Goods and Services Tax

(GST)

Done By,M.Bharath Kesav

Overview Present Taxation System

Old Sales Tax Regime

Introduction of VAT and CST

Value Added Tax and Input Credit System

Excise Tax, Service Tax, MODVAT, CENVAT

Why GST?

What is GST?

Which Central And States Taxes would be subsumed

Framework of GST

Integrated GST(IGST)

Benefits of GST

GST Council and its Objectives

Implementation Challenges

122nd Constitutional Amendment Bill,2014

PRESENT TAX STRUCTURE IN INDIA

Sales TaxIt is an indirect tax levied on the sales of goods.

Rs. 10000

10% sales tax 10% sales tax

+500 value added

Rs. 10000 +

Rs.1000 +

Rs. 500

Rs. 11500 +

Rs. 1150

Rs.12650

1000+100+50

Till 2005

Problems of Sales Tax

Cascading effect(Tax on tax)

Selling without bill- no tax liability

“Inspector Raj”- Bribing of officials

Tax base decreases and thus the revenue

decreases

Solution: Introduction of VAT and CST

VAT CST Value added Tax Central Sales Tax

Levied on the sales of goods withinthe state.

Levied on the sales of goods fromone state to another.

It is collected by state. It is collected by selling state.

Comes under the State list. But comes under the central list.

Tax on value addition at each stage. Input credit same as VAT

Here, every next stage dealer gets credit of the tax paid at earlier stage against his tax liability.(INPUT CREDIT SYSTEM)

In fact, It’s a VAT but comes intoplay when sales of goods b/w states.

So, tax liability= output tax – input tax.

Input Credit

System• Dealers liability = Output tax – Input tax

• You can consider Input credit as wallet.

• It is this system on which VAT and CST is based.

Purchase(Input) =

1000 paid

(VAT)

Sales(output)=

1150

collected

Dealer’s VAT liability

Output - Input =

1150-1000=

150 to pay to state

VAT paid on

Inputs

Rs. 10000

Input Credit Rs.10000

VAT collected from

Output

Rs. 5000

Input Credit (+)Rs. 5000

VAT paid on

Inputs

0(no new stock)

Input Credit Rs.5000

VAT on Output Rs. 7000

Input Credit (-)Rs. 2000

i.e. Rs. 2000 to be

paid

January February

Have to sell and buy with

Invoice and TIN

Else No Input Credit

Value Added Tax(VAT)

₹ 10000

10% VAT 10% VAT

+500 value added

₹ 10000 +

₹ 0 +

₹ 500

₹ 10500 +

₹1050

₹ 11550

₹ 50

ax Credit-

000

Input T

1 Output Tax - 1050

After 2005

Excise Duty• An Excise or Excise Duty is an indirect tax on the goods produced or

manufactured for sale within the country.

• It is levied by the central govt. and comes within the union list.

Excise

Excise

Excise

Excise

Excise

Cascading

Cascading

Cascading

To address this cascading

effect, MODVAT was

introduced

MODVAT : Modified Value Added

Tax

Excise

Excise

Excise

Excise

Excise

Input Credit

Now, similar to VAT, manufacturer

at each stage started getting

credit for the excise duty paid

earlier. Thus eliminating

cascading effect.

Cascading

Service Tax

Service Tax

Service Tax

Excise

Cascading

• Service Tax is

a tax imposed by Govt.

of India on services

provided(except those

in negative list) in India.

• The service provider

collects the tax and

pays the same to the

govt.

• Introduced in 1994,only

on 3 services.

• In 2012, there were 119

such services after

which govt. gave the

definition of ‘services’

and made all of them

taxable.

• However, there are

negative list and

exemption list.

Cascading

Service Tax

Service Tax

Service Tax

Excise

Cascading

CENVAT :

Central Value

Added Tax

Input Credit

• CENVAT replaced

MODVAT

• CENVAT collected by

central govt.

• Input credit on Excise

duty as well as

service tax paid

earlier.

• Thus, removes

cascading of taxes.

• For raw components,

materials used.

• For services used.

THEN WHY GST????

Cascading of taxes removed to a large

extent.

Tax evasion reduced.

Efficient Input Credit(VAT, CENVAT) system

introduced.

Tax collection improved

Electricity

Fuel

Advertisement

Hoardings

CST

VAT

Final cost=all

the taxes

included

But State VAT

credit is not given

for all the taxes.

Hence, cascading

effect

Also, CENVAT credit and VAT

Input credit can't offset

each other.

Why India need

GST?

Purpose- GST is introduced majorly due to two reasons:

1. The current indirect tax structure is full of uncertainties due to multiple taxes and

multiple rates.

2. Due to multiple rates, there are multiple forms and intern cumbersome

compliances. This will improve Tax compliances.

Because of above transparency, Taxation would increase and lead to reduced

tax evasion.

It would also reduce cascading effect(tax on tax) up to much extent.

Goods And Services Act(GST) Touted as “Single biggest Indirect Tax reform” since 1947.

GST aims to simplify the indirect tax regime with a single tax on

manufacture, sale and consumption of goods and services at national

level.

No distinction is made between

A study conducted by NCAER estimated that roll out of GSTwould

boost the India’s GDP growth by 1% to 2%.

It is a consumption based tax.

It would subsume most of the indirect taxes of the centre and the

state.

It is a tax on goods and services with value addition at each stage of

transaction(sale,manufacture and consumption).

Based on Input credit system just like VAT.

Overcomes most of the drawbacks of the current system.

Framework(Model) of GST India will have Concurrent Dual GST comprising of Central GST and State GST

levied on the same base.

GST rate= CGST rate + SGST rate

Total tax collected in GST will be distributed to centre and state as per CGST

, SGST rate

Central GST(or CGST) would be administered by Central Govt.

State GST(or SGST) would be administered by State Govt.

Integrated GST(or IGST) administered by central Govt. on inter state transfer

of goods and services.

In this model, all the goods and services would be subject to concurrent

taxation by the state and the centre.

For example, if a product have levy at base price of Rs. 10000 and rate of GST

are 8% , CGST is 3% and SGST is 5% ,then tax collected during transaction is

800 , 300 goes to central govt as CGST tax, 500 goes to the state govt. as

SGST tax.

Central GST

(CGST)

• No Excise

• No Service Tax

• No Cess,

Surcharges,

etc.

State GST

(SGST)

• No VAT

• No Cess,

Surcharges,

entry taxes,

etc.

Which Central Taxes will be subsumed??

1) Custom Duty

2) Tobacco Products

3) Petroleum Products- so far no but maybe yes

4) Central Excise Duty

5) Central Sales Tax

6) Service Tax

7) Counter-Veiling Duty on Imported goods

8) Cess, Surcharges

ONLY CGST

Which State Taxes Will Be Subsumed??

1) Excise On Liquor For Human Consumption

2) Stamp Duty On Immovable Properties

3) Electricity Duty

4) Petroleum Products (Will Depend Upon The

GST Council But till now no)

5) State VAT

6) Luxury Tax, Entertainment Tax,Purchase tax

7) Entry Tax

8) Lottery , Betting , Gambling

ONLY SGST

GST

Sales Price

Before GST(in ₹)

After GST

GST=10%(assumption)

Payment to Government

(Total GST-Input

Credited)

Supplier Price=100 Supplier sales price

=100+10

=110

Total GST=10

Input Credited=0

GST Payable=10

Manufacturer=160 Manufacturer sales price

=160+16

=176

Total GST=16

Input Credited=10

GST Payable=6

Wholesaler=200 Whole Sales price

=200+20

=220

Total GST=20

Input Credited=16

GST Payable=4

Retailer=250 Retailer Sales price

=250+25

=275

Total GST=25

Input Credited=20

GST Payable=5

Consumer Total payment to retailer

=275

Total GST paid to the

govt. = 25

Integrated GST (IGST) IGST just a

mechanism

not a “Tax”

IGST model would be adopted for inter-state transaction of goods and

services.

Centre would levy IGST where IGST = CGST + SGST

The revenue collected from IGST will be distributed among the state

and the centre as per SGST and CGST rate.

Input Tax Credit system would be followed.

SGST is credited to the importing state as against the exporting state

(in present system).

Mechanism of IGST:

1. X has to collect ₹1.2 lakh as SGST and ₹1.4 lakh as CGST on sale of his goods to Y of same

state.

2. Input credit of Y is ₹1.2 lakh as SGST and ₹1.4 lakh as CGST paid by him to X of same state.

3. Rate of IGST is 26%(CGST + SGST).

4. When Y sales this to Z of Rajasthan at ₹10.5 lacs, he charges ₹2.73 lacs as IGST. Y will

deposit ₹13k after claiming his input credit against CGST and SGST.

5. The state of Maharashtra will transfer the amount of SGST(₹1.2 lacs) to the centre which is

used by Y as IGST.

6. Z of Rajasthan sold it to a consumer at cost of ₹11 lacs and will collect from him ₹1.32 lacs

as SGST and ₹1.54 lacs as CGST. Z has already paid ₹2.73 lacs while as IGST which he will

claim while paying his liability of CGST and SGST. So he has input credit of ₹1.26 lacs as

SGST and ₹1.47 lacs as CGST. After deducting, he will pay ₹6000 SGST and ₹7000 CGST.

7. A central agency will transfer the amount of input credit of SGST i.e. ₹1.26 lacs to the

consumer state(Rajasthan).

Lets understand this mechanism via a example

Transaction of Sales: X of Mumbai sold Goods worth ₹10 lacs to Y of Mumbai and Y of

Mumbai sold the same goods to Z of Rajasthan at ₹10.50 lacs. Now at the second

stage, Z of Rajasthan sold the same goods to a consumer in Rajasthan at ₹11 lacs.

Suppose rate of SGST is 12% and that of CGST is 14%.

Benefits of GST Improved Logistics/Seamless movement of goods across the country as entry check

points(for entry tax)won’t be there. It will end the warehousing obsession of largecompanies.

It will convert India into a uniform market.

Better compliance and tax buoyancy.

A lower GST rate and removal of Cascading effect will bring down the prices.

GST will be levied only at destination point and not at various points(frommanufacturing to retail outputs).

Expected to build a transparent and corruption-free tax administration.

Both CGST and SGST will be charged at same floor(manufacturing cost). This will benefit the consumers as the cost will go down.

No distinction b/w imported goods and Indigenous goods. Same rate(CGST/SGST)on both.

Exports would however will be zero rated i.e. exporters of goods/services need not pay the GST. GST paid by them on the procurement of goods/services will be refunded to them.

GST Administration by GSTCouncil

1/3rd votingpower 2/3rd voting

power

MIN QUORUM-

50% MEMBERS

GST Council

Chairman

Union Min. of

State for

Finance/Revenue

Min. of Finance

or any other Min.

nominated by

each State Govt.

Each decision must have

approval of 3/4th members

of the council.

Objective of GST Council

GST council would give the following recommendation:

Which Central/State taxes would be subsumed in GST

Which goods/services are subject to GST

Threshold limit under GST

Floor rate with band of Goods and Services

Disputes Resolution

• Voting Strength- 1/3rd vote of CG and 2/3rd vote of SG.

• Any Decision needs 75% support.

• At least 50% of the members must be present at the time of voting.

GST IMPLEMENTATION

CHALLENGESHigh Revenue Neutral Rate: After GST, the govt. revenue will not remain the same.

Through RNR govt. would try to adjust tax in such a way that its revenue remains the

same. If RNR is kept high, it will have negative impact on economy.

Compensation to States: Revenue loss to the states(specially to manufacturing states) in

the short run owing to reduction in no of taxes. So, compensation has to be paid to the

states for the initial 5 years.

Threshold Limit: Difficulties in deciding THRESHOLD LIMIT OF TURNOVER for the

companies/dealers to pay GST .

Lack of unanimity on Threshold limit between State Finance ministers

And Union finance min.

Dispute between State Finance ministers over tax-sharing.

Support in Parliament: Lack of support in Upper house and some of the manufacturing

states.

GST IMPLEMENTATION

CHALLENGESRobust IT (Information technology) Network:

• Success of GST depends on robust IT network connecting central govt., every

state govt. , all Banks, public/private companies, manufacturers, dealers

etc.

• Centre has already Incorporated an SPV- GSTN. But real challenge is in some

of the states which lack IT infrastructure.

• A very large database needed for registrations, tax return filing, IGST, CGST,

SGST settlements all over the country.

Extensive Training to tax administration staff for better GST implementation.

Dispute Settlement Authority: Decision making problems in GST council due to

the democratic structure of the council. So, an independent authority must be

set up to settle disputes between Centre and States.

122nd Constitutional Amendment Bill,2014

To provide greater authority to states in tax collection, this bill amends the

constitution to provide the same.

It aims to introduce Goods and Services Tax(GST).

Parliament and state legislatures will have concurrent powers to make laws on GST.

Only Centre may levy IGST on interstate supply of goods and services, and imports.

Alcohol for human consumption has been exempted from GST. GST will apply to five

petroleum products at later date as suggested by council.

A GST council has to be constituted inside 60 days of its approval from the president.

Parliament may, by law, provide compensation to states for any loss of revenue up to

a period of 5 years.

How to pass

the bill

122nd Bill

Highlights of the Bill:

122nd Constitutional Amendment Bill,2014

Since it is an constitution amendment bill, The govt. requires the support of 2/3rd of

the members in both the houses (Lok Sabha and Rajya Sabha) of the parliament.

It cannot be passed by calling joint session in the parliament.

It also needs to get passed in the legislative assembly of at least half of the states.

After approval from Parliament and the states, the bill will become law as soon as the

President signs it.

Currently, this bill has been passed in the Lok Sabha but is stuck in Rajya Sabha as the

govt. is in minority there.

How to pass

the bill

122nd Bill

How to pass the Bill: