GOODS AND SERVICE TAX (GST) IN INDIA – Challenges Ahead

January 29, 2012

AGENDA

Present Indirect Taxation system in India

Concept of GST and other salient points

Why GST

Proposed GST Model and How it would work

IGST MODEL

Challenge before us

Opportunity for Company Secretary

• Central Excise• Custom Duty• Export Duty • Service Tax • Central sales Tax

• Sales Tax / VAT• Entertainment Tax • Luxury Tax • Taxes on lottery, betting and gambling• Entry Tax • Octroi etc.

PRESENT INDIRECT TAX SCENARIO IN INDIA

INDIRECT TAXATION

CENTRAL STATE

• More than 150 countries have already introduced GST/ National Level VAT

• Typically GST is a unified Tax System in most of the Countries

• Canada and Brazil only have dual GST

• Standard rate of most of the Countries ranges between 16- 20%

GST – GLOBAL SCENATIO

GST is a tax on goods and services, which is leviable at each point of sale or provision of services, in which at the time of sale of goods or providing the services the seller or service provider can claim the input tax credit (ITC) which he has paid while purchasing the goods or procuring the services.

WHAT IS GST ?

A Comprehensive value added ax

on goods and services

Value added in each stage

Taking Input Tax

Credit (ITC)

Manufacturer

Wholesaler

Retailer

Customer

Department of Tax

150+(15+15)

200+(20+20)

250+(25+25)

30

40-3

0=

10

50-40=10

Assume GGST & SGST is 10%Total Tax collection =(30+10+10)=Rs50 which equal to 20% of Rs.250/-

GST CHART

A Comprehensive Tax on Goods and Services

SALIENT POINTS OF GST:

Multi-point Tax on value added at each stage

Tax is only cost to the end customer

Consumption based tax not origin base

No cascading due to input credit mechanism

Self policing or voluntary compliances

Reduction of Tax evasion /Widens the taxation base

Division of power for imposition of tax between Central and State (Excise vs. VAT)

Multiplicity of taxes at the Central and States Level.

Multiplicity of taxable event.

Complexity in the present system

Cascading effect (i.e Tax on Tax) or Double Taxation

Central Sales Tax (CST): No ITC

Composite Contracts

No harmonized system of taxation

WHY GST ?

• Why Dual GST : India is federal country. Centre and States have been assigned

power to levy taxes Benefits of Dual GST:• Reduction of no. of taxes at centre and

State• Decrease in effective Tax for widen of tax

base• Removal of current cascading effect• Reduction of transactional cost through

simplified tax compliances

GST MODEL

DUEL GST CENTRAL

GST STATE GST

Excise Duty levied under the MTP Act

Central Excise Duty

Service Tax

Special Additional

Duty of Customs

Additional Excise Duty

Additional Custom Duty

(CVD)

Central GST

SUBSUMING OF CENTRAL CST

Entertainment Tax

VAT / Sales Tax

Luxury Tax

Taxes on lottery,

betting & gambling

State Cesses & Surcharges

Entry Tax

State GST

SUBSUMING OF STATE GST

• Basic Custom duty• Basket of petroleum products: crude, motor sprit

(including AFT) and HSD • Alcoholic beverages• Stamp duty

• Purchase Tax• Electricity duty• Taxes on Natural Gas• Tax on vehicles and transport of goods &

passengers

NOT- SUBSUMING IN GST

DECISION DEFERRED ON FOLLOWING

TAXES

Applicable to all transactions of goods and services except:

•the exempted goods and services •Goods which are outside the purview of GST and •the transactions which are below the prescribed threshold

limits

CGST and SGST are to be paid to the accounts to the centre and the states separately.

ITC (Input Tax Credit):

•ITC on central GST would be utilized only against the payment of CGST. The same principal will be applicable for SGST.

•Cross utilization of ITC between the CGST and SGST would not be allowed.

•The taxpayer would have to maintain separate book of accounts for utilization/refund of credit.

SALIENT FEATURES OF THE PROPOSED GST MODEL

Threshold limit :• Minimum exemption limit has not decided as yet.

• Present exemption limit: Service tax:Rs. 10 lacs Central excise Rs.1.5crores Vat in different states Rs.1 lac to 5 lacs.

Compound/ Composition Scheme: • For Gross annual turnover of Rs. 50 lacs and the floor rate

of 0.5% for small traders and small scale industries.• Optional GST registration is also allowed to dealers whose

turnover below the compounding cut-off.

Each taxpayer would be allotted a PAN-linked taxpayer identification no. with a total of 13/15 digits.

Works contract Tax (WCT) would be abolished on or after implementation of GST.

SALIENT FEATURES OF THE PROPOSED GST MODEL

In GST, the rate may be expected be in the range of 16-20%

There may single rate for GST on services at the Central and State level

But in case of goods, there would be a few rates for Central and State GST :

• Standard rate for general (RNR)• Special rate for gold & silver, other precious metal etc.• lower rate for necessary and goods of basic important• Exempted goods considering the special need of each state

In every transaction, both CGST and SGST would apply at pre-determined level.

RATE STRUCTURE

• IMPORT BE TAXED UNDER GST ?

Both CSGT & SGST will be levied on import of goods and services

Incidence of tax will follow the destination based principal

Tax so paid will be available as input tax credit (ITC)

Constitutional Amendments is Required

Export would be zero rated

Similar benefits will be given to Special Economic Zones (SEZs).

• Industrial incentives & Special Industrial Area Scheme :

The tax exemption, remission etc. related to industrial incentives would be converted into cash refund scheme after collection of tax.

Area based exemptions will continue up to legitimate time.

No new exemption, remission etc. would be allowed.

EXPORT & EXEMPTION

• IGST (CGST+SGST) on all inter-state transactions of taxable goods and services

• Supplier will pay IGST after set-off available credit of IGST, CGST & SGST on his purchases.

• The exporting state will transfer to the central agency the credit of SGST used for payment of IGST

• The importing taxpayer will claim ITC of IGST against his IGST,CGST and SGST tax liability.

• The central agency will transfer to the importing state the credit of IGST used in payment of SGST.

IGST MODEL: INTER-STATE TRANSACTIONS

(in INR)Value of Goods 1,000 Add : IGST IGST @ 20% 200 CGST @ 10% -

SGST @ 10% - 200

Total 1,200

GST Liabilities: 200 Less: IGST 100

CGST 50 SGST 25 175

Paid to the Central Government 25

Value of Goods (intra -state Sales) 1,500 Add : GST CGST @ 10% 150

SGST @ 10% 150 300 TOTAL INVOICE VALUE 1,800

Discharged of Output GSTOutput CGST 150Less: Input IGST 150Output SGST 150 Input IGST 50 Input SGST 25 75Paid to the Government 75

Local Sales

Central Agency

Delhi

Mumbai

Input Credit in HandIGST 100CGST 50SGST 25

Input Credit in HandIGST 200CGST 25SGST 25

ILLUSTRATION

• Uninterrupted ITC chain on inter-state transactions

• No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer

• No refund claim in exporting State

• Self- Monitoring model

• IT facility

• All inter-state dealers will be e-registered

ADVANTAGE OF IGST MODEL

Output Input Set-off Allowed

IGST SGST YES

IGST CGST YES

IGST IGST YES

SGST SGST YES

CGST CGST YES

CGST SGST NO

SGST CGST NO

RULES REGARDING SET-OFF OF GST

GST Rates

Constitutional Amendments for :

Sharing of resources and compensation

Administrative preparedness to implement the new tax regime

GST Council and Dispute settlement authority

Setting up IT structure :

Treatment of un-utilised tax credit carried forward under CENVAT and State VAT

Design and Structure: IGST Model, Issue like Service

MAJOR CHALLENGES

Advisory /Support to Government

Training to Corporate Staff

Decision making functions such as market strategies, stock transfer etc.

Registration of service tax in each State and cancellation of CST etc.

Opportunity for CS and Other Professions

Special Audit /Certification like non applicability, exemption etc.

Helping the small business for composition scheme

Impact on various sectors

“Law cannot stand still, it must change with the changing social concepts and value. If the law fails to respond to the needs of the changing society, then either it will stifle the growth of society and choke its progress”

P N Bhawati

• THANKS