Understanding Goods and Service Tax, India - (GST)

“Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and service at a national level.

GST is a tax on goods and services with value addition at each stage having comprehensive and continuous chain of set-of benefits from the producer’s/ service provider’s point up to the retailer’s level where only the final consumer should bear the tax.” 

Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice versa. Separate taxation of goods and services often requires splitting of transaction values into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions and will help in development of a common national market.

Despite the success of VAT, there are still certain shortcomings in the structure of VAT, both at the Centre and at the State level.

A. Justification at the Central Level

1. At present excise duty paid on the raw material consumed is being allowed as input credit only. For other taxes and duties paid for post-manufacturing expenses, there is no mechanism for input credit under the Central Excise Duty Act.
2. Credit for service tax paid is being allowed manufacturer/ service provider to a limited extent. In order to give the credit of service tax paid in respect of services consumed, it is necessary that there should be a comprehensive system under which both the goods and services are covered.
3. At present, the service tax is levied on restricted items only. Many other large number of services could not be taxed. It is to reduce the effect of cascading of taxes, which means levying tax on taxes.

B. Justification at the State Level

1. A major defect under the State VAT is that the State is charging VAT on the excise duty paid to the Central Government, which goes against the principle of not levying tax on taxes.
2. In the present State level VAT scheme, Cenvat allowed on the goods remains included in the value of goods to be taxed which is a cascading effect on account of Cenvat element.
3. Many of the States are still continuing with various types of indirect taxes, such as luxury tax, entertainment tax, etc.
4. As tax is being levied on inter-state transfer of goods, there is no provision for taking input credit on CST leading to additional burden on the dealers.

Model of GST

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The dual GST model proposed by the Empowered Committee and accepted by the Centre will have 

dual system for imposing the tax. GST shall have two components i.e.

                (i) Central GST

                (ii) State GST

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Central Excise duty, additional excise duty, services tax and additional duty of customs (equivalent to 

excise), state VAT entertainment tax, taxes on lotteries, betting and gambling and entry tax (not levied by 

local bodies)would be subsumed within GST

GST - Salient Features

— It would be applicable to all transactions of goods and service.

— It to be paid to the accounts of the Centre and the States separately.

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The rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

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Cross utilization of ITC between the Central
 

GST and the State GST would not be allowed except in the case of inter-State supply of goods.

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The Centre and the States would have concurrent jurisdiction for the entire value chain and for all 

taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.

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The taxpayer would need to submit common format for periodical returns, to both the Central and to the 

concerned State GST authorities.

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Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 

digits.

Chargeability of Tax under GST

 It will be replacement of ED and other taxes.

—There will be two parallel Statutes – one at the Centre and other under the respective State GST Act – 

governing the tax liability of the same transaction.

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All the items of goods and services are proposed to be covered and exemptions will be granted to few 

selected items.

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After introduction of GST, all the traders will be paying both the types of taxes i.e. CGST and SGST.

Taxable Event

Following questions arises:

At what point of time, the tax will be levied?

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Will TE covers both i.e. supply of goods and rendering of services?

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What will be the nature of TE?

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Will it not involve new language and terminology?

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What impact the change in TE can have?

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GST is proposed to be levied by both the CG and SGs. How will it be defined under CGST and SGST?

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 under each jurisdiction of SGs.

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All the dealers/ business entities will have to pay both the types of taxes on all the transactions.

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A dealer must get registered under CGST as it will make him entitle to claim ITC of CGST thereby 

attracting buyers under B2B transactions.

—

Importers have to register under both CGST and SGST as well.

Subsuming of Existing Taxes

The sub-sumation should result in free flow of tax credit in intra and inter-State levels so that unrelated taxes, levies and fees are not be subsumed under GST.

 

Sl. No.	Subsumed under CGST	Subsumed under SGST
1	Central Excise Duty	VAT / Sales tax
2	Additional Excise Duties	Entertainment tax (unless it is levied by the local bodies).
3	Excise Duty-Medicinal and Toiletries Preparation Act	Luxury tax
4	Service Tax	Taxes on lottery, betting and gambling.
5	Additional CVD	State Cesses and Surcharges (supply of goods and services)
6	Special Additional Duty of Customs - 4% (SAD)	Entry tax not in lieu of Octroi
7	Surcharges
8	Ceses

Taxes that may or may not be subsumed

There are few other indirect taxes that may or may not be subsumed under the GST regime as there is no consensus among States and Centre & States –

—  Purchase tax

—  Stamp Duty

—  Vehicle Tax

—  Electricity Duty

—  Other Entry taxes and Octroi

Rate of Tax

There with be a two-rate structure –a lower rate for necessary items and items of basic importance and 

a  standard rate for goods in general. There will also be a special rate for precious metals and a list of 

exempted items.

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For CGST relating to goods, the  States considered that the Government of India might also have a 

two-rate structure, with conformity in the levels of rate with the SGST. For taxation of services, there 

may be a single rate for both CGST and SGST.

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It will be total of the rate as applicable under CGST & SGST.

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It is understood that the Government is considering pegging the revenue neutral rate of GST at a rate 

between 18% to 22%. This represents the aggregate of CGST and SGST payable on the transaction. 

However, it may be noted that at this stage, the Government is yet to indicate whether the revenue 

neutral rate of tax on goods and services would be the same.

What will be out of GST?

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Levies on petroleum products

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Levies on alcoholic products

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Taxes on lottery and betting

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Basic customs duty and safeguard duties on import of goods into India

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Entry taxes levied by municipalities or panchayats

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Entertainment and Luxury taxes

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Electricity duties/ taxes

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Stamp duties on immovable properties

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Taxes on vehicles

Exemption of Goods and Services

Concept of providing threshold exemption of GST

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Scope of composition and compounding scheme under GST

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Items of GS to be exempt

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Treatment for goods exempt under one state and taxable under the other

GST on Export & Import

GST on export would be zero rated

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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. 

Inter-State Transactions of Goods & Services

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The existing CST will be discontinued. Instead, a new statute known as IGST will come into place. It 

will empower the GC to levy and collect the tax on the inter-state transfer of the GS.

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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 with appropriate provision for consignment or 

stock transfer of goods and services.

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The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, 

and SGST on his purchases. 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.

Advantages of IGST Mode

      Maintenance of uninterrupted ITC chain on inter-State transactions.

      

      No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.

       

      No refund claim in exporting State, as ITC is used up while paying the tax.

Self monitoring mode

Level of computerization is limited to inter-State dealers and Central and State Governments  

should be able to computerize their processes expeditiously.

       

      As all inter-State dealers will be e-registered and correspondence with them will be by e-mail, the    

      compliance level will improve substantially.

       

      Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.

Registration under GST

Under GST registration, it is likely to be linked with the existing PAN.

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The new business identification number was likely to be the 10-digit alphanumeric PAN, in addition to 

two digits for state code and one or two check numbers for disallowing fake numbers. The total number 

of digits in the new number was likely to be 13-14.

GST Invoice

In an invoice based VAT system, the issue of invoices in the proper form is an essential part of the 

procedure for imposing and enforcing the VAT.

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An invoice is also required by the tax authorities to audit the collection of VAT.

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What is required is –

The law should require a supplier making a taxable supply to another taxable person to provide 

a VAT invoice with that supply or the payment for it.

The VAT invoice should be standardised across all states so as to contain a minimum of 

information about the supply being invoiced.

Periodicity of GST Payment

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Since the amount of VAT collected by a dealer is related to his turnover, the dealer is likely to 

accumulate a huge VAT liability within a very short period. Hence, it is necessary to minimize the risk of 

payment defaults by dealers, in particular fly-by-night operators.

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Given that the collection under VAT will serve as the dominant source of revenue for state government, it 

is imperative to provide for a collection mechanism which would ensure a period flow of revenue to the 

exchequer subject to a minimum compliance burden on taxpayers and risk of revenue loss. Therefore, 

VAT period should be a calendar month.

Latest updates on GST

Parliament panel might propose optional GST for states

The panel, to consider its draft report on the Constitution (115^th Amendment) Bill on the GST, feel 

states should be given enough fiscal space if the success of Value Added Tax (VAT) is to be replicated.

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To address concerns of the states on revenue loss, the panel might recommend an automatic 

compensation mechanism, wherein a fund is created under the proposed GST Council. It also wants a 

study to evaluate the impact of GST on the revenue of states. It could suggest a floor rate with a narrow 

band, decision by voting and not consensus in the GST Council, omitting the provision on setting up a 

Dispute Settlement Authority, subsuming entry tax in GST and giving powers to states to levy tax in the 

event of a natural calamity, among other things.

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The report of the standing committee could be adopted in its next meeting and the finance ministry, after 

incorporating the panel’s views, would approach the cabinet to present the Bill in Parliament with the 

changes.

Emerging Issues

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What preparations are required at the level of CG and SG for implementing GST?

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Whether the Government machinery is in place for such a mammoth change?

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Whether the tax-payers are ready for such a change?

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What impact it can have on the revenue of the government?

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How can the burden of tax, in general, fall under the GST?

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In what respect, it will affect the manufacturers, traders and ultimate consumers?

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How will GST benefit the small entrepreneurs and small traders?

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Which type of administrative work will be involved in complying with the GST requirements?

Conclusion

 The taxation of goods and services in India has, hitherto, been characterized as a cascading and 

distortionary tax on production resulting in mis-allocation of resources and lower productivity and 

economic growth. It also inhibits voluntary compliance. It is well recognized that this problem can be 

effectively addressed by shifting the tax burden from production and trade to final consumption. A well 

designed destination-based value added tax on all goods and services is the most elegant method of 

eliminating distortions and taxing consumption. Under this 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.

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A ‘flawless’ GST in the context of the federal structure which would optimize efficiency, equity and 

effectiveness. The ‘flawless’ GST is designed as a consumption type destination VAT based on invoice-

credit method.