Concept of GST

1. GOODS AND SERVICES TAX (GST) IN INDIAby Basharat Hussain Bhat Department of Economics GDC Tral

2. Concept of GST • GST is a tax on goods and services with comprehensive and continuous chain of setoff benefits from the Producer’s point and Service provider’s point up to the retailer level. • GST is expected be levied only at the destination point, and not at various points (from manufacturing to retail outlets). It is essentially a tax only on value addition at each stage and a supplier at each stage is permitted to setoff through a tax credit mechanism which would eliminate the burden of all cascading effects, including the burden of CENVAT and service tax. • Under GST structure, all different stages of production and distribution can be interpreted as a mere tax pass through and the tax essentially sticks on final consumption within the taxing jurisdiction. • Currently, a manufacturer needs to pay tax when a finished product moves out from the factory, and it is again taxed at the retail outlet when sold. The taxes are levied at the multiple stages such as CENVAT, Central sales tax, State Sales Tax, Octroi, etc. is replaced by GST introduced at Central and State level. Continued…….

3. Concept of GST • All goods and services, barring a few exceptions, are brought into the GST base. There is no distinction between goods and services. • Under GST, the taxation burden is divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions. • 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. is uniform across these statutes as far as practicable. • The existing CST is discontinued. Instead, a new statute known as IGST has come into place on the inter-state transfer of the Goods and Services. • By removing the cascading effect of taxes (CST, additional customs duty, surcharges, luxury Tax, Entertainment Tax, etc. ),CGST & SGST is charged on same price .

4. Model of GST • SGST and CGST for intrastate transaction : In the GST system, both Central and State taxes are collected at the point of sale. Both components (the Central and State GST) are charged on the manufacturing cost. This will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping companies. • IGST for Interstate transaction: ‘IGST Model’ is in place for taxation of inter State transaction of Goods and Services. The scope of IGST Model is that center 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 GST paid on the purchase of goods and services, to be paid on the supply of goods and services. • There is no distinction between raw materials and capital goods in allowing input tax credit. The tax base should comprehensively extend over all goods and services up to final consumption point on value addition. • Assessable value for all the taxes will be same.

5. Set-off methodology • Since the Central GST and State GST are to be treated separately, in general, 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. • Cross utilization of ITC between the Central GST and the State GST would, in general, be allowed.

6. Functioning of GST The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholesaler and one retailer, how GST will work. • Manufacturer : Let us suppose that CGST rate is 10% and SGST rate is 5% , with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods CGST paid @10%) and services used in the manufacturing process. The manufacturer will then pay net CGST of Rs. 3 after setting-off Rs. 10 as CGST paid on his inputs (i.e. Input Tax Credit) from gross CGST of Rs. 13 and Rs, 6.5 as SGST. Gross Value:130 on that CGST 13/- and SGST 6.5/- Input Credit: CGST 10-/ and SGST NIL/- Net Liability: Rs. 3 + 6.5 = 9.5/- • Wholesaler: The manufacturer sells the goods to the wholesaler. When the wholesaler sells the same goods after making value addition of (say), Rs. 20, he pays net CGST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13, from the gross CGST of Rs. 15 and net SGST of only Rs. 1, after setting-off of Input Tax Credit of Rs. 6.5, from the gross SGST of Rs. 7.5 to the manufacturer. Gross Value:150 on that CGST 15/- and SGST 7.5/- Input Credit: CGST 13-/ and SGST 6.5/- Net Liability: Rs. 2 + 1 = 3/-

7. Taxable Person • It will cover all types of person carrying on business activities, i.e. manufacturer, job-worker, trader, importer, exporter, all types of service providers, etc. • If a company is having four branches in four different states, all the four branches will be considered as TP (Taxable person) under each jurisdiction of SGs. • A dealer must get registered under CGST as it will make him entitle to claim ITC of CGST thereby attracting buyers under B2B (Business to Business) transactions. • Importers have to register under both CGST and SGST as well.

8. GST on Export of Goods and Services • GST on export would be zero rated. • Similar benefits may be given to Special Economic Zones (in processing zones only). • No benefit to the sales from an SEZ to Domestic Tariff Area (DTA). • GST paid by Exporter on the procurement of goods and services will be refunded.

9. Registration under GST • 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 prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. • The exact design would be worked out in consultation with the Income-Tax Department.

10. Returns under GST • The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities. • ITC credit can also be verified on the basis of the returns filed and revenues reconciled against Challan data from banks. • Common standardized return for all taxes (with different account heads for CGST, SGST, IGST) can come into picture. • Common standardized Challan for all taxes (with different account heads for CGST, SGST, IGST) can come into picture.

11. Taxable Event

12. GST Invoice • The Task Force on GST said the computation of CGST and SGST liability should be based on the Invoice credit method. i.e., allow credit for tax paid on all intermediate goods and services on the basis of invoices issued by the supplier. • Invoice level detail is necessary for the reconciliation of tax deposits, and the end-to-end reconciliation of ITC. An effective IGST implementation may also require invoice-level details. • A number of states were capturing invoice details even in the erstwhile VAT systems. It is proposed to follow a two-pronged approach with Dealer level granularity of returns in the first phase followed by invoice level in the next phase.

13. Rate of Tax • The combined GST rate is being discussed by government. The rate is expected around 16 per cent. After the total GST rate is arrived at, the States and the Centre will decide on the CGST and SGST rates. Currently, services are taxed at 12 per cent and the combined charge indirect taxes on most goods are around 20 per cent. • Today the Rate of GST in some countries are Australia10%, France19.60%, Canada5%, Germany19%, Japan5%, Singapore7%, Sweden25%, New Zealand15% & Pakistan17%

14. Exemption of Goods and Services Alcohol, tobacco, petroleum products are out of the GST regime. Tax on items containing Alcohol: Alcoholic beverages is kept out of the purview of GST. Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the existing practiceTax on Petroleum Products:  Petroleum and petroleum products have also been constitutionally brought under the GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. 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 with ITC. Taxation of Services: As indicated earlier, both the Centre and the States have concurrent power to levy tax on goods and services. In the case of States, the principle for taxation of intra-State and inter State has already been formulated by the Working Group of Principal Secretaries /Secretaries of Finance / Taxation and Commissioners of Trade Taxes with senior representatives of Department of Revenue, Government of India. For inter-State transactions an innovative model of Integrated GST is adopted by appropriately aligning and integrating CGST and IGST.

15. GST and Information Technology (IT) Interface • Based on the legal provisions and procedure for GST, the content of work-flow software such as ACES (Automated Central Excise & Service Tax) would require review. • On the IT front, there has been consensus that there will be a common portal providing three core services (registration, returns and payments).

16. Tax reconciliation between Central and State Govt. • 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, • The relevant information will also be submitted to the Central Agency which will act as a clearing house mechanism.

17. Flaws of GST Model • Major flaw of this model is ,Local Dealers have to pay CGST in addition to SGST. • In Addition to this, CGST mainly represents the Excise/service tax and SGST mainly represents the VAT portion but, because of ‘No differentiation between Goods and Services’ service supply within the state would attract SGST as GST is levied at each stage in the supply chain and Assessee have to Pay CGST as well SGST. • The issue which still needs to be resolved are, the revenue sharing between States and Centre, and a framework for exemption, thresholds and composition.

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