» GOODS AND SERVICES TAX
GOODS AND SERVICES TAX
ACHIEVERS IAS ACADEMY
GST: Goods and Services Tax
Terms you must know before reading this articles:
- Setting off: When you file your service tax, you compute the due tax and deduct the total amount you have already paid your vendors as service tax. Then, pay only the balance.
- Value addition: A value addition can either increase the product's price or value.
What is GST? How does it work?
- GST is one indirect tax for the whole nation, which will make India one unified common market.
- GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
- Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.
- The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
Working of GST with Example:
In a full non-GST system:
There is a cascading burden of “tax on tax”, as there are no set-offs for taxes paid on inputs or on previous purchases.
- If we consider the manufacturer buys raw materials/inputs at Rs 100 after paying tax of Rs 10. The gross value of the shirt (good) he manufacturers would be Rs 130, on which he pays a tax of Rs 13. But since there is no set-off against the Rs 10 he has already paid as tax on raw materials/inputs, the good is sold to the wholesaler at Rs 143 (130 + 13).
- With the wholesaler adding value of Rs 20, the gross value of the good sold by him is, then, Rs 163. On this, the tax of Rs 16.30 (at 10%) takes the sale value of the good to Rs 179.30.
- The retailer, thus, buys the good at Rs 179.30, and sells it at a gross value of Rs 208.23, which includes his value addition of Rs 10 and a tax of Rs 18.93 (at 10% of Rs 179.30).
The total tax on the chain from the raw material/input suppliers to the final retailer in this full no-GST regime will, thus, work out to Rs 10 + 13 + 16.30 + 18.93 = Rs 58.23. For the final consumer, the price of the good would then be Rs 150 + 58.23 = Rs 208.23.
In a GST system:
- Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
- In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
- At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).so rs 100+30+3= 133.
- The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 133, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 133 + 20 — or a total of Rs 153.
- A 10% tax on this amount will be Rs 15.3. But again, under GST, he can set off the tax on his output (Rs 15.3) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2.3 (15.3 – 13).
- In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 152.3, he adds value, or margin, of, say, Rs 10.
- The gross value of what he sells, therefore, goes up to Rs 152.3 + 10, or Rs 162.3. The tax on this, at 10%, will be Rs 16.23. But by setting off this tax (Rs 16.23) against the tax on his purchase from the wholesaler (Rs 15.3), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.
- Rs 208.23 — with a tax of Rs 58.23 —
- Rs 163.3, which includes a total tax of Rs 16, under GST.
See this to understand difference
- Currently, we have Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT or CENVAT mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production.
- CENVAT does not extend to value addition by the distributive trade below the stage of manufacturing; even manufacturers cannot claim set-off against other central taxes such as additional excise duty and surcharge.
- Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes imposed within the states such as luxury and entertainment tax, octroi, etc.
Once GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components:
- a central GST
- a state GST.
This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it, there will be tax only on value addition at each stage, with the producer/seller at every stage able to set off his taxes against the central/state GST paid on his purchases. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
How would GST be administered in India?
- Keeping in mind the federal structure of India, there will be two components of GST –1)Central GST (CGST) and 2) State GST (SGST).
- Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
- The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage.
- Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.
Why The Constitution (122nd Amendment) (GST) Bill bill?
- Bill basically seeks to amends the Constitution to empower both the Centre and the states to levy GST.
- This they cannot do now, because the Centre cannot impose any tax on goods beyond manufacturing (Excise) or primary import (Customs) stage, while states do not have the power to tax services.
- The proposed GST would subsume various central (Excise Duty, Additional Excise Duty, service tax, Countervailing or Additional Customs Duty, Special Additional Duty of Customs, etc.), as well as state-level indirect taxes (VAT/sales tax, purchase tax, entertainment tax, luxury tax, octroi, entry tax, etc).
- Once the Bill is passed, there will only be a national-level central GST and a state-level GST spanning the entire value chain for all goods and services, with some exemptions.
What was the problem with The Constitution (122nd Amendment) (GST) Bill,?
- An ideal GST regime intends to create a harmonised system of taxation by subsuming all indirect taxes under one tax. It seeks to address challenges with the current indirect tax regime by broadening the tax base, eliminating cascading of taxes, increasing compliance, and reducing economic distortions caused by inter-state variations in taxes.
- The provisions of this Bill do not fully conform to an ideal GST regime. Deferring the levy of GST on five petroleum products could lead to cascading of taxes.
- The additional 1% tax levied on goods that are transported across states dilutes the objective of creating a harmonised national market for goods and services. Inter-state trade of a good would be more expensive than intra-state trade, with the burden being borne by retail consumers. Further, cascading of taxes will continue.
- The Bill permits the centre to levy and collect GST in the course of inter-state trade and commerce. Instead, some experts have recommended a modified bank model for inter-state transactions to ease tax compliance and administrative burden.
Central taxes That The GST will replace
# Central Excise Duty
# Duties of Excise (medicinal and toilet preparations)
# Additional Duties of Excise (goods of special importance)
# Additional Duties of Excise (textiles and textile products)
# Additional Duties of Customs (commonly known as CVD)
# Special Additional Duty of Customs (SAD)
# Service Tax
# Cesses and surcharges in so far as they relate to supply of goods or services
State taxes That The GST will Subsume
# State VAT
# Central Sales Tax
# Purchase Tax
# Luxury Tax
# Entry Tax (all forms)
# Entertainment Tax (not levied by local bodies)
# Taxes on advertisements
# Taxes on lotteries, betting and gambling
# State cesses and surcharges
Benefits of GST:
For business and industry
- Easy compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
- Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business.
- Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
- Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
- Gain to manufacturers and exporters: It would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports.
For Central and State Governments
o Simple and easy to administer: GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.
o Better controls on leakage: Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
o Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.
For the consumer
o Single and transparent tax proportionate to the value of goods and services: Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
o Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.
The GST Council
- WILL CONSIST of the union Finance Minister (chairman) and MoS in charge of Revenue; Minister in charge of Finance or Taxation, or any other Minister, nominated by each state
- DECISIONS WILL be made by three-fourths majority of votes cast; Centre shall have a third of votes cast, states shall together have two-thirds
- MECHANISM for resolving disputes arising out of its recommendations may be decided by the Council itself.
The President shall constitute the GST Council
The GST Council shall make recommendations on:
# Taxes to be subsumed
# Model GST laws, Principles of Levy, etc.
# Threshold for exemption
# Rates, including floor and bands
# Special rate/rates for specified period
# Date from which GST to be levied on crude, high speed diesel, natural gas, aviation turbine fuel and petrol
# Special provisions for the Northeast, J&K, etc.
- Parliament will have to pass legislation on central GST (CGST) and Integrated GST (IGST)
- All 29 states and 9 UTs will have to pass their state GST (SGST) Acts
How will be Inter-State Transactions of Goods and Services be taxed under GST in terms of IGST method?
- In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services under Article 269A (1) of the Constitution.
- The IGST would roughly be equal to CGST plus SGST.
- The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another.
- The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order).
- 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 (both CGST and SGST) in his own State.
- The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.
How will IT be used for the implementation of GST?
- For the implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders.
Working Example of GST :
- BIGGEST BENEFIT is that it will disincentivise tax evasion. If you don’t pay tax on what you sell, you don’t get credit for taxes on your inputs. Also, you will buy only from those who have already paid taxes on what they are supplying. Result: a lot of currently underground transactions will come overground.
- LOWER TAX RATES will follow from GST covering all goods and services, with tax only on value addition and set-offs against taxes on inputs/previous purchases. Right now, we have more tax on fewer items; with GST, there will be less tax on more items. Ideally, no good or service should be tax-exempt, as this will break the input tax chain.
- The Commerce Ministry has raised with the Finance Ministry the Special Economic Zone (SEZ) sector’s concerns about the lack of clarity in the proposed Goods & Services Tax (GST) regime on the continuation of tax & duty exemptions,.
2. “For industry, which seeks to be competitive in the global marketplace, a standard rate of 18 per cent will be advantageous,” said Naushad Forbes, President, Confederation of Indian Industry (CII).
GST bill can now go for Presidential assent
- Govt will seek Presidential assent for the landmark Constitution amendment bill for GST as 16 states have ratified the legislation.
- After the Presidential assent, the government will notify the GST Council.
- Following the notification of the Constitutional (122nd Amendment) Act, 2014, no State will be able to remain outside the GST regime. Upon its notification, all States will lose the powers to levy and collect value-added tax. This will be regardless of whether a State has ratified the amendment or not.
- Union Finance Minister will head the GST Council, which will comprise state Finance Ministers.
- The GST Council will decide on the tax rate, cess and surcharges which are to be subsumed and also decide on the goods and services which would be exempted from the purview of the new indirect tax regime.