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:
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 Margin@10%||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:
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|
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)
Other key points:
Exemption/Composition Scheme under GST:
GST on Export & Import with example:
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
Central Taxes which will be subsumed in CGST
Taxes that may or may not be subsumed due to no consensus between the Central and State Governments:
Other Benefits of GST apart from discussed in first 2-3 paragraph of this article:
General points on Various Business Sectors that arise after GST implementation:-
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.
Questions, please ask?
Hope you got the sound understanding of the provisions of GST.
Link to Previous Article on MAT provisions (IT Act, 1961) of Author: https://taxguru.in/income-tax/minimum-alternate-tax-alternate-minimum-tax-provisions.html
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 Shivashish Karnani is a CA and can be reach out freely at email@example.com and on +91-9818472772)