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GST in India

Value Added Tax made its first opening in France in 1954. At that time
it was not a full VAT system, since it was restricted to manufacturers and
whole-sellers. The retailers and agriculturist were kept beyond its
purview.
In the past three decades this new system was introduced world-wide
including India and in about 130 countries.
VAT IN INDIA
VAT was introduced w.e.f 1
st
day of April, 2005 in almost entire country
by Government
In the present form, VAT is a transition from the present sales
tax systems to a full VAT and then onto a Goods and Services
Tax (GST). The transition phase will continue till CST is phased out. In
the long-run , once the Goods and Services Act comes into force, India
would become one market and there would not be any difference in
procuring goods or services within the State or from outside the State.
FIVE YEAR OF VAT
Our tax collections have risen between 20% to 30% since
the introduction of VAT. Have achieved the set-out objectives during
these initial three years in the midst of political interferences, & in spite of
it teething problems while replacing such old established sales
tax system, reducing cascading effect, reducing large number of tax laws
and large number of tax exemptions ? In spite of lack of professionalism
and poor expertise of the State administrations have evolved as a solid
measure for making the way for the much awaited tax implementation of
GST .
The consumer at large has been benefited by the introduction of VAT.
The dealers have also been benefited with introduction of VAT.
GLOBAL DEMAND OF A TAX SYSTEM:-
Only honest tax payers pay regular taxes while the dishonest walk escort
free. The idea to bring GST is to make a chain which is difficult to break
and base of tax collections may widen, so that at lower rates better
revenue may be collected.
When an MNC wants to start business in India it finds new laws in each
State. Not only that but they find so many laws applicable to them and
find it impossible to work with such a country like India and they forced to
shift to some other neighboring country like China etc. Therefore, it is a
compulsion for India now to go in for GST.
DOUBLE TAXATION
The GST will make no differentiation between Good and Services as the
GST is levied at each stage in the supply chain. The problem of double
taxation was addressed by the Supreme Court of India in the landmark
decision of BSNL Vs UOI (2006 (3) SCC-1). The Supreme Court had
held that the same activity cannot be regarded as both goods and
services and hence both service tax and VAT should not be applicable on
the same set of transaction. However, inspite of the ruling in the BSNL
case, there has been a lot of confusion whether to treat specific activity as
goods or services . Implementation of GST will resolve the dilemma of a
large number of assessees.
JUSTIFICATION IN IMPLEMENTATION OF GST
Inspite of the success of VAT, there are still some shortcomings both in
the Central and State level. In the existing State-level VAT structure there
are also certain shortcomings .
1. There are, for instance, even now several taxes in the
category nature of Indirect Tax on Goods and Services, such
as Entry Tax , Luxury Tax, Entertainment Tax etc., which
are yet not subsumed in the VAT scheme .
2. At present the Central Government is charging Central
Excise Duty at the point of removable of goods from the
place of manufacture. The Central Excise Duty is to be
deposited irrespective of payment against goods removed
from the place of manufacture.
3. Service tax is charged on the date of rendition of services or
the date of receipt of payment whichever is earlier.
4. The State VAT is chargeable at the time of sale of goods
irrespective of receipt of payment against such sale.
The introduction of GST will resolve this anomaly. GST would be
chargeable on each transaction like sale of goods, incorporation of goods
in a individual contract, hiring equipment, lease paid , consultation fee
paid , rendition of any service or may be a transfer of immovable property
etc.
The introduction of unified GST would bring VAT in its true sense.
Presently the VAT system, basically can be called un-integrated GST, in
the sense that at present goods and services are taxed separately .
The taxable event under GST system will be the supply of goods and the
supply of services. The current taxable event such as manufacture,
sale of goods render of services will not be relevant under GST
system.
The prices of commodities are expected to come down in the long run
as dealers pass on the benefits of reduced tax incidence to consumers by
slashing the prices of goods. Being a consumption based tax, dual GST
will result in better revenue collection for states with higher consumption
of goods and services. This is been explained with an example .
(A) Goods-Producer
to Whole-Seller
Under
VAT (Rs.)

Under GST
(Rs.)

Cost of Production 100000/- 100000/-
Add: Producers margin
of profit
20000/- 20000/-
Producers basic price 120000/- 1200000/-
Add: Central Excise duty
@ 8%
Add: Service Tax @ 10%
on Transportation & Job
work paid
8000/-
4000/-
NIL
NIL
(Included in
GST)

Add: Value Added Tax @
12.5%
16500/- NIL
Add: Central GST @
12%
NIL 14400/-
Add: State GST @ 8% NIL 9600/-
Total Price 148500/- 144000/-
(B) Goods Whole-Seller to Retailer
Cost of goods to the
Whole-seller
132000/- 120000/-
Add: Profit margin @
10%
13200/- 12000/-
Total 145200/- 132000/-
Add: Value Added Tax @
12.5%
1650/- NIL
Add: Central GST @
12%
NIL 1440/-
Add: State GST @ 8% NIL 960/-
(C) Goods-Retailer to
Final Consumer

Cost of goods to the
Retailer
145200/- 132000/-
Add: Profit margin @
20%
29040/- 26400/-
Total 174240/- 158400/-
Add: Value Added Tax @
12.5%
3630/- NIL
Add: Central GST @
12%
NIL 3120/-
Add: State GST @ 8% NIL 2112/-
Total Price to the final
Consumer
177870/- 163632/-
Tax component in price
to Final Consumer
21780/- 31632/-
Final Price ex-taxes 156090/- 132000/-
It is evident from the above example that due to multiplicity of taxes and
due to non-availability of input tax credit across the board the final price
to the consumer is much higher not only due to tax component but due to
cascading affect also.
Window to GST
Goods and Service Tax (GST) is that tax credit mechanism wherein the
tax is levied on goods and services at each point of sale or provision of
service. Under this tax regime the seller of goods or the service provider
can claim the input credit of tax paid / payable by him (i.e. input GST) for
purchasing / selling the goods or procuring the service. GST may be
termed as a national level VAT on goods and services with one of the
differences that it also covers all states of India.
It will evade the cascading effect in Indirect tax regime. For instance,
when a Auto part making company produces auto parts, the central
Government charges an excise duty on them as they leave the factory.
Whereas on lower end of the supply chain i.e. at the retail level. VAT is
charged without giving credit of the excise duty levied earlier. But in GST
system, both central and state taxes will be collected at the point of
sale. Both components will be charged on the manufacturing cost., it will
result in increased tax collections due to wider tax base and better
conformity.
1. Single versus multiple stage
Unlike the existing sales tax and service tax, GST is generally charged on
the consumption of goods and services at every stage of the supply chain,
with the tax levels feature of GST.
Goods and Service subject to tax
GST operates on a negative concept all goods and services are subject
to GST unless specifically exempted.
Under a GST regime, a much wider range of services will fall within the
GST net than before.
2. Tax payment and accounting periods.
o Time of supply is an important feature under the GST regime as it
determines when one should account for GST in the GST returns.
The GST rules differ from the existing sales tax structure where sales
tax becomes due and payable when there is a sale or disposal otherwise
than by sale. On the other hand, service tax is only due when payment is
received.
GST in India:
Single GST Model
Under this system there would be single Union GST from each transaction
which may comprise sale of goods or rendition of services. Such
transactions would be inter-State VATable. Each intermediary from
production level to consumer level shall pay GST on the value addition
after setting off input tax credit out of charged by it.
Dual GST Model
The JWC laid down various recommendation including to have two GST
components viz. Central tax and single uniform state tax across the
country, levying of a tax over and above GST by the states on tobacco,
petroleum and liquor, GST with a quadruple tax structure comprising of a
central tax on goods extending up to retail level, a central tax on goods
extending up to the retail level, a central service tax, state VAT on goods,
and a state VAT on services. Further it recommended that because of
quadruple structure, there may be at least four rate categories one for
each of the components given above. In this system the taxpayer may be
required to calculate tax liability separately for the different rates of tax.

1. The states must tax intra-state services while inter-state services must
remain with the centre.
2. Petroleum products, including crude, high speed diesel and petrol, may
remain outside the ambit of GST.
3. Central cess like education and oil cess may be kept outside the dual
GST structure to be introduced from April 2010.
4. Levies like the toll tax, environment tax and road tax to be kept outside
the GST ambit, as these are user charges; and
5. That the levies which are in the nature of user chargers and royalty for
use of minerals must be kept out of the purview of the proposed tax.
GST MECHANISM
The Goods and Services Tax (GST) is a comprehensive value added tax
(VAT) on the supply of goods or services.
Benefits of Dual GST
o The Dual GST is expected to be a simple and transparent tax with one
or two CGST and SGST rates.
Applicability of other indirect taxes:
It is proposed that the taxes to be subsumed under CGST will include
Central Excise Duty (CENVAT), Service Tax and Additional Duties of
Customs and the Taxes to be subsumed under the SGST will include value
Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax, Luxury
Tax, Octoroi, Lottery Taxes, Electricity Duty and State Surcharges relating
to supply of goods and services. Specific Cess, Excise duty on tobacco
products and State Taxes like taxes on items containing alcohol,
entertainment tax (local Bodies), entry tax for local bodies and electricity
duty are proposed to be included in GST.
GST collection model
(a) The GST shall have two components: one levied by the Centre
(CGST), and the other levied by the States (SGST)..
(b) The Central GST and the State GST would be applicable to all
transactions of goods and services made for a consideration except the
exempted goods and services, the transactions which are below the
prescribed threshold limits.
(c) The Central GST and State GST are to be paid to the accounts of the
Centre and the States separately.
Threshold limits for levy of GST
The present threshold prescribed in different State VAT Acts below which
VAT is not applicable varies from State to State. A uniform State GST
threshold across States is desirable and, therefore, it is considered that a
threshold of gross annual turnover of Rs.10 lakh both for goods and
services for all the States .
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.
Compounding Scheme
The States are also of the view that Composition/ Compounding Scheme,
there would be a compounding cut-off at Rs. 50 lakh of gross annual turn
over and a floor rate of 0.5% across the States. The scheme would also
allow option for GST registration for dealers with turnover below the
compounding cut-off.
Expected aggregate rate of GST
The aggregate rate of GST, across the central and State GST, is expected
to be approximately 18%.
GST Rate Structure
GST is expected to have a dual structure with multiple rates on goods at
both the centre and state level. Officials said the two rates being
considered are 8-10% for the lower slab and 16-18% for the higher slab.
In addition states will levy a 1% on precious metals and a list of
exempted items.
Purchase tax: Some of the States felt that they are getting substantial
revenue from Purchase Tax and, therefore, it should not be subsumed
under GST while majority of the States were of the view that no such
exemptions should be given.
Tax on items containing Alcohol: Alcoholic beverages would be kept out of
the purview of GST. Sales Tax/VAT can be continued to be levied on
alcoholic beverages as per the existing practice. In case it has been made
VAT able by some States, there is no objection to that. Excise Duty, which
is presently being levied by the States may not be also affected.
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 without ITC.
Tax on Petroleum Products: As far as petroleum products are concerned,
it was decided that the basket of petroleum products, i.e. crude, motor
spirit (including ATF) and HSD would be kept outside GST as is the
prevailing practice in India.
Taxation of Services : Both the Centre and the States will have concurrent
power to levy tax on all goods and services.
Cross utilization of credits between goods and services
The taxes will be levied in parallel by the Centre and the States who will
levy the CGST and SGST respectively on each supply of goods/ services.
Since the Central GST and State GST are to be treated separately, 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. A taxpayer or exporter would have to maintain separate
details in books of account for utilization or refund of credit. Further, the
rules for taking and utilization of credit for the Central GST and the State
GST would be aligned. Thus the cross utilization of credits for goods and
services would be allowed subject to the fact that cross utilization of
credits between the CGST and SGST would not be permissible.
Taxation of Stock Transfer
The GST regime would work under a destination/ consumption based
concept and hence the tax on inter-state sale transactions will accrue to
the destination State. As a corollary, it will be zero rated in the Origin
State.
Inter-State Transactions of Goods and Services
The Empowered Committee has accepted the recommendations of the
Working Group of concerned officials of Central and State Governments
for adoption of IGST model for taxation of inter-State transaction of
Goods and Services. The scope of IGST Model is that Centre 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 inter-State seller will pay IGST
on value addition after adjusting available credit of IGST, CGST, and
SGST on his purchases. 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.
Single return or multiple returns
It is expected that a single return will be required to be prepared by the
assessee and copies filed with the central GST and State GST authorities.
Process of assessment under the dual GST
The dual GST is expected to be a self assessed tax. The tax
administration would have powers to audit and re-assess the taxpayers
on a selective basis.
Benefits availed presently by EOUs (exemption from excise duty
and Central Sales Tax (CST) on domestic procurement of goods.
CST will be phased out and will have no place in the GST regime. It is
expected that the benefits presently availed by the EOUs by way of
exemptions would continue to be available in the GST regime as well.
Continuation of exemption currently available
After the introduction of GST, the tax exemptions, remissions etc. related
to industrial incentives should be converted, if at all needed, into cash
refund schemes after collection of tax, so that the GST scheme on the
basis of a continuous chain of set-offs is not disturbed. Regarding Special
Industrial Area Schemes, it is clarified that such exemptions, remissions
etc. would continue up to legitimate expiry time both for the Centre and
the States. Any new exemption, remission etc. or continuation of
earlier exemption, remission etc. would not be allowed. In such
cases, the Central and the State Governments could provide
reimbursement after collecting GST.
GST and works contract
Works contract can straddle three taxable activities as per the current
law. There is of course supply of goods. Then due to the very nature of
the contract, there is supply of services. Further, if in the process of
completing the works contract a new commodity comes into existence,
there is the taxable event of manufacture. As of now the supply of goods
is taxable in the form of Value Added Tax (VAT), while the services
element is taxable as service tax. Hence, different aspects of the same
activity have a potential to be taxed by different statutes.
GST AND ITS IMPACT ON VARIOUS SECTORS
1. Impact of GST on Revenue States
2. GST to reduce Manufacturing cost
3. Implications of GST on imports & exports
4. Impact on Pharma Industry
5. Impact on FMCG Industry
6. Impact on Auto Industry
7. Impact on Logistics Sector
8. GST regime to Realign Firms Warehousing Needs.
Impact of GST on Revenue States
GST is a consumption based tax and not origin based. Under GST
structure, the tax would be collected by the states where the goods or
services are actually consumed i.e., where the goods are actually sold and
not the goods where it is actually originated. Hence, losses could be
heavy for producing states. In view of the above, the Centre is
considering a proposal to compensate states for any revenue loss.
GST to reduce Manufacturing Cost
The GST will be a dual tax with both central and state GST component
levied on the same base. There will be no distinction between goods and
services for tax purpose with a common legislation applicable to both.
Implications of GST on imports & exports
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. Place of supply rules will
determine which state will have the authority to get the tax. However, the
taxes so paid will be available as Input Tax Credit and therefore it would
be a revenue neutral. Exports, however, will be zero rated, meaning
exporters of goods and services need not pay GST on their exports. GST
paid by them on the procurement of goods and services will be refunded.
Impact on Pharma Industry
The Indian Pharmaceuticals Industry (IPI), estimated turnover at 450
billion, ranks fourth globally in terms of volume and is amongst the
largest producer of Pharma products in the world along with USA. Japan,
Europe and China. The cutting edge that IPI enjoys over most other
nations is the cost advantage, given that the cost of labour and overall
production is lower in India as compared to other nations. To cite an
example, the manufacturing cost of Pharma products in India is nearly
half the cost incurred in the US. But the multistage taxation in the
Pharma Industry i.e. Customs Duty on imports, Central excise duty on
manufacture, Central Sales Tax (CST)/VAT on sale of goods. Service tax
on provision of services and levies such as entry tax, Octoroi, cess by the
State or Local municipal corporations/ municipalities is one of the key
stumbling block in its progress. Levy of multiple taxes, loss of credit of tax
paid, compliance and litigation cost associated with the present tax set up
are causing problems to the Pharma Industry.
Introduction of GST is a positive step and if implemented in the right
spirit could result in reduction in transaction cost. The most visible and
immediate impact of GST appears to be the proposed discontinuance of
(Central Sales Tax (CST) levy. As on date, CST is a cost to Pharma
manufacturers whenever they procure raw materials from outside their
state and if sale is on inter-state basis. This is on account of the fact that
CST paid in purchases cannot be set off against the local value added tax
(VAT) liability of manufacturer/ dealer. Though, over the last couple of
years CST rates have reduced from four to two percent, the said levy
continues to be a cost to the manufacturers and traders dealing in
interstate transactions. The phasing out of CST with the advent of GST
could do away with the perennial issue of credit leakage on this front.
Another evident impact of GST would be a definite re-look and review of
the present warehousing strategies followed by the Pharma Industry. As it
stands on date, most Pharma manufacturers maintain warehouses in
different states to evidence movement of goods from one warehouse to
another so as to save on the CST. Also, quite a few entities set up
warehouses on hitherto attractive locations like Pondicherry or Daman as
the CST rate at such locations were previously lower than the rate at such
locations were previously lower than the rates prevalent in other states.
Warehouses across various states and movement of goods thereof have
been a nightmare to the Pharma Industry from the logistics perspective
not to mention the increased compliance requirements and transaction
costs. With GST in the anvil, Pharma manufacturers can set up
warehouses for distribution at select strategic location without looking at
the same tax planning options resulting in cost of operations.
Currently, certain locations such as Himachal Pradesh, Uttranchal enjoy
an excise tax holiday on their manufacturing activities. However, since
the output is exempt the tax paid in inputs/capital goods tend to be a cost
to the entitles located in such areas. Though, area based exemptions may
not continue in the GST era, based on past experience of VAT and on a
generic basis, it appears that the presently exempted units may be
required to pay GST on their finished goods but, would be entitled to
claim refund in order to ensure continuity of GST at every stage. By doing
so, the credit chain remains intact and at the same time incentives
already agreed by the Centre and the State Government for both Central
and State Level GST is passed on to the manufacturers. Such a move
would ensure that the various manufacturing hubs of the Pharma Industry
in said areas continue manufacturing operations in such locations.
Pharma goods attract excise duty at 4.12 percent whereas the Active
Pharmaceuticals Ingredients (API), which are inputs for manufacture of
Pharma products typically, attracts duty at 8.24 percent. The difference n
duty rates of inputs vis--vis the finished goods has resulted in
accumulation of differential Cenvat Credit for the manufacturers not
engaged of export of Pharma goods. The Central Excise/Cenvat Credit
legislation does not provide any mechanism for refund of such
accumulated Cenvat credit. With the Central GST presumed to have a
single rate for both goods and services, going forward accumulation of
credit may cease to be an issue for the industry. It is not clear as on date
whether the proposed GST will have transitional provisions to carry
forward the unutilized accumulated Cenvat credit from the Central excise
law to Central GST legislation and how the same would be implemented.
Impact on Auto Industry
The Auto Industry is sensitive to the changes in the economy as well as
fiscal policy and is accepted as the barometer of economic well-being of a
country. The imminent introduction of the goods and service tax (GST)
replacing central excise duty, service tax, state value added tax (VAT)
and central sales tax (CST) may change the way business is done today.
The Practice in this industry is to sell vehicles to a dealer network that
sells as well as services the vehicles. More than 80% of the sales is
generally outside the state of manufacture. The distribution of the
vehicles may be by way of direct sales to dealers, currently subjected to
CST or by stock transfers to depots and stockyards across the country.
Both these models entail a tax cost, which gets embedded in the final
price to the customers. Though the rate of CST cannot be set off by the
dealer against his VAT liability. Similarly, though stock transfers are not
eligible to tax, state VTA laws provide for retention or reduction of input
tax credits.
Currently, stock transfers do not attract any tax (other than the loss of
input tax credit in the exporting state). It is possible GST would be
applicable on all supplies including stock transfers. This would have its
own challenges. The valuation of such stock transfers have to be tackled
as there would be no sale value available to calculate tax. There could be
significant cash flow issues as well. Special transition provisions will be
required for the in-movement stock from factory to depot on the date of
introduction of GST.
Most of the new investments by auto companies have gone to the states
that have offered most competitive tax incentives. Such incentives are
largely in the form of subsidies/loan equal to the VAT/CST paid in the
state govt. For instance, under the GST regime, the state of manufacture
will not collect any existing incentives (in terms of CST
exemption/deferral) can continue. Himachal Pradesh etc would also be
effected.
One of the reasons for auto component manufacturers to set up units
close to OEM plants is to avoid breaking of the VAT credit chain. The
removal of CST in the new regime would provide a new opportunity for
consolidation of theses units into larger units, which would be good for
economic efficiency of the sector as a whole.
If the GST rate is fixed anywhere between 16-18% as being discussed
currently, it may be a good news for the industry. The current effective
rate works out to be more, particularly for the bigger cars, where the
excise duty is higher.
Impact on Logistics Sector
The introduction of a national sales tax in India next year could have a
similar impact on freight demand as the creation of the European single
market and customs union, according to leading logistics operations.
Logistics firms are building warehouses and logistics parks across India
as the country gets ready for a centrally administrated goods and services
tax (GST).
The GST will standardize rates across the nation, allowing many
corporations to move away from having warehouses in different states to
adhere to each state tax code and employ logistics companies to manage
distribution and supply chain.
With GST coming in place, a lot of consolidation is expected in this space.
The case for having a warehouse in each state will disappear.
Big Corporations such as Larsen and Toubro, ITC and Philips are planning
to close down their regional warehouse in the wake of GST coming in.
Many corporations have approached their distribution and logistics part to
cut down the cost.
Logistics firm such as Safeexpress Pvt. Ltd. Transport Corp. of India Ltd.
Gati Ltd. are new building warehouses or logistics parks
Most of the leading manufacturers currently have 20, 25 warehouses
across the country. With GST, this will change and companies like
Safeexpress will take charge Safeexpress building 32 logistics parks with
an investments of Rs. 650 crore by 2011.