GOODS AND SERVICES TAX

(GST) IN INDIA

A Presentation by

CA. Preeti Goyal

 Concept of GST
GST is a tax on goods and services with comprehensive and continuous chain of
setoff benefits from the Producers point and Service providers point up to the
retailer level.
GST is expected be levied only at the destination point, and not at various points
(from manufacturing to retail outlets). It is essentially a tax only on value addition at
each stage and a supplier at each stage is permitted to setoff through a tax credit
mechanism which would eliminate the burden of all cascading effects, including the
burden of CENVAT and service tax.

Under GST structure, all different stages of production and distribution can be
interpreted as a mere tax pass through and the tax essentially sticks on final
consumption within the taxing jurisdiction.

Currently, a manufacturer needs to pay tax when a finished product moves out from
the factory, and it is again taxed at the retail outlet when sold. The taxes are levied
at the multiple stages such as CENVAT, Central sales tax, State Sales Tax, Octroi,
etc. will be replaced by GST to be introduced at Central and State level.

Continued.
 Concept of GST
All goods and services, barring a few exceptions, will be brought into the GST
base. There will be no distinction between goods and services.

Under GST, the taxation burden will be divided equitably between

manufacturing and services, through a lower tax rate by increasing the tax base
and minimizing exemptions.

However, the basic features of law such as chargeability, definition of taxable

event and taxable person, measure of levy including valuation provisions, basis
of classification etc. would be uniform across these statutes as far as
practicable.

The existing CST will be discontinued. Instead, a new statute known as IGST
will come into place on the inter-state transfer of the Goods and Services.

By removing the cascading effect of taxes (CST, additional customs duty,

surcharges, luxury Tax, Entertainment Tax, etc. ),CGST & SGST will be
charged on same price .
 Existing Tax structure in India
Tax Structure

Direct Tax Indirect Tax

Income Tax Wealth Tax Central Tax State Tax

Entry Tax,
Excise Service Tax Custome VAT luxury tax,
Lottery Tax, etc.
Proposed Tax Structure in India
Tax Structure

Indirect Tax =
Direct Tax GST (Except
customs)

Income Tax
Wealth Tax Intra- state Inter State

CGST
SGST (State) IGST (Central)
(Central)
Subsuming of Existing Taxes
Central Excise
Additional duties of Custom (CVD)
CGST Service Tax
Surcharges and all cesses

VAT/sales tax
Entertainment Tax
Luxury Tax
Lottery Tax
Entry Tax
SGST

Purchase Tax
Stamp Duty
Goods and passenger Tax
Tax on vehicle
Electricity, banking, Real state

CST
IGST
 Model of GST
SGST and CGST for intrastate transaction : In the 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. This will benefit individuals
as prices are likely to come down. Lower prices will lead to more consumption,
thereby helping companies.

IGST for Interstate transaction: IGST Model will be in place for taxation of inter
State transaction of Goods and Services. The scope of IGST Model is that center
would levy IGST which would be CGST plus SGST on all inter State transactions of
taxable goods and services with appropriate provision for consignment or stock
transfer of goods and services.

The GST paid on the purchase of goods and services, to be paid on the supply of
goods and services.

There should be no distinction between raw materials and capital goods in allowing
input tax credit. The tax base should comprehensively extend over all goods and
services up to final consumption point on value addition.

Assessable value for all the taxes will be same.

Stakeholder in Business Chain
1.
Manufacturer

5.Government
2. Wholesaler
and Banks
Goods
+
Services

4.Consumer 3.Retailer
 GST Set off Chain
Input Credit of Goods+ services
Manufacturer After taking set off of Input credit, pay the Output Liability on value addition

Input Credit of Goods+ services from manufacturer

Wholesaler After taking set off of Input credit, pay the Output Liability on value addition

Input Credit of Goods+ services from wholesaler

Retailer After taking set off of Input credit, pay the Output Liability on value addition

Consumer Ultimate Output Liability recovered from consumer

 Set-off methodology

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.

Cross utilization of ITC between the Central GST and the State GST
would, in general, be allowed.

ADC paid on Import of goods and service would fall under the IGST
and this duty would be allowed for setoff of SGST and CGST.
 Set off Heads
CGST SGST
IGST Input
Input Input
IGST IGST IGST
Output Output Output
CGST CGST CGST
Output Output Output
 Functioning of GST
The illustration shown below indicates, in terms of a hypothetical example with a
manufacturer, one wholesaler and one retailer, how GST will work.

Manufacturer : Let us suppose that CGST rate is 10% and SGST rate is 5% ,
with the manufacturer making value addition of Rs.30 on his purchases worth
Rs.100 of input of goods CGST paid @10%) and services used in the
manufacturing process. The manufacturer will then pay net CGST of Rs. 3 after
setting-off Rs. 10 as CGST paid on his inputs (i.e. Input Tax Credit) from gross
CGST of Rs. 13 and Rs, 6.5 as SGST.
Gross Value:130 on that CGST 13/- and SGST 6.5/-
Input Credit: CGST 10-/ and SGST NIL/-
Net Liability: Rs. 3 + 6.5 = 9.5/-

Wholesaler: 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 CGST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13, from
the gross CGST of Rs. 15 and net SGST of only Rs. 1, after setting-off of Input Tax
Credit of Rs. 6.5, from the gross SGST of Rs. 7.5 to the manufacturer.
Gross Value:150 on that CGST 15/- and SGST 7.5/-
Input Credit: CGST 13-/ and SGST 6.5/-
Net Liability: Rs. 2 + 1 = 3/-
Continued.
 Functioning of GST
Retailer: Similarly, when a retailer sells the same goods after a value
addition of (say) Rs. 10, he pays net CGST of only Re.1, after setting-off
Rs.15 from his gross GST of Rs. 16 and net SGST of only Rs. 0.5, after
setting-off of Input Tax Credit of Rs. 7.5, from the gross SGST of Rs. 8/-
paid to wholesaler.
Gross Value:160 on that CGST 16/- and SGST 8/-
Input Credit: CGST 15-/ and SGST 7.5/-
Net Liability: Rs. 1 + 0.5 = 1.5/-

Total Liability: Thus, the manufacturer, wholesaler and retailer have

to pay only Rs. 6 (= Rs. 3+Rs. 2+Rs. 1) as CGST Rs. 8 (= Rs. 6.5+Rs. 1+Rs.
0.5) as SGST and on the value addition along the entire value chain
from the producer to the retailer, after setting-off GST paid at the
earlier stages. This is shown in the table in next slide. The same
illustration will hold in the case of final service provider as well.
Continued.
CGST & SGST Tax Liability working
Value at Net
Purc Which Inpu Net SGST=
Stage hase Supply Rate CGST t Input CGST=C SGST
Valu CGST
of Valu Goods Rate of on Tax Tax GST on on
e on
Suppl e and of SGS Outp Cred Credi output- output
Addi Outpu
y Of Services SGST T ut it on t on Input -Input
tion t
Chain Inpu Made to CGS SGST Tax Tax
t Next T Credit Credit
Stage
Manu
6.5-0=
factur 100 30 130 10% 5% 13 6.5 10 0 1310 = 3
6.5
er
Whol
7.5-
e 130 20 150 10% 5% 15 7.5 13 6.5 1513 = 2
6.5=1
Seller
8-
Retail
150 10 160 10% 5% 16 8 15 7.5 1615 = 1 7.5=0.
er
5
 Mechanism of Dual Taxation
After introduction of GST, all the traders including manufacturer will be paying both the types of taxes
i.e. CGST and SGST. The Central GST and the State GST would be levied simultaneously on every
transaction of supply of goods and services except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the prescribed threshold limits.
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, i.e CGST & SGST will be charged on same price
Supply of Goods: Suppose 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.
Supply of Services : Suppose, that the rate of CGST is 10% and that of SGST is 10%. When an
advertising company located in Mumbai supplies advertising services, to a company manufacturing
soap which is also located within the State of Maharashtra for, Rs. 100, then the ad company would
charge CGST of Rs. 10 as well as SGST of Rs. 10 to the basic value of the service.

In both the cases, he would be required to deposit the CGST component into a Central Government
account and the SGST portion into concerned State Government account. He need not actually pay duty
in cash, as he would be entitled to set-off this liability against the CGST or SGST paid on his purchases
(say, inputs). But for paying CGST he would be allowed to use only the credit of CGST & SGST paid on
his purchases respectively. In other words, CGST credit cannot, in general, be used for payment of SGST.
Nor can SGST credit be used for payment of CGST.
 services

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(Place of supply rules).
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.
Thus, import of goods will attract BCD and IGST. It may be noted that import of
services, as against service tax at present, in GST regime, will attract IGST.
Basic Custom Duty will continue to there under GST system. However, the additional
custom duty in lieu of CVD /Excise and the Special Additional Duty (SAD) in lieu of
sales tax/VAT will be subsumed in the import GST.
The import of services will be subject to Central GST and State GST on a reverse
charge mechanism. In other words, the GST will be payable by the Importer on a self
declaration basis.
 Taxable Person
It will cover all types of person carrying on business
activities, i.e. manufacturer, job-worker, trader, importer,
exporter, all types of service providers, etc.
If a company is having four branches in four different
states, all the four branches will be considered as TP
(Taxable person) under each jurisdiction of SGs.
A dealer must get registered under CGST as it will make
him entitle to claim ITC of CGST thereby attracting
buyers under B2B (Business to Business) transactions.
Importers have to register under both CGST and SGST as
well.
 GST on Export of Goods and Services
GST on export would be zero rated.
Similar benefits may be given to Special Economic Zones (in
processing zones only).
No benefit to the sales from an SEZ to Domestic Tariff Area
(DTA).
GST paid by Exporter on the procurement of goods and
services will be refunded.
 Registration under GST
Each taxpayer would be allotted a PAN linked taxpayer
identification number with a total of 13/15 digits.

This would bring the GST PAN-linked system in line with the
prevailing PAN-based system for Income tax facilitating data
exchange and taxpayer compliance.

The exact design would be worked out in consultation with the

Income-Tax Department.
 Returns under GST
The taxpayer would need to submit periodical returns to both
the Central GST authority and to the concerned State GST
authorities.
ITC credit can also be verified on the basis of the returns filed
and revenues reconciled against Challan data from banks.
Common standardized return for all taxes (with different
account heads for CGST, SGST, IGST) can come into picture.
Common standardized Challan for all taxes (with different
account heads for CGST, SGST, IGST) can come into picture.
 Taxable Event

Existing Practice GST

Taxable event is Supply of Goods & service

Excise Duty-Manufacturing,

The location of the supplier and the recipient

within the country is immaterial for the
Sales Tax/VAT- Sale of Goods purpose of CGST.

SGST would be chargeable only when the

Service Tax- Realization of Service supplier and the recipient are both located
within the State.

Inter state Supply of goods and services will

attract IGST.
 GST Invoice
The Task Force on GST said the computation of CGST and
SGST liability should be based on the Invoice credit method.
i.e., allow credit for tax paid on all intermediate goods and
services on the basis of invoices issued by the supplier.
Invoice level detail is necessary for the reconciliation of tax
deposits, and the end-to-end reconciliation of ITC. An effective
IGST implementation may also require invoice-level details.
A number of states are capturing invoice details even in the
existing VAT systems. It is proposed to follow a two-pronged
approach with Dealer level granularity of returns in the first
phase followed by invoice level in the next phase.
 Rate of Tax
The combined GST rate is being discussed by
government. The rate is expected around 16 per cent. After
the total GST rate is arrived at, the States and the Centre
will decide on the CGST and SGST rates. Currently,
services are taxed at 12 per cent and the combined charge
indirect taxes on most goods are around 20 per cent.

Today the Rate of GST in some countries are

Australia10%, France19.60%, Canada5%, Germany19%,
Japan5%, Singapore7%, Sweden25%, New Zealand15%
& Pakistan17%
 Exemption of Goods and Services
Alcohol, tobacco, petroleum products are likely to be out of the GST regime.

Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview
of GST. Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the
existing practice. In case it has been made VA table by some States, there is no objection
to that. Excise Duty, which is presently levied by the States may not also be affected.
Tax on Petroleum Products: Petroleum and petroleum products have also been
constitutionally brought under the GST. However, it has also been provided that
petroleum and petroleum products shall not be subject to the levy of GST till notified at a
future date on the recommendation of the GST Council.

Tax on Tobacco products: Tobacco products would be subjected to GST with ITC.
Centre may be allowed to levy excise duty on tobacco products over and above GST with
ITC.

Taxation of Services: As indicated earlier, both the Centre and the States will have
concurrent power to levy tax on goods and services. In the case of States, the principle for
taxation of intra-State and inter46 State has already been formulated by the Working
Group of Principal Secretaries /Secretaries of Finance / Taxation and Commissioners of
Trade Taxes with senior representatives of Department of Revenue, Government of India.
For inter-State transactions an innovative model of Integrated GST will be adopted by
appropriately aligning and integrating CGST and IGST.
 Composition scheme
A Composition/Compounding Scheme will be an important feature of GST,
to protect the interests of small traders and small scale industries. The
Composition/Compounding scheme for the purpose of GST should have an
upper ceiling on gross annual turnover and a floor tax rate with respect to
gross annual turnover.
In particular there will be a compounding cut-off at Rs. 50 lakhs of the
gross annual turnover and the floor rate of 0.5% across the States. The
scheme would allow option for GST registration for dealers with turnover
below the compounding cut-off.
 GST and Information Technology
(IT) Interface
Based on the legal provisions and procedure for GST,
the content of work-flow software such as ACES
(Automated Central Excise & Service Tax) would
require review.
On the IT front, there has been consensus that there
will be a common portal providing three core services
(registration, returns and payments).
Information Flow and Associated Entities

Send Challan
Taxpayer Banks and RBI

File Returns Upload Challan

Details

CBEC
State 1Portal
(Central
Portal)
Common GST State 2 Portal
CGST and Portal
(Reconciliation SGST and
IGST Returns IGST Return
system) State N Portal

MCA CBDT
NSDL
Increased Assessee Base
Under the CGST model proposed, with threshold of
annual turnover of Rs.10 lakhs, the present Assessee
base of Excise and Service Tax of about 10 lakhs will
increase to about 50 lakhs as every manufacturer and
Trader above the specified threshold will be liable to
CGST.
Tax reconciliation between Central
and
The Exporting StateState Govt.
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.
 Flaws of GST Model
Major flaw of this model is ,Local Dealers have to pay
CGST in addition to SGST.
In Addition to this, CGST mainly represents the
Excise/service tax and SGST mainly represents the VAT
portion but, because of No differentiation between Goods
and Services service supply within the state would attract
SGST as GST is levied at each stage in the supply chain
and Assessee have to Pay CGST as well SGST.
The issue which still needs to be resolved are, the revenue
sharing between States and Centre, and a framework for
exemption, thresholds and composition.