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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
PRESENT TAX STRUCTURE IN INDIA
Tax
Tax

Direct Tax Indirect Tax


Direct Tax Indirect Tax

Income Tax Wealth Tax


Income Tax Wealth Tax

Central Tax State Tax


Central Tax State Tax

Entry Tax,
Excise Duty Service Tax Custom VAT Entry Tax,
Excise Duty Service Tax Custom VAT Lottery,
Lottery,
Entertainm
Entertainm
ent tax,
ent tax,
etc
etc
Till 2005
Sales Tax
It is an indirect tax levied on the sales of goods.
Rs. 10000
Rs. 10000 + Rs.1000
+
Rs. 500

+500 value added


Rs. 11500 +
Rs. 1150
0
1 00 50 Rs.12650
. 1
Rs s .1
1000+100+50 R

10% sales tax 10% sales tax


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 within Levied on the sales of goods from
the state. one 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
In fact, Its a VAT but comes into
against his tax liability.(INPUT CREDIT play when sales of goods b/w
SYSTEM) 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) =
Sales(output)=
1000 paid
1150
(VAT)
collected

Dealers VAT liability


Output - Input =
1150-1000=
150 to pay to state
January February

VAT paid on Rs. 10000 VAT paid on 0(no new stock)


Inputs Inputs

Input Credit Rs.10000 Input Credit Rs.5000

VAT collected from Rs. 5000 VAT on Output Rs. 7000


Output

Input Credit (+)Rs. 5000 Input Credit (-)Rs. 2000


i.e. Rs. 2000 to be
paid

Have to sell and buy with


Invoice and TIN
Else No Input Credit
After 2005

Value Added Tax(VAT)

10000
10000 +
0+
500
Input Tax Credit-
1000 Output Tax -
1050
+500 value added
10500 +
1050
0 0 0 - 11550
10 05
50 y =1
50 lit
a bi
Li
x
Ta 00
10

10% VAT 10% VAT


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.

Cascading

Cascading

Excise Excise

Cascading Excise

To address this cascading


effect, MODVAT was
Excise
Excise introduced
MODVAT : Modified Value Added Tax

Input Credit

Excise Excise

Excise

Now, similar to VAT,


manufacturer at each stage
started getting credit for the
Excise excise duty paid earlier. Thus
Excise
eliminating cascading effect.
Service Tax Service Taxis
ataximposed by Govt.
Service Tax of India on services
provided(except those
in negative list) in India.
Theserviceprovider
Service Tax collects thetaxand
pays the same to the
govt.
Introduced in 1994,only
on 3 services.
Cascading In 2012, there were 119
such services after
which govt. gave the
definition of services
and made all of them
taxable.
However, there are
Cascading
Excise negative list and
exemption list.
Service Tax CENVAT replaced
MODVAT
Service Tax CENVAT : CENVAT collected by
central govt.
Central Value Input credit on Excise
duty as well as
Service Tax
Added Tax service tax paid
earlier.
Thus, removes
cascading of taxes.
For raw components,
materials used.
Cascading
Input Credit For services used.

Cascading
Excise
Cascading of taxes removed to a large
extent.
Tax evasion reduced.
Efficient Input Credit(VAT, CENVAT)
system introduced.
Tax collection improved

THEN WHY GST????


Also, CENVAT credit and
VAT Input credit can't
offset each other.

Electricity Advertisement
Hoardings

CST
Final cost=all
the taxes
included
Fuel

But State VAT


credit is not given
for all the taxes.
Hence, cascading
VAT
effect
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 Indias 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 Central GST
(CGST)
India will have Concurrent Dual GST comprising of Central GST and State GST No Excise
levied on the same base. No Service
GST rate= CGST rate + SGST rate Tax
No Cess,
Total tax collected in GST will be distributed to centre and state as per Surcharges,
CGST , SGST rate etc.
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 State GST
of goods and services. (SGST)
In this model, all the goods and services would be subject to concurrent No VAT
taxation by the state and the centre. No Cess,
Surcharges,
For example, if a product have levy at base price of Rs. 10000 and rate of GST entry taxes,
are 8% , CGST is 3% and SGST is 5% ,then tax collected during transaction is etc.
800 , 300 goes to central govt as CGST tax, 500 goes to the state govt. as
SGST tax.
Which Central Taxes will be subsumed?? ONLY CGST

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 SGST
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


GST

Sales Price After GST Payment to Government


Before GST(in ) GST=10%(assumption) (Total GST-Input
Credited)
Supplier Price=100 Supplier sales price Total GST=10
=100+10 Input Credited=0
=110 GST Payable=10
Manufacturer=160 Manufacturer sales price Total GST=16
=160+16 Input Credited=10
=176 GST Payable=6
Wholesaler=200 Whole Sales price Total GST=20
=200+20 Input Credited=16
=220 GST Payable=4
Retailer=250 Retailer Sales price Total GST=25
=250+25 Input Credited=20
=275 GST Payable=5
Consumer Total payment to retailer Total GST paid to the
=275 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:
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%.

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).
Benefits of GST
Improved Logistics/Seamless movement of goods across the country as entry check
points(for entry tax)wont 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

GST Council
Each decision must have
approval of 3/4th members
of the council. MIN QUORUM-
50% MEMBERS
Chairman

Union Min. of Min. of Finance


State for or any other Min.
Finance/Revenue nominated by
each State Govt.
1/3rd voting
power 2/3rd voting
power
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 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 CHALLENGES

Robust 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 Bill

122nd Constitutional Amendment Bill, 2014 How to pass


the bill
Highlights of the Bill:

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.
122nd Bill

122nd Constitutional Amendment Bill, 2014 How to pass


the bill

How to pass the Bill:

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