GOODS AND SERVICE TAX : AN INTRODUCTION

Presented By

Aditya Khajanji

MBA-(AB)

1st Year1

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Flow of Presentation

GST –Global Scenario

Background in India

What is GST

Why GST for Indian Commerce

Structure of GST

GST advantages

GST disadvantages

Way Forward

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GST :Global Scenario• More than 140 countries have already

introduced GST/National VAT• France was the first country to introduce GST

system in 1954 • Most countries have a single GST rate• Typically it is a single rate system but two/three

rate systems are also prevalent depending upon the requirement of the implementing nation.

• Standard GST rate in most countries ranges between 15-20%

• All sectors are taxed with very few exceptions/ exemptions

• Canada and Brazil alone have a dual GST.

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Background In India• The effort to introduce the new tax regime was

reflected, for the first time, in 2006-2007 Union Budget Speech.

• Finance Minister Mr. P. Chidambaram remarked that there is a large consensus that the country must move towards a national level GST that must be shared between the centre and the states.

• He proposed 1 April, 2010 as the date for introducing GST. After successful introduction of Value Added Tax (VAT) in almost all the states and continuous increase in number of services under the service tax net.

• Finance Minister Pranab Mukherjee while presenting the Budget on July 6, 2009, said that GST would come into effect from April 2010

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What is GST

• Goods and Services Tax -- GST -- is a comprehensive tax on manufacture, sale and consumption of goods and services at a national level. Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.

• A good and service tax (GST) is a tax on domestic consumption. It is multi-stage tax for which the tax burden is intended to fall on the final consumer.

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Why GST for Indian Commerce

• This division of tax powers makes both the CENVAT and the state VATs partial in nature and contributes to their inefficiency and complexity.

• The CENVAT is levied on goods manufactured or produced in India. This gives rise to definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied.

• Minimising the three costs of taxation• Desirable features of an efficient tax

system: Focus on revenues;

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Why GST for Indian Commerce Contd..

• Need for a competitive tax environment in a globalising scenario: maximise revenues to provide efficient infrastructure and need to minimise distortions.

• Enhancing revenue productivity - Compensating revenue loss from customs.

• Narrow base – Centre can not levy CENVAT beyond manufacturing and states can not levy tax on SERVICES

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Why GST for Indian Commerce Contd..

• The advancements in information technology and digitization have blurred the distinction between goods and services. In India even intangible are treated as goods whereas generally it is part of service contract.

• Real estate transactions are outside the scope of both VAT and CENVAT

• Tax cascading effect –

Tax CascadingManufacturer 1 Manufacturer 2

Raw materials 50 Raw materials 125

Labour 30 Labour 45

Others 10 Others 15

Profit 10 Profit 15

Total ex-factory 100 Total ex-factory 200

Central Excise@12% 12 Central Excise @12% 24

Sale Price 112 Sale Price 224

Sales Tax @12% 13 Sales Tax @12% 27

Total paid by M2 125 Total sale price 251

Total tax paid 12+13+24+27=76Sale price excl. tax : 251–76=175

Effective tax rate : 76 / 175 = 43%

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Taxes Levied By Centre & State

• Direct Tax – Income Tax levied by the Centre• Tax on manufacturing levied by Centre-

(Central Excise)• Tax on sales levied by the State- (Sales Tax

or State VAT)• Tax on inter-State sale & Declared Goods -

Central Sales Tax but collected & retained by the State

• Tax on services levied by the Centre- (Service Tax)

• Tax on Exports & Imports levied by the Centre- (Customs Duty & Export Duty)

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Volume of Tax Collected 2007-08

Centre

Income Tax – Rs 3,14,000 cr

Customs Duty – Rs 1,04,000 cr

Central Excise – Rs 63,864 cr (excl.petroleum)

Service Tax – Rs 51,133 cr

CVD - Rs 53,293 cr

Sub-total - Rs 168,290 cr

States

Sales Tax/VAT – Rs 108,340 cr (excl. non-VAT)

CST – Rs 30,585 cr

Others - Rs 7,627 cr

Sub-total - Rs 146,552 cr

Source- India stat.com

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Share Of Centre and State

Centre's Share53%

States Share47%

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Centre’ s Share (in crores)

Income Tax –

59%

Customs Duty – 20%

Central Excise –

12%

Service Tax – 10%

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State Share (In crores)

Sales Tax VAT74%

CST21%

Others5%

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Volume Of Tax Collected First Quarter

• Corporate tax collection to Rs 43,439 crore

• Net Direct tax collection was Rs 68,675 crore

• PIT collection was Rs 24, 075 crore • Corporate advance tax for the first

quarter, at Rs.26,876 crore

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What type of GST is proposed for India

• India is planning to implement a dual GST system. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction. All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services.

• GST will start with 3 rate slabs 20 % on goods 16 % on services and 12 % on essential commodities, but later on GST for goods and services will be equal.

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Contd..

• Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimising exemptions. GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets).

• GST is a consumer based tax and not origin based. Under this structure of GST, the tax will be collected by the states where the goods or services actually consumed.

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Contd..• GST will subsume Central Excise, State VAT and

Service Tax. It will also subsume all taxes & surcharges (by Centre & the States), Entry Tax not in lieu of Octroi, Entertainment tax levied & collected by the State Government, etc. It will not subsume levies by local self-Governments (Panchayats & Urban Local Bodies), petroleum, etc. For liquor, tobacco, etc States could impose an additional tax, over and above the GST.

• Administration of CGST will be Centre’s responsibility; Administration of SGST will be the responsibility of each State.

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Contd..• Centre will legislate, levy & administer the

CGST portion on its own and the States the SGST portion on their own.

• Centre will give Input Tax Credit (ITC) only for CGST and the State only for SGST. Cross utilization of ITC between CGST & SGST shall not be allowed.

• Procedures for collection of Central and State GSTs would be uniform. There would be one common tax return for both taxes, with one copy given to the Central authority and the other to the relevant State authority.

GST – An Example(3) All transactions will be taxed – manufacture, sales, service etc..

CGST@9% SGST@8%

Manufacturer-1 Basic Cost 70

Value Addition 30

Total 100 9.00 8.00

Manufacturer-2 Value Addition 50 4.50 4.00

Total 150

Sales Dealer 1 Value Addition 40 3.60 3.20

Total 190

Sales Dealer 2 Value Addition 60 5.40 4.80

Total 250

Service Providr Value Addition 50 4.50 4.00

Total 300 27 24

(9%) (8%)

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GST Explanation

• For example if a good is prepared in Haryana and comes for selling in Delhi then surely GST will be charged in Haryana, but what has been paid in Haryana that will be deducted in Delhi.

•  For example:-A watch prepared in Haryana costs Rs 100 GST@20% = Rs 120, now this watch comes for sale in Delhi again it will be charged GST @ 20 % i.e 20 % of Rs 120 = Rs 24, But here the Rs 20 will be deducted and in Delhi on that good we need to give only Rs 4 because Rs 20 has been already paid. Now the problem is the receiver state is in loss who will compensate for this ? ans is still a bone of contention between centre and state.

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Current Tax Vs GST

• Current Tax Regime• Cost of Good= Rs 100 • Excise Duty= 14%= Rs 14 • VAT on 114 Rs @ 12.5 %= Rs 14• Total Cost= Rs 128 • GST • Cost of Good= Rs 100• GST @ 20%= Rs 20• Total Cost= Rs120 

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GST – Advantages• In GST system, both Central and state taxes will be

collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.

• It is intended to reduce the tax burden for consumers;• It will result in a simple, transparent and easy tax

structure; merging all levies on goods and services into one GST.

• It would also help in reducing the cost of administration and paperwork while improving compliance

• GST is expected to increase tax revenue for the State Governments due to a wider tax base

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Income Of States In Current Scenario

• Excise duty – 4 lakh croreVAT- 5 lakh croreTotal revenue- 9 lakh crore

• Currently only 15 to 20 % market is organized it is hoped that after GST is implemented organized market will become 70 to 80 %.

• Expected Revenue generation by GST- 30 lakh crore

• Centre’ s share- 15 lakh crore• States share- 15 lakh crore

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Contd..• It will bring uniformity in tax rates with only

one or two tax rates across the supply chain;

• It will result in a good administration of tax structure;

• It may broaden the tax base;• It will increase tax collections due to wide

coverage of goods and services.• It will result in cost competitiveness of

goods and services in Global market.

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GST DISADVANTAGES

• In this system, the final consumer ends up bearing the full burden of tax without any set off benefit.

• While GST will increase uniformity of the tax issues, there would be a likely rise in the price of products. As there was no centralized tax before, so some lump sum would be added to the product, which will result in burden to the customers.

• There is lots of confusion about tax on interstate goods.

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GST Way Ahead• Sub-Working Groups to give report on • (1) Items which require special rates (2)

Mechanism for inter-State transactions & (3) Rules for inter-State services

• Rates to be finalized, between the Centre & the States

• Constitutional amendment – easier, if there is consensus

• Model legislations• IT infrastructure• Dispute Resolution Mechanism• Compensation Mechanism

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References

• Pratiyogita Darpan : Extra Issue• GST the way ahead- J K Mittal• GST in India- Kavita Rao

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Let’s hope GST is

Great & Simplified Tax !!!

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………Thank you………..

Value Added Tax Centre

CX @12%State

VAT@12%

Manufacturer-1 Basic Cost 70 Centre

Value Addition 30

Total 100 12 13.4

Manufacturer-2 ValueAddn.+ Taxes 50 6

Total 150 18

Sales Dealer 1 Basic Cost 150 18-13.4=4.6

ValueAddn.+ Taxes 40 4.8

Total 190

Sales Dealer 2 ValueAddn.+ Taxes 60 7.2

Total 250 18 + 7.2 +4.8= 30

Service Provider

Basic Cost 250 36-18=18

ValueAddn.+ Taxes 50 6

Total 300

300-66 = 234 (66/234 = 28%) 66 36 3031

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Value Added Tax -Tax payable only on the value addition at each stage

• After tax is calculated on Rs100 @ 12 % which amounts to be Rs 112 the State VAT is calculated on Rs 112 which amounts to be Rs 13.44

• Sale price excl. tax 300-66 = Rs 234• Effective tax rate : 66 / 234 = 28%

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Explanation 3 Disadvantage

• When rates are made uniform across all States and input tax credit is given for all transactions (manufacture or sale or service), some States will lose, while some will gain. How will losing States be compensated

• One of the problem areas is inter-State transactions and giving ITC across States.

• The entire input tax paid in the preceding transactions will have to be paid by the origin State to the destination State.

• You never know when one of your goods trucks are stopped at a border someplace and asked to produce papers to show whether a particular tax has been paid or not. GST in these situations will be there and state-to-state billing will be made easier.

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Input Tax Credit

• On the other hand, the tax is exercised on the value-added component of the supply. This is accomplished by working tax on the full fundamental value of the goods or service and giving set off/credit of tax undergo at previous stage, identified as input stage, to keep away from cascading effect. Thus, the entire supply chain up to final consumer gets taxed with in-built mechanism of input stage credit. In this system, the final consumer ends up bearing the full burden of tax without any set off benefit.

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C V D

• CVD stands for Counter Veiling Duty. It is applicable to goods imported in the country, whereas Excise duty is charged on the goods manufactured in the country.