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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.

Worldwide GST:

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:-

CountryRate of GST
Australia10%
France19.6%
Canada5%
Germany19%
Japan5%
Singapore7%
New Zealand15%

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
ParticularsWithout GSTWith GST
(Rs.)
Manufacture to Wholesaler
Cost of Production5,000.005,000.00
Add: Profit Margin2,000.002,000.00
Manufacturer Price7,000.007,000.00
Add: Excise Duty @ 12%840.00
Total Value(a)7,840.007,000.00
Add: VAT @ 12.5%980.00
Add: CGST @ 12%840.00
Add: SGST @ 12%840.00
Invoice Value8,820.008,680.00
Wholesaler to Retailer
COG to Wholesaler(a)7,840.007,000.00
Add: Profit [email protected]%784.00700.00
Total Value(b)8,624.007,700.00
Add: VAT @ 12.5%1,078.00
Add: CGST @ 12%924.00
Add: SGST @ 12%924.00
Invoice Value9,702.009,548.00
Retailer to Consumer:
COG to Retailer (b)8,624.007,700.00
Add: Profit Margin862.40770.00
Total Value(c)9,486.408,470.00
Add: VAT @ 12.5%1,185.80
Add: CGST @ 12%1,016.40
Add: SGST @ 12%1,016.40
Total Price to the Final consumer10,672.2010,502.80
Cost saving to consumer169.40
% Cost Saving1.59
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.

Solution:

Output Tax Calculation

ParticularsSales Within StateStock Transfer Outside StateInter State SalesTotal
Qty. Sold800350650
Price per unit101010
Value of Goods Sold8,0003,5006,50018,000
Tax Amount:
Tax Amount – CGST(5%)400400
Tax Amount – SGST(7%)560560
Tax Amount – IGST(12%)4207801,200

Calculation of Tax Payable

ParticularsCGSTSGSTIGST Total
Tax Payable Amount4005601200
Less: Input Tax Credit
CGST400350750
SGST5604901050
Balance Payable360360 

Notes:

  • 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.

Solution:

Calculation of Tax Payable

ParticularsCGSTSGSTIGST
Tax Payable Amount4005601,200
Less: Input Tax Credit
CGST
SGST
IGST4004001,2002000
Balance Payable160.00160

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.

Example-4 (Import)

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

ParticularsAmount
(Rs)
Cost of Goods imported10,000
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

ParticularsAmount(Rs)
Sale Value (before tax)45,000
Add: CGST on Import @ 5%2,250
Add: SGST on Import @ 7%3,150
Sales Value50,400

Tax Payable Calculation

ParticularsCGSTSGST
(Rs.)(Rs.)
Output tax2,2503,150
Less: Input tax credit
CGST550
SGST770
Net tax payable1,7002,380

Note: Please note that GST shall be levied including Basic Customs Duty considering.

Example-5 (Export)

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

ParticularsAmount
(Rs)
Cost of Imported Goods(from above example)50,400
Add: Margin and Modification Amt.10,000
Sale Value60,400
Add: CGST on Export @ 5%
Add: SGST on Export @ 7%
Export Value60,400

Refund Calculation

ParticularsAmount
(Rs)
Basic Customs Duty(BCD, from above example)1,000.00
Refund Factor0.80
Refund amount of BDC800.00
Add: CGST(from above example)550.00
Add: SGST(from above example)770.00
Total Refund amount2,120.00

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
  • Surcharges

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)

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