GST India:

What is GST?

GST stands for Goods and Service Tax which is a comprehensive tax levied on manufacture, sale and consumption of goods and services at pan-India level. Implying, GST will subsume host of central (Excise, Countervailing Duty and Service Tax) and state taxes (Octroi, VAT, Entry tax and Luxury tax).

GST is touted as the biggest indirect tax reform in India since independence and is expected to boost GDP growth by 100 to 150 basis points.

Why GST?

The current indirect taxation regime has several limitations and inefficiencies that will get addressed by GST. GST will redistribute the taxation uniformly across manufacturing and services and bring in simplicity and uniformity in tax administration. The unhealthy competition between states will be eliminated thus uniting the country economically. By expanding the tax base (Tax: GDP ratio will increase) and improving compliance, GST aims to boost economic growth of the country besides increasing revenue for the government.

A uniform tax framework across country would boost businesses by significantly reducing the efforts required in meeting tax compliance. Efficiencies will also be derived in tax administration and audit by central and state governments. By eliminating the cascading effect of taxes from production till end customer, the burden on consumer is also reduced.                                                                                                     

What is cascading of Taxes?

Let us understand a little history;

Sales Tax Regime:

Under the sales tax regime, the tax is calculated on the selling price of a product and each stage of transaction (Manufacturer > Wholesaler > Retailer > End Consumer) the tax gets added. This ‘tax on tax’ or double taxation is termed cascading effect.

Illustration:

·              Product: Mobile Phone

·              Tax Rate: 5%

·              Margin: 10%

Seller	Cost	Selling Price  (after 10% margin)	Tax (@ 5%)	Amount
Manufacturer	5000	5500	275	5775
Wholesaler	5775	6353	318	6671
Retailer	6671	7338	367	7705
			960

The total tax paid to government is Rs 960 in the above example with tax getting added at each stage. In the above illustration from stage 2 onwards, tax is getting calculated on the selling price which already includes tax charged in previous stage, thus leading to double taxation.

Value Added Tax Regime:

To overcome the cascading effect of taxation, VAT was introduced in stages across India beginning 1^st April 2005. As VAT is applied only on the value addition done (difference between Sale price and purchase price) and not on the entire sale price, this prevents the cascading effect. VAT provides for an ability to set-off the Output VAT collected on sales against the input VAT paid on purchases and pay only the differential to the government.

Illustration:

In the context of the above example, let us see the VAT implications:

Seller	Cost	Selling Price  (after 10% margin)	Input VAT (@ 5%)	Output VAT (@ 5%)	Tax Paid to Govt.	Amount
Manufacturer	5000	5500		275	275	5775
Wholesaler	5775	6353	275	318	43	6671
Retailer	6671	7338	318	367	49	7705
			960		341

As is obvious, the amount of tax to be paid to government is significantly reduced to Rs 341 and a tax saving of Rs 619. Businesses can in turn pass on the accrued benefit to end customers.

 How GST is different from VAT?

If VAT is addressing the cascading effect, why do we need GST?

With introduction of VAT the cascading effect of taxes in Sales tax regime got addressed and helped in reducing the inflationary effect of taxes on prices. Similarly in the case of Central Excise, the credit accrued from excise duty paid at input stages is allowed to be set-off against liability of excise on removal of goods under MODVAT scheme. In case of Service tax as well, since 2002, set-off has been provided. Also, in 2004 CENVAT Credit rules allowed cross utilisation of input between excise and service tax.

However, there is no cross-utilisation between central (Excise/Service Tax) and state taxes (VAT). That is, the credit of VAT cannot be set-off against liability of Excise/Service tax and vice-versa. The assessable value for calculation of VAT includes excise paid. Similarly, CENVAT credit is provided only for Excise duty paid on inputs, excluding VAT component.

Hence the cascading effect of taxes, although reduced, still exists!

GST aims to eliminate this cascading effect by introducing a single uniform tax across the country which will subsume a host of central and state indirect taxes.

What is Dual GST structure?

Taking cognizance of the federal structure of India, the GST model adopted is dual GST which is very unique and prevalent in few countries like Canada and Brazil. Under this model, tax is administered, collected and shared by both centre and states based on the nature of transaction (local or interstate).

The components of Dual GST:

• SGST: State GST
• CGST: Central GST
• IGST: Integrated GST

Transaction	Applicability	Remarks
Supply within the state	SGST and CGST	SGST will go to state and CGST collected will go to centre
Supply outside the state	IGST(CGST+SGST)	Proceeds of IGST will get apportioned between centre (CGST component) and consuming state (SGST part of IGST)

IGST will have 2 components (i.e CGST and SGST), the centre will collect IGST, retain the CGST component and transfer the SGST part to the consuming state.

Salient Features:

·        GST would enable central government to tax supply of goods (hitherto VAT is charged by state governments only) and state governments to tax supply of services (till now, the domain of centre).

·        GST is a destination or consumption based tax and the implication being, the state where goods/services are consumed earns the GST revenue. Hence, imports will be taxed and not exports.

·        Taxable event will shift from manufacturing or sale of goods or provision of services to ‘Supply of goods and services’. The term ‘Supply’ refers to all sale, transfer, barter, lease and import of goods/services for a consideration.

·        Eligibility for Input Tax Credit:

Sl No.	Nature of Supply	Eligibility for ITC
1	Taxable Supply	Yes
2	Zero Rated Supply	Yes
3	Exempted Supply	No

·        Cross-utilization of Input:

Input Tax Credit	Set-off against liability of
CGST	CGST and IGST (in that order)
SGST	SGST and IGST (in that order)
IGST	IGST, CGST, SGST (in that order)

Cross-utilization of SGST input against liability of CGST or vice-versa is not allowed. Excess input if any after set-off may be either claimed or carried forward.

·        What will get subsumed under GST?

o   Central Excise

o   Service Tax

o   VAT/Sales Tax

o   Entertainment Tax

o   Luxury Tax

o   Taxes on lottery

o   Octroi and Entry Tax

o   Purchase tax

·        What will not get subsumed in GST?

o   Basic Customs duty

o   Alcohol for human consumption

o   Petrol / Diesel / Aviation fuel / Natural Gas (to be included only at a later date)

o   Stamp duty and Property tax

o   Toll tax

o   Electricity Duty

Disclaimer: The views expressed in this blog post are strictly personal and do not in any way represent my employer.