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Goods and Service Tax (GST)

  • GST has not been implemented in India till now despite the fact that Budget 2009-10 had proposed to introduce it with effect from 1st April 2010.
  • There was a burden of “tax on tax” in the pre-existing Central excise duty of the Goverment of India and sales tax system of the State Governments.
  • The introduction of Central VAT (CENVAT) has removed the cascading burden of “tax on tax” to a good extent by providing a mechanism, of “set off” for tax paid on inputs and services up to the stage of production, and has been an improvement over the pre-existing Central excise duty.
  • Similarly, the introduction of VAT in the States has removed the cascading effect by giving set-off for tax paid on input as well as tax paid on previous purchases and has again been an improvement over the previous sales tax regime.
  • But both the CENVAT and the State VAT have certain incompleteness. The Incompleteness in CENVAT is that it has yet not been extended to include chain of value addition in the distributive trade below the stage of production.
  • It has also not included several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges etc. in the overall framework of CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/ dealers. These taxes still are complex due to the existence of exemptions and multiple rates and the extent structure of the The introduction of GST aims to remove these deficiencies.
  • Goods and Service Tax is a tax on goods and services, which can be levied at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service. This is very similar to VAT which is at present applicable in most of the states and can be termed as National level VAT on Goods and Services with only one difference 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.
  • Generally, the dealers registered under GST (Manufacturers, Wholesalers and retailers and service providers) charge GST on the price of goods and services from their customers and claim credits for the GST included in the price of their own purchases of goods and services used by them.
  • While GST is paid at each step in the supply chain of goods and services, the paying dealers don’t actually bear the burden of the tax because GST is an indirect tax and ultimate burden of the GST has to be taken by the last customer, This is because they include GST in the price of the goods and services they sell and can claim credits for the most GST included in the price of goods and services they buy. The cost of GST is borne by the final consumer, who can’t claim GST credits, i.e. input credit of the tax paid.

Example to explain mechanism of GST : 

Let us assume that there is a uniform GST of 16% and a glass manufacturer plans to sell goods worth Re. 100 lakh to a trader. For this, the manufacturer buys raw materials and other inputs: worth Rs. 75 lakh. Thus, the input tax for the manufacturer is (75*16%) = Rs. 12 lakh.

The output tax or the tax charged from the purchaser is (100* 16%) = Rs. 16 lakh. Thus, net GST payable by the manufacturer is (16-12) = Rs. 4 lakh.

Suppose that the trader spends Rs. 5 lakh on services before selling it to the final consumer. On this he pays a tax of (5*16%) = Rs. 0.80 lakh. Thus, total input tax for the trader is (16+0.80) = Rs. 16.80 lakh. The trader before selling it to the consumer wants to pocket a profit of Rs. 10 lakhs and therefore quote Rs. 115 lakh price to customer (100+5 on services+10 as profit).

The consumer actually pays 115+ (115*16%) = 115+ 18.40 = Rs. 133.40 lakh for this out of which Rs. 18.40 is also the output tax for the trader. Thus, net tax payable by the trader is (18.40-16.80) = Rs. 1.60 lakh.

Now through this system, goods and services worth Rs. 115 lakh are sold to customers and government has collected tax worth (Re. 12 lakh from raw material seller + Rs, 4 lakh from manufacturer + Rs. 0.80 lakh from the service provider to trader + Rs. 1.60 lakh from the trader) = Rs. 18.40 lakh.

This is exactly same amount that has been borne and ultimately paid by the final consumers on Rs. 115 lakh @ 16% GST or Rs. 18.40 lakh.

Thus, under GST, the raw material sellers, manufacturers, and traders act like the collecting agents for the government while tax is finally borne by the consumers. This is fine as finally the consumers are enjoying the fruits of the value added to the goods and services at every stage of production and distribution.  GOODS AND SERVICE TAX (GST)

  • The GST shall have two components: one levied by the Centre or Central GST (CGST), and the other levied by the States or State GST (SGST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability.
  • This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). 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.  GOODS AND SERVICE TAX (GST)
  • The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.
  • Export of goods and services will be zero-rated and in that case the GST paid by the exporters of these goods and services is refunded. This is the basic difference between Zero rated goods and services and exempted goods and services.
  • Since the Central GST and State GST are to be treated separately, 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 not be allowed except in the case of inter-State supply of goods and services under the Inter­state GST (IGST) model.
  • 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.
  • 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.  GOODS AND SERVICE TAX (GST)


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