CA Srikant Agarwal

CA Srikant AgarwalAll of us know that Govt is planning to introduce GST (Goods and Service Tax) in India which will subsume a number of existing state level taxes (i.e VAT, CST, Entertainment tax, Entry tax, Purchase Tax and Luxury tax) and central level taxes (i.e Excise Duty, Custom Duty and service tax).

The rate of GST may range from 18% to 22% .

Under the model GST law following taxes will apply:

  • Central GST / State GST (i.e CGST / SGST) = on all intra-state sales (i.e sale within the state)
  • Integrated GST (i.e IGST) = on all inter state sales (i.e CST sale)

Apart from that reverse charge mechanism (as currently applicable in respect of service tax) under which purchaser will pay GST and composition scheme will also apply for those dealers having turnover below Rs 50 lacs.

Under model GST law a person whose turnover is below Rs 10 lacs does not need to take compulsory registration (However for North-East states the above limit will be Rs 5 lacs only).

The radical shift will take place in the way CENVAT credit or Input Tax credit is taken as of now. Under the model GST law, the Input tax credit mechanism can be illustrated with help of following table:

Credit type Utilization against
IGST 1st preference IGST
2nd Preference CGST and
3rd Preference SGST
CGST 1st preference CGST
2nd Preference IGST
SGST 1st preference SGST
2nd Preference IGST

So with the introduction of GST, Input tax credit will be available on tax paid on interstate purchase transaction as well (which is not allowed under current VAT scenario)

GST will be destination based tax i.e more revenue will flow to the states where the goods are actually consumed. Here the exporting state will transfer to centre the credit of SGST used in payment of IGST. Similarly the importing state will claim credit of IGST used in payment of output tax liability in his state. The centre will transfer to the importing state the credit of IGST used in payment of SGST in that state.

This can be explained with the help of below example:

Example: Say Mr K of Kolkata purchased locally goods of Rs 1000 (before tax) on which he paid CGST @ 9% and SGST @ 9%.

He then sold the same goods to Mr M of Mumbai for Rs 1200 (before tax) on which he collected IGST @ 18%.

At the time of discharging his IGST liability he will take Input tax credit of CGST and SGST paid in following manner.

Particulars Am Rs Am Rs
Output Tax (18% of 1200) 216
Less: Input tax Credit of
CGST (9% of 1000) 90
SGST (9% of 1000) 90 180
Net payment to be made to Govt ex-chequer 36

Now the state of West Bengal will transfer Rs 90 to centre on account of SGST used in payment of IGST.

Now say Mr M of Mumbai sell such product locally at Rs 1500 (before tax) then he will collect CGST @ 9% and SGST @ 9%. His final payment of tax would be as below:

Particulars Am Rs
Output Tax
  -CGST (9% of 1500) 135
  -SGST (9% of 1500) 135
Less: Input tax Credit of IGST (18% of 1200) 216
Net payment to be made to Govt ex-chequer 54

In such a scenario Centre will make payment of Rs 81 to Maharshtra state (i.e IGST-CGST (216-135)} on account of IGST used in payment of SGST.

A detail calculation sheet is attached with this article which clearly shows tax impact under existing as well as proposed GST scenario. Hope readers will find the same useful.

Download Excel Sheet

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  1. senthil kumar says:

    SIr, Very good excel utility which gives clear picture on GST impact. This utility covers up to manufacturing to consumer. If we assume the present rate also 18% (ED 9% & VAT/CST 9%) and supply flow from Mfr-Distributor-Retailer-Consumer, the final price and tax effect will completely change as the CGST will travel up to consumer stage.

  2. CA Suraj R. Agrawal says:

    Hi Srikant,

    In case of Case 3 i.e. 100% CST purchase and 100% Local sales
    Please check the calculation again i think the amount of Additional tax to Govt at this value chain stage (Rs) is worng 11.70 and the correct one is 12.60

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