CA Soniya Agarwal
Presently Indian Economy has various taxes on Goods and services such as VAT, Service Tax, Excise, Entertainment Tax; Luxury Tax Etc so with coming of GST there shall be single Taxation System. GST is an integrated scheme of taxation that does not discriminate between goods and services. GST chains commence from manufacture of Goods & ends at final consumer of goods who bears the tax burden.
FEATURES OF GST
A. Destination Based Taxation
B. Apply to all stages of the value chain
C. GST has two component
i. CGST – The GST to be levied by the Centre would be called Central GST (CGST)
ii. SGST – The GST to be levied by the “State would be called State GST (SGST)”
D. CGST/SGST will get applicable on all taxable supplies of goods and services made for a consideration including import of goods and services into the country except:
I. Exempted goods or services – common list of CGST & SGST
II. Goods or Services outside the purview of GST
III. Transactions below threshold limits
E. Concept of different rate structure under GST like :-
I. Lower rate for necessary items and goods of basic importance
II. Standard rate for goods in general.
III. Special rate for precious metals
IV. Nil Rate
F. The administration of the Central GST to the Centre and for State GST to the States would be given to ensure harmonious functioning between them which shall reduce unhealthy competition among the centre and the states over tax revenue.
G. CGST & SGST on intra – State supplies of goods or services in India.
H. IGST (Integrated GST) on inter- state supplies of goods or services in India – Levied & Collected by the Centre.
I. GST applicable to
i. Import of goods & services
ii. Inter – state stock transfers of goods & services
J. Export of goods & services – Zero rated.
K. All goods or services likely to be covered under GSt except :-
i. Alcohol for human consumption – state excise + vat
ii. Electricity – Electricity duty
iii. Real State – Stamp duty + property taxes
iv. Petroleum Products
L. Tobacco Products under GST with Central Excise Duty
M. Optional Threshold exemption in both components of GST
N. Optional Compounding scheme for tax payers having taxable turnover up to a certain threshold above the exemption
O. HSN Code like to be used for classification of goods
P. Present Accounting codes likely to be used for services
BENEFITS OF GST
- GST will reduce the tax burden for consumers since it will evade cascading effect in Indirect tax regime like presently when on a good excise duty gets levied as they leave the factory however at retail level VAT is charged, without giving credit of the excise duty levied earlier. But in GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.
- It will result in a simple, transparent and easy tax structure; merging all levies on goods and services into one GST
- It will result in a good administration of tax structure as it will distribute burden of taxation equally between manufacturing & Services
- It will increase tax collections due to wide coverage of goods and services
- It will result in cost competitiveness of goods and services in Global market
- It will reduce transaction costs for taxpayers through simplified tax compliance
HIGHLIGHTS OF NEW PROPOSED GOODS & SERVICE TAX (GST)
1. We will be having only two taxes in the new proposal for GST which are:
- State Level GST (SGST)
- Central Level GST (CGST)
2. CGST will take over following taxes presently being levied on goods and services by Central government
- Central Excise Duty
- Additional Excise Duty
- The Excise Duty levied under Medicinal and toiletries preparation Act
- Service Tax
- Additional Custom Duty (CVD)
- Special Additional Duty of customs ( SAD)
- Surcharge
- Education Cess and Secondary and Higher Secondary education Cess
3. Whereas under SCGST given below taxes will get merged:-
- State VAT/ Central Sales Tax
- Entertainment Tax (not levied by local bodies)
- Purchase Tax
- Entry Tax ( All forms)
- Luxury Tax
- Tax on lottery, betting & gambling
- State Cess and Surcharge to the extend related to supply of goods and services
4. The basic principal for subsuming of taxes in GST is provided as follows:
- Those taxes which commences with import / manufacture /production of goods or provision of services at one end and the consumption of goods and services on other end.
- The taxes, levies and fees which are not related to supply of goods & services should not be subsumed under GST.
5. Taxes on items containing alcohol and petroleum product are kept out of GST. They will continue to be taxed as per existing practices.
6. Tax on Tobacco products will be subject to GST. But government can levy the extra Excise duty over and above GST.
7. The Small Taxpayer: The small taxpayers whose gross annual turnover is less than 1.5 Crore are exempted from CGST and SGST.
8. Input Tax Credit (ITC): Taxes Paid against CGST allowed as ITC against CGST. Taxes paid against SGST allowed as ITC against SGST.
9. Cross utilization of ITC between the Central GST and State GST would not be allowed. Exception: Inter State Supply of goods and services.
- ITC of CGST allowed for payment of CGST
- ITC of SGST allowed for payment of SGST
- ITC of CGST allowed for payment of CGST & IGST in that order
- ITC of SGST allowed for payment of SGST & IGST in that order
- ITC of IGST allowed for payment of IGST, CGST & SGST in that order
10. PAN based identification number will be allowed to each taxpayer to have integration of GST with Direct Tax.
11. IGST Model and ITC:
- Centre would levy IGST levy (CGST + SGST)
- The ITC will be allowed in this transaction will be SGST, IGST, CGST as applicable.
- Appropriate provision will be provided for consignment or Stock transfer.
12. Exports are fully exempted with Zero rates
ILLUSTRATIONS
At present:
Even today, a manufacturer’s commercial invoice reflects both central excise duty and state VAT on the same goods. This is because both are indirect taxes and are collected from the customer. Conceptually, however, at present the centre taxes ‘manufacture’, and thereafter the state taxes ‘sale’ of the goods. The result is that the central excise duty is imposed first on the goods, and the state tax comes after that, on a value that is price plus central excise duty. If the goods are priced at Rs 100, and excise duty is 10% and VAT is 14%, the present scenario is that the invoice will read as follows:
Goods Rs. 100.00
Excise duty @ 10% Rs. 10.00
Sub-total Rs. 110.00
VAT @ 14% Rs. 15.40
Price of the good = 125.40
In future (during GST regime):
When the same transaction of ‘supply’ is being taxed by both centre and states, the taxes are levied simultaneously on the same value. The rate of GST in the above transaction will be 24%, split as 10% central GST and 14% state GST. The transaction will then be taxed as follows:
Goods Rs. 100.00
GST @ 10% Rs. 10.00
S.GST @ 14% Rs. 14.00
Price of the good – 124.00
Reduction in price of good under GST regime = 1.4
Levy of Tax under GST considering rate @ 10%
Suppose a manufacturer purchases X commodity for Rs. 200 and adds a value of Rs. 80 into it thus price of commodity X becomes Rs. 280.
GST paid by manufacturer will be- Rs. 8 i.e.
(Tax on output- Rs. 28 minus Tax paid on input –Rs. 20)
Now the second party in the chain, the wholesaler will get this X for Rs. 280 and supposing the value addition by him is Rs. 60.
GST paid by wholesaler will be- Rs. 6 i.e.
(Tax on output- Rs. 34 minus Tax paid on input –Rs. 28)
The retailer buys the X for Rs. 340 and added a value of Rs. 100 to it.
GST paid by retailer will be- Rs. 10 i.e.
(Tax on output- Rs. 44 minus Tax paid on input –Rs. 34)
Mr. A (based in Maharashtra) supplied Goods to Mr. B (based in Gujarat) and paid 17% IGST. Mr. A has Input credit of CGST 8% and SGST 8% from local Purchases. So he paid only 1% to Central Government Account i.e. in IGST code of that product. Maharashtra will transfer to Centre 8% SGST used for payment of IGST.
Mr. B (based in Gujarat) who had purchased those goods supplied the same locally to Mr. C (based in Gujarat) and liable to SGST 10% and CGST 8%. He will utilize Credit of IGST of 17% first for CGST (8%) and balance for SGST (9%) and will pay 1% in cash. Gujarat Government where goods are consumed is entitled to get destination based tax i.e. SGST. Centre will transfer 9% IGST Credit used for payment of SGST to Gujarat. In this example, few important points may be noted:
- Maharashtra Government in this transaction will not get any tax since it is interstate supply from Maharashtra to Gujarat
- Central Government will get 9% IGST on inter-state supply of goods to Gujarat (8% from Maharashtra Government and 1% paid as Cash by Mr. A)
- Gujarat Government will get 10% SGST for intra-state supply of Goods (9% from central Government and 1%paid as cash by Mr. B)
- Important to note is that Mr. B (based in Gujarat) has been allowed full credit of IGST paid by Mr. A (based in Maharashtra) of 17%
Reply to: Andrew Bohnet :
At present in India VAT is a State subject and each State has its own rates of VAT. It is levied in the State of production and the revenue accrues to the said State. However, GST is a destination based consumption tax which is levied by the State wherein the final consumer is located. Thus under GST the revenue will accrue to the destination State.This is the fundamental difference between VAT and upcoming GST.
India can’t be treated like a group of independent countries like the EU which was formed for limited purpose of forming a common market with a common currency.However India is Union of States with each State having an exclusive power to tax intrastate movement of goods while the Interstate movement of goods is taxed by a Central Law i.e. CST.
With the advent of GST each state will levy two taxes i.e SGST and CGST for intrastate trade and interstate trade. However for interstate trade one single rate called IGST will apply and the credit for which would move with the movement of goods. This will obviate the need for zero rating or reverse charging which will be applicable to only international trade.IGST will be same for each product group and for each business entity across the whole nation. This will also obviate the need for knowing each State’s tax rate to meet the principle of tax on consumption.
Lastly, one of the core principle of VAT is that the burden of tax shall never fall upon any business. It is to be born entirely by the final private consumption. The intermediaries are just SPV to collect the tax in a staggered way and deposit the same with the Govt. They have nothing to do with the impact of tax on their business. It is fundamentally wrong to factor the impact of tax in the cost of the product. Therefore locating business in any State with higher or lower State rates will impact the consumers only and not the business.
Point No. 7. “The Small Taxpayer: The small taxpayers whose gross annual turnover is less than 1.5 Crore are exempted from CGST and SGST.”
This is factually incorrect. As on today even the constitutional amendment 122nd bill is not yet passed by Rajya Sabha. The actual GST legislation would follow the constitutional amendment bill and no body knows ,with surety, what would be the contents of the proposed GST Legislation. Minimum threshold limit will definitely be prescribed but would it be 1.5 Cr or any other sum (including for services) is not yet known. Subject to this correction, the article is really nice. Thanks & good wishes.
Hi Soniya,
It is nice article written for all of us.
I have few questions.
What will be status of Billing for works contract i.e. composite contract) in GST regime?
What will be fate of Stock transfer from/to HO to depot/works/branches?
what will be status of Job contractor who receive freeissue material from their customers/vendors and do not add any material as value addition?
Nice sonia dd
Nice article on GST with illustration….Thanks
Very nice post
Thank you Soniya Mam
Hi,
Will the State GST be treated more as a sales tax like we see with Canada. The principles of GST is that the tax is charged based on where the products are being sold to but come under one jurisdiction. If each state was treated as a country like we see in the EU then they would all have their own GST rate and when selling to another state would zero rate the tax and then the purchasing state would reverse charge it. However, in Canada, there is a common country wide GST rate but then each province charges their own sales tax. The sales tax is based on the buying (final) destination where as GST is usually based on the selling destination. If India operated the traditional GST solution then it would beneficial for many companies to simply set up in the cheapest state for tax because all their sales would have the cheapest tax rate. The Canadian provincial solution means it does not matter where your business is as you have to pay the same tax based on where you sell to regardless of which province you ship from.
So the 2 questions I have are:
1. will the state GST be levied on the buying state rate or the selling state rate and;
2. if neither of the above are true, does it mean intrastate sales are zero rated for state tax (only charging the country GST rate) with the customer then reverse charging any local state GST taxes?
Very nice article.. must read for article……. much appreciated
so, the small taxpayers need not to collect the VAT or excise duty on goods if their turnover is below 1.5crore?????? is it??????….explain
very nice……soniya
A good Article with lot of basic information about GST. Thanks for the time and effort. The final version of GST may come with some small changes.