You are on page 1of 42

GST: A basic understanding

What is GST
A good and service tax (GST) or value added tax
(VAT) is a tax on domestic consumption. It is
multi-stage tax for which the tax burden is
intended to fall on the final consumer.
Under GST, registered dealer is to charged GST
on its output and pay GST on inputs. Difference of
OUTPUT GST and input GST he has to pay to the
tax authorities.
To avoid cascading effect tax is paid on only on
the vale addition at each stage.

GST-Global Scenario
More than 140 countries have already introduced
GST/National VAT
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

GST
Country
Korea
Indonesia
Taiwan
New Zealand
Philippines
Japan
Thailand
China
Singapore
Cambodia
Vietnam
Australia
India
Malaysia
Slide 4

Standard rate
10%
10%
5%
12.5%
12%
5%
7%
17%
7%
10%
10%
10%
16% (TBC)
4% (?)

Date introduced
22 Dec 1976
1 April 1985
15 November 1985
1 October 1986
1988
1 April 1989
1 January 1992
1 January 1994
1 April 1994
1 January 1999
1 January 1999
1 July 2000
1 Oct 2010 (TBC)
July 2011 (?)

Constitutional Provisions on Centre-State


Fiscal Balance
Direct Tax Income Tax levied by the Centre
Tax on manufacturing levied by Centre
(Central Excise)
Tax on sales levied by the State
(Sales Tax or State VAT)
Tax on inter-State sale & Declared Goods
Central Sales Tax - Central law but collected &
retained by the State
Tax on services levied by the Centre
(Service Tax)
Tax on Exports & Imports levied by the Centre
(Customs Duty & Export Duty)
5

Different taxes
Direct Taxes

Personal Income Tax


Tax on Corporate Income
Tax Incentives
Capital Gains Tax

Indirect Taxes

Securities Transaction Tax


Service Tax
Excise Duty
Customs Duty
Taxes Levied by State Governments and
Local Bodies
Other Taxes
Sales Tax or Value Added Tax

Taxes Levied by Central Government


Direct Taxes
Tax on Corporate Income
Capital Gains Tax
Personal Income Tax
Tax Incentives
Double Taxation Avoidance Treaty
Indirect Taxes
Excise Duty
Customs Duty
Service Tax
Securities Transaction Tax
Taxes Levied by State Governments and Local
Bodies
Sales Tax/VAT
Other Taxes

Excise Duty
Manufacture of goods in India attracts Excise Duty
under the Central Excise act 1944 and the Central
Excise Tariff Act 1985. Herein, the term Manufacture
means bringing into existence a new article having a
distinct name, character, use and marketability and
includes packing, labeling etc.
Customs Duty
The levy and the rate of customs duty in India are
governed by the Customs Act 1962 and the Customs
Tariff Act 1975. Imported goods in India attract basic
customs duty, additional customs duty and education
cess.
Sales Tax/VAT
Sales tax is levied on the sale of movable goods. Most
of the Indian States have replaced Sales tax with a new
Value Added Tax (VAT) from April 01, 2005. VAT is
imposed on goods only and not services and it has
replaced sales tax.

Service Tax
Service tax is levied at the rate of 10% (plus 2%
education cess) on certain identified taxable
services provided in India by specified service
providers. Service tax on taxable services
rendered in India are exempt, if payment for such
services is received in convertible foreign
exchange in India and the same is not repatriated
outside India.
Securities Transaction Tax
Transactions in equity shares, derivatives and
units of equity-oriented funds entered in a
recognized stock exchange attract Securities
Transaction Tax

How VAT is applied :


If, for example, input worth Rs. 1,00,000/- is
purchased
and sales are worth Rs. 2,00,000/- in a month, and
input tax rate and output tax rate are 4% and 10%
respectively, then input tax credit/set-off and
calculation of VAT will be as shown below:
(a) Input purchased within the month : Rs. 1,00,000/ (b) Output sold in the month : Rs. 2,00,000/ (c) Input tax paid : Rs. 4,000/ (d) Output tax payable : Rs. 20,000/ (e) VAT payable during the month : Rs. 16,000/ after set-off/input tax credit
[(d) (c)]
Coverage of Set-Off / Input Tax Credit

Why there is need to GST


The design of the CENVAT and state VATs was
dictated by the constraints imposed by the
Constitution, which allows neither the Centre
nor the States to levy taxes on a
comprehensive base of all goods and services
and at all points in their supply chain.
The Centre is constrained from levying the
tax on goods beyond the point of
manufacturing, and the States in extending
the tax to services.
11

Why there is need to GST


This division of tax powers makes both the
CENVAT and the state VATs partial in
nature and contributes to their inefficiency
and complexity.
The
CENVAT
is
levied
on
goods
manufactured or produced in India. This
gives rise to definitional issues as to what
constitutes manufacturing, and valuation
issues for determining the value on which
the tax is to be levied.
12

Why there is need to GST


The taxable value at the point of
manufacturing relative to the value added
beyond this point.
The
advancements
in
information
technology and digitization have blurred
the distinction between goods and
services. In India even intangible are
treated as goods whereas generally it is
part of service contract.
13

Why there is need to GST


Tax cascading effect
Central Sales Tax (CST) on inter-state
sales, collected by the origin state and for
which no credit is allowed by any level of
government
Real estate transactions are outside the
scope of both VAT and CENVAT
The exempt sectors are not allowed to
claim any credit for the CENVAT or the
service tax paid on their inputs
14

Central VAT & State VAT


Easy to give input tax credit (ITC) within same
jurisdiction. CENVAT is in operation for 10-15
years now.
Centre can give ITC for Central Excise and even
for Service Tax; but cannot do so when there is
a sale of good, which is in the States domain.
State can give ITC for Sales Tax within the
State, but cannot do so against Central Excise
paid to Centre and Sales Tax paid to other
States.
Even if some mechanism for giving ITC
between Centre & States is evolved, there has
to be uniformity of rates.
If rates are made uniform across all States,
there will be a number of States which will lose
revenue. They have to be compensated.

15

Tax Cascading
Manufacturer 1

Manufacturer 2

Raw materials

50

Raw materials

Labour

30

Labour

45

Others

10

Others

15

Profit

10

Profit

15

Total ex-factory
Central Excise@12%
Sale Price

100
12
112

Sales Tax @12%

13

Total paid by M2

125

Total tax paid 12+13+24+27=76


Sale price excl. tax : 25176=175

Total ex-factory
Central Excise @12%
Sale Price
Sales Tax @12%
Total sale price

125

200
24
224
27
251

Effective tax rate : 76 / 175 = 43%


17

Value Added Tax


Tax payable only on the value addition at each stage

Centre
CX @12%
Manufacturer-1

Manufacturer-2
Sales Dealer 1

Sales Dealer 2
Service
Provider

State
VAT@12%

Centre

Basic Cost

70

Value Addition

30

Total

100

12

ValueAddn.+ Taxes

50

Total

150

18

Basic Cost

150

18-13.4=4.6

ValueAddn.+ Taxes

40

4.8

Total

190

ValueAddn.+ Taxes

60

7.2

Total

250

30

Basic Cost

250

ValueAddn.+ Taxes

50

Total

300

36-18=18

66

36

(66/234 = 28%)

13.4

30
18

GST Basic Features


(3) All transactions will be taxed manufacture, sales, service etc. ITC will be given at each stage.

Manufacturer-1

Manufacturer-2
Sales Dealer 1
Sales Dealer 2
Service Providr

CGST@9%

SGST@8%

Basic Cost

70

Value Addition

30

Total

100

9.00

8.00

Value Addition

50

4.50

4.00

Total

150

Value Addition

40

3.60

3.20

Total

190

Value Addition

60

5.40

4.80

Total

250

Value Addition

50

4.50

4.00

Total

300

27

24

(9%)

(8%)

Rates indicated are for demonstration only. Final rates have not even been discussed .
19

General concepts
Output tax
OUTgoing invoice Sale OUTput Tax

Input tax
INcoming invoice Purchase INput Tax
Difference = Amount payable to / refundable by Customs( 14
or 28 days)
GST is a tax on final consumer. It is not a cost to the
Intermediaries.
It does not appear as an expense item in the financial
statement of the intermediaries.
Slide 20

GST how does it work?


GST @ 4%
Price: RM 10
GST: RM
0.40

Tax remitted to Customs


Supplier

Manufacturer
Price: RM 50
GST: RM
2.00
Retailer
Price: RM 60
GST: RM
2.40
Consumer

Slide 21

Output tax = RM 0.40


Output tax = RM 2.00
Input tax =
RM 0.40
RM 1.60

Output tax = RM 2.40


Input tax =
RM 2.00
RM 0.40
Total amount remitted to
Customs = RM 2.40

Why is GST considered as the preferred tax structure?


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
indigenous goods and services

cost

competitiveness

of

Enhancement in efficiency in manufacture and distribution due


to economies of scale
GST encourages an unbiased tax structure that is neutral to
business processes, business models, organization structure,
product substitutes and geographical locations

How GST is applied:

A few points
The EC has been discussing GST for about 2 years now.
There is a broad consensus between Centre & States on
the policy areas relating to GST to be introduced by
1.4.2010. This will be a dual GST

Under this model both goods and services would be


subject to concurrent taxation by the Centre and the
States. This model is closer to the model
recommended by the Kelkar Committee in 2002.
inter-state services for which the place of destination
would be difficult to determine. The State tax on
these services may be collected by the Centre, and
then apportioned among the States in some manner.
24

Few more points..


(1) This will be a dual GST there will be Central GST
portion (CGST) and a State GST portion (SGST) eg. if
GST is 17%, CGST can be 9% & SGST 8% and so on.
There could also be multiple rates.
(2) GST will subsume Central Excise, State VAT and
Service Tax.
It will also subsume all cesses &
surcharges (by Centre & the States), Entry Tax not in
lieu of Octroi, Entertainment tax levied & collected by
the State Government, etc. It will not subsume levies
by local self-Governments (Panchayats & Urban Local
Bodies), petroleum, etc. For liquor, tobacco, etc
States could impose an additional tax, over and above
the GST. Final view yet to be taken by the EC.

25

GST Basic Features Contd


(4) Centre will give Input Tax Credit (ITC) only for
CGST and the State only for SGST. Cross
utilisation of ITC between CGST & SGST shall
not be allowed.
(5) Centre will legislate, levy & administer the
CGST portion on its own and the States the
SGST portion on their own.
(6) To avoid deviations by the States, there shall
be a mechanism (eg. EC), wherein the rates
and other relevant parameters will be decided
upon by the Centre & the States. The rates can
thereafter not be changed by the Centre or any
of the States, without approval of the same
mechanism. A Constitutional mechanism will
be introduced.

26

GST Basic Features


Contd
(7) Destination principle for inter State
sales of goods. For services, the rules
are yet to be formulated; sub-Working
Group has been constituted.
(8) Administration of CGST will be
Centres responsibility; Administration
of SGST will be the responsibility of
each State Concurrent jurisdiction
for entire value chain and all
taxpayers will cause difficulties.
A
solution will have to be found for this.

27

Dual GST Other features/ suggestions:

There would a single registration or


taxpayer
identification
number,
based on the Permanent Account
Number (PAN) for direct taxation.
Three additional digits would be
added to the current PAN to identify
registration for the Centre and State
GSTs.
28

Dual GST Other features:


Procedures for collection of Central
and State GSTs would be uniform.
There would be one common tax
return for both taxes, with one copy
given to the Central authority and
the other to the relevant State
authority.

29

Dual GST Other features:


To minimize the need for additional
administrative resources at the Centre,
States
would
also
assume
the
responsibility for administering the
Central GST for dealers with gross
turnover below the current registration
threshold of Rs 1.5 crores under the
central Excise (CENVAT). They would
collect the Central GST from such
dealers on behalf of the Centre and
transfer the funds to the Centre.
30

GST Important Issues to be


addressed
(1) Rates : A revenue neutral model has
to be evolved.
Fairly simple for the
Centre, but difficult when it comes to
each State.
However, what the new base will be is
difficult to calculate, mainly because one
has to capture the sum of all value
additions at each stage of the billions of
transactions.
(2) Single rate or multiple rates?
(3) non GST items, Exempted items & 0%
31
rate items.

GST Compensation
Mechanism
When rates are made uniform across
all States and input tax credit is given
for all transactions (manufacture or
sale or service), some States will
lose, while some will gain. How will
losing States be compensated?
One method is through the mechanism
of the XIII Finance Commission.
32

GST Inter State


transactions
One of the problem areas is inter-State
transactions and giving ITC across
States.
The entire input tax paid in the
preceding transactions will have to be
paid by the origin State to the
destination State.
An IT based clearing house mechanism
is to be evolved.
33

GST- Rules for appropriation of


Service tax
Presently, Centre is collecting the entire
Service Tax. So, no need to evolve any
rules; eg. telephone companies
When States also levy service tax, the
rules of taxation need to be decided
upon.
eg.
(1) Phone companies
(2) Transport carriers
(3) Architect
34

GST Rate in India


What would be the GST rate in India?
Clearly a huge debate and the rates which are
typically being discussed are as follows:
- 20%
- 14%
- 12%
Any of the above, would still be less than the present
cumulative rate of indirect taxes
The rate to be adopted would depend on the extent
of coverage of GST and ability to prune exemptions

GST impacts EVERY aspect of BUSINESS

Education and
communication

Impact on cash flow


Identification of transaction
and GST liability
Maximisation of input tax credit: GST invoice based
- no invoice no claim

Finance and
Administration

Human
Capital

Effect on demand- You

Sales and
Marketing

Goods & Services


Tax
(GST)

Informati
on
Systems changes
Technolo
for GST compliance
gy
Accountabil
ity

May need to do some study


Pricing strategies Will
price remain the same?

Impact on current
contracts

Procurement

Business
efficiency

Indirect tax exemption /


trade facilities GST
payments on purchases
Preferential vendors
under GST To maximize
input tax credit claim

Registration & Compliance


Cancellation of sales tax /
service tax licences
potential audit ?

Group structure
review

Slide 36

INPUT

GST rate

Raw Materials

- local
- Imported

4%
4%

Services

- local
- Imported

4%
4%

Capital Assets
- local
- Imported

Salaries

Slide 37

- Out of Scope

4%
4%

OUTPUT

Sales
- Export
- local

GST
0%
4%

Cash flow Impact

GST on accrual basis. If customers dont pay you, you still need to pay
the GST.

Slide 38

Longer term supply contracts e.g.:


- Rental of warehouse
- Supply of finished goods
- Maintenance Contract

If they cross over to 2011 who will bear


the GST on these contracts

Slide 39

GST Treatment on Farming Out


(Sub- contractor arrangement)
Farming out does not transfer the ownership of the goods to the subcontractor

i.e. No supply to goods and you do not have to account for GST output tax
on the raw materials
If the sub-contractor is a GST registrant, he has to account for GST output tax on
the raw materials
If the sub-contractor is a GST registrant, he has to account for GST output tax on
the value of the services supplies to the owner

Finished goods (No GST) and RM15,000 for


labour (GST @ 4%)

A Sdn Bhd
Farmed Out

Slide 40

B Sdn Bhd
Raw materials valued at RM10,000 (No
GST)

Before GST
(a)
A

Sales Tax
Licensed
Manufacturer

(1)

(2)

Trading
Company

(1) A & B are related companies

(2) A charges sales tax on sales to B


(3) No sales tax on sales to and customer.

Slide 41

End Customer

After GST
(b)
(3) Cashflow Impact

(3) Cashflow
Impact

(1)

(2)

End
Customer

(1) A charges GST on sales to B


(2) B charges GST on sales to end customer
(3) Cashflow impact to A & B as they need to charge & collect GST for
the Government

Slide 42

Few more impacts:


Supply chains designed to benefit from VAT
In Delhi, pulses are exempt from VAT and cashew nuts are taxed at
4%; downstream
from Gulati, in Haryana, pulses are taxed at 4% and cashew nuts at
12.5%
In Assam, unprocessed tea leaves are exempt from VAT; in Delhi and
Haryana and
some other states, the sale of these leaves is taxed at 4%.
Integrated Business
Below par watch manufacturers