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GSTImpactonIndianEconomy
GSTImpactonIndianEconomy
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SamyakSanghvi
BasicideaofGST
GSTisacomprehensivetaxlevyonmanufacture,saleandconsumptionofgoodsandservicesatanationallevel.
GSTisapartofproposedtaxreformsinIndiahavinganextensivebasethatinstigatetheapplicabilityofan
efficientandharmonizedconsumptiontaxsystem.GSThasbeencommonlyacceptedbyworldandmorethan
140countrieshaveacknowledgedthesame.GenerallytheGSTrangesbetween15%20%inmostofthe
countries.
JustificationinImplementationofGST
DespitethesuccesswithVAT,therearestillcertainshortcominginstructureinthelevyofVATbothatCentrallevel
andStatelevel.TheshortcominginCENVAToftheGovernmentofIndialiesinnoninclusionofseveraltaxesin
theoverallframeworkofCENVATsuchasVAT,ACD,Surchargeetc.
Moreover,inthepresentStatelevelVATscheme,CENVATloadonthegoodsremainsincludedinthevalueof
goodstobetaxedunderStateVAT,andcontributingtothatextentacascadingeffectonaccountofCENVAT
element.Furthermore,anycommodity,ingeneral,isproducedonthebasisofphysicalinputsaswellasservices,
andthereshouldbeintegrationofVATongoodswithtaxonservicesattheStatelevelaswell,andatthesametime
thereshouldalsoberemovalofcascadingeffectofservicetax.
Further,byremovingcascadingeffect,layersoftaxesandsimplifyingstructures,theGSTwouldencourage
compliance,whichisalsoexpectedtowidenthetaxbase.ButvirtuallyeverymediareportthatmentionstheGST
saysthatthetaxreformhasthepotentialtoaddupto2percenttoIndiasGDP.
IfVATisconsideredtobeamajorimprovementoverthepreexistingCentralexcisedutyatthenationalleveland
thesalestaxsystemattheStatelevel,thenGSTwillbeafurthersignificantbreakthroughthenextlogical
steptowardsacomprehensiveindirecttaxreforminthecountry.
However,thepapermakessomecrucialassumptionsuchaspeggingtherevenueneutralrateintherangeof6.2
percentand9.4percent.TherevenueneutralrateistherateforGSTthatwillnotmakeanetdifferencetothe
overalltaxcollectionofcentreandstates.
SalientFeaturesofGST
TheGSTFrameworkcouldeasilybeoneofthemostimportanttaxreformstobetabledfordiscussioninthe
Parliament.Itdoesbringwithsomeproblems,likedivisionoftaxationpowerbetweenCentreandState.TheGST
willbeapplicableonthebasisofDestinationprinciple.
SotheGSThastwocomponents:
OneleviedbyCentre(hereinafterreferredtoasCentralGST)andTheotherleviedbytheStates(hereinafter
referredasStateGST)
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GSTImpactonIndianEconomy
However,thebasicfeaturesoflawsuchaschargeability,definitionoftaxableeventandtaxableperson,measureof
levyincludingvaluationprovisions,basisofclassificationetc.willbeuniformacrossthesestatutesasfaras
practicable.
TheGSTwouldbeleviedin3differentforms.
CGST
SGST
ThisisapplicableinthecaseofInterStatesaleofgoods
andprovisionofservice
IncaseofsaleofgoodsIntrastatethentaxwillbe
chargedasperthisform.
Taxes/DutiesCovered
underCGST
Taxes/DutiesCovered
underSGST
CentralExciseDuty
Entrytax(notoctroi)
ServiceTax
Entertainmenttax
CVD,SAD
VAT/SalesTax
ExcisedutyonM&TPetc.
Luxurytaxetc.
IntegratedGST(IGST)
ThescopeofIGSTModelisthatcentrewouldlevyIGSTwhichwouldbeCGSTplusSGSTonallinterstate
transactionsoftaxablegoodsandserviceswithappropriateprovisionforconsignmentorstocktransferof
goodsandservices.
IGSTwillbecombinationofCGSTandSGSTandthesamewillbecollectedbytheCentreintheOriginState.
TaxCreditMechanism
Timeboundrefundofcreditwillbeallowedincasessuchasexportsandinverteddutystructure.
ItisclearthatcrossutilisationofCGSTandSGSTisnotallowedgenerallybuttheIGSTmechanismwillmakethis
creditfungible.
Followingexamplewillgiveclearideaaboveutilisationofcreditandcostingunderpresentsystem&GST.
Example:
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Assumption:(1)RateofExciseDuty8%(2)VATRate12.5%(3)CentralGSTRate12%(4)StateGST
Rate8%(5)ProfitMarginRs.5,000/fixed(6)Allpartiesarelocatedinonestate.
Particulars
UnderPresentScenario
UnderGST
CostofProduction
45000
45000
InputTaxCredit(Assumingnil)
Add:ProfitMargin
5000
5000
ProducersBasicPrice
50000
50000
Add:CentralExciseDuty@12%
6000
Add:ValueAddedTax@12.5%onRs.56,000/
7000
Add:CentralGST@12%
6000
Add:StateGST@8%
4000
SalePrice
63000
60000
CostofGoodstoD2
56000
50000
AvailableInputTaxCreditforsetoff
7000
10000
Add:ProfitMargin
5000
5000
Total
61000
55000
Add:ValueAddedTax@12.5%
7625
Add:CentralGST@12%
6600
Add:StateGST@8%
4400
TotalPricetotheRetailer
68625
66000
CostofGoodstoD3
61000
55000
InputTaxCredit
7625
11000
Add:ProfitMargin
5000
5000
Total1,32,0001,20,000
66000
60000
Add:ValueAddedTax@12.5%
8250
Add:CentralGST@12%
7200
(I)Manufacturer(D1)toWholesaler(D2)
(II)Wholesaler(D2)toRetailer(D3)
(III)Retailer(D3)toFinalConsumer(C)
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Add:StateGST@8%
4800
TotalPricetotheConsumer
74250
72000
TotalTaxPayableinAllTransactions
14250
12000
Verification:VAT@12.5%[74,250*12.5/112.5]=8250+6000(CENVAT)=14250
D1(6000+7000)
13,000
D2(76257000)
625
D3(82507625)
625
Verification:GST@20%[72000*20/120]=12000
D1(6,000+4,000)
10,000
D2(11,00010,000)
1,000
D3(12,00011,000)
1,000
CostBenefit
InthecurrentTaxscenariocreditofsurcharge,VAT,ACDisnotavailablewhichincreasescost.Withtheintroduction
ofGSTcreditofthesetaxesisavailablewithcascadingeffectwhichwillhelpinreductionincost.Fromtheabove
exampleiswillclearthatTaxPayableinGSTislessthanCurrentSituation.
StockTransfer
Anotherimportantaspectisstocktransfer.BecauseinGST,taxwillbeleviedonthedispatch.Everydispatchwillbe
taxableunderGST,soateverystagei.e.factory,warehouseetc.registrationisnecessary.
PlaceofSupply
ThemainchallengeinintroducingGSTisdefiningtheplaceofsupplyinrespectofcertainservices.Inexistingtax
regimeitisnotaproblemasServiceTaxischargeablebyCentreonly.ButinGSTplaceofsupplyhastobedefined
clearlytoavoiddisputeamongstatesandincaseofinterstatetransaction.
PlaceofTaxationInterStateTransactions
AnimportantquestioninthecontextoftheDualGSTiswhethertheserulesforinternationalcrossbordersupplies
canbeadoptedfordomesticinterstatesuppliesalso.Itisrecognizedthattheplacewherethesupplierorthe
recipientisestablishedcannotbedefineduniquelyatthesubnationallevelwithinacommonmarket.
PositiveimpactonIndianeconomy
SpeedsupeconomicunionofIndia
BettercomplianceandrevenuebuoyancyReplacingthecascadingeffect[taxontax]createdbyexisting
indirecttaxesTaxincidenceforconsumersmayfallLowertransactioncostforfinalconsumers
Bymergingallleviesongoodsandservicesintoone,GSTacquiresaverysimpleandtransparentcharacter
Uniformityintaxregimewithonlyoneortwotaxratesacrossthesupplychainasagainstmultipletax
structureasofpresent
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GSTImpactonIndianEconomy
Increasedtaxcollectionsduetowidecoverageofgoodsandservices
Improvementincostcompetitivenessofgoodsandservicesintheinternationalmarket
Pointstobereviewed
Taxationofinterstateservicesandtheirmethodoftaxation
DifficultiesindefiningPlaceofsupply,placeofdelivery
RoadPermitandCheckposts
StockTransfer
IntegrationofcertainCentralandStatetaxes(VariousCess,Electricitydutyetc.)
Constitutionalamendmentauthorizingstatetocollectandretaintaxonservice
GroupHealthInsurance
Consultingservices
HowevermostoftheB2Bservicesnotaproblembecauseofavailabilityofcredit
Disputesevenwithregardtoclassificationofgoods
JurisdictionalIssueswithregardtoregistrationandSCN/Assessments
LatestupdatesonGST
Constitutional(115thAmendment)billontheGST
Automaticcompensationmechanism
ConceptofGSTCouncil
DisputeSettlementAuthority
Conclusion
Inthelightoftheempiricalconclusionsdevelopedinthispaper,itseemsappropriatetoconcludebybrieflynoting
thepolicyimplicationsoftheresults.
Inthefirstplace,themacroeconomicimpactofachangetotheintroductionoftheGSTissignificantintermsof
growtheffects,priceeffects,currentaccounteffectsandtheeffectonthebudgetbalance.
Secondly,inahighlydevelopedopeneconomywithahighandgrowingservicesector,achangeinthetaxmixfrom
incometoconsumptionbasedtaxesislikelytoprovideafruitfulsourceofrevenue.
Thirdly,theaggregateconsumerpriceimpactoftheintroductionoftheGSTinIndiaonthemacroeconomywas
bothlimitedandtemporary.Finally,despitefallingoutsidethelimitedfocusofthisshortnote,weshouldrecordthat
someimpacthasalsooccurredintheadministrativecomponentofthecompliancecostoftheGSTaswellasa
likelyincreaseintaxrevenuefromtheundergroundorblackeconomy.
Thetaskoffiscalconsolidationforthisgovernmentwillnotbeeasy.Therewillbelittlescopetocutoverall
expenditure,asithasalreadybeentrimmedsharplyinthelast2years.Thegovernmentmustinsteadfocuson
switchingexpenditurefromunproductivesubsidiestowardsspendingonsectorsuchashealth,educationand
infrastructure.Theonlywaytoreducefiscaldeficit,therefore,istoraiserevenuesasashareofGDP.Todoso,the
governmentmustimplementstructuraltaxreformssuchasGST,improvetaxcomplianceandwidentaxcoverage.
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GSTImpactonIndianEconomy
Thescopetolowerfiscaldeficitinfiscal2015islimitedgivenlargerolloverofsubsidiesfromlastfiscalandlittle
possibilitiesofimplementationofGSTwithinthisyear.Beyondthat,however,implementationofGSTcouldfacilitate
amuchneededcorrectioninfiscaldeficit.Inthebasecase,itisbelievedthatpartialGSTonethatexcludes
petroleumgoodsismostlikely.Evenwiththis,fiscaldeficitcouldcorrectto3.3%ofGDPbyfiscal2017.Onthe
downside,acompletefailuretoimplementGSTwouldresultinthefiscaldeficitbeinghigherataround44.2%in
fiscal20162017.
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