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GOODS SERVICE TAX IN INDIA

 
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In order to mitigate the cascading effect of double taxation, the Government of India introduced Goods and Service Tax (hereinafter referred to as “GST”) by amalgamating various Central and State taxes into one. GST can prove to be a significant tax reform in India. Introduction of GST would also make Indian products competitive in the domestic and international markets.

 

GST is a destination based tax on consumption of goods and services. It is to be levied at all stages right from manufacturing up to final consumption with credit of taxes paid at previous stages available as setoff. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer.

 

Understanding GST

 

GST is a tax levied on goods and services, allowing a comprehensive and continuous chain of set-off benefits at every point in the production / supply chain starting from the producer’s point upto the retailer’s point. In other words, GST is a tax levied on value addition at each stage, whereby the producer / supplier at each stage is permitted to set-off, through an “input tax credit” mechanism, the amount of GST already paid on the purchase of goods and services against the GST to be paid on the subsequent supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, providing set-off benefits at all the previous stages.

 

Illustration

  1. Old Regime

    The illustration presented below in Table 1 shows the cascading effect of tax on cost of goods in case of a 4 point delivery chain of supplier of raw material, manufacturer, wholesaler and retailer. Let us suppose that the manufacturer procures raw material at the cost of Rs. 100 and pays tax at the rate of 10%, i.e., Rs. 10, making the cost of the product Rs. 110 (100+10). Subsequently, the manufacturer makes value addition of Rs. 50 on his purchases worth Rs.110 and pays a tax of Rs. 16 (10% of Rs. 160). The cost of the product is now Rs. 176. When the wholeseller sells the same product after making value addition of Rs. 30, he pays tax of Rs. 20.6 (10% of 206), thereby increasing the cost to Rs. 226.6. Finally, when a retailer sells the same goods after a value addition of Rs. 20, he pays tax of Rs. 24.7 (10% of 246.7), bringing up the total cost to Rs. 271.3. Thus, the total amount of tax paid on the said product sums upto Rs. 71.3 (= Rs. 10 + 16 + 20.6 + 24.7). Therefore, the final cost of the product is increased to Rs. 271.3 wherein the burden of the cascading effect of tax is borne by the end-consumer.

     

    Table 1:

     

    S. No.

    Stage of Production / Supply Chain

    Purchase Value of Input

    Value Addition

    Total Cost

    Rate of Tax

    Amount of Tax

    Final Price

    1

    Raw Material

    100

    -

    -

    10%

    10

    110

    2

    Manufacturer

    110

    50

    160

    10%

    16

    176

    3

    Wholeseller

    176

    30

    206

    10%

    20.6

    226.6

    4

    Retailer

    226.6

    20

    246.6

    10%

    24.7

    271.3

     

    Therefore, the final cost of the product is increased to Rs. 271.3 wherein the burden of the cascading effect of tax is borne by the end-consumer.

     

  2. GST Regime

    The illustration presented below in Table 2 shows the computation of GST and its effect on cost of goods in case of a 4 point delivery chain of supplier of raw material, manufacturer, wholesaler and retailer. Let us suppose that the manufacturer procures raw material at the cost of Rs. 100 and pays GST at the rate of 10%, i.e., Rs. 10. Subsequently, the manufacturer makes value addition of Rs. 50 on his purchases worth Rs.100 during the manufacturing process. The manufacturer will then pay net GST of Rs. 5 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 15. Now, the manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of Rs. 30, he pays net GST of only Rs. 3, after setting-off of Input Tax Credit of Rs. 15 from the gross GST of Rs. 18 to the manufacturer. Finally, when a retailer sells the same goods after a value addition of Rs. 20, he pays net GST of only Rs. 2, after setting-off Rs.18 from his gross GST of Rs. 20 paid to wholeseller. Thus, the total amount of GST made on the said product merely sums upto Rs. 20 (= Rs. 10 + 5 + 3 + 2) as GST on the value addition along the entire value chain from the producer to the retailer, after setting off GST paid at the earlier stages. The overall burden of GST on the goods is thus considerably reduced.

     

    Table 2:

     

    S. No.

    Stage of Production / Supply Chain

    Purchase Value of Input

    Value Addition

    Total Cost

    Rate of GST

    Amount of GST

    Input Tax Credit

    Net GST

    Final Price

    1

    Raw Material

    100

    -

    -

    10%

    10

    -

    10

    110

    2

    Manufacturer

    100

    50

    150

    10%

    15

    10

    5 (15-10)

    155

    3

    Wholeseller

    150

    30

    180

    10%

    18

    15

    3 (18-15)

    183

    4

    Retailer

    180

    20

    200

    10%

    20

    18

    2 (20-18)

    202

     

Therefore, the final cost of the product is Rs. 202 as against Rs. 271.3 under the old tax regime.

 

Salient features of GST

 

 

GST has three components:

  • Central GST (CGST) will be levied by the Central government and will be applicable on supply of goods and services within a state.

  • State GST (SGST) or Union Territory GST (UTGST) will be levied by the State government or Union Territory government and will be applicable on supply of goods and services within a state.

  • Integrated GST (IGST) will be collected by the Central government. IGST will be applicable on interstate supply of goods and services and import of goods and services. Import of goods will be subject to IGST in addition to the applicable customs duties.

This GST model shall 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 and basis of classification would be uniform across these statutes as far as practicable.

 

The Central GST and the State GST would be applicable to all transactions of goods and services except the exempted goods and services or the goods which are outside the purview of GST; and the transactions which are below the prescribed threshold limits. The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. Since the Central GST and State GST are to be treated separately, in general, 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 utilisation of ITC between the Central GST and the State GST would, in general, not be allowed.

 

Illustration: It is assumed that the rate of CGST is 10% and SGST is 10%. When a consultancy company ‘A’ located in Bangalore supplies services to a company manufacturing garments ‘B’ located within Karnataka for Rs. 100, the company A would charge CGST of Rs. 10 and SGST of Rs. 10 over the value of the service. A would be required to deposit the CGST component into the Central Government account and the SGST component into the Karnataka State Government account. Thereafter, the company would be entitled to set-off this liability against the CGST or SGST paid on its subsequent purchase. But for paying CGST it would be allowed to use only the credit of CGST paid on its purchase while for SGST it can utilise the credit of SGST alone. In other words, CGST credit cannot, in general, be used for payment of SGST. Nor can SGST credit be used for payment of CGST.

 

Limitation period to raise demand is three years from the due date of filing of annual return or from the date of erroneous refund for raising demand for short-payment or non-payment of tax or erroneous refund and its adjudication in normal cases. Limitation period to raise demand is five (5) years from the due date of filing of annual return or from the date of erroneous refund for raising demand for short-payment or non-payment of tax or erroneous refund and its adjudication in case of fraud, suppression or willful misstatement.

 

Goods and Services Tax Appellate Tribunal shall be constituted by the Central Government for hearing appeals against the orders passed by the Appellate Authority or the Revisional Authority.

 

Benefits of GST:

 

  • Introduction of GST has mitigated cascading of taxes, multiplicity of taxes and double taxation as it facilitates tax credits throughout the value chain, and across states.

  • Procedures, rates and laws relating to indirect tax will be integrated, thus making it simpler.

  • GST will be levied only at the final destination and not at various stages which will prevent economic distortions.

  • One uniform indirect form of tax will result in a common national market which will attract foreign investment in India and promote the “Make in India” campaign.

  • Seamless flow of input tax credit between manufacturer, retailer and service supplier will result in reduction of price of goods

  • Tax burden on companies will reduce which will result in lower prices, thus leading to more consumption which in turn serve as a boost to the manufacturing sector.

  • Growth in manufacturing sector will generate more employment.

  • Increase in consumption and product demand will generate more revenue for the government.

  • Process of paying taxes, filing tax return and refund process will become simpler and hassle free.

  • Implementation of GST will reduce chances of tax evasion.

Ease of Doing Business:

  • Foreign businesses are often intimidated by the multiplicity of taxes in different Indian states and payment of different states across state borers. Such practices restrain free flows of goods and services, therefore lowering profit margins and the flexibility in doing business. GST is one tax for the entire country which will make conduct of business easier in India.

  • By replacing 17 indirect taxes, it has made the taxation system simpler and uniform which has resulted in reduction of compliance costs. There will be no requirement of maintaining multiple records for different kinds of taxes. Therefore, there will be lesser requirement of manpower and resources to maintain records.

  • Compliances like registration, filing returns, tax payments etc will be easier, paperless and automated for businesses.

  • Introduction of the GST portal will reduce public interface between taxpayer and tax administration.

  • Input tax credits will be conducted by electronic matching throughout India.

  • GST will make doing business in the country tax neutral, irrespective of the choice of place of doing business.

Registration

 

Any supplier who carries on any business at any place in India and whose aggregate turnover exceeds threshold limit as prescribed in a year is liable to get himself registered. However, certain categories of persons mentioned in Schedule III of Model GST Law are liable to be registered irrespective of this threshold. It is pertinent to mention that a person without GST registration can neither collect GST from his customers nor claim any input tax credit of GST paid by him.

 

Compulsory Registration

 

The following categories of persons shall be required to be registered compulsorily irrespective of the threshold limit:

  • persons making any inter-State taxable supply;

  • casual taxable persons;

  • persons who are required to pay tax under reverse charge;

  • non-resident taxable persons;

  • persons who are required to deduct tax under section 37;

  • persons who supply goods and/or services on behalf of other registered taxable persons whether as an agent or otherwise;

  • input service distributor;

  • persons who supply goods and/or services, other than branded services, through electronic commerce operator;

  • every electronic commerce operator;

  • an aggregator who supplies services under his brand name or his trade name; and

  • such other person or class of persons as may be notified by the Central Government or a State Government on the recommendations of the Council.

Advantages of obtaining Registration

  • Legally recognized as supplier of goods or services.

  • Proper accounting of taxes paid on the input goods or services which can be utilized for payment of GST due on supply of goods or services or both by the business.

  • Legally authorized to collect tax from his purchasers and pass on the credit of the taxes paid on the goods or services supplied to purchasers or recipients.

Filing of Return

 

Under GST, a regular taxpayer needs to furnish monthly returns and one annual return. There are separate returns for a taxpayer registered under the composition scheme, non-resident taxpayer, taxpayer registered as an Input Service Distributor, a person liable to deduct or collect the tax (TDS/TCS) and a person granted Unique Identification Number. A taxpayer is required to file returns depending on the activities undertaken by him. All the returns are to be filed online.

 

A taxpayer is required to file the Annual return by 31st December of the next Financial Year. In this return, the taxpayer needs to furnish details of expenditure and details of income for the entire Financial Year. However, the monthly return is to be filed by 20th of the succeeding month.

For more information on GST India, Goods and Service Tax in India please write to us at info@ssrana.com

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