GST INDIA

Goods and Services Tax(GST)

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

Tax

Income Tax

Indirect TaxDirect Tax

State TaxCentral Tax

Wealth Tax

Excise Duty Service Tax Entry Tax, Lottery,

Entertainment tax,

etc

VATCustom

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

Rs.1000

+500 value added

Rs. 10000 + Rs.1000 +

Rs. 500

Rs.1150

Rs. 11500 + Rs. 1150

Rs.126501000+100+5

0

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 Value added Tax Levied on the sales of goods within

the state. It is collected by state. Comes under the State list. Tax on value addition at each stage. Here, every next stage dealer gets

credit of the tax paid at earlier stage against his tax liability.(INPUT CREDIT SYSTEM)

So, tax liability= output tax – input tax.

Central Sales Tax Levied on the sales of goods

from one state to another. It is collected by selling state. But comes under the central

list. Input credit same as VAT In fact, It’s a VAT but comes

into play when sales of goods b/w states.

VAT CST

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. 2000i.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

₹ 1000

+500 value added

₹ 10000 + ₹ 0 + ₹ 500

₹ 50

₹ 10500 + ₹1050

₹ 11550

₹ 50

Input Tax Credit- 1000 Output Tax -

1050

Tax Lia

bility=1050-

1000

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 GST

would 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 PriceBefore GST(in ₹)

After GSTGST=10%

(assumption)

Payment to Government

(Total GST-Input Credited)

Supplier Price=100 Supplier sales price=100+10=110

Total GST=10Input Credited=0GST Payable=10

Manufacturer=160 Manufacturer sales price=160+16=176


Wholesaler=200 Whole Sales price=200+20=220


Retailer=250 Retailer Sales price=250+25=275


Consumer Total payment to retailer=275

Total GST paid to the govt. = 25

Integrated GST (IGST)

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).

IGST just a

mechanism not a “Tax”

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 exampleTransaction 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 large companies.

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(from

manufacturing 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 GST Council

1/3rd voting power 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

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

GST council would give the following recommendation:

• 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 CHALLENGES

High 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:

Economy & Finance

GST INDIA