Goods & Services Tax

Narendra Singh, Roll No - 14 Mushtaq Khan, Roll No - 03

“A government should tax its people like a shepherd shears his flock or a bee gets nectar from a flower ” …….. Chanakya



• From Sales Tax to VAT. • GST-Global Scenario • Why is GST considered as the preferred tax structure? • Constitution of the Joint Working Group • GST- Current State of Play • Present Structure • Features of Proposed GST Model • Rate of GST • Issues & Challenges

The Problem – “Sales Tax”

• • •

The existing sales tax structure allows for double taxation thereby cascading the tax burden. Increased cost of goods – consumer bears the brunt. Tax evasion.

TAX ON GOODS AND SERVICES The following indirect taxes apply EXCISE DUTY Manufacturing units need to pay an excise duty on goods produced in India. The duty varies between products and the unit is required to periodically deposit the duty on removal of products. Furthermore, these units are to maintain detailed stock records and accounts in respect of duty payable on final goods, credit claimed on inputs etc and submit annual returns. Submission dates are linked to level of operations. CUSTOMS DUTY Movement of goods across borders would need compliance to customs duty regulations. This duty varies between products. The compliance requirement includes determination and deposit of duty prior to clearance of goods by the customs authority. SERVICE TAX Businesses rendering specified services are liable to a Service Tax at 12 percent plus education cess on the billable value. They are required to monthly deposit the tax collected. CENTRAL SALES TAX (‘CST’) / VALUE ADDED TAX (‘VAT’) Businesses trading in goods between states are liable to charge CST whereas those trading within the same state are subject to VAT. The rate of VAT / CST varies between products and states. The businesses are required to deposit the tax collected and submit bi – annual / quarterly returns with the sales tax authorities. Besides, certain states of India levy entry / octroi tax on movement of goods.


• General consumption tax assessed on the value added to the goods and services. • Deductions allowed from the VAT liability, the amount of tax which the business has paid to the other taxable person/entity on purchase of business activity.

Lets see an example !

* The transaction chain under VAT assuming that a profit of Rs 10 is retained during each sale.

Some instances of VAT deviations
• • • • • Paddy, rice, wheat & pulses taxed at 4% in AP but exempt in W. Bengal, Mah and Delhi. VAT on tyres is 12.5% in Delhi, Punjab, but 8% in Haryana. VAT on tea is 4% in Assam, West Bengal and Delhi but 12.5% elsewhere. VAT on capital goods figuring in 4% list, but taxed at 12.5% in Mah and AP. Drugs - 6% (MRP) Assam - 4% on minimum retail price (MRP) only on first sale in W Bengal,Mah, Orissa, Kerala & Meghalaya - 4% in Andhra Pradesh, not on MRP LPG - 9% in Assam - 12.5% in Delhi Gold - 0.25% in Rajasthan - 2% in Assam but others 1%

Here is the solution – GST !

• • • • • •

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 cost competitiveness of indigenous goods and services GST encourages an unbiased tax structure that is neutral to business processes, business models, organization structure, product substitutes and geographical locations

Lets see an example !
Stage of supplyPurcha Value chain se Additi Value on of Input Value at Rate GST on Input Net which of Output Tax GST=GST supply of GST Credit on outputGoods and Input Tax services credit made to next stage 130 150 160 10% 13 10% 15 10% 16 10 13 15 13-10=3 15-13=2 16-15=1

Manufacturer Whole seller Retailer

100 130 150

30 20 10

Total GST paid to the govt = Rs 16/

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 • Canada and Brazil alone have a dual VAT • US does not have a national level VAT

Main differences between VAT and GST
VAT Only by the States; Centre has no role GST To be imposed by the Centre and the States in coordination Centre and States to tax both goods and services

Only on goods.

States’ exclusive legislative power to taxCentre to be empowered to tax goods; sale of goods States to be empowered to tax services Replaces only the State sales tax; centralWill replace central excise and service excise and other taxes are unaffected tax etc. imposed by the Centre, and VAT, entry tax etc. imposed by the States No input tax credit for inter-State transactions Tax paid in exporting State would be available as credit against inter-State transactions

Constitution of the Joint Working Group
• The Empowered Committee (EC) in consultation with the Central Government, had constituted a Joint Working Group (JWG) in May 2007 to lay out the road map for the GST • The JWG had been entrusted with the task of studying global GST models and identify alternate models for introduction in India • Based on a study of the alternate models vis-à-vis India’s federal structure, the JWG had suggested the best model for introduction of GST in India • JWG constituted 3 Sub-Working Groups for discussions in smaller groups • The JWG presented its report in November 2007

GST – Current State of Play
• Empowered Committee (EC) has submitted its report to the FM on the

recommended model
• EC has suggested a dual GST • FM has requested the Finance Commission, headed by Dr. Kelkar, to

study the report and make recommendations. Finance Commission has sought the views of various associations and chambers
• The Commission envisages that its recommendations will be submitted

to the FM by end 2008, in time for all subsequent work to commence and conclude by first quarter 2010

Features of proposed GST Model
• Dual GST recommended by Joint Working Group of the EC

• EC has accepted the recommendations and submitted its report to the Government

• Present available details form the basis for subsequent slides

Features of proposed GST Model
• Basic Structure - Dual GST comprising Central GST and State GST - Central GST and State GST, in themselves, to comprise both the goods tax and the services tax • Central GST and State GST to operate throughout the supply / value chain • Taxable event to be supplies - as against manufacture (excise) and sales (VAT)

Features of proposed GST Model
• Rates uniform rates for services multiple rates for goods

• Imports to be charged to both Central and State GST • Excise Free Zones could continue for their life spans

Features of proposed GST Model
• Input tax Credits ( ITC) - full credits under the Central and the State GST that will operate in parallel - cross utilization of credits between Central GST and State GST not permitted - refund of unutilized accumulated ITC • Inter-State transactions - goods to be taxed in the destination/importing State - services to be taxed in the State of consumption - zero rating in the originating State

Features of proposed GST Model
• Basic Structure - identified taxes to be subsumed by GST - stamp duty, toll tax, passenger tax and road tax not subsumed in GST - exports to be zero rated

Features of proposed GST Model
• Taxes proposed to be subsumed by GST


Central excise Additional duties of customs Service tax VAT Central Sales tax Entertainment tax Luxury tax Octroi Lottery taxes Electricity duty State surcharges relating to supply of goods and services Purchase tax

Features of proposed GST Model
• Taxation of crude & petroleum products to be brought in GST with ITC excise duties ( without ITC) to be levied over and above GST by both Centre & State Or only crude, motor spirit & high speed diesel be out of the purview of the GST → remaining products as per above • Finance Commission will make recommendations in regard to petroleum products

Features of proposed GST Model
• Treatment of services • Any economic activity which is not supply of goods is supply of services • All services to be taxed with few exceptions • Central GST on services relatively easy to collect • State GST on services will be far more complex – particularly on cross border services

Features of proposed GST model
• Cross border Services • Taxed at the place of consumption of services • Difficult to determine the actual place of effective use/enjoyment of services • Rules for place of supply of services to be framed • Currently no uniform practice exists • Administrative convenience + convenience of the trade & industry to be factored to determine the place of collection of service tax

Features of proposed GST Model

• Exemptions common lists for Centre and States with little flexibility for States to deviate exemption schemes proposed to be converted to post-tax cash refund schemes

GST Rate in Select Countries
• EU - UK – 17.5% - Germany – 19% - France – 19.6% - Belgium – 21% • • • Australia – 10% New Zealand – 12.5% China – 17%

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

Issues & Challenges
General • By far the most important indirect tax reform in the area of indirect taxes is just around the corner • Huge issues and challenges which need utmost attention by the Government • Ideally GST model should be finalised at least 12 months prior to implementation. • Trade & Industry should be consulted before finalisation so that the implementation does not fail • This will give certainty to the businesses and result in high compliance • Finalization of the GST Laws is critical

Issues & Challenges
Specific Issues & Challenges - Law • Rates - integration of a large number of Central & State Taxes and obtaining of consensus amongst States to abolish multiple local taxes - multiplicity of taxes and tax rates • Thresholds - rationalization under Central & State GST • Taxation of Petroleum /Alcohol/Tobacco products - GST with ITC - excise duties ( without GST)

Issues & Challenges
Specific Issues & Challenges - Law • Taxation of Inter-State Services - huge challenges due to its complexity • Operating a seamless input credit system - pure VAT/ no cascading • Integrating the origin based tax with the destination based GST • Uniformity across States • Proper transition from existing tax structures

Issues & Challenges
Specific Issues & Challenges – Govt related • Standardization of systems and procedures • Uniform dispute settlement machinery • Training • Re-organization of administrative machinery for GST implementation is the key • Building information technology backbone – the single most important initiative for GST implementation

Issues & Challenges
Specific Issues & Challenges – Govt related • Protecting and balancing the present and future revenues of the Centre and the States - commission on Centre-State Relations (CCSR) - views from Trade & Industry • Impact on backward States - safeguarding the interests of less developed States with lower revenue potential

GST is about Common Indian Market
• Article 301 guarantees the right to freedom of trade and commerce throughout India. • The essential purpose of GST is the creation of a truly unified Indian market by enabling free movement of trade and commerce throughout the country, unhindered by tax barriers and disparities.

Let’s hope GST is
Great & Simplified Tax !!! Thank you.