Goods and Service Tax

GST is India’s biggest tax reform in 60years. It is an Act

one if its kind and whereas many countries across the
world have adopted this Act.
India has excellently converged the “One Nation One
Tax” slogan with the diverse nature of transactions and
inequalities that exist in our nation.
GST Act is centrally governed by a GST Council which is
represented by the Finance Minister and representatives
of all other States. GST Council shall be responsible for all
major decisions regarding the act.
GST Act is the result of great effort of a tri-way
partnership between Government, Professionals and
Business Sector.
For example, a manufacturer that makes notebooks obtains the raw materials for, say,
Rs. 10, which includes a 10% tax. This means that they pay Rs. 1 in tax for Rs. 9 worth
of materials. In the process of manufacturing the notebook, the manufacturer adds
value to the original materials of Rs. 5, for a total value of Rs. 10 + Rs. 5 = Rs. 15. The
10% tax due on the finished good will be Rs. 1.50. Under a GST system, the previous
tax paid can be applied against this additional tax to bring the effective tax rate to Rs.
1.50 – Rs. 1.00 = Rs. 0.50.

In turn, the wholesaler purchases the notebook for Rs. 15 and sells it to the retailer at a
Rs. 2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the good will be
Rs. 1.75, which the wholesaler can apply against the tax on the original cost price from
the manufacturer (i.e., Rs. 15). The wholesaler's effective tax rate will, thus, be Rs. 1.75
– Rs. 1.50 = Rs. 0.25.

Similarly, if the retailer's margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19)
– Rs. 1.75 = Rs. 0.15. Total tax that cascades from manufacturer to retailer will be Rs. 1
+ Rs. 0.50 + Rs. 0.25 + Rs. 0.15 = Rs. 1.90.
Salient features of proposed GST:

Dual GST: Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied
on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax
(CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions
within a State. The input tax credit of CGST would be available for discharging the CGST liability on the
output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on
output. No cross utilization of credit would be permitted.

Inter-State Transactions and the IGST Mechanism: The Centre would levy and collect the
Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. The IGST
mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The
inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit
of IGST, CGST and SGST on his purchases (in that order). 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 (both CGST and SGST) in his own State. The Centre will transfer to the
importing State the credit of IGST used in payment of SGST.

Destination-Based Consumption Tax: GST will be a destination-based tax. This implies that all
SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides.
Central Taxes to be subsumed:

 i. Central Excise Duty

 ii. Additional Excise Duty
 iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
 iv. Service Tax
 v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
 vi. Special Additional Duty of Customs-4% (SAD)
 vii. Cesses and surcharges in so far as they relate to supply of goods and services.

State Taxes to be subsumed:

 i. VAT/Sales Tax
 ii. Central Sales Tax (levied by the Centre and collected by the States)
 iii. Entertainment Tax
 iv. Octroi and Entry Tax (all forms)
 v. Purchase Tax
 vi. Luxury Tax
 vii. Taxes on lottery, betting and gambling
 viii. State cesses and surcharges in so far as they relate to supply of goods and services.