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Goods & Service Tax (GST)

1
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
Tax
 A fee charged ("levied") by a government on
a product, income, or activity.
 If tax is levied directly on personal or corporate income,
then it is a direct tax.
 If tax is levied on the price of a good or service, then it is
called an indirect tax.
 The purpose of taxation is to finance government
expenditure.
 One of the most important uses of taxes is to finance public
goods and services, such as street lighting and street
cleaning.
GST
 Goods and service tax (GST) is a comprehensive
tax levy on manufacture, sale and consumption of
goods and service at a national level.
 GST is a tax on goods and services with value
addition at each stage.
 GST will include many state and
central level indirect taxes.
 It overcomes drawback present tax system.
VIDEO 1
PRESENT TAX STRUCTURE IN INDIA
Tax

Direct Tax Indirect Tax

Wealth
Income Tax
Tax

Central Tax State Tax

Excise Service Entry Tax,


Duty Custom VAT
Tax Lottery,
Entertainment
tax, etc
Short comings in current
Tax System
 Tax Cascading (Tax on Tax)
 Complexity
 Taxation at Manufacturing Level
 Exclusion of Services
 Tax Evasion
 Corruption
Cascading Effect of
Present Tax system
Sales Tax
 Under sales tax, tax is levied on every sale made.
 For example if a dealer (say A) sold goods to another dealer
(say B) he collects local sales tax from such dealer which is
normally included in his sale price. If dealer B again sells
goods to another dealer (say C) he again collects tax on
sales made by him. The tax levied by dealer B shall be on
his sale price i.e. (his purchase price + profit ). As his
purchase price already includes tax paid by him, sales tax
includes tax on tax already paid i.e. it is repetitive in
nature.
Under VAT (value added tax) the tax is on sales made by
any dealer levied only on value added at each selling point.
So it is not repetitive in nature.
VAT
(Value Added Tax)
Implemented in April-1/2005
It is replacement to complex Sales Tax
It overcomes a Cascading Effect of Tax
It applied on " Value Added Portion" in sales
price
Value Added Tax(VAT)
 Sales tax is retail only.
 Value-Added tax is a tax at every step of the inventory
process
 Taxed at every step from manufacturer to distributor to
warehouse to retailer to customer.
 VAT is uniform; whereas sales tax differs from state to
state.
Illustration of VAT
• In the previous
example, ‘value
added’ by B is only
Rs.50 (150–100)

• tax on producer B
would be only Rs.5
(i.e., 10 % of Rs. 50)
while

• the tax paid in


previous system was
Rs. 15 (10 % of Rs.
150).
In Old Tax System Consumer has to pay Rs 220
In VAT system Consumer Actually Paid Rs 205
Problems with VAT
 It is not uniform in nature
 VAT is different for different states
 Different rates of taxation for different
good
After
2005

Value Added Tax(VAT)


₹ 10000
₹ 10000 +
₹0+
₹ 500
Input Tax
Credit- 1000 Output Tax -
1050
+500 value ₹ 10500 +
added ₹1050
₹ 11550

₹ 50

10% VAT 10% VAT


Service • Service Tax is
Tax a tax imposed by
Service Govt. of India on
Tax services
provided(except
those in negative list)
Service in India.
Tax • The service provider
collects the tax and
pays the same to the
Cascading govt.
• Introduced in
1994,only on 3
services.
• In 2012, there were
119 such services after
which govt. gave the
definition of
Excise ‘services’ and made
all of them taxable.
• However, there are
Cascading negative list and
exemption list.
VAT Vs GST
 VAT is value added tax (on products). GST (Goods and
Services Tax) is like VAT but applies to Services also
(apart from products).
 In India, we have VAT and Service Tax. Whereas in
many countries you have only GST that applies to both
products and services.
 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
Fuel included

But State VAT


credit is not
given for all the
taxes. Hence,
VAT
cascading 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 & Service Tax (GST)
A Common Tax on

Goods Services
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 between goods and services as GST is
levied at each stage in the supply chain.
 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.
 All sectors are taxed with very few exceptions / exemptions
History
 Feb, 2006 : First time introduced concept of GST and
announced the date of its implementation in 2010
 Jan. 2007: First GST study by ASSOCHAM released
by Dr. Shome
 Feb. 2007: F.M. Announced introduction of GST from
1 April 2010 in Budget
The Government came out with a First Discussion
Paper on GST in November, 2009
Introduced the 115th Constitution Amendment (GST)
Bill in the year 2011.
Model Of GST
GST Structure

Centre GST State GST Dual GST

GST to be levied GST to be levied


by the by the GST to be levied by the Centre and the
Centre State States concurrently
Proposed GST Rate
Items Total GST Centre State
rates (in %)
Goods 20 12 8
Services 16 8 8
Essential 12 6 6
Goods

Presently it is (26.5 % , CENVAT-14 % and


State VAT 12.5% )
Central GST
Framework(Model) of GST (CGST)

 India will have Concurrent Dual GST comprising of • No Excise


Central GST and State GST 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 CGST , SGST rate Surcharge
s, 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 State GST
inter state transfer of goods and services. (SGST)
 In this model, all the goods and services would be subject
to concurrent taxation by the state and the centre. • No VAT
 For example, if a product have levy at base price of Rs. • No Cess,
10000 and rate of GST are 8% , CGST is 3% and SGST is Surcharge
5% ,then tax collected during transaction is 800 , 300 s, entry
goes to central govt as CGST tax, 500 goes to the state taxes, etc.
govt. as SGST tax.
Taxes proposed to be
subsumed in GST
Central Taxes
Excise Duty
Additional Excise duty
Excise duty under medicinal and toilet
preparation Act
Service Tax
Additional Custom duty commonly known as
countervailing duty (CVD), special additional duty(
SAD)
Surcharge
CENVAT
Taxes proposed to be
subsumed in GST
State Taxes
Value added tax (VAT)
Entertainment tax levied by states
Luxury Tax
Tax on Lottery, betting and gambling
Entry tax other than for local bodies
(Octroi)
Product Excluded from
GST
Petroleum Product
Alcohol
Tobacco Product
Illustration Of GST
Product A VAT System GST System

Base Price 100 100


+ 12% Excise duty 12 NA
+12.5%VAT 14 NA

State GST NA 8
centre GST NA 12

Total Tax Burden 26 20

Value Of Product to 126 120


Consumer
GST

Sales Price After GST Payment to


Before GST(in ₹) GST=10%(assumption) Government
(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
 VIDEO 2
IGST
just a
mechani
Integrated GST (IGST) sm 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).
GST Council
 GST levy will be administered by
1. Union finance minister(chairmen)
2. Union minister in charge of state revenue or finance
3. Minister in charge of finance or taxation.
4. Any other minister(finance minister of the state)
nominated by each state gvt would constitute the council.
Dispute Settlement Authority(DSA)
 Dispute between state and centre will be handled by
the DSA.
 Appeal from DSA would be dealt with supreme
court.
 Example: if a state receives less revenue in
comparison with its previous one than it can appeal
this case to the DSA.
Importance of Article 246(A)
 There is resistance by the SG as VAT is the main source of
revenue for the SG.
 In 246(a) certain powers are allocated to the state
government.
 The parliament & legislature of every state will have the
power to make law with respect to goods and service tax
imposed by union(gvt) or by the state.
Benefits of GST
Transparent Tax System
Uniform Tax system Across India
Reduce Tax Evasion
Export will be more competitive
Hurdles in Implementation
Dispute between centre and Tax over Tax
Sharing
Highly sophisticated IT infrastructure required .
Issue of taxing e-commerce is to be appropriately
addressed and integrated.
Political Imbalace
VIDEO 3
GST Global Scenario
More than 140 countries have already introduced
GST/National VAT.
France was the first country to introduce GST
system in 1954.
Typically it is a single rate system but two/three
rate systems are also prevalent. Canada and
Brazil alone have a dual VAT.
Standard GST rate in most countries
ranges between 15-20%.
India's GST structure is complex, says
IMF
 Report says the proposed GST structure will require the centre to
coordinate with 30 states, which is an administrative challenge.
 Even as the international monetary fund (imf) says the
proposed goods and services tax (GST) will improve tax
compliance and enhance economic growth by 1-1.5 per cent over
time, it finds the structure of the indirect tax regime in india
complex.
 “The GST design being contemplated is... Fairly complex, with a
dual administration arrangement that involves the tax authorities
of both the centre and states separately taxing a single transaction,”
says the fund in a report on india.
GST – Advantages
 As a developing country, India needs a transparent & unambiguous tax
structure
 A complex tax structure with multiple rates of taxes
 Multiple taxes across the supply chain
 High transaction cost in the hands of the tax payers
 Increased tax collections due to wider tax base and better compliance
 Improvement in international cost competitiveness of indigenous goods
and services.
 Enhancement in efficiency in manufacture and distribution due to
economies of scale
 GST encourages an unbiased tax structure that is neutral to business
processes, business models, organization structure, product substitutes and
geographical locations
 Helping as a weapon against corruption
 GST operates on a negative list i.e. All goods and services are subject to
GST unless specifically exempted

GST – Advantages
 Nature of complexities i.e. Classification to
valuation regarding taxability, exist in the present
structure.
Some of such burning issues are:
 Excise on MRP
 Excise, VAT and service tax on software,
 VAT & service tax on:
 Works contracts
 Right to use
GST : Key Features
 Dual GST : central GST & state GST
 Destination based state GST
 Uniform classification
 Uniform forms – returns, challans ( in electronic mode)
 No cascading of central and state taxes
 Cross credit between centre and state not allowed
 Tax levied from production to consumption
GST : Global Perspective
 It has been a part of the tax landscape in Europe for the past 50 years.
 It is fast becoming the preferred form of indirect tax in the Asia-pacific
region.
 While countries such as Singapore and new Zealand tax virtually
everything at a single rate, Indonesia has five positive rates, a zero rate
and over 30 categories of exemptions.
 In china, GST applies only to goods and the provision of repairs,
replacement and processing services.
 It is only recoverable on goods used in the production process, and GST
on fixed assets is not recoverable.
 There is a separate business tax in the form of vat.
GST : Global Perspective
 Goods and services tax in brazil
 Brazil was the first country to adopt GST system.
 Brazil has adopted a dual GST where the tax is levied
by both the central and the provincial governments.
 GST rate is 20 %.
GST- CAN WE ADOPT IT
 An information network allowing GST Council to cross-
check payment information should be developed.

 What is needed is an IT system like the tax information


network (tin), where the TDS or the vat credit is recorded in
a central database.

 Paper bills and fraud to be largely eliminated.


Knowing more about GST
 We all will pay GST on every product or service we buy/ consume

 All indirect taxes levied by the states and the centre will be merged into one
GST, we would exactly know how much tax we pay which at present is
difficult to understand.
 The sellers or service providers collect the tax from their customer.

 Before depositing the same to the exchequer, they deduct the tax they have
already paid.
 The success of GST would rest upon efficiency, equity and Simplicity.

 VIDEO 4