GST is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. GST is a part of proposed tax reforms in India having an extensive base that instigate the applicability of an efficient and harmonized consumption tax system. GST has been commonly accepted by world and more than 140 countries have acknowledged the same. Generally the GST ranges between 15%- 20% in most of the countries.
Justification in Implementation of GST
Despite the success with VAT, there are still certain shortcoming in structure in the levy of VAT both at Central level and State level. The shortcoming in CENVAT of the Government of India lies in non-inclusion of several taxes in the overall framework of CENVAT such as VAT, ACD, Surcharge etc.
Moreover, in the present State-level VAT scheme, CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and contributing to that extent a cascading effect on account of CENVAT element. Furthermore, any commodity, in general, is produced on the basis of physical inputs as well as services, and there should be integration of VAT on goods with tax on services at the State level as well, and at the same time there should also be removal of cascading effect of service tax.
Further, by removing cascading effect, layers of taxes and simplifying structures, the GST would encourage compliance, which is also expected to widen the tax base. But virtually every media report that mentions the GST says that the tax reform has the potential to add up to 2 percent to India’s GDP.
If VAT is considered to be a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level, then GST will be a further significant breakthrough – the next logical step – towards a comprehensive indirect tax reform in the country.
However, the paper makes some crucial assumption such as pegging the revenue-neutral rate in the range of 6.2 percent and 9.4 percent. The revenue-neutral rate is the rate for GST that will not make a net difference to the overall tax collection of centre and states.
Salient Features of GST
The GST Framework could easily be one of the most important tax reforms to be tabled for discussion in the Parliament. It does bring with some problems, like division of taxation power between Centre and State. The GST will be applicable on the basis of Destination principle.
So the GST has two components:-
One levied by Centre (hereinafter referred to as Central GST) and The other levied by the States ( hereinafter referred as State GST)
However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. will be uniform across these statutes as far as practicable.
The GST would be levied in 3 different forms.
|This is applicable in the case of Inter-State sale of goods and provision of service||In case of sale of goods Intra-state then tax will be charged as per this form.|
|Central Excise Duty||Entry tax (not octroi)|
|Service Tax||Entertainment tax|
|CVD, SAD||VAT/Sales Tax|
|Excise duty on M&TP etc.||Luxury tax etc.|
Integrated GST (IGST)
Tax Credit Mechanism
It is clear that cross utilisation of CGST and SGST is not allowed generally but the IGST mechanism will make this credit fungible.
Following example will give clear idea above utilisation of credit and costing under present system & GST.
Assumption:- (1) Rate of Excise Duty – 8%; (2) VAT Rate – 12.5%; (3) Central GST Rate – 12%; (4) State GST Rate – 8%; (5) Profit Margin – Rs. 5,000/- fixed (6)All parties are located in one state.
|Particulars||Under Present Scenario||Under GST|
|(I) Manufacturer (D1) to Wholesaler (D2)|
|Cost of Production||45000||45000|
|Input Tax Credit (Assuming nil)||–||–|
|Add : Profit Margin||5000||5000|
|Producers Basic Price||50000||50000|
|Add: Central Excise Duty @ 12%||6000||–|
|Add : Value Added Tax @ 12.5% on Rs. 56,000/-||7000||–|
|Add : Central GST @ 12%||–||6000|
|Add : State GST @ 8%||–||4000|
|(II) Wholesaler (D2) to Retailer (D3)|
|Cost of Goods to D2||56000||50000|
|Available Input Tax Credit for set off||7000||10000|
|Add : Profit Margin||5000||5000|
|Add : Value Added Tax @ 12.5%||7625||–|
|Add : Central GST @ 12%||–||6600|
|Add : State GST @ 8%||–||4400|
|Total Price to the Retailer||68625||66000|
|(III) Retailer (D3) to Final Consumer (C)|
|Cost of Goods to D3||61000||55000|
|Input Tax Credit||7625||11000|
|Add : Profit Margin||5000||5000|
|Total 1,32,000 1,20,000||66000||60000|
|Add : Value Added Tax @ 12.5%||8250||–|
|Add : Central GST @ 12%||–||7200|
|Add : State GST @ 8%||–||4800|
|Total Price to the Consumer||74250||72000|
|Total Tax Payable in All Transactions||14250||12000|
|Verification:- VAT @12.5% [74,250 * 12.5 / 112.5] = 8250 + 6000 (CENVAT) = 14250
– D1 (6000 +7000)
– D2 (7625 – 7000) –
D3 (8250 – 7625)
|Verification:- GST @20% [72000 *20 / 120] =12000
– D1 (6,000 + 4,000)
– D2 (11,000 – 10,000) –
D3 (12,000 – 11,000)
In the current Tax scenario credit of surcharge, VAT, ACD is not available which increases cost. With the introduction of GST credit of these taxes is available with cascading effect which will help in reduction in cost. From the above example is will clear that Tax Payable in GST is less than Current Situation.
Another important aspect is stock transfer. Because in GST, tax will be levied on the dispatch. Every dispatch will be taxable under GST, so at every stage i.e. factory, warehouse etc. registration is necessary.
Place of Supply
The main challenge in introducing GST is defining the place of supply in respect of certain services. In existing tax regime it is not a problem as Service Tax is chargeable by Centre only. But in GST place of supply has to be defined clearly to avoid dispute among states and in case of inter-state transaction.
Place of Taxation – Inter-State Transactions
An important question in the context of the Dual GST is whether these rules for international cross-border supplies can be adopted for domestic inter-state supplies also. It is recognized that the place where the supplier or the recipient is established cannot be defined uniquely at the sub-national level within a common market.
Positive impact on Indian economy
Points to be reviewed
Latest updates on GST
In the light of the empirical conclusions developed in this paper, it seems appropriate to conclude by briefly noting the policy implications of the results.
In the first place, the macroeconomic impact of a change to the introduction of the GST is significant in terms of growth effects, price effects, current account effects and the effect on the budget balance.
Secondly, in a highly developed open economy with a high and growing service sector, a change in the tax mix from income to consumption-based taxes is likely to provide a fruitful source of revenue.
Thirdly, the aggregate consumer price impact of the introduction of the GST in India on the macro-economy was both limited and temporary. Finally, despite falling outside the limited focus of this short note, we should record that some impact has also occurred in the administrative component of the compliance cost of the GST as well as a likely increase in tax revenue from the “underground” or “black” economy.
The task of fiscal consolidation for this government will not be easy. There will be little scope to cut overall expenditure, as it has already been trimmed sharply in the last 2 years. The government must instead focus on switching expenditure from unproductive subsidies towards spending on sector such as health, education and infrastructure. The only way to reduce fiscal deficit, therefore, is to raise revenues as a share of GDP. To do so, the government must implement structural tax reforms such as GST, improve tax compliance and widen tax coverage.
The scope to lower fiscal deficit in fiscal 2015 is limited given large roll-over of subsidies from last fiscal and little possibilities of implementation of GST within this year. Beyond that, however, implementation of GST could facilitate a much needed correction in fiscal deficit. In the base case, it is believed that partial GST – one that excludes petroleum goods is most likely. Even with this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017. On the downside, a complete failure to implement GST would result in the fiscal deficit being higher at around 4-4.2% in fiscal 2016-2017.