GOODS AND SERVICES TAX (GST) IN INDIA

Presentation by CA. VINAY BHUSHAN

Associate Director - Taxpert Professionals

Present system :Power to levy taxes

Power to levy taxes

Central

Excise duty On Manufacture

Customs dutyOn

importation/exportation

Service Tax On provision of services

Central Sales Tax On interstate sales

State

Value added TaxOn sales of good within

the states

Entry Tax/ Octroi/Local Body taxes

On movement of goods/transfer

Introduction

of the GST

would

require

amendment

s in the

Constitution

so as to

concurrentl

y empower

the Centre

and the

States to

levy and

collect the

GST.

GST : A boon to economy

- G ST is a comprehensive value added taxlevied on goods and services . In aG ST regime,

goods and services are not differentiated asthey move through the supply chain

- potential to additionally contribute over onepercent to India’s G ross Domestic Product

(G DP)

Need for GST

Imperative in the emerging economic environment.

Full credit for inputs taxes collected.

GST, being a destination-based consumption taxbased on VAT principle, would also greatly help inremoving economic distortions

Will help in development of a common nationalmarket.

About 150

countries have

adopted a GST

or national-level

value-added tax

framework

Bahamas and

Malaysia are

likely to

implement

GST/VAT in

2015

Tax System should be

•Simple

•Conducive

•Fair

•Representative

Justification at the center level

i. At present excise duty paid on the raw materialconsumed is being allowed as input credit only.For other taxes and duties paid for post-manufacturing expenses, there is no mechanismfor input credit under the Central Excise Duty Act.

ii. Credit for service tax paid is being allowedmanufacturer/ service provider to a limitedextent. In order to give the credit of service taxpaid in respect of services consumed, it isnecessary that there should be a comprehensivesystem under which both the goods and servicesare covered.

iii. At present, the service tax is levied on restricteditems only. Many other large number of servicescould not be taxed. It is to reduce the effect ofcascading of taxes, which means levying tax ontaxes.

Justification at the State Level

i. A major defect under the State VAT is thatthe State is charging VAT on the excise dutypaid to the Central Government, which goesagainst the principle of not levying tax ontaxes.

ii. In the present State level VAT scheme,Cenvat allowed on the goods remainsincluded in the value of goods to be taxedwhich is a cascading effect on account ofCenvat element.

iii. Many of the States are still continuing withvarious types of indirect taxes, such asluxury tax, entertainment tax, etc.

iv. As tax is being levied on inter-state transferof goods, there is no provision for takinginput credit on CST leading to additionalburden on the dealers.

Rationale for GST

Salient features of GST

GST on supply of goods or services as against

manufacture or on sale of goods or on provision of

services.

GST would be a destination based tax as against the present concept of origin

based tax.

It would be a dual GST with the Centre and the States

simultaneously levying it on a common base.

GST would apply to all goods and services barring a few to

be specified

The GST to be levied by the Centre would be called

Central GST (CGST) and that to be levied by the States would be called State GST

(SGST)

Integrated GST (IGST) would be levied on inter-State

supply of goods or services.

CGST and SGST would be levied at rates to be mutually

agreed upon by the Centre and the States.

Mechanism of GST

GST

CGSTTo be leived by Central

Government

location of the supplier and the recipient within

the country is immaterial for the purpose of CGST

SGSTTo be levied by state

government

Chargeable only when the supplier and the

recipient are both located within the State

IGSTTo be leived by central government in place of

CST

Unlike CST Credit of IGST shall be available

IGST = CGST + SGST

Set off/Credits/Refunds

Present system of Credits

Types of Taxes

Whether credit/Refund is allowed

levied by

Basic Custom duty NO, It’s a cost Centre

Counter vailing custom duty Yes Centre

Special Addition Duty Yes Centre

Excise duty Yes Centre

Service tax Yes Centre

Central Sales tax NO, It’s a cost Centre

Value added tax Yes State

Octroi/Entry Tax/Local Body Tax NO, It’s a cost State

Type of Taxes

Whether credit/refund is allowed Against

CGST YesCGST only

SGST YesSGST Only

IGST Yes All

Credits under GST

Taxable Event

TAXABLE EVENT IN CASE OF GST : SUPPLY OF GOODS

Type of Tax Taxable Event

Custom Duty Import/Export

Excise Duty Manufacture

Service Tax on Provision of Service

VAT Sale within the state

CST Sale outside the state

Taxable person/Rate of Tax

•cover all types of person carrying on business activities, i.e. manufacturer, job-worker, trader, importer, exporter, all types of service providers, etc.

•If a company is having four branches in four different states, all the four branches will be considered as TP under each jurisdiction of SGs.

•All the dealers/ business entities will have to pay both the types of taxes on all the transactions.

•A dealer must get registered under CGST as it will make him entitle to claim ITC of CGST thereby attracting buyers under B2B transactions.

•Importers have to register under both CGST and SGST as well.

Taxable person

•Two-rate structure –a lower rate for necessary items and items of basic importance and a standard rate for goods in general.

•For CGST relating to goods, the States considered that the Government of India might also have a two-rate structure, with conformity in the levels of rate with the SGST. For taxation of services, there may be a single rate for both CGST and SGST.

•It will be total of the rate as applicable under CGST & SGST.

Rate of Tax

VAT/GST

Position before VAT

VAT

Position after VAT : GST

There was cascading effect of Tax I,e. Tax on Tax

VAT is the tax on Value addition only thereby removing the cascading effect

However, the cascading effect is not removed completely. GST is an improvement over VAT

VAT was introduced in the

Indian taxation system from

April 1, 2005

in an effort to address the

problems associated with

the earlier Sales

Tax1.

India is one of the 123

countries across the world

that are

following the VAT mode,

which is an improvement in

several respects.

essence of GST is to correct

certain

shortcomings of VAT like

bringing services under a cogent

tax net,

which is not possible under the

VAT system. Hence, GST has

been

modeled as an extension of the

current VAT that would make the

tax

system more comprehensive

and smoother in its functioning.

Understanding VAT

Producer/manuf

acturer Cost of input Value of output Tax Rate

Selling price

including tax rate Tax Burden

Manufacturer A 0 100 10% 110(100+10%*100) 10

Manufacturer B 110 150 10% 165(150+10%*150) 15

Manufacturer C 165 200 10% 220(200+10%*200) 20

Producer/manuf

acturer Cost of input Value of output Value addition Tax Rate

Selling price

including tax rate Tax Burden

Manufacturer A 0 100 0 10% 110(100+10%*100) 10

Manufacturer B 110 150 50(150-100) 10% 165(150+10%*150) 15

Manufacturer C 165 200 50(200-150) 10% 220(200+10%*200) 20

Position before VAT

Position after VAT

Problems with VAT

- Central Value Added Tax or CENVAT on certain commodities remains included in the value of goods to be taxed under State

VAT.

- In the VAT system, taxing service sector is practically difficult. in the existing VAT system where the aspect of taxing services is

not very clear-cut

Subsuming of Existing Taxes

The sub-sumation should result in free flow of tax credit in intra and inter-State levels so

that unrelated taxes, levies and fees are not be subsumed under GST.

Sl. No.

Subsumed under CGST Subsumed under SGST

1 Central Excise Duty VAT / Sales tax

2 Additional Excise Duties Entertainment tax (unless it is levied by the local bodies).

3 Excise Duty-Medicinal and Toiletries Preparation Act

Luxury tax

4 Service Tax Taxes on lottery, betting and gambling.

5 Additional CVD State Cesses and Surcharges (supply of goods and services)

6 Special Additional Duty of Customs - 4% (SAD)

Entry tax not in lieu of Octroi

7 Surcharges

8 Ceses

Following are considered as

outside the GST

Levies on petroleum

products

Levies on alcoholic

products

Taxes on lottery and

betting

Basic customs duty and

safeguard duties on

import of goods into

India

Entry taxes levied by

municipalities or

panchayats

Entertainment and

Luxury taxes

Electricity duties/ taxes

Stamp duties on

immovable properties

Taxes on vehicles

HOW does GST work

Stage of supply

chain

Purchase

value of

input

Value addition value of which

supply of goods

and services is

made at the

next stage

Rate of

GST

GST on output Input tax

credit

Net GST=

GST on

output -

Input tax

credit

Manufacturer 100 30 130 10% 13 10 13-10=3

Wholsesaler 130 20 150 10% 15 13 15-13=2

Retailer 150 10 160 10% 16 15 16-15=1

Position after GST

Rate of GST: 10% (assumed)

Cost of purchase by manufacturer: Rs. 150

Sale value by manufacturer to wholeseller: Rs. 200 (value addition of Rs. 50)

Sale value by wholeseller to retailer: Rs. 230 (value addition of Rs. 30)

Sale value by retailer to final consumer: Rs. 250 (value addition of Rs. 20)

GST Impact

• The GST offers a unique opportunity to rationalize and re-engineer logisticsnetworks in India, given the inherent inefficiencies with taxes based on thecrossing of administrative boundaries. It will free up decisions onwarehousing and distribution from tax considerations so that operationaland logistics efficiency determines the location and movement of goods, itadded.

• Will reduce the tax burden as taxes only on value addition

• Reduction in overall product costing

• Challenges of new system in terms of infrastructure etc.

Manufacturing in India accounts for around 16 percent of GDP, a level that has remained largely unchanged in the last two decades and is relatively low when compared to the 20-percent plus share in countries like Brazil, China, Indonesia, Korea and Malaysia, even after controlling for differences in per capita incomes. .

Impact on sectors

Manufacturing sector

Will reduce the tax burden as taxes only on value addition

Reduction in overall product costing

Challenges of new system in terms of infrastructure etc

Pharmaceutical

Lower transaction and compliance cost for industry

Location based incentives will continue

Currently drugs and medicines fall under the 4-5% excise duty category. This is expected to continue in GST

Automobile sector

Inter state stock Movement

For the automobile industry 80% of stock is sold outside the manufacturing state through distributors and stock transfers

Logistics sector

Relocation by manufacturers will benefit logistics company

India

Plant

RawMaterial

Inter-State

RawMaterial

Inter-State

CGST + SGST

BCD+(CGST + SGST) or IGST

BCD + CVD + SAD

CGST + SGST or IGST

(net of input taxes

credit)

Post GST

Pre GST

Outside India

Excise Duty

(credit of Excise duty

/CVD+SAD+S.Tax)

Warehouse/Depot

Raw Material

BCD + CVD + SAD

BCD+(CGST + SGST) or IGSTFinished Goods

Input Services

CST (VAT

Credit)IGST net of input

taxes credit

Distributor

(inter-state)

CGST + SGST net of

input taxes credit

Excise duty + CST

IGST

Excise duty + VAT

Service Tax

CGST + SGST or IGST

Distributor

(inter-state)

VAT (Vat

Credit)

Recent Development

The Constitution (one hundred and twenty second amendment) Bill, 2014

Article 246A is introduced in Part XI Chapter 1 titled “Legislative Relations”. This article empowers the legislature of every state to make laws with respect to goods and services tax imposed by the Union or by the State.

Part XII Chapter 1 titled “Finance” will be a place for the new article 269A which will address the issue of distribution of revenue between the Union and the States.

The levy of additional tax on supply of goods in the course of inter-state trade not exceeding one percent to be levied and collected by the Government of India for a period not exceeding two years or such other period as the GST Council may recommend.

Article 279A - new authority called the “GST Council” will be constituted.

The concept of sale being replaced with supply will bring to tax free supplies in the nature of samples, compliments, testing etc. unless otherwise specifically exempted in the GST law.

Article 366 “services means anything other than goods”

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