GST - Veera Reddy

[GURU]

How does GST work?


NOVEMBER 14, 2009

By P Veera Reddy

What is GST?

GST stands for Goods and Service Tax. It is not simply VAT plus
service tax, but a major improvement over the previous system of VAT
and disjointed services tax. GST is a tax on goods and services with
comprehensive and continuous chain of set-off benefits from the
producer's point and service provider's point upto the retailer's
level. It is essentially a tax only on value addition at each stage,
and a supplier at each stage is permitted to set-off, through a tax
credit mechanism, the GST paid on the purchase of goods and services
as available for set-off on the GST to be paid on the supply of goods
and services. The final consumer will thus bear only the GST charged
by the last dealer in the supply chain, with set-off benefits at all
the previous stages.

How does it work?

The illustration shown below indicates, in terms of a hypothetical
example with a manufacturer, one wholesaler and one retailer, how GST
will work. Let us suppose that GST rate is 10%, with the manufacturer
making value addition of Rs.30 on his purchases worth Rs.100 of input
of goods and services used in the manufacturing process. The
manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10
as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of
Rs. 13. The manufacturer sells the goods to the wholesaler. When the
wholesaler sells the same goods after making value addition of (say),
Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax
Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer.
Similarly, when a retailer sells the same goods after a value addition
of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15
from his gross GST of Rs. 16 paid to wholesaler. Thus, the
manufacturer, wholesaler and retailer have to pay only Rs. 6 (= Rs.
3+Rs. 2+Re. 1) as GST on the value addition along the entire value
chain from the producer to the retailer, after setting-off GST paid at
the earlier stages. The overall burden of GST on the goods is thus
much less. This is shown in the table below. The same illustration
will hold in the case of final service provider as well.

Table

Stage of supply chain
Purchase value of Input
Value addition
Value at which supply of goods and services made to next stage
Rate of GST
GST on output
Input Tax credit
Net GST= GST on output ++ Input tax credit

Manufacturer
100
30
130
10%
13
10
13-10 = 3

Wholesaler
130
20
150
10%
15
13
15-13 = 2

Retailer
150
10
160
10%
16
15
16-15 = 1



Which central taxes are proposed to be subsumed under GST?

The following Central Taxes should be, to begin with, subsumed under
the Goods and Services Tax:

++ Central Excise Duty

++ Additional Excise Duties

++ The Excise Duty levied under the Medicinal and Toiletries
Preparation Act

++ Service Tax

++ Additional Customs Duty, commonly known as Countervailing Duty
(CVD)

++ Special Additional Duty of Customs ++ 4% (SAD)

++ Surcharges, and

++ Cesses.

Which state taxes are proposed to be subsumed under GST?

The following State taxes and levies would be, to begin with, subsumed
under GST:

++ VAT / Sales tax

++ Entertainment tax (unless it is levied by the local bodies).

++ Luxury tax

++ Taxes on lottery, betting and gambling.

++ State Cesses and Surcharges in so far as they relate to supply of
goods and services.

++ Entry tax not in lieu of Octroi.

What is the taxable event?

Taxable event for the GST is at the point of sale of goods and
services only by the Centre.

What is the fate of Central Sales Tax?

CST will be abolished in the GST regime.

Would there be purchase tax?

It is not clear as of now. In case Purchase Tax has to be subsumed
then adequate and continuing compensation has to be provided to such
States. This issue is being discussed in consultation with the
Government of India.

How to utilize the input tax credit (ITC)?

Since the Central GST and State GST are to be treated separately, in
general, taxes paid against the Central GST shall be allowed to be
taken as input tax credit (ITC) for the Central GST and could be
utilized only against the payment of Central GST. The same principle
will be applicable for the State GST.

Will cross utilization of credits between goods and services be
allowed under GST regime?

Cross utilization of credit of CGST between goods and services would
be allowed. Similarly, the facility of cross utilization of credit
will be available in case of SGST. However, the cross utilization of
CGST and SGST would generally not be allowed except in the case of
inter-State supply of goods and services under the IGST model which is
explained in answer to the next question.

How is the location of the supplier and the recipient relevant?

The location of the supplier and the recipient within the country is
immaterial for the purpose of CGST. SGST would be chargeable only when
the supplier and the recipient are both located within the State.

How would a particular transaction of goods and services be taxed
simultaneously under Central GST (CGST) and State GST (SGST)?

The Central GST and the State GST would be levied simultaneously on
every transaction of supply of goods and services. Further, both would
be levied on the same price or value unlike State VAT which is levied
on the value of the goods inclusive of CENVAT.

Illustration: Suppose hypothetically that the rate of CGST is 10% and
that of SGST is 10%. When a wholesale dealer of steel in Uttar Pradesh
supplies steel bars and rods to a construction company which is also
located within the same State for, say Rs. 100, the dealer would
charge CGST of Rs. 10 and SGST of Rs. 10 in addition to the basic
price of the goods. He would be required to deposit the CGST component
into a Central Government account while the SGST portion into the
account of the concerned State Government. Of course, he need not
actually pay Rs. 20 (Rs. 10 + Rs. 10 ) in cash as he would be entitled
to set-off this liability against the CGST or SGST paid on his
purchases (say, inputs).

How will be Inter-State Transactions of Goods and Services be taxed
under GST in terms of Integrated GST ( IGST) method?

The scope of IGST Model is that Centre would levy IGST which would be
CGST plus SGST on all inter-State transactions of taxable goods and
services. The inter-State seller will pay IGST on value addition after
adjusting available credit of IGST, CGST, and SGST on his purchases.

How will GST benefit the small entrepreneurs and small traders?

The present threshold prescribed in different State VAT Acts below
which VAT is not applicable varies from State to State. The existing
threshold of goods under State VAT is Rs. 5 lakhs for a majority of
bigger States and a lower threshold for North Eastern States and
Special Category States . A uniform State GST threshold across States
is desirable and, therefore, the Empowered Committee has recommended
that a threshold of gross annual turnover of Rs. 10 lakh both for
goods and services for all the States and Union Territories . The
threshold for Central GST for goods may be kept at Rs.1.5 crore and
the threshold for services should also be appropriately high.

How will GST benefit the exporters?

The subsuming of major Central and State taxes in GST, complete and
comprehensive setoff of input goods and services and phasing out of
Central Sales Tax (CST) would reduce the cost of locally manufactured
goods and services. This will increase the competitiveness of Indian
goods and services in the international market and give boost to
Indian exports.

How will imports be taxed under GST?

With constitutional amendments, both CGST and SGST will be levied on
import of goods and services into the country. The incidence of tax
will follow the destination principle and the tax revenue in case of
SGST will accrue to the State where the imported goods and services
are consumed. Full and complete set-off will be available on the GST
paid on import on goods and services.

Will there be any concept of manufacture?

The concept of manufacture may simply vanish.

Are the procedures common for the state and central GST?

To the extent feasible, uniform procedure for collection of both
Central GST and State GST would be prescribed in the respective
legislation for Central GST and State GST.

How to submit the periodical returns?

The taxpayer would need to submit periodical returns to both the
Central GST authority and to the concerned State GST authorities.

What are the advantages of GST?

++ elimination of multiple taxes

++ elimination of cascading effect

++ it will redistribute the burden of taxation equitably between
manufacturing and services.

++ speeds up economic union of India ;

++ better compliance and revenue buoyancy;

++ tax incidence for consumers may fall;

++ lower transaction cost for final consumers;

++ it acquires a very simple and transparent character;

++ uniformity in tax regime

++ efficiency in tax administration;

++ increased tax collections due to wide coverage of goods and
services

++ the increasing proximity of our tax system to the global tax
system.

++ it may boost our economy and enable us to compete at the global
front.

++ It will certainly reduce the tax burden for consumers;

++ it will reduce prices of manufacturing goods, attract higher
investment

++ creates employment due to its rationalisation and simplification of
taxes

++ it will lower the tax rate by broadening the tax base

++ it will foster a common market across the country

++ it will promote exports

++ it will spur growth

(The author is working with the Department and the views expressed are
strictly personal)