GOODS AND SERVICE TAX IN INDIA – A STUDY ON THE FIRST DISCUSSION PAPER

The First Discussion Paper on Goods and Service Tax (GST) in India envisages a Dual GST structure with defined functions and responsibilities of the Centre and States with the objective of an overall harmonious structure of rates.

Rationale for Introduction of GST

Central Indirect Taxes at present don’t extend to the entire chain of value addition especially the distributive trade below the stage of production. Further, all Central Indirect Taxes are not based on the Value Added Tax Model. Thus, invariably, there is a burden of “tax on tax” on goods and services (also referred as the ‘Cascading Effect’). The introduction of the Central GST will comprehensively include all Central Indirect Taxes and integrate taxes on Goods and Services for set-off relief. However, it will also capture the value addition in the distributive trade, hitherto exempt from Central Taxes on transactions in goods. Similarly, State level Indirect Taxes such as Entertainment Tax and Luxury Tax, etc have not been subsumed fully under the VAT, which is more of a tax on goods rather than services. Further, the burden of CST has been reduced from 4% to 2% but has not been completely phased out. CST & State Level taxes on Services such as Entertainment & Luxury Tax are not based on the Value Added Tax Model. The introduction of the State GST will comprehensively include all State level Indirect Taxes and integrate taxes on Goods and Services for set-off relief, eliminating the burden of all cascading effects including that of existing State VAT on CENVAT & Service Tax.

Notes: i. GST will subsume the following Central taxes and duties – Central Excise duties, Additional Excise Duties, Service Tax, The Excise duty levied under the Medicinal and Toiletries Preparation Act, Additional Duty of Customs (Commonly known as Countervailing Duty (CVD)), Special Additional Duty of Customs @ 4%, Surcharges and Cess thereon.

ii. GST will subsume the following State taxes and duties – VAT / Sales Tax, Entertainment Tax (except levied by local bodies), Luxury Tax, Taxes on Lottery, betting and gambling, State Surcharges and Cesses to the extent on transactions on goods and services, Entry tax not in lieu of octroi.

iii. Purchase tax though a tax on transaction in goods will not be subsumed under the GST and shall continue to be separately levied.

The GST Model

i. Central GST to be levied by the Centre and State GST to be levied by the States. Multiple Statutes will be enacted. One at the Centre and One for each State for GST to be levied by them respectively. 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. A dual GST model is required to meet the requirements of the Constitutional Division of Powers between the Centre and the States.

ii. CGST and SGST will be applicable for all transactions in Goods and Services except to-

  1. Exempted goods
  2. Goods outside the purview of GST (i.e., Alcoholic Beverages, Petroleum products)
  3. The transactions which are below the prescribed threshold limit (See clause vii).

iii. CGST and SGST are to be treated as separate taxes and.

  1. Cross utilisation of Input Tax Credit (ITC) not allowed between CGST and SGST of respective State except in case of Inter-State supply of Goods and Services – Free flow of tax credit at the inter and intra state level is proposed.
  2. To be paid separately to accounts of the Centre and the respective State.
  3. Taxpayer to maintain separate details in books of accounts for Central GST and State GST.

iv. Credit accumulation of CGST and SGST to be limited to Exports, purchase of capital goods and input tax at higher rate than output tax, etc and refund / adjustment to be completed in a time bound manner.

v. Dual Administration – Centre and State to have concurrent jurisdiction in respect of transactions in goods and services for the entire value chain and for all taxpayers on the basis of threshold limits prescribed under the respective Central and State legislation and:

a. Tax payer to submit periodical returns to both Central and to the concerned State GST authorities (Common format, to the extent possible).

b. Administrative functions such as Assessment, Enforcement, Scrutiny and Audit to be undertaken by the authority which is collecting the tax (that would invariably imply, both Central and State authorities).

c. Information sharing between Centre and States and among States inter-se.

vi. Uniform procedure for collection of CGST and SGST (as far as practicable).

vii. Uniform SGST threshold limit across all states & UT’s of Rs. 10 lakhs for all goods and services.

viii. The threshold limit in respect of CGST for goods to be Rs. 1.5 crores and for services to be appropriately high. (Not specified in the Draft Discussion Paper and at present it is 10 lakhs.)

ix. The taxpayer will be provided 13 or 15 digit PAN linked Taxpayer Identification No. (TIN) to facilitate taxpayer compliance and data exchange.

x. Composition scheme in respect of State GST to have an upper ceiling of Rs. 50 lakhs of Gross Annual Turnover and a floor rate of tax at 0.50% of Turnover.

Composition scheme to be optional and at the instance of the taxpayer.

Integrated GST on Inter-State Transactions of Goods and Services

i. The Centre would levy IGST on all inter-state Transactions of Goods and Services at the rate which would be equal to CGST + SGST with appropriate provision for consignment / stock transfer of goods and services.

ii. The Inter-State seller to pay IGST after availing Input tax credit in respect of IGST + CGST + SGST paid in respect of his purchase.

iii. The Inter-State purchase will be allowed claim of credit of IGST while discharging output tax liability in his own state.

iv. The Exporting State will transfer to the Central A/c, the credit of SGST used in payment of IGST.

v. The Centre will transfer to the Importing State, the credit of IGST used in payment of SGST. Basically, under the IGST model, Tax Incidence will follow the Destination model, whereby the Tax Revenue will accrue to the state in which the goods and services are consumed. IGST model will require Computerisation of the processes of the Central and State GST authorities in respect of Inter-State transactions and also for Inter-State Dealers. IGST to be a administered in a wholly computerised environment.

Proposed Rate Structures of CGST and SGST

Whereas the exact value of the CGST and SGST rates will be contained in the appropriate legislations, the Empowered Committee has decided to adopt a two-rate structure – a lower rate for necessary items and basic items and a standard rate for goods in general. There will also be a special rate for Precious metals and a list of exempted items. Further,

i. Exports will be Zero rated. Similar benefit to SEZ’s. No benefit to Sale from SEZ to Domestic Tariff area.

ii. Imports
will be subject to both CGST and SGST. Tax revenue in case of SGST will accrue to the state in which the imported goods and services are consumed. CGST and SGST paid on Imported goods will also be eligible for full and complete Input tax credit (ITC).

iii. Exemptions from GST under the Special Industrial Area Scheme will continue up to the legitimate expiry time for both Centre and States. However, the same will have to be converted to Cash Refund Schemes after collection of tax, so that the GST scheme on the basis of continuous chain of set-offs is not disturbed.

Tax Scenario’s

Scenario I
Intra-State Sale Only

Hypothetically, CGST Rate @ 8% SGST Rate @ 12% SGST Rate for Composition Scheme @ 0.50%

Manufacturer ‘M’ purchases Raw Materials & Input Services for Rs. 50 + CGST + SGST (i.e., Rs. 60/-).

He then produces Finished Goods ‘F’ and sell to a wholeseller ‘W’ for Rs. 100 + CGST + SGST (i.e., Rs. 120/-) Wholeseller ‘W’ sells to

  1. Retailer ‘C’ covered by the Composition Scheme.
  2. Super Store ‘S’ not covered by the Composition Scheme. for Rs. 125 + CGST + SGST. Retailer ‘C’ and Super Store ‘S’ sell the finished goods ‘F’ for Rs. 180/- (M.R.P.) (inclusive of all taxes).

TABLE

Figures in `

Stage of Supply Chain Manufacturer Wholeseller SuperStore ‘S’ Retailer ‘C’
State Gujarat Gujarat Gujarat Gujarat
Purchase Value of Inputs 50 100 125 125
Value Addition 50 25 25 NA
Transfer Value to next Stage 100 125 150 180 (Incl of Tax)
CGST Rate 8 % 8 % 8 % Nil
Input Tax paid 4 8 10 NA
Output Tax collected 8 10 12 NA
Net CGST payable 4 2 2 NA
SGST Rate 12 % 12 % 12 % 0. 50 %
Input Tax paid 6 12 15 NA
Output Tax collected 12 15 18 NA
Net SGST payable 6 3 3 0.90 paisa

Scenario II
Inter-State Sales

Hypothetically, CGST Rate @ 8% SGST Rate @ 12% (same for both Rajasthan & Gujarat) SGST Rate for Composition Scheme @ 0.50% (same for both Rajasthan & Gujarat).

Manufacturer ‘M’ purchases Raw Materials & Input Services for Rs. 50 + CGST + SGST (i.e., Rs. 60/-). He then produces Finished Goods ‘F’ and sell to a wholeseller ‘W’ for Rs. 100 + CGST + SGST (i.e., Rs. 120/-) Wholeseller ‘W’ sells to

  1. Retailer ‘C’ covered by the Composition Scheme.
  2. Super Store ‘S’ not covered by the Composition Scheme. for Rs. 125 + CGST + SGST (i.e., Rs. 150/-). Retailer ‘C’ and Super Store ‘S’ sell the finished goods ‘F’ for Rs. 180/- (M.R.P.) (inclusive of all taxes).

M is based in Gujarat. W, C & S are based in Rajasthan. M & W are dealing on Principal to Principal basis (i.e., No consignment or Branch Transfer).

TABLE

Figures in `

Stage of Supply Chain Manufacturer Wholeseller SuperStore ‘S’ Retailer ‘C’
State Gujarat Rajasthan Rajasthan Rajasthan
Purchase Value of Inputs 50 100 125 125
Value Addition 50 25 25 NA
Transfer Value to next Stage 100 125 150 180 (Incl of Tax)
CGST Rate 8 % 8 % 8 % Nil
Input Tax paid 4 8 10 NA
Output Tax collected 8 10 12 NA
Net CGST payable 4 2 2 NA
For Gujarat
SGST Rate 12 %
Input Tax paid 6
Output Tax collected 12
Net SGST payable 6 (As IGST)
For Rajasthan
SGST Rate 12 % 12 % 0. 50 %
Input Tax paid 12 (As IGST) 15 NA
Output Tax collected 15 18 NA
Net SGST payable 3 3 0.90 paisa

Table (Tax Collection Accounts of Centre & Respective States)

Figures in `

Centre / State Centre* Gujarat Rajasthan**
IGST / SGST Collected 6 6 3
SGST Transferred to Centre 6 (6) NA
IGST Transferred from Centre (12) NA 12
Accrual of Tax To NIL NIL Entire Tax (15)(on Goods consumed )

Remarks: Under the IGST model, Tax Incidence will follow the Destination model, whereby the Tax Revenue will accrue to the state in which the goods and services are consumed.

* The Centre here acts as a Clearing House.

** Calculations are made till the stage of Wholesale Dealer.

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