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All about goods and service tax in India (GST)

Goods and service tax in India will be game changer for tax system. GST tax system will replace most of the indirect taxes. which taxes will be covered in gst? What will be advantages and disadvantages of GST?  What are the important points to know about GST ? Get answers by reading this post.

What is goods and service tax ( GST) in India?

Goods and service tax ( GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and services at national level.GST is value added tax and covers indirect tax area. Goods and service tax means single tax for goods and services. Like now we are charging service tax on services and VAT for sale of goods. But by implementing GST, we are required to charge single percentage  tax ( GST) on goods as well as services.

Why GST?

It is common question why GST regime should be implemented. Following are the reasons for GST implementation:

  1. Multiple tax structure at state and central level having multiple taxes on good and services.
  2. need of single tax structure for good and services because it is difficult to split transaction value in goods and services.
  3. No full availability of input tax credit which can be achieved by GST.
  4. Higher compliance and administrative costs.
  5. Economic distortions.

 

HOW Goods and service tax will be worked?

We can understand working of GST from the example below – Table 1:

Stage ofPurchase ValueValueValue at Which Supply Goods and Services Made to Next StageRate ofGST onInput TaxNet GST=GST on output-Input Tax Credit
Supply ChainOf InputAdditionGSTOutputCredit
Manufacturer1003013010%131013–10 = 3
Whole Seller1302015010%151315–13 = 2
Retailer1501016010%161516–15 = 1

Some concepts of goods and service tax (GST) are:

CGST AND SGST:

GST has two systems: unified GST system and dual GST system. Indian will adopt two dual GST system. So GST shall have two components – CGST and SGST. CGST means central GST and SGST means GST at state level. The rates for both GST will be decided. GST will be applicable on all the transaction ( Sale and service) except exempted goods.

Taxes which will be included in GST:

Covered under CGSTCovered under SGST
Excise dutyVAT/Sales tax
Additional excise dutyLuxury tax
service taxEntertainment tax
Additional CVDTax on lottery
special additional CVDEntry tax not in lieu of octroi
SurchargeState cess and surcharge
Cess

Taxes which may or may not be included in GST:

  1. Purchase tax
  2. Stamp duty
  3. Vehicle tax
  4. Electricity duty
  5. Other entry taxes and Octroi.

 

Rate of GST:

Rate of GST is not declared but expecting between 18% to 22%. Notworthy thing is that service tax rate has been already increased to 14% from 1st june, 2015. ( Read more here) and 2% swachh Bharat Cess will also be levied. So overall rate of service tax would be go to 16%. So we are expecting more rate than 16%. There is expectation of two rates. The lower rate will be for necessary items and a standard rate for goods in general. There will be special rate for exempted goods and precious metals like gold, silver, platinum etc.

Other silent features of GST India:

  1. It will be applicable to all the transactions related to sell of goods and provision of services.
  2. Taxpayer can pay GST tax to state level and central level separately.
  3. Alignment of utilization of central GST and state GST.
  4. Cross utilisation of CGST and SGST will not be allowed except cases of inter state supply of goods.
  5. Common format for periodical returns for CGST and SGST.
  6. Unique PAN linked tax payer number having 13 or 15 digits.
  7. Exemptions will be given to fewer items.
  8. The function of assessment, scrutiny, audit, enforcement will be done by the authority collecting tax with  information sharing between state and central level.

Input tax credit in GST:

For intera state transaction:

The dealer dealing with intera state transaction has to charge CGST and SGST in his bill. He can avail input tax credit for CGST and SGST paid for input purchase.

Suppose dealer has brough goods of Rs. 1000 and paid Rs. 100 (10% )SGST and 12%  Rs. (120) CGST on that purchase. He sells that good after adding Rs. 200 profit. So output SGST will be Rs.120 ( 120010%) ( SGST) and CGST will be Rs. 144 ( 120012%) ( CGST). He will be liable to pay Rs. 20 ( 120-100) SGST and Rs. 24 ( 144-120) CGST.

We can summarize the same in table below:

Input GoodsSGST at 10%CGST at 12 %
1000100120
Output goodsSGST at 10%CGST at 12%
1200120144
Tax payableOutput Tax – Input taxOutput tax – input tax
2024

 

Input tax credit in inter state trasaction:

Getting input tax credit in current vat and service tax system requires lots of forms filling and administrative hurdles. GST will make input tax credit availment procedure simplified and remove the cascading effect.

New Mechanism called IGST will be implemented for it. The agency called clearing house setup by central governemnt shall settle funds between state and central level. IGST and CGST shall be governed by Central governemnt and SGST shall be government by state governement. The loss suffered to each other shall be compensated together by clearing house mechanism which has setup as gstn.

Example to understand input tax credit in inter state transaction:

A dealer in Gujarat has following sales, tax credit. See example to understand how he can use input tax credit in gst system to pay his taxes.

ParticularsSales within stateSales outside stateTotal
Tax creditSGSTCGST
Available600800
Value of goods sold100005000
Tax amount
SGST – 5%500500
CGST – 6%600600
IGST – 11%550550
ParticularsSGSTCGSTIGST
Output Tax payable500600550
Input tax credit(500)(600)(300)*
Net tax payable00250

*—The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. In above example, the dealer pays IGST tax by utilising SGST and CGST credit. First, he utilise input tax credit to pay SGST and CGST and after that he can utilise remaining SGST and CGST credit to pay IGST tax.

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. The relevant information will also be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.

IGST model for inter state transactions:

  1. CST will be discontinued for inter state transactions.
  2. New statute IGST will be levied on inter state transactions.
  3. Central government has power to levy IGST which would be plus of CGST and IGST on all inter state transaction of goods and services with provision of consignment of stock transfer of goods and services.
  4. Self monitoring mode.
  5. All inter state dealer will be e registered and correspondence will be through email. In this way, compliance will be improved.
  6. ‘Business to business’ and ‘Business to consumer’ transactions will be taken into account.
  7. No refund claim in exporting state due to full utilisation of ITC.
  8. No blockage of fund in interstate transactions.

 GST on import and export:

  1. There will be no GST tax on export of goods and services.
  2. CGST and SGST will be levied on import of goods and services. The tax incidence will follow destination principal.Tax revenue will be accrued to the state where goods and services are exported. The full input tax credit will be allowed to importer.

Benefits of Gst in India:

  • One tax method: The big benefit of GST is one tax method. No need to pay 18 or 20 taxes for one transaction.

 

  • Increase in interstate transaction: CST mechanism will be abolised and there will be no worry for blockage of fund in CST. Manufacturers and traders will be encouraged indirectly to trade outside state and this will impact prices and competition which will be ultimately benefit final consumer.

 

  • No need to worry about distinction between goods and services: It is very difficult to segregate goods and services value in sales. This will result double taxation system. This contraversy will be removed by implemetation of GST.
  • Simple invoice: I am getting daily hundred of queries on indirect taxes on this blog. Most of the taxpayers are confused to make proper invoice due to segregation of value between goods and service. With GST implementaion in India , invoice will be simple with one value and one rate of tax. So it will be easy for seller to make invoice and for buyer to understand rate of tax on purchase.

 

  • No entry tax: Entry tax will be abolished and it ultimately saves time in transportation of goods.

 

  • Common exemptions : As there are different  exemptions given by the Centre and the states , the final price becomes different in different states. In the GST regime, exemptions will be common between the Centre and the states which will make the rates of duty same all over India.

 

  • Classification and identification controversies will go: Now, classification controversies are galore since there are so many rates of duty. This problem will also go if the exemptions are limited. Similarly there will no need to identification of each item and its rate of duty.

Disadvantages of GST:

GST will solve everything. It is the best for India. But is it true? No, it is half truth. There are disadvantages of GST implementation in India.

  1. Administrative conflicts:

      A merger between two government agencies is invitation of conflicts because  appraisals and promotions are linked to seniority and regretfully with little bit concern about performance.Now government is planning to  integrate the revenue collection services of 28 odd states and an extremely powerful Central Service into one GST collection agent.
    This would either mean disbanding the  Sales Departments of the states or winding up the Indian Revenue Service (Customs and Central Excise), both of which are plain impossible.  The states shall collect SGST (State GST) and the Centre shall collect the CGST(Central GST). Seems fair. But is it improvement over current scheme?
    There will be again dual administrative systems where businessmen should visit both the offices. Again same hardship and same time wasting activities.
  2. Staff shortage:

    Even today, indirect tax administrative faces shortage of staff for tax collection, document management, recovery etc. work. The Gst will increase asseessee base. How can staff shortage problem be solved?   It is big question.

  3.  Harmonization is dream:

    How central revenue and state revenue boards will coordinate with each other ? Even after 50 years of establishment, the dream has not be come true. It is big expectation.

  4. Revenue generation items are out of GST:

    Tobacco, alcoholic liquor, petorleum are kept out of GST regime. Because states are not ready to loose its revenue. Slowly it is found that almost 300 items at state and central level are going to kept out of perview of GST. Is it beneficial system or beneficial to each state system? What is demerit items? What is the creitaria to decide demeritation of item? Nothing is clear. Is it really fair GST system?

  5. compensation to local bodies :

    The states will be given compensation for revenue loss in first few years due to implemetation of GST. But no one is thinking about revenue loss of local bodies. Who will pay compensation to them?

GST and budget 2015:

It is stated in union budget 2015 that GST will be put in action by 1st Arpil, 2015. Union budget 2015 considered GST as leakage proof tax regime but do not clear on the manner of implementation of GST.

The constitution bill, 2014 has been passed in LOK sabha on 6/5/2015 but Rajya sabha referred the bill to review committee. The Select Committee had already met once on 22 May, 2015 and is expected to submit its report by the end of first week of forthcoming monsoon session of Parliament.

What is your view about Goods and service tax regime? Let me know through comments. Also share this article about GST to social media to encourage me to write.

 

 

 

 

 

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