Goods and Services Tax (GST)

What is GST?

‘G’ – Goods

‘S’ – Services

‘T’ – Tax

“Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and service at a national level under which no distinction is made between goods and services for levying of tax. It will mostly substitute all indirect taxes levied on goods and services by the Central and State governments in India.GST is a tax on goods and services under which every person is liable to pay tax on his output and is entitled to get input tax credit (ITC) on the tax paid on its inputs(therefore a tax on value addition only) and ultimately the final consumer shall bear the tax”.
Worldwide GST:
France was the first country to introduce GST in 1954. Worldwide, Almost 150 countries have introduced GST in one or the other form since now. Most of the countries have a unified GST system. Brazil and Canada follow a dual system vis-à-vis India is going to introduce. In China, GST applies only to goods and the provision of repairs, replacement and processing services. GST rates of some countries are given below:-

Country Rate of GST
Australia 10%
France 19.6%
Canada 5%
Germany 19%
Japan 5%
Singapore 7%
New Zealand 15%
 Rate of GST:

There would be two-rate structure –a lower rate for necessary items and items of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For goods in general, government is considering pegging the rate of GST from 20% to 23% that is well above the global average rate of 16.4% for similar taxes, however below the revenue neutral rate of 27%.

Model of GST 
The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST). Rates for Central GST and State GST would beapproved appropriately, reflecting revenue considerations and acceptability.
The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services.


Cross utilization of ITC both in case of Inputs and capital goods between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services (i.e. IGST).
The Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.

IGST Model (Inter-State Transactions of Goods & Services) and Input tax credit (ITC)

Existing CST (Central state tax, tax on interstate movement of goods) shall be discontinued.
Center would levy IGST (cumulative rate for CGST and SGST)on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.The ITC of SGST, CGST shall be allowed as applicable.Since ITC of SGST shall be allowed, 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 SGST liability (while selling the goods in state itself). Thereafter, the Centre will transfer to the importing State the credit of IGST used in payment of SGST. (Please see example 4 & 5),The relevant information shall be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective state governments or central government to transfer the funds.

Advantage of IGST:
No refund claim in exporting State, as ITC is used up while paying the tax.
Maintenance of uninterrupted ITC chain on inter-State transactions.

Some Specific points for specific products (being high revenue generating products)

1. This tax does not apply to alcohol and petroleum products. They will be continued to be taxed as per the existing practices.
2. Tax on Tobacco products will be subject to GST. But government can levy the extra tax percent over and above GST rate.

Other key points:

• Manufacturing state (the state in India in which the goods are manufactured) will be allowed to levy an additional tax percent (say 1%) on supply of goods.
• PAN based identification number will be allowed to each taxpayer to have integration of GST withDirect Tax.
• The taxpayer would need to submit periodical returns, in common format as far as possible, to both the CGST authority and to the concerned SGST authorities.

Exemption/Composition Scheme under GST:

• The Small Taxpayer: The small taxpayers whose gross annual turnover is less than 1.5 Crore will not be covered by GST law and no need to pay tax.
• Scope of composition and compounding scheme under GST to be provided for this purpose, an upper ceiling on gross annual turnover (say Rs.50 Lacs) and a floor tax rate (say 0.5%) with respect to gross annual turnover should be provided.
• Treatment for goods exempt under one state and taxable under the other to be provided.

List of exempt items which shall be outside the purview of GST shall be provided. GST on Export & Import

• GST on export would be zero rated
• Both CGST and SGST will be levied on import of goods and services into India. The incidence of tax will follow thedestination principle i.e. SGST goes to the state where it is consumed. Complete set-off will be available on the GST paid on import on goods and services.
• No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.
• Indirect taxes that will be included under GST:-

State taxes which will be subsumed in SGST

• VAT/Sales Tax
• Entertainment Tax (unless it is levied by local bodies)
• Luxury Tax
• Taxes on lottery, betting and gambling.
• State cess and surcharges to the extent related to supply of goods and services.
• Entry tax not on in lieu of octroi.

 

 Central Taxes which will be subsumed in CGST 

• Central Excise Duty.
• Additional Excise Duty.
• The Excise Duty levied under the medical and Toiletries Preparation Act
• Service Tax.
• Additional Customs Duty, commonly known as countervailing Duty (CVD)
• Special Additional duty of customs(SAD)
• Education Cess
• Surcharges

Taxes that may or may not be subsumed due to no consensus between the Central and State Governments:

• Stamp Duty
• Vehicle Tax
• Electricity Duty
• Other Entry taxes and Octroi
• Entertainment Tax (levied by local bodies)
• Basic customs duty and safeguard duties on import of goods into India

Other Benefits of GST 

• Reduces transaction costs and unnecessary wastages:A single registration and a single compliance will suffice for both SGST and CGST provided government produces effective IT infrastructure and integration of states level with the union.
• Eliminates the multiplicity of taxation: The reduction in the number of taxation applicable in a chain of transaction will help to reduce the paper work and clean up the current mess that is brought by existing indirect taxation laws.
• One Point Single Tax: They would be focus on business rather than worrying about their taxation that may crop at later stages. This will help the business community to decide their supply chain, pricing modalities and in the long run helps the consumers being goods competitive as price will no longer be the function of tax components but function of sheer business intelligence and innovation.
• Reduces average tax burdens:- The cost of tax that consumers have to bear will be certain and it is expected that GST would reduce the average tax burdens on the consumers.
• Reduces the corruption:-As the no. of taxes reduces so does the no of visits to multiple department reducesand hence the reduction in corruption.

In all cases except a few products and states, there would be uniformity of tax rates across the states.

General points on Various Business Sectors that arise after GST implementation:-

Real Estate Industry: Construction and Housing sector need to be included in the GST tax base being high tax revenue generating sector and for reduction in no. of tax legislations involved.
FMCG Sector:.Implementation of proposed GST and opening of Foreign Direct Investment (F.D.I.) are expected to fuel the growth and raise industry’s size.

Rail Sector:There have been suggestions for including the rail sector under the GST umbrella to bring about significant tax gains and widen the tax net so as to keep overall GST rate low. This will have the added benefit of ensuring that all inter–state transportation of goods can be tracked through the proposed Information technology (IT) network.

Information Technology enabled services:At present, if the software is transferred through electronic form, it should be considered as Intellectual Property and regarded as a service and if the software is transmitted on media or any other tangible property, then it should be treated as goods and this classification is full of litigation. As GST will have uniform rate for Goods and Services and no concept of state revenue being VAT or central revenue being service tax and hence, the reduction in litigation.

Transport Sector: Truck drivers spend more than half of their time while negotiating check post and tolls. At present there are more than 600 check points and more than ton types of taxes in road sector.
After the introduction of GST, the time spend by the road transport industry in complaining with laws will reduce and service is going to be better which will boost the goods industry and thus the taxes also.

Impact on Small Enterprises:There will be three categories of Small Enterprises in the GST regime.
Those below threshold limit of Rs.1.5 Crores would not be covered.

Those between the threshold and composition turnovers will have the option to pay a turnover based tax i.e.composite tax or opt to join the GST regime.Those above threshold limit will need to be within framework of GST. Possible downward changes in the threshold in some States consequent to the introduction of GST may result in obligation being created for some dealers.

Questions, please ask?