Jyoti Raj, Tax Consultant
Value Added Tax made in first opening in France in 1954. At that time it was not a full VAT system, since it was restricted to manufacturers and whole-sellers. The retailers and agriculturist were kept beyond its purview.
In the past three decades this new system was introduced world-wide including India in about 130 countries.
VAT IN INDIA
Neither rain no hail could stop the Government from introducing VAT w.e.f 1st day of April, 2005 in almost entire country.
In the present form, VAT is a transition from the present sales tax systems to a full VAT and then onto a Goods and Services Tax (GST). The transition phase will continue till CST is phased out. In the long-run , once the Goods and Services Act comes into force, India would become one market and there would not be any difference in procuring goods or services within the State or from outside the State.
FIVE YEAR OF VAT
No doubt that our tax collections have risen between 20% to 30% since the introduction of VAT. But the main question that arises is whether we have achieved the set-out objectives during these initial three years. In the midst of political interferences, & in spite of it teething problems while replacing such old established sales tax system, reducing cascading effect, reducing large number of tax laws and large number of tax exemptions, in spite of lack of professionalism and poor expertise of the State administrations have evolved as a solid measure for making the way for the much awaited tax implementation of GST .
The consumer at large has been benefited by the introduction of VAT. The dealers have also been benefited with introduction.
GLOBAL DEMAND OF A TAX SYSTEM:-
Only honest tax payers payees regular taxes whereas the offenders are still walk escort free. The idea to bring GST is to make a chain which is difficult to break and base of tax collections may widen, so that at lower rates better revenue may be garnered.
When an MNC wants to do business in India it finds new laws in each State. Not only that but they find so many laws applicable on them that find it impossible to work with such a country like India and they reroute to some other neighboring country like China. Therefore, it is almost imperative now to enter in the era of GST.
The GST will make no differentiation between Good and Services as the GST is levied at each stage in the supply chain. The problem of double taxation was addressed by the Supreme Court of India in the landmark decision of BSNL Vs UOI (2006 (3) SCC-1). The Supreme Court had held that the same activity cannot be regarded as both goods and services and hence both service tax and VST should not be applicable on the same set of transaction. However, inspite of the ruling in the BSNL case, there has been a lot of confusion whether to treat specified activities as goods or services . Implementation of GST will resolve the dilemma of a large number of assessees
JUSTIFICATION IN IMPLEMENTATION OF GST
Inspite of the success of VAT at large there are still some shortcomings both in the Central and State level. In the existing State-level VAT Structure there are also certain shortcomings . There are, for instance, even now several taxes which are in the nature of indirect tax on goods and services, such as Entry Tax , luxury tax, entertainment tax etc., are yet not subsumed in the VAT scheme . At present the Central Government is charging Central Excise Duty at the point of removable of goods from the place of manufacture. The Central Excise Duty is to be deposited irrespective of payment against goods removed from the place of manufacture. Service tax is charged on the date of rendition of services or the date of receipt of payment whichever is earlier. The State VAT if chargeable at the time of sale of goods irrespective of receipt of payment against such sale. The introduction of GST will be a solution to it. GST would be chargeable on each transaction like sale of goods, incorporation of goods in a individual contract, hiring equipment, lease paid , consultation fee paid ,rendition of any service or may be a transfer of immovable property etc.
The introduction of unified GST would bring VAT in its true sense. Presently the VAT system, basically can be called un-integrated GST, in the sense that at present goods and services are taxed separately .
The taxable event under GST system will be the “supply of goods” and the “supply of services”. The current taxable event such as “manufacture”, “sale of goods” “render of services” will not be relevant under GST system.
The prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods. Being a consumption based tax, dual GST will result in better revenue collection for states with higher consumption of goods and services. This is been explained with an example .
|(A) Goods-Producer to Whole-Seller||Under VAT (Rs.)||Under GST (Rs.)|
|Cost of Production||100000/-||100000/-|
|Add: Producers margin of profit||20000/-||20000/-|
|Producers basic price||120000/-||1200000/-|
|Add:Central Excise duty @ 8%Add: Service Tax @ 10% on Transportation & Job work paid||8000/-4000/-||NILNIL (Included in GST)|
|Add: Value Added Tax @ 12.5%||16500/-||NIL|
|Add: Central GST @ 12%||NIL||14400/-|
|Add: State GST @ 8%||NIL||9600/-|
|(B) Goods –Whole-Seller to Retailer|
|Cost of goods to the Whole-seller||132000/-||120000/-|
|Add: Profit margin @ 10%||13200/-||12000/-|
|Add: Value Added Tax @ 12.5%||1650/-||NIL|
|Add: Central GST @ 12%||NIL||1440/-|
|Add: State GST @ 8%||NIL||960/-|
|(C) Goods-Retailer to Final Consumer|
|Cost of goods to the Retailer||145200/-||132000/-|
|Add: Profit margin @ 20%||29040/-||26400/-|
|Add: Value Added Tax @ 12.5%||3630/-||NIL|
|Add: Central GST @ 12%||NIL||3120/-|
|Add: State GST @ 8%||NIL||2112/-|
|Total Price to the final Consumer||177870/-||163632/-|
|Tax component in price to Final Consumer||21780/-||31632/-|
|Final Price ex-taxes||156090/-||132000/-|
It is evident from the above example that due to multiplicity of taxes and due to non-availability of input tax credit across the board the final price to the consumer is much higher not only due to tax component but due to cascading affect also.
Window to GST
Goods and Service Tax (GST) is that tax credit mechanism wherein the tax is levied on goods and services at each point of sale or provision of service. Under this tax regime the seller of goods or the service provider can claim the input credit of tax paid / payable by him (i.e. input GST) for purchasing / selling the goods or procuring the service. GST may be termed as a national level VAT on goods and services with one of the differences that it also covers.
It will evade the cascading effect in Indirect tax regime. For instance, when a Auto part making company produces auto part’s, the central Government charges an excise duty on them as they leave the factory. Whereas on lower end of the supply chain i.e. at the 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 will be charged on the manufacturing cost., it will result in increased tax collections due to wider tax base and better conformity.
1. Single versus multiple stage
Unlike the existing sales tax and service tax, GST is generally charged on the consumption of goods and services at every stage of the supply chain, with the tax levels feature of GST in
Goods and Service subject to tax
GST operates on a negative concept – all goods and services are subject to GST unless specifically exempted.
Under a GST regime, a much wider range of services will fall within the GST net then before.
2. Tax payment and accounting periods.
The GST rules differ from the existing sales tax structure where sales tax becomes due and payable when there is a sale or disposal otherwise than by sale. On the other hand, service tax is only due when payment is received.
GST in India:
Single GST Model
Under this system there would be single Union GST from each transaction which may comprise sale of goods or rendition of services. Such transactions would be inter-State VATable. Each intermediary from production level to consumer level shall pay GST on the value addition after setting off input tax credit out of charged by it.
Dual GST Model
The JWC laid down various recommendation including to have two GST components viz. Central tax and single uniform state tax across the country, levying of a tax over and above GST by the states on tobacco, petroleum and liquor, GST with a quadruple tax structure comprising of a central tax on goods extending up to retail level, a central tax on goods extending up to the retail level, a central service tax, state VAT on goods, and a state VAT on services. Further it recommended that because of quadruple structure, there may be at least four rate categories one for each of the components given above. In this system the taxpayer may be required to calculate tax liability separately for the different rates of tax.
The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on the supply of goods or services.
Benefits of Dual GST
Applicability of other indirect taxes:
It is proposed that the taxes to be subsumed under CGST will include Central Excise Duty (CENVAT), Service Tax and Additional Duties of Customs and the Taxes to be subsumed under the SGST will include value Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax, Luxury Tax, Octoroi, Lottery Taxes, Electricity Duty and State Surcharges relating to supply of goods and services. Specific Cess, Excise duty on tobacco products and State Taxes like taxes on items containing alcohol, entertainment tax (local Bodies), entry tax for local bodies and electricity duty are proposed to be included in GST.
GST collection model
(a) The GST shall have two components: one levied by the Centre (CGST), and the other levied by the States (SGST)..
(b) The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, the transactions which are below the prescribed threshold limits.
(c) The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.
Threshold limits for levy of GST
The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is desirable and, therefore, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States .
Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the
The States are also of the view that Composition/ Compounding Scheme, there would be a compounding cut-off at Rs. 50 lakh of gross annual turn over and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for dealers with turnover below the compounding cut-off.
Expected aggregate rate of GST
The aggregate rate of GST, across the central and State GST, is expected to be approximately 18%.
GST Rate Structure
GST is expected to have a dual structure with multiple rates on goods at both the centre and state level. Officials said the two rates being considered are 8-10% for the lower slab and 16-18% for the higher slab. In addition states will levy a 1% on precious metalsand a list of exempted items.
Purchase tax: Some of the States felt that they are getting substantial revenue from Purchase Tax and, therefore, it should not be subsumed under GST while majority of the States were of the view that no such exemptions should be given.
Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST. Sales Tax/VAT can be continued to be levied on alcoholic beverages as per the existing practice. In case it has been made Vatable by some States, there is no objection to that. Excise Duty, which is presently being levied by the States may not be also affected.
Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre may be allowed to levy excise duty on tobacco products over and above GST without ITC.
Tax on Petroleum Products: As far as petroleum products are concerned, it was decided that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is the prevailing practice in India.
Taxation of Services : Both the Centre and the States will have concurrent power to levy tax on all goods and services.
Cross utilization of credits between goods and services
The taxes will be levied in parallel by the Centre and the States who will levy the CGST and SGST respectively on each supply of goods/ services. Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned. Thus the cross utilization of credits for goods and services would be allowed subject to the fact that cross utilization of credits between the CGST and SGST would not be permissible.
Taxation of Stock Transfer
The GST regime would work under a destination/ consumption based concept and hence the tax on inter-state sale transactions will accrue to the destination State. As a corollary, it will be zero rated in the Origin State.
Inter-State Transactions of Goods and Services
The Empowered Committee has accepted the recommendations of the Working Group of concerned officials of Central and State Governments for adoption of IGST model for taxation of inter-State transaction of Goods and Services. The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. 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 output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
Single return or multiple returns
It is expected that a single return will be required to be prepared by the assessee and copies filed with the central GST and State GST authorities.
Process of assessment under the dual GST
The dual GST is expected to be a self assessed tax. The tax administration would have powers to audit and re-assess the taxpayers on a selective basis.
Benefits availed presently by EOU’s (exemption from excise duty and Central Sales Tax (CST) on domestic procurement of goods.
CST will be phased out and will have no place in the GST regime. It is expected that the benefits presently availed by the EOUs by way of exemptions would continue to be available in the GST regime as well.
Continuation of exemption currently available
After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives should be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. Regarding Special Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would continue up to legitimate expiry time both for the Centre and the States. Any new exemption, remission etc. or continuation of earlier exemption, remission etc. would not be allowed. In such cases, the Central and the State Governments could provide reimbursement after collecting GST.
GST and works contract
Works contract can straddle three taxable activities as per the current law. There is of course supply of goods. Then due to the very nature of the contract, there is supply of services. Further, if in the process of completing the works contract a new commodity comes into existence, there is the taxable event of manufacture. As of now the supply of goods is taxable in the form of Value Added Tax (VAT), while the services element is taxable as service tax. Hence, different aspects of the same activity have a potential to be taxed by different statutes.
GST AND ITS IMPACT ON VARIOUS SECTORS
Impact of GST on Revenue States
GST is a consumption based tax and not origin based. Under GST structure, the tax would be collected by the states where the goods or services are actually consumed i.e., where the goods are actually sold and not the goods where it is actually originated. Hence, losses could be heavy for producing states. In view of the above, the Centre is considering a proposal to compensate states for any revenue loss.
GST to reduce Manufacturing Cost
The proposed Goods and Services Tax (GST) would reduce manufacturing cost and benefit end-customers, Nothing that the Indian manufacturing sector was highly taxed. The elimination of multiple tax structure at central and State levels would make the sector viable and globally competitive. “Our manufacturing sector is one of the highest taxed sectors in the world. Even a two per cent reduction in production cost will increase profits by over 20 per sent, giving headroom for reducing prices and benefiting end-users”.
The GST will be a dual tax with both central and state GST component levied on the same base. There will be no distinction between goods and services for tax purpose with a common legislation applicable to both.
Implications of GST on imports & exports
Basic Custom Duty will continue to there under GST system. However, the additional custom duty in lieu of CVD /Excise and the Special Additional Duty (SAD) in lieu of sales tax/VAT will be subsumed in the import GST.The import of services will be subject to Central GST and State GST on a reverse charge mechanism. In other words, the GST will be payable by the Importer on a self declaration basis. Place of supply rules will determine which state will have the authority to get the tax. However, the taxes so paid will be available as Input Tax Credit and therefore it would be a revenue neutral. Exports, however, will be zero rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded.
Impact on Pharma Industry
The Indian Pharmaceuticals Industry (IPI), estimated turnover at 450 billion, ranks fourth globally in terms of volume and is amongst the largest producer of Pharma products in the world along with USA. Japan, Europe and China. The cutting edge that IPI enjoys over most other nations is the cost advantage, given that the cost of labour and overall production is lower in India as compared to other nations. To cite an example, the manufacturing cost of Pharma products in India is nearly half the cost incurred in the US. But the multistage taxation in the Pharma Industry i.e. Customs Duty on imports, Central excise duty on manufacture, Central Sales Tax (CST)/VAT on sale of goods. Service tax on provision of services and levies such as entry tax, Octoroi, cess by the State or Local municipal corporations/ municipalities is one of the key stumbling block in its progress. Levy of multiple taxes, loss of credit of tax paid, compliance and litigation cost associated with the present tax set up are causing problems to the Pharma Industry.
Introduction of GST is a positive step and if implemented in the right spirit could result in reduction in transaction cost. The most visible and immediate impact of GST appears to be the proposed discontinuance of (Central Sales Tax (CST) levy. As on date, CST is a cost to Pharma manufacturers whenever they procure raw materials from outside their state and if sale is on inter-state basis. This is on account of the fact that CST paid in purchases cannot be set off against the local value added tax (VAT) liability of manufacturer/ dealer. Though, over the last couple of years CST rates have reduced from four to two percent, the said levy continues to be a cost to the manufacturers and traders dealing in interstate transactions. The phasing out of CST with the advent of GST could do away with the perennial issue of credit leakage on this front.
Another evident impact of GST would be a definite re-look and review of the present warehousing strategies followed by the Pharma Industry. As it stands on date, most Pharma manufacturers maintain warehouses in different states to evidence movement of goods from one warehouse to another so as to save on the CST. Also, quite a few entities set up warehouses on hitherto attractive locations like Pondicherry or Daman as the CST rate at such locations were previously lower than the rate at such locations were previously lower than the rates prevalent in other states. Warehouses across various states and movement of goods thereof have been a nightmare to the Pharma Industry from the logistics perspective – not to mention the increased compliance requirements and transaction costs. With GST in the anvil, Pharma manufacturers can set up warehouses for distribution at select strategic location without looking at the same tax planning options resulting in cost of operations.
Currently, certain locations such as Himachal Pradesh, Uttranchal enjoy an excise tax holiday on their manufacturing activities. However, since the output is exempt the tax paid in inputs/capital goods tend to be a cost to the entitles located in such areas. Though, area based exemptions may not continue in the GST era, based on past experience of VAT and on a generic basis, it appears that the presently exempted units may be required to pay GST on their finished goods but, would be entitled to claim refund in order to ensure continuity of GST at every stage. By doing so, the credit chain remains intact and at the same time incentives already agreed by the Centre and the State Government for both Central and State Level GST is passed on to the manufacturers. Such a move would ensure that the various manufacturing hubs of the Pharma Industry in said areas continue manufacturing operations in such locations.
Pharma goods attract excise duty at 4.12 percent whereas the Active Pharmaceuticals Ingredients (API), which are inputs for manufacture of Pharma products typically, attracts duty at 8.24 percent. The difference n duty rates of inputs vis-à-vis the finished goods has resulted in accumulation of differential Cenvat Credit for the manufacturers not engaged of export of Pharma goods. The Central Excise/Cenvat Credit legislation does not provide any mechanism for refund of such accumulated Cenvat credit. With the Central GST presumed to have a single rate for both goods and services, going forward accumulation of credit may cease to be an issue for the industry. It is not clear as on date whether the proposed GST will have transitional provisions to carry forward the unutilized accumulated Cenvat credit from the Central excise law to Central GST legislation and how the same would be implemented.
Impact on Auto Industry
The Auto Industry is sensitive to the changes in the economy as well as fiscal policy and is accepted as the barometer of economic well-being of a country. The imminent introduction of the goods and service tax (GST) replacing central excise duty, service tax, state value added tax (VAT) and central sales tax (CST) may change the way business is done today.
The Practice in this industry is to sell vehicles to a dealer network that sells as well as services the vehicles. More than 80% of the sales is generally outside the state of manufacture. The distribution of the vehicles may be by way of direct sales to dealers, currently subjected to CST or by stock transfers to depots and stockyards across the country. Both these models entail a tax cost, which gets embedded in the final price to the customers. Though the rate of CST cannot be set off by the dealer against his VAT liability. Similarly, though stock transfers are not eligible to tax, state VTA laws provide for retention or reduction of input tax credits.
Currently, stock transfers do not attract any tax (other than the loss of input tax credit in the exporting state). It is possible GST would be applicable on all ‘supplies’ including stock transfers. This would have its own challenges. The valuation of such stock transfers have to be tackled as there would be no sale value available to calculate tax. There could be significant cash flow issues as well. Special transition provisions will be required for the in-movement stock from factory to depot on the date of introduction of GST.
Most of the new investments by auto companies have gone to the states that have offered most competitive tax incentives. Such incentives are largely in the form of subsidies/loan equal to the VAT/CST paid in the state govt. For instance, under the GST regime, the state of manufacture will not collect any existing incentives (in terms of CST exemption/deferral) can continue. Himachal Pradesh etc would also be effected.
One of the reasons for auto component manufacturers to set up units close to OEM plants is to avoid breaking of the VAT credit chain. The removal of CST in the new regime would provide a new opportunity for consolidation of theses units into larger units, which would be good for economic efficiency of the sector as a whole.
If the GST rate is fixed anywhere between 16-18% as being discussed currently, it may be a good news for the industry. The current effective rate works out to be more, particularly for the bigger cars, where the excise duty is higher.
Impact on Logistics Sector
The introduction of a national sales tax in India next year could have a similar impact on freight demand as the creation of the European single market and customs union, according to leading logistics operations.
Logistics firms are building warehouses and logistics parks across India as the country gets ready for a centrally administrated goods and services tax (GST).
The GST will standardize rates across the nation, allowing many corporations to move away from having warehouses in different states to adhere to each state tax code and employ logistics companies to manage distribution and supply chain.
With GST coming in place, a lot of consolidation is expected in this space. The case for having a warehouse in each state will disappear.
“Big Corporations such as Larsen and Toubro, ITC and Philips are planning to close down their regional warehouse in the wake of GST coming in.
Many corporations have approached their distribution and logistics part to cut down the cost.
Logistics firm such as Safeexpress Pvt. Ltd. Transport Corp. of India Ltd. Gati Ltd. are new building warehouses or logistics parks.
Most of the leading manufacturers currently have 20, 25 warehouses across the country. “With GST, this will change and companies like Safeexpress will take charge” Safeexpress building 32 logistics parks with an investments of Rs. 650 crore by 2011.
Let’s hope GST is
Good & Simplified Tax !!!