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Goods&ServicesTax|BSC4SUCCESS

GoodsandServicesTax
WhatistheGSTbill?
The Goods and Services Tax bill, touted to be Indias biggest tax reform, will simplify the current system of taxation. The bill will
convertthecountryintoaunifiedmarketbyreplacingallindirecttaxeswithonetax.
WhatisGST?Whyisthereaneedforthisbill?
Quiteliterally,GST(GoodsandServicesTax)isataxleviedwhenaconsumerbuysagoodorservice.
ThecurrenttaxregimeisriddledwithindirecttaxeswhichtheGSTaimstosubsumewithasinglecomprehensivetax,bringingitall
underasingleumbrella.Thebillaimstoeliminatethecascadingeffectoftaxesonproductionanddistributionpricesongoodsand
services
Whatisthecascadingeffectoftaxation?
Cascading effect of taxes is caused due to levy of different charges by state and union governments separately. In the current
multistagedtaxstructure,thefollowingtaxesareleviedbythecentreandstateseparately:
TaxesleviedbytheCentreinclude:Incometax,servicetax,centralsalestax,excisedutyandsecuritytransactiontax.
Taxesleviedbythestateinclude:VAT/salestax,octroi,stateexcise,propertytax,entrytaxandagriculturetax.
ThistaxstructureraisesthetaxburdenonIndianproducts,affectingtheirprices,andasaresult,salesintheinternationalmarket.
Thenewtaxregimewilltherefore,helpboostexports.
Whatarethechallengesintheimplementation?
India is adopting a dual GST, wherein the Central GST will be called CGST and state SGST. The main road block is the
coordinationamongstates.CentreandstateshavetocometoaconsensusonuniformGSTrates,interstatetransactionofgoods
andservices,administrativeefficiencyandinfrastructuralpreparednesstoimplementthenewtaxreform.
HowwillGSTremedythesituation?
GSTwilldoawaywithGordianknotofmultipletaxrateswhichisaburdenonthecommonman.
DualGSTmeansitwillhaveafederalstructure.TheGSTwillbasicallyhaveonlythreekindsoftaxesCentral,stateandanother
onecalledintegratedGSTtotackleinterstatetransactions.

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Under the current GST tax reform, all forms of supply of goods and services like transfer, sale, barter, exchange, and rental will
haveaCGST(centrallevy)andSGST(statelevy).
GST will also help usherin an era of a transparent and corruptionfree tax administration. It is set to weed out the current
shortcomingsofthesupplychainowingtothecomplicated,multilayeredpolicies.
HereshowGSTdiffersfromthecurrentregimes,howitwillwork,andwhatwillhappenifParliamentclearstheBill.
Stage1
Imagine a manufacturer of, say, shirts. He buys raw material or inputs cloth, thread, buttons, tailoring equipment worth Rs
100,asumthatincludesataxofRs10.Withtheserawmaterials,hemanufacturesashirt.
Intheprocessofcreatingtheshirt,themanufactureraddsvaluetothematerialshestartedoutwith.Letustakethisvalueadded
byhimtobeRs30.Thegrossvalueofhisgoodwould,then,beRs100+30,orRs130.
Atataxrateof10%,thetaxonoutput(thisshirt)willthenbeRs13.ButunderGST,hecansetoffthistax(Rs13)againstthetax
hehasalreadypaidonrawmaterial/inputs(Rs10).Therefore,theeffectiveGSTincidenceonthemanufacturerisonlyRs3(13
10).
Stage2
The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and
addsonvalue(whichisbasicallyhismargin)of,say,Rs20.ThegrossvalueofthegoodhesellswouldthenbeRs130+20or
atotalofRs150.
A10%taxonthisamountwillbeRs15.Butagain,underGST,hecansetoffthetaxonhisoutput(Rs15)againstthetaxonhis
purchasedgoodfromthemanufacturer(Rs13).Thus,theeffectiveGSTincidenceonthewholesalerisonlyRs2(1513).
Stage3
Inthefinalstage,aretailerbuystheshirtfromthewholesaler.TohispurchasepriceofRs150,headdsvalue,ormargin,of,say,
Rs10.Thegrossvalueofwhathesells,therefore,goesuptoRs150+10,orRs160.Thetaxonthis,at10%,willbeRs16.But
by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective
GSTincidenceonhimselftoRe1(1615).
Thus,thetotalGSTontheentirevaluechainfromtherawmaterial/inputsuppliers(whocanclaimnotaxcreditsincetheyhavent
purchasedanythingthemselves)throughthemanufacturer,wholesalerandretaileris,Rs10+3+2+1,orRs16.
HowitwouldbeinanonGSTregime?
In a full nonGST system, there is a cascading burden of tax on tax, as there are no setoffs for taxes paid on inputs or on
previouspurchases.
Thus,ifweconsiderthesameexampleasabove,themanufacturerbuysrawmaterials/inputsatRs100afterpayingtaxofRs10.
Thegrossvalueoftheshirt(good)hemanufacturerswouldbeRs130,onwhichhepaysataxofRs13.Butsincethereisnoset
offagainsttheRs10hehasalreadypaidastaxonrawmaterials/inputs,thegoodissoldtothewholesaleratRs143(130+13).

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WiththewholesaleraddingvalueofRs20,thegrossvalueofthegoodsoldbyhimis,then,Rs163.Onthis,thetaxofRs16.30
(at 10%) takes the sale value of the good to Rs 179.30. The wholesaler, again, cannot set off the tax on the sale of his good
againstthetaxpaidonhispurchasefromthemanufacturer.
Theretailer,thus,buysthegoodatRs179.30,andsellsitatagrossvalueofRs208.23,whichincludeshisvalueadditionofRs10
andataxofRs18.93(at10%ofRs179.30).Again,thereisnomechanismforsettingoffthetaxontheretailerssaleagainstthe
taxpaidonhispreviouspurchase.
Thetotaltaxonthechainfromtherawmaterial/inputsupplierstothefinalretailerinthisfullnoGSTregimewill,thus,workoutto
Rs10+13+16.30+18.93=Rs58.23.Forthefinalconsumer,thepriceofthegoodwouldthenbeRs150+58.23=Rs208.23.
ComparethisRs208.23withataxofRs58.23tothefinalpriceofRs166,whichincludesatotaltaxofRs16,underGST.
Whatsitlikeintodaysmixedscenario?
Currently, we have ValueAdded Tax (VAT) systems both at the central and state levels. But the central VAT or CENVAT
mechanismextendstaxsetoffsonlyagainstcentralexcisedutyandservicetaxpaiduptothelevelofproduction.CENVATdoes
not extend to value addition by the distributive trade below the stage of manufacturing even manufacturers cannot claim setoff
againstothercentraltaxessuchasadditionalexcisedutyandsurcharge.
Likewise,stateVATscoveronlysales.SellerscanclaimcreditonlyagainstVATpaidonpreviouspurchases.TheVATalsodoes
notsubsumeahostofothertaxesimposedwithinthestatessuchasluxuryandentertainmenttax,octroi,etc.
Once GST comes into effect, all central and statelevel taxes and levies on all goods and services will be subsumed within an
integratedtaxhavingtwocomponents:acentralGSTandastateGST.
This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it, there will be tax only on value
addition at each stage, with the producer/seller at every stage able to set off his taxes against the central/state GST paid on his
purchases.TheendconsumerwillbearonlytheGSTchargedbythelastdealerinthesupplychain,withsetoffbenefitsatallthe
previousstages.
CentraltaxesthatTheGSTwillreplace
#CentralExciseDuty
#DutiesofExcise(medicinalandtoiletpreparations)
#AdditionalDutiesofExcise(goodsofspecialimportance)
#AdditionalDutiesofExcise(textilesandtextileproducts)
#AdditionalDutiesofCustoms(commonlyknownasCVD)
#SpecialAdditionalDutyofCustoms(SAD)
#ServiceTax
#Cessesandsurchargesinsofarastheyrelatetosupplyofgoodsorservices
StatetaxesthatTheGSTwillSubsume

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#StateVAT
#CentralSalesTax
#PurchaseTax
#LuxuryTax
#EntryTax(allforms)
#EntertainmentTax(notleviedbylocalbodies)
#Taxesonadvertisements
#Taxesonlotteries,bettingandgambling
#Statecessesandsurcharges
TheGSTCouncil
ThecouncilwillconsistoftheunionFinanceMinister(chairman)andMoSinchargeofRevenueMinisterinchargeofFinanceor
Taxation,oranyotherMinister,nominatedbyeachstate
DecisionswillbemadebythreefourthsmajorityofvotescastCentreshallhaveathirdofvotescast,statesshalltogetherhave
twothirds
MechanismforresolvingdisputesarisingoutofitsrecommendationsmaybedecidedbytheCouncilitself
ThelevyofGST
BothParliament,stateHouseswillhavethepowertomakelawsonthetaxationofgoodsandservices
ParliamentslawwillnotoverrideastatelawonGST
ExclusivePowertoCentretolevy,collectGSTinthecourseofinterstatetradeorcommerce,orimports.Thiswillbeknownas
IntegratedGST(IGST)
CentralLawwillprescribemannerofsharingofIGSTbetweenCentreandstates,basedonGSTCouncilsviews
WhatsOutofGST
Alcoholicliquorforhumanconsumption
Petroleumcrude,highspeeddiesel,motorspirit(petrol),naturalgasandaviationturbinefuelGSTCouncilwilldecideuntilwhen
ANDWhatsIn
Tobacco,tobaccoproducts.Centremayimposeexcisedutyontobacco

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