction of GST, the time spend by the road transport industry in complaining with laws will reduce and service is going to be better which will boost the goods industry and thus the taxes also.
- Impact on Small Enterprises:There will be three categories of Small Enterprises in the GST regime.
- Those below threshold limit of Rs.1.5 Crores would not be covered.
- Those between the threshold and composition turnovers will have the option to pay a turnover based tax i.e.composite tax or opt to join the GST regime.
- Those above threshold limit will need to be within framework of GST. Possible downward changes in the threshold in some States consequent to the introduction of GST may result in obligation being created for some dealers.
Questions, please ask?
- At what point of time, the tax will be levied?
- What will be the nature of Taxable Event?
- GST is proposed to be levied by both the CG and SGs. How will it be defined under CGST and SGST?
Hope you got the sound understanding of the provisions of GST.
No part of this article shall be reproduced, copied in any material form (including e-medium) without written permission of CA. Shivashish.
The information provided is not a substitute for legal and other professional advice where the facts and circumstances warrant.
(Author CA. Shivashish Karnani – B.Com(H), ACA is a Commerce Faculty & Former Tax Consultant-Ernst & Young and can be reach out freely at [email protected] and on +91-9818472772)