Goods & Services Tax

An Introduction

Presenter-
Rajesh Sharma

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 Points to Ponder

 What is Goods & Services Tax?

 GST –Global Scenario
 Background in India
 Constitution of the Joint Working Group (JWG)
 Basic Structure of GST
 Recommendations of JWG
 Dual structure of GST
 Likely Features Of GST
 Justification of GST
 Hurdles in Implementation
 VAT
 References

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What is Goods & Services Tax?

 GST is a broad based and a single

comprehensive tax levied on goods and
services consumed in an economy.

 GST paid on the procurement of goods

and services can be set off against that
payable on the supply of goods or
services. But being the last person in the
supply chain, the end consumer has to
bear this tax and so, in many respects,
GST is like a last-point retail tax.

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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

 Full tax credits on inputs – 100% set off

 Canada and Brazil alone have a dual VAT.

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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.

 The then 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.

 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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Basic Structure of GST
Empowered Committee (EC) suggested a
dual GST – Central GST & State GST
 ‘Central GST’ and ‘State GST’ to operate
in a parallel fashion.
 Both Central and State GST to be further
bifurcated into ‘Goods Tax’ and ‘Services
Tax’.
 The proposed rate of GST in India is 16%.

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Taxes proposed to be subsumed by
GST

Tax Rates : All existing taxes to be subsumed

Central Taxes: Excise duty, Additional Excise duty,
Service tax, CVD, SAD, Surcharges
Edu. Cess, SHE cess, all other cesses

State Taxes : VAT

Mandi tax on food products
The Medicinal & Toilet Preparations
(Excise Duties) Act
Octroi
Entry tax
Entertainment tax
Electricity tax
Luxury tax
Tax on lottery

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How will the dual structure work?

 Export of goods and services would be zero

rated.GST paid by them on the procurement of
goods and services will be refunded

 Central GST on services relatively easy to collect.

 State GST on services will be far more complex –

particularly on cross border services.
 Services taxed at the place of consumption.

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Continued…
 GST paid on imports (goods as well as services) would
be available as credit.
 Input tax Credits ( ITC)
 full credits under the Central and the State GST that
will operate in parallel
 cross utilization of credits between Central GST and
State GST not permitted
 refund of unutilized accumulated ITC.
 Inter-State transactions
 goods to be taxed in the destination/importing State
 services to be taxed in the State of consumption
 zero rating in the originating State

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Likely Features of GST
 Credit of tax paid on purchases would be allowed
across the supply chain
 Credit of State GST may not be allowed against
Central GST or vice versa.
 State GST paid in one State would be creditable
against State GST liability of another State.
 Requirement of ‘C’ forms and ‘F’ forms would be
abolished.
 Certain specified goods may be subject to a lower
State GST rate or be exempted.

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Continued…
 Manufacturers, traders and service
providers having turnover more than the
threshold limit to register under Central
and State GST.
 A single Tax Identification Number (TIN)
would be allotted for both Central and
State GST.
 Both Central as well as State GST would
be levied at every point of sale.

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Why GST ???
 A simple tax structure with only one or two rates of taxes.

 Uniform single tax across the supply chain.

 Reduced transaction cost in the hands of the tax payers.

 Increased tax collections due to wider tax base and better

compliance.

 Improvement in international cost competitiveness of

indigenous goods and services.

 Enhancement in efficiency in manufacture and distribution

due to economies of scale.

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Continued…
 GST encourages an unbiased tax structure that is
neutral to business processes, business models,
organization structure, product substitutes and
geographical locations.

 The prices of commodities are expected to come

down in the long run as dealers pass on the
benefits of reduced tax incidence to consumers by
slashing the prices of goods.
 replacing the cascading effect [tax on tax]
created by existing indirect taxes.

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Hurdles in Implementation
 Implementation of GST calls for effecting widespread
amendments in the Constitution and the various
constitutional entries relating to taxation.

 It is important to note that states will have to be given

constitutional powers to tax services. At present, states
do not enjoy the power to tax services.

 Fate of various area based exemptions/concessions

provided by Central as well as State to be decided
 Protecting and balancing the present and future
revenues of the Centre and the States.
 The Centre is expected to put in place a mechanism to
compensate states for any revenue loss due to GST

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 VAT

Value Added Tax

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 WHAT IS VAT
 Value Added Tax (VAT) is a multistage sales tax with
credit for taxes paid on business purchases.

 Under VAT system, a dealer collects tax on his sales,

retains the tax paid on his purchase and pays balance to
the Govt. Treasury. It is a consumption tax because it is
borne ultimately by the final Consumer. The tax paid by
the dealer is passed on to the buyer. It is not a charge on
the dealer. Hence, VAT is a multipoint tax system with
provision for set off of tax paid on purchases at each point
of sale.      

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 Status of VAT in India

J&K

Punjab Chandigarh
Haryana Uttaranchal
Delhi UP
Assam
Rajasthan Bihar

MP Jharkhand
Gujarat WB
Chattisgarh
Orissa
Maharashtra
20 States VAT live April 1, 2005

AP
Goa 2 State/ UT implementing VAT between the
Karnataka period April 1, 2005 to March 31, 2006
Pondicherry
5 States implementing VAT wef
Tamil Nadu
Kerala April 1, 2006

2 State/UT implementing VAT on or

after January1 ,2007

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State Date of Number of
imposition of VAT states

1.Haryana 1-4-2003 1

2.Andhrapradesh,W.B, Kerala, Karnataka, 1-4-2005 20

Orissa,NCT Delhi, Tripura, Bihar, Arunachal
pradesh, sikkim,
Punjab,Goa,Mizoram,Ngaland,J&K,Manipur,
Maharashtra,HP,Assam,Meghalaya
3.Uttaranchal 1-10-2005 1

4.Rajasthan, Gujarat ,MP and Chhatisgarh, 1-4-2006 5

Jharkhand

5.UP and TamilNadu 1-1-2007 2

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Features of VAT :-
 Uniform schedule rates of VAT for all states.
This would make the tax system simple and
uniform and prevent unhealthy tax competition
among states.
 The provisions of input tax credit would help in
prevent cascading effect tax.
 The provisions of self assessment by dealers
would reduce harassment small traders with
turn over upto Rs 5 lakh would be exempt from
the provisions of VAT.
 The zero – rating of exports would increase the
competitiveness of Indian exports.

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Computation of VAT
 VAT can be computed by adopting three
alternative methods. They are:
 Addition method -calculation of value added can
be done by summation of all the elements of
value added (i.e. profits, rent, and wages)
 Subtraction method – This method estimates
value added by taking the difference between the
value of outputs and inputs.
 Tax – credit method – under this method the tax
on inputs is deducted from the tax on sales to
arrive at the VAT payable by the dealer. In
practice, most countries use this method

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VAT Rates
 Broadly following VAT rates were being proposed
 0% on natural and unprocessed produces in
unorganized sector goods of social importance l
ike states , pencil education book etc.,
 1% floor rate for gold, silver, precious and semi-
precious store.
 4% for goods of basic necessities industrial and
agricultural inputs like beedi leaves , fibers , seeds ,
declared goods ( Iron and steel , hide and skin etc)
Medicine and drugs ; textiles and sugar , capital goods.
 12.5% RNR( Revenue Neutral Rate ) on other goods
 Aviation turbine fuel and petroleum products will be out
of VAT regime. Liquor and cigarettes will also be taxed
at higher rate.

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Advantages of VAT
 Simplification:-Under the CST Act, there are 8 types of
tax rates- 1%, 2%, 4%, 8%, 10%, 12%, 20% and
25%. However, under the present VAT system, there
would only be 2 types of taxes 4% on declared goods
and 10-12% on RNR. This will eliminate any disputes
that relate to rates of tax and classification of goods as
this is the most usual cause of litigation.
 Transparency :-The tax that is levied at the first stage
on the goods or sale or purchase is not transparent.
This is because the amount of tax, which the goods
have suffered, is not known at the subsequent stage.
In the VAT system, the amount of tax would be known
at each and every stage of goods of sale or purchase

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Advantages of VAT
 Fair and Equitable:- VAT introduces the uniform tax rates
across the state so that unfair advantages cannot be taken while
levying the tax.
 Minimize the Discretion:- the VAT system proposes to
minimize the discretion with the assessing officer so that every
person is treated alike. For example, there would be no
discretion involved in the imposition of penalty, late filing of
returns, non-filing of returns, late payment of tax or non
payment of tax or in case of tax evasion. Such system would be
free from all these harassment .
 Computerization:- the VAT proposes computerization which
would focus on the tax evaders by generating Exception Report.
In a large number of cases, no processing or scrutiny of returns
would be required as it would free the tax compliant dealers
from all the harassment which is so much a part of assessment.

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Disadvantages of VAT
 VAT is regressive:-It is claimed that the tax is regressive, i.e its
burden falls disproportionately on the poor, since the poor are
likely to spend more of their income than the relatively rich
person.
 VAT is too difficult to operate from the position of both the
administration and business:-Before VAT there are many
indirect taxes such as customs duties, purchase tax and excise
duties replaced by VAT had its own rate structure as well as a
different tax base and separate administrative procedure.
 VAT favours the capital intensive firm:-It is also argued that
VAT places a heavy direct impact of tax on the labour-intensive
firm compared to the capital- intensive competitor, since the ratio
of value added to selling price is greater for the former. This is a
real problem for labour-intensive economies and industries.
 

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Difference between VAT and GST
 This is simply very similar to VAT.
 Only one difference is that in
this system not only goods but also
services are
involved and the rate of tax on
goods and services are generally
the same.

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 References
 Economic times –dated

Nov.13,2009 and
Dec.4,2009.
www.google.com
www.goodsandservicetax.in
www.gstinindia.com

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