India GST - A Summary on Paper

How will the goods and services tax (GST) work in India? How is it any different than the value added tax (VAT)?

How is the proposed GST framework different from the current scenario ? What are the pros and cons of implementing it ? Why is there such fierce opposition to it being implemented ?

THE  NEED  FOR GST

Let us begin by elaborating on the important concept of – cascading effect of taxes. It is also, logically, referred to as “taxes on taxes”. It is simple to illustrate – say A sells goods to B after charging sales tax, and then B re-sells those goods to C after charging sales tax. While B was computing his sales tax liability, he also included the sales tax paid on previous purchase, which is how it becomes a tax on tax.

This was the case with the sales tax few years ago. At that time, a VAT system was introduced whereby every next stage dealer used to get credit of the tax paid at earlier stage against his tax liability. This reduced an overall liability of many traders and also helped to reduce inflationary impact this had on the prices.

Similar concept came in the duty on manufacture – The Central Excise Duty – much before it came for sales tax. The CENVAT credit scheme (earlier known as MODVAT) was also a welcome move by trade and industry where credit of excise duty paid at the input stages was allowed to be set-off against the liability of excise on removal of goods. With effect from 2004, this system was extended to Service Tax also. Moreover, cross utilisation of credit between excise duty and service tax was also permitted. To a huge extent, the problem of cascading effect of taxes is resolved by these measures.

However, there are still problems with the system that have not been solved till date. We shall talk about these problems now.

• The credit of Input VAT is available against Output VAT. In the same manner, the credit of input excise/service tax is available for set-off against output liability of excise/service tax. However, the credit of VAT is not available against excise and vice versa.
• VAT is computed on a value which includes excise duty, and no CENVAT credit is allowed for it. This shows that there is a tax on tax!

Excise duty and service tax are levied by the Central Government, while the VAT is levied by the State Government, which is one of the reasons why such a cross-utilisation of credits was not allowed. However, this does not constitute a valid reason that justifies the cascading effect of taxes. For the people, it makes no difference if a tax is levied by the Centre or the State – a tax is a tax, and there is a tax on tax. The GST is introduced to combat this problem, among many others

PRESENT  SYSTEM  OF  INDIRECT  TAXES

Let us first understand the various indirect taxes that are presently being levied by the Central & State Governments.

​(*CVD – Countervailing Duty; SAD – Special Additional Duty)

• The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be charged even after the introduction of GST. Other indirect taxes, such as stamp duties etc shall also continue.
• India shall adopt a Dual GST model, meaning that the GST would be administered both by the Central and the State Governments. This makes it the first tax of its kind in India!

 DUAL  GST  MODEL

Let us begin by stating the dual GST model and the taxes levied on each kind of transaction. See these abbreviations before we understand them-

SGST – State GST, collected by the State Govt.
CGST – Central GST, collected by the Central Govt.
IGST – Integrated GST, collected by the Central Govt.

(The names may change in the actual law;  purpose is only to understand their nature)

Now look at the chart that follows:​

 It is worth mentioning here that the levy of Excise or Service Tax was not dependent on the levy of VAT/CST, as they were governed by different laws.

These are the taxes that shall be levied under the new system of GST. How this shall operate, and how can we have cross utilisation of credits can be seen in the discussion that follows –

HOW  GST  OPERATES?

Case 1: Sale in one state, resale in the same state

In the example illustrated below, goods are moving from Mumbai to Pune. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Then the goods are resold from Pune to Nagpur. This is again a sale within a state, so CGST and SGST will be levied. Sale price is increased so tax liability will also increase. In the case of resale, the credit of input CGST and input SGST (Rs. 8) is claimed as shown; and the remaining taxes go to the respective governments.

Case 2: Sale in one state, resale in another state

In this case, goods are moving from Indore to Bhopal. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Later the goods are resold from Bhopal to Lucknow (outside the state). Therefore, IGST will be levied. Whole IGST goes to the central government.

Against IGST, both the input taxes are taken as credit. But we see that SGST never went to the central government, still the credit is claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the state government compensates the central government by transferring the credit to the central government.

Case 3: Sale outside the state, resale in that state

In this case, goods are moving from Delhi to Jaipur. Since it is an interstate sale, IGST will be levied. The collection goes to the Central Government. Later the goods are resold from Jaipur to Jodhpur (within the state). Therefore, CGST and SGST will be levied.

Against CGST and SGST, 50% of the IGST, that is Rs. 8 is taken as a credit. But we see that IGST never went to the state government, still the credit is claimed against SGST. Since this amounts to a loss to the State Government, the Central government compensates the State government by transferring the credit to the State government.

ADVANTAGES  OF  GST

Apart from full allowance of credit, there are several other advantages of introducing a GST in India:

• Reduction in prices:Due to full and seamless credit, manufacturers or traders do not have to include taxes as a part of their cost of production, which is a very big reason to say that we can see a reduction in prices. However, if the government seeks to introduce GST with a higher rate, this might be lost.
• Increase in Government Revenues:This might seem to be a little vague. However, even at the time of introduction of VAT, the public revenues actually went up instead of falling because many people resorted to paying taxes rather than evading the same. However, the government may wish to introduce GST at a Revenue Neutral Rate, in which case the revenues might not see a significant increase in the short run.
• Less compliance and procedural cost:Instead of maintaining big records, returns and reporting under various different statutes, all assessees will find comfortable under GST as the compliance cost will be reduced. It should be noted that the assessees are, nevertheless, required to keep record of CGST, SGST and IGST separately.
• Move towards a Unified GST:Internationally, the GST is always preferred in a unified form (that is, one single GST for the whole nation, instead of the dual GST format). Although India is adopting Dual GST looking into the federal structure, it is still a good move towards a Unified GST which is regarded as the best method of Indirect Taxes.

POINTS  TO  PONDER : FOOD  FOR  THOUGHT

The GST is a very good type of tax. However, for the successful implementation of the same, we must be cautious about a few aspects. Following are some of the factors that must be kept in mind about GST:

• Firstly, it is really required that all the states implement the GSTtogether and that too at the same rates. Otherwise, it will be really cumbersome for businesses to comply with the provisions of the law. Further, GST will be very advantageous if the rates are same, because in that case taxes will not be a factor in investment location decisions, and people will be able to focus on profitability.
• For smooth functioning, it is important that the GST clearly sets out the taxable event. Presently, the CENVAT credit rules, the Point of Taxation Rules are amended/ introduced for this purpose only. However, the rules should be more refined and free from ambiguity.
• The GST is a destination based tax,not the origin one. In such circumstances, it should be clearly identifiable as to where the goods are going. This shall be difficult in case of services, because it is not easy to identify where a service is provided, thus this should be properly dealt with.
• More awareness about GST and its advantages have to be made, and professionals like us really have to take the onus to assume this responsibility.

The GST framework could easily be one of the most important tax reforms to be tabled for discussion in the parliament. It does bring with it some problems, like division of taxation powers between the central government and states. Not surprisingly, the Finance ministry has already missed three of its deadlines to come out with an acceptable framework. In fact, most of the proposals aren't even in the beta stage yet. But, most administrators and more importantly, producers believe it would make the tax procedures more fair, transparent and efficient.

An ideal tax system collects taxes at various stages of production, supply and retail. It is based on the value that the producers, suppliers and retailers individually add to the product. However, the current tax regime is unfairly skewed against most producers. Let's outline and simplify the current system of taxes to see how it operates:

Assume there is a soap manufacturer that procures raw materials at 500 lakhs per batch. The manufacturer keeps his operating profits at 100 lakhs and encumbers a processing cost of 50 lakhs. The flow would look something like this:

If we calculate the total tax that the producer has to pay in this case, it would be 120 lakhs(50 lakhs on procurement and 70 lakhs on sales). Now if you have a GST framework in place, the total tax that the producer pays is 70 lakhs. How?

The producer had initially paid an input tax of 50 lakhs. Now when he goes on to sell his batch for 700 lakhs, he gets a tax credit of 50 lakhs. Thus, he pays 20 lakhs in the form of taxes for the final transaction. This adds up to just 70 lakhs for the producer. The GST hence, reduces the tax burden on producers. The biggest benefit of such a system is that it would contain various indirect taxes currently levied on various participants in the supply chain. Reducing such taxes would lower the overall production cost and  increase the output of the economy in the long run.

GST vs VAT

GST is essentially the same as VAT but, with a wider base.
VAT, which replaced Sales Tax was imposed only on goods while, GST will be a VAT on Goods and Services.(as the name suggests)

II. How will it work in India ? 

The economic arguments in favour of GST are that :

1. Since GST is a single slab for an array of indirect taxes ( entertainment tax, luxury tax, etc. ) , it will
simplify administration ,improve compliance, eliminate economic distortions in production, trade and consumption. 

2. GST taxes only the final consumer. Hence avoids "cascading of taxes" thereby, cutting production costs and making exports more competitive. 

How is GST different from VAT?

VAT is applicable for goods sold and not service. Service tax takes care of services rendered. However, GST will be applicable for both goods and services, and will have a uniform pricing.

Very simply put, VAT is the tax a manufacturer has to pay for the additional value created. So, if the raw material costs INR 50 and finished product costs INR 100, the value added to raw material is INR 50.

However, the VAT applicable on INR 100 and INR 50 will be based on the VAT guidelines and the difference of those tax amounts needs to be paid by the manufacturer.

GST is essentially riding on the VAT calculation but with uniform taxation across goods and services. This is exceptionally easy computability as some goods are sold as services, like a food in a restaurant, and vice versa.

The proposed framework rides on the current principles but is slightly different when it calculates the interstate sales. The interstate sales are handled by an integrated GST model. This system ensures correct allocation of SGST and CGST, and the correct flow of money between the state and central exchequers.

Pros of GST

• Uniformity in computing taxes for goods and service and elimination of multiple excise, CST, VAT, service tax calculations
• Fixed rate of tax regime for both goods and services. The exact percentage is yet to be decided.
• Appropriate allocation to Central and State funds.
• Accounting will be simplified and consideration for input tax from raw materials will also become easy.

Cons of GST

• VAT and service tax on some products may become higher than the current levels.
• Most developed economies use a single GST instead of a dual GST. Hence, it will still be a very complicated billing and reconciliation IT machinery.
• Since the mechanism is still complicated, it cannot completely eliminate black money and tax evasion.

There is fierce opposition because the states will lose autonomy over how much they can charge. Some states are suggesting that the maximum GST should be capped at 18% and mentioned in the bill that is to be passed in the parliament. Businesses are opposing the bill as they will have to give detailed sales records at both, state and central level.

These pages should have some more information about VAT and Service tax:

We currently have 4 major indirect tax laws in India (not including Customs law):

1. State VAT - for sales within the state
2. Central Sales Tax (CST) - for interstate sales
3. Excise Duty - on manufacture
4. Service tax - on all service except exempt services

The "input tax adjustment with output tax" that mechanism  describes is available in all the above tax laws except CST. GST aims to eliminate all four laws. This means administrative convenience for the Government and the taxpayers. A taxpayer to whom all four laws apply has to file four returns to 4 different departments. This new law will be relief to the already tired taxpayer.

Politicians object it because that's what politicians do. GST is not going to cause an inflation. In fact, it will curb the cascading effect of the unadjustable CST on inputs cutting costs to the end consumer.

The following taxes are proposed to be subsumed under GST:

Central Taxes subsumed under GST

• Central Excise Duty (including additional excise duties)
• Service tax
• Additional customs duty (CVD)
• Special Additional Duty of Customs (SAD)
• Central surcharges and cesses

State Government Taxes subsumed under GST

• Value Added Tax
• Central Sales Tax
• Octroi and Entry Tax
• Purchase Tax
• Luxury Tax
• Taxes on lottery, betting & gambling
• State cesses and surcharges
• Entertainment tax

 The GST framework could easily be one of the most important tax reforms to be tabled for discussion in the parliament. It does bring with it some problems, like division of taxation powers between the central government and states. Not surprisingly, the Finance ministry has already missed three of its deadlines to come out with an acceptable framework. In fact, most of the proposals aren't even in the beta stage yet. But, most administrators and more importantly, producers believe it would make the tax procedures more fair, transparent and efficient.

An ideal tax system collects taxes at various stages of production, supply and retail. It is based on the value that the producers, suppliers and retailers individually add to the product. However, the current tax regime is unfairly skewed against most producers. Let's outline and simplify the current system of taxes to see how it operates:

Assume there is a soap manufacturer that procures raw materials at 500 lakhs per batch. The manufacturer keeps his operating profits at 100 lakhs and encumbers a processing cost of 50 lakhs. The flow would look something like this:
 

 If we calculate the total tax that the producer has to pay in this case, it would be 120 lakhs(50 lakhs on procurement and 70 lakhs on sales). Now if you have a GST framework in place, the total tax that the producer pays is 70 lakhs. How?

The producer had initially paid an input tax of 50 lakhs. Now when he goes on to sell his batch for 700 lakhs, he gets a tax credit of 50 lakhs. Thus, he pays 20 lakhs in the form of taxes for the final transaction. This adds up to just 70 lakhs for the producer. The GST hence, reduces the tax burden on producers. The biggest benefit of such a system is that it would contain various indirect taxes currently levied on various participants in the supply chain. Reducing such taxes would lower the overall production cost and  increase the output of the economy in the long run.

That sounds great, but, why GST when we already have VAT? Isn't the VAT framework similar to that of GST? VAT regulations and rates generally vary across states. There is a tendency, as has been observed, that states may resort to undercutting of rates to attract more investors. This generally leads to a loss of revenue to both the state and centre. GST would introduce uniform taxation laws across states and different sectors. The taxes would be divided between the state and centre, based on a formula that would be acceptable to both. Also, it would be easier to supply goods and services uniformly across the country, as no additional taxes would have to be paid across different states.Currently, no tax credits are provided for interstate transactions.

So do we as consumers get goods at a cheaper price? Probably not, and it is here that the GST has been attacked by the opposition. Since taxes are distributed across the chain, the consumer prices are likely to rise to maintain the current tax revenue levels. The government has justified this by saying it would provide tax cuts across various brackets. This isn't entirely satisfactory. First, the tax paying population isn't too significant a number to begin with and second, the tax payer is likely to get a meager tax cut for the GST he would pay for all the goods or services he purchases.

GST is clearly a long term strategy, it would lead to a higher output, more employment opportunities, and economic inclusion. Initially however, it is likely cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy

 At present, Goods and Services are taxed seperately and also by different authorities at Centre, State and Municipal level. Hence the same goods are taxed differently when produced in different states and even different districts.
GST is an attempt to unify all taxation of goods and services to provide a seamless tax system for the entire country.
The Advantages of GST
1. It removes multiple taxation
2. It creates India as a single market
3. It taxes goods and services at the same rates so many disputes are eliminated on tax matter.
4. It reduces taxes on manufactueres. hence it increases their business and make them more competitive at national and international level.
5. A seamless flow of Credit is available throughout the country. Hence evasion is minimised.

The Disadvanteges of GST
1. The Tax on services would go up substantially from 14% to 20%
2. Tax on retails would be almost double.
3. Imported goods would be taxed at higher rate by around 6%
4. There will be dual control on every business by Central and State Government. So compliance cost will go up.
5. All credit will be available on from online conenctivity with GST Network. Hence, small businesses may find it difficult to use the system

Why There is Fierce Oppositition?
1. Congress is doing what BJP did when Congress wanted to pass the Bill. So it is political.
2. States may lose autonomy to change their tax rates.
3. There will still be tax in the name of Additional Tax @ 1% for Inter-state movement of goods which is against the spirit of GST.
4. Manufacturing states would lose big revenue

Challanges after GST is passed!!
1. Service sector may oppose because they have to register in every state with central and state government. So every business at all India level will have around 60 registrations while they are having just one today. Morever their rates will also go up.
2. Retail business may oppose because their taxes will go up and they will also have to deal with Central Government now in addition to States.
3. GSTN may not work optimally for quite sometime.
4. Dual control can increase harrassment to businesses.

Challenges ahead of GST-

•  Passage of the bill in the Rajya Sabha
• Support by at least half of the states
• A functionally robust GSTN to facilitate the implementation
• Formulating the Revenue Neutral rate for GST
• Drafting a model legislation to be adopted by the states
• Deciding the minimum threshold value beyond which the GST will be applicable
•  Compiling the 'place of supply' rules to determine where the goods and serrvices will be taxed. India favors the ''destination based consumption'' principle

Key issues in the GST-

1.      Loss of revenue for states- States are going to be compensated for it, further Alcohol has been left out of the purview of GST. Petroleum products will be dealt with at a later stage in the GST Council with states on board.

2.      Loss of fiscal autonomy of the states- although the GST Council will be a very important player in tax related matters there will be democratic functioning of the Council. The voting powers will be shared between Centre and States in the ratio 33.33:66.66. Centre and States will have veto and minimum 75% votes will have to be secured for adopting a decision

3.      The additional 1% tax levied on goods that are transported across states dilutes the objective of creating a harmonized national market for goods and services. Inter-state trade of a good would be more expensive than intra-state trade, with the burden being borne by retail consumers. Further, cascading of taxes will continue.