GOODS AND SERVICE TAX Concept of GST GST

GOODS AND SERVICE TAX

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. will be replaced by GST to be introduced at Central and State level. Continued…….

Concept of GST � All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services. � Under GST, the taxation burden will be 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. would be uniform across these statutes as far as practicable. � The existing CST will be discontinued. Instead, a new statute known as IGST will 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 will be charged on same price.

Existing Tax structure in India Tax Structure Direct Tax Income Tax Indirect Tax Wealth Tax Central Tax Excise Service Tax State Tax Custome VAT Entry Tax, luxury tax, Lottery Tax, etc.

Proposed Tax Structure in India Tax Structure Indirect Tax = GST (Except customs) Direct Tax Income Tax Wealth Tax Intra- state CGST (Central) SGST (State) Inter State IGST (Central)

Subsuming of Existing Taxes CGST SGST • Central Excise • Additional duties of Custom (CVD) • Service Tax • Surcharges and all cesses • VAT/sales tax • Entertainment Tax • Luxury Tax • Lottery Tax • Entry Tax • Purchase Tax • Stamp Duty • Goods and passenger Tax • Tax on vehicle • Electricity, banking, Real state IGST • CST

Model of GST � SGST and CGST for intrastate transaction : In the GST system, both Central and State taxes will be collected at the point of sale. Both components (the Central and State GST) will be 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’ will be 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 should be 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.

Stakeholder in Business Chain 1. Manufacturer 5. Government and Banks 2. Wholesaler Goods + Services 4. Consumer 3. Retailer

GST Set off Chain Manufacturer Wholesaler Retailer Consumer • Input Credit of Goods+ services • After taking set off of Input credit, pay the Output Liability on value addition • Input Credit of Goods+ services from manufacturer • After taking set off of Input credit, pay the Output Liability on value addition • Input Credit of Goods+ services from wholesaler • After taking set off of Input credit, pay the Output Liability on value addition • Ultimate Output Liability recovered from consumer

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. ADC paid on Import of goods and service would fall under the IGST and this duty would be allowed for setoff of SGST and CGST.

Set off Heads IGST Input CGST Input SGST Input IGST Output CGST Output

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/Continued…….

Functioning of GST � � Retailer: Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net CGST of only Re. 1, after setting-off Rs. 15 from his gross GST of Rs. 16 and net SGST of only Rs. 0. 5, after setting-off of Input Tax Credit of Rs. 7. 5, from the gross SGST of Rs. 8/- paid to wholesaler. Gross Value: 160 on that CGST 16/- and SGST 8/Input Credit: CGST 15 -/ and SGST 7. 5/Net Liability: Rs. 1 + 0. 5 = 1. 5/Total Liability: Thus, the manufacturer, wholesaler and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Rs. 1) as CGST Rs. 8 (= Rs. 6. 5+Rs. 1+Rs. 0. 5) as SGST and on the value addition along the entire value chain from the producer to the retailer, after settingoff GST paid at the earlier stages. This is shown in the table in next slide. The same illustration will hold in the case of final service provider as well. Continued…….

CGST & SGST Tax Liability working Purc Stage hase of Valu Suppl e y Of Chain Inpu t Man ufact 100 urer Value Net at Inpu Net SGST Which t CGST= =SGST Rate CGST Input Valu Supply CGST Tax CGST on Tax on Rate of Goods e on Cre on output of SGS Outp Credi Addi and Outpu dit output. SGST T ut t on -Input tion Service t on Input Tax SGST s Made CGS Tax Credit to Next T Credit Stage 6. 513– 10 30 10% 5% 13 6. 5 10 0 0= =3 6. 5 Whol e 130 20 Seller Retai 150 10 ler 150 160 10% 5% 15 16 7. 5 8 13 15 6. 5 15– 13 =2 7. 56. 5=1 7. 5 16– 15 =1 87. 5=0. 5

Mechanism of Dual Taxation After introduction of GST, all the traders including manufacturer will be paying both the types of taxes i. e. CGST and SGST. The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of CENVAT, i. e CGST & SGST will be charged on same price � Supply of Goods: Suppose the rate of CGST is 10% and that of SGST is 10%. When a wholesale dealer of steel in Uttar Pradesh supplies steel bars and rods to a construction company, which is also located within the same State for , say Rs. 100, the dealer would charge CGST of Rs. 10 and SGST of Rs. 10 in addition to the basic price of the goods. � Supply of Services : Suppose, that the rate of CGST is 10% and that of SGST is 10%. When an advertising company located in Mumbai supplies advertising services, to a company manufacturing soap which is also located within the State of Maharashtra for, Rs. 100, then the ad company would charge CGST of Rs. 10 as well as SGST of Rs. 10 to the basic value of the service. In both the cases, he would be required to deposit the CGST component into a Central Government account and the SGST portion into concerned State Government account. He need not actually pay duty in cash, as he would be entitled to set-off this liability against the CGST or SGST paid on his purchases (say, inputs). But for paying CGST he would be allowed to use only the credit of CGST & SGST paid on his purchases respectively. In other words, CGST credit cannot, in general, be used for payment of SGST. Nor can SGST credit be used for payment of CGST.

� � � � GST on Import of Goods and services With Constitutional Amendments, both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle(Place of supply rules). Tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services. Thus, import of goods will attract BCD and IGST. It may be noted that import of services, as against service tax at present, in GST regime, will attract IGST. 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.

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 B 2 B (Business to Business) transactions. � Importers have to register under both CGST and SGST as well.

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.

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.

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.

Taxable Event Existing Practice GST Excise Duty-Manufacturing, Taxable event is “Supply “ of Goods & service Sales Tax/VAT- Sale of Goods The location of the supplier and the recipient within the country is immaterial for the purpose of CGST. Service Tax- Realization of Service SGST would be chargeable only when the supplier and the recipient are both located within the State. Inter state Supply of goods and services will attract IGST.

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 invoicelevel details. � A number of states are capturing invoice details even in the existing VAT systems. It is proposed to follow a twopronged approach with Dealer level granularity of returns in the first phase followed by invoice level in the next phase.

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 Australia 10%, France 19. 60%, Canada 5%, Germany 19%, Japan 5%, Singapore 7%, Sweden 25%, New Zealand 15% & Pakistan 17%

Exemption of Goods and Services Alcohol, tobacco, petroleum products are likely to be out of the GST regime. Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST. Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the existing practice. In case it has been made VA table by some States, there is no objection to that. Excise Duty, which is presently levied by the States may not also be affected. Tax 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 will have concurrent power to levy tax on goods and services. In the case of States, the principle for taxation of intra -State and inter 46 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 will be adopted by appropriately aligning and integrating CGST and IGST.

Composition scheme A Composition/Compounding Scheme will be an important feature of GST, to protect the interests of small traders and small scale industries. The Composition/Compounding scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular there will be a compounding cut-off at Rs. 50 lakhs of the gross annual turnover and the floor rate of 0. 5% across the States. The scheme would allow option for GST registration for dealers with turnover below the compounding cut-off.

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).

Information Flow and Associated Entities Send Challan Taxpayer Banks and RBI File Returns Upload Challan Details CBEC (Central Portal) State 1 Portal CGST and IGST Returns Common GST Portal (Reconciliation system) State 2 Portal SGST and IGST Return CBDT MCA NSDL State N Portal

Increased Assessee Base � Under the CGST model proposed, with threshold of annual turnover of Rs. 10 lakhs, the present Assessee base of Excise and Service Tax of about 10 lakhs will increase to about 50 lakhs as every manufacturer and Trader above the specified threshold will be liable to CGST.

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.

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.