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University of Mumbai
GNVS Institute of Management
GTB Nagar, Sion-Koliwada (E), Mumbai-400037

Final Year Project Report

A.Y. 2017-18

Submitted in Partial Fulfillment of

Masters in Management Studies
(Specialization: Finance)

Topic I: General Management: Textiles Industry

Topic II: Functional Analysis: Goods and Service Tax (GST)

Topic III: Social relevance: NGO Visit

Submitted by:
Name: Nagesh Bhandari
Roll No: 201643

Under the Guidance of

Professor Name: Dr. Latha Sreeram

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DECLARATION

I hereby declare that the Final Year Project Report submitted for the MMS Degree
program at GNVS Institute of Management (Affiliated to University of Mumbai) is my
original work and is conducted in under the guidance of Dr. Latha Sreeram.

Place: Mumbai

Date:

(Nagesh Bhandari)

Signature of the Student

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CERTIFICATE

This is to certify that the Final Year Report is the bonafide work, which carried out by
Mr. Nagesh Bhandari, student of MMS programme, at GNVS Institute of Management
(Affiliated to University of Mumbai) during the period of December 2017 to March 2018,
in partial fulfillment of the requirements for the award of the Degree of Master in
Management Studies.

Place: Mumbai
Signature of Student
Date:

Signature of Internal Guide Signature of External Examiner

College seal Signature of Director

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ACKNOWLEDGEMENTS

I wish to express my gratitude to Sister Maria Joseph from the Missionaries of Charity
for providing me valuable information and guidance for the NGO Project.

I am grateful to GNVS Institute of Management for giving me an opportunity to pursue

MMS programme. I wish to thank Dr. R. K. Singh, Director, GNVS Institute of
Management who has been a perpetual source of inspiration and offered valuable
suggestions.

I am indebted to my Guide Dr. Latha Sreeram, GNVS Institute of Management, for

providing guidance, support, and encouragement throughout my internship Study.

I would like to express my thanks to all people from the Missionaries of Charity for their
support and guidance from time to time during my internship programme.

Place: Mumbai
Date:

Signature of the student

(Name: Nagesh Bhandari)

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EXECUTIVE SUMMARY

The differential multiple tax regime across sectors of production leads to distortions in
allocation of resources thus introducing inefficiencies in the sectors of domestic
production. While indirect taxes paid by the producing firms get offsets under state
VAT and CENVAT, the producers do not receive full offsets particularly at the state
level. The multiplicity of taxes further adds the difficulty in getting full offsets.

Add to this, the lack of full offsets of taxes loaded on to the fob export prices. The
export competitiveness gets negatively impacted even further. Efficient allocation of
productive resources and providing full tax offsets is expected to result in gains for
GDP, returns to the factors of production and exports of the economy.

The Joint Working Group of the Empowered Committee of the State Finance Ministers
submitted its report on the proposed Goods and Services Tax (GST) to the Finance
Minister in November 2007. A dual GST, one for the Centre and other for the states,
was to be implemented by 1 April 2010. The new system would replace the state VAT,
CENVAT, and some other taxes.

The proposed GST would eliminate the cascading effect and would integrate hitherto
disjointed goods and service taxes. It will lead to uniformity in tax rates and procedures
throughout the country. It will ensure better compliance and thus will increase the
revenue of both centre and states. The export sector will also gain from this integration
of state and centre taxes. Consumer will be benefited in form of lower tax rates.

There will be dual tax rate viz Central GST(CGST) and State GST(SGST). Also, for
interstate sales there will be an Integrated GST. However cross credits among CGST
and SGST will not be allowed. The rates for CGST and SGST are yet to be decided.
It is also proposed to keep certain taxes such as taxes on petroleum products to be
kept out of purview of GST.

However, there are major challenges to introduction of GST like amendment of

constitution of India to alter power of taxation of center and state, rates of SGST and
CGST, standardization of procedure, compensation for revenue loss to states, etc.

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Table of Contents

Executive Summary

1 Introduction 7

2 Existing tax structure 9

3 Overview of GST 12

4 System of GST 17

5 Features of GST 19

6 Benefits of GST 25

7 Taxes to be subsumed under GST 28

8 IGST 30

9 GST on Export and Import 31

10 Examples to understand GST 32

11 Miscellaneous matters 35

12 Some of terms and there meaning 37

13 Road Blocks in implementation of GST? 38

14 Some question to be answered 40

15 Suggestion for effective Implementation 43

16 GST Implications for organizations 44

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1. INTRODUCTION

Taxes represent the amount of money we pay to the Government. Taxes are the basic
source of revenue to the Government using which it provides various kinds of services
to the tax payers. There are mainly two types of Taxes, direct tax and indirect tax which
are governed by two different boards, Central Board of Direct Taxes (CBDT) and
Central Board of Excise and Customs (CBEC).

Tax policies play an important role on the economy through their impact on both
efficiency and equity. A good tax system should keep in view issues of income
distribution and, at the same time, also endeavor to generate tax revenues to support
government expenditure on public services and infrastructure development.
Cascading tax revenues have differential impacts on firms in the economy with
relatively high burden on those not getting full offsets.

Traditionally India’s tax regime relied heavily on indirect taxes including customs and
excise. Revenue from indirect taxes was the major source of tax revenue till tax
reforms were undertaken during nineties. The major argument put forth for heavy
reliance on indirect taxes was that the India’s majority of population was poor and thus
widening base of direct taxes had inherent limitations. Another argument for reliance
on indirect taxes was that agricultural income was not subjected to central income tax
and there were administrative difficulties involved in collecting taxes.

However, it became evident that indirect taxes lead to undesirable effects on prices
and allocation of resources. The Government of India constituted Indirect Taxation
Enquiry Committee in 1976 headed by Shri L. K. Jha to study the structure of indirect
taxes, central, state and local level taxes and suggest policy reforms. Indirect Taxation
Enquiry Committee submitted its report in 1978. The committee found a major problem
with indirect tax regime as it had caused unintended distortion in the allocation of
resources and cascading effects. The committee recommended that indirect taxation
should move towards taxation of final products and introduce modified form of value
added tax. However, a major obstacle in rationalisation of indirect tax system was the
levy of tax on commodities by government at different levels viz., centre, state and
local authorities. This multiple taxation provides incentives for tax evasion and

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undermines efficiency. Further, there is lack of uniformity in the pattern of commodity

taxation resulting in harassment to the public by multiple tax authorities. Heavy
reliance on indirect taxes for raising revenue was also found to increase cost and fuel
inflation.

The Government of introduced the Long Term Fiscal Policy (LTFP) on 19 December
1985 for prudent fiscal management. Major excise and custom reforms were
introduced in LTFP. The reforms in excise relates to introduction of modified value
added tax i.e. MODVAT. However, fill up in the tax policy came with introduction of
economic reforms in 1990. The system of MODVAT was progressively converted into
VAT and CENVAT was introduced at center level. Subsequently, after Constitutional
Amendment empowering the Centre to levy taxes on services, these service taxes
were also added to CENVAT in 2004-05. At state level also VAT was introduced in
2005.

Despite all the various changes the overall taxation system continues to be complex
and has various exemptions. The Government of India constituted a Task Force on
implementation of Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)
to chalk out a framework for fiscal policies to achieve FRBM targets. The Report of the
Task Force on implementation of the FRBMA, chaired by Dr. Vijay Kelkar, submitted
its Report in July 2004. It has recommended introduction of a national VAT on goods
and services (GST) which would help improve the revenue productivity of domestic
indirect taxes and enhance welfare through efficient resource allocation.

The Joint Working Group of the Empowered Committee of the State Finance Ministers
submitted its report on the proposed Goods and Services Tax (GST) to the Finance
Minister in November 2007. A dual GST, one for the Centre and other for the states,
was to be implemented by 1 April 2010

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2. Existing tax structure

India the power for taxation has been divided between centre and state under article
246 of the constitution. As per the said article the centre has power to tax under list I
of the Schedule VII of the constitution, the state can tax under list II of the schedule
and both can make law under list III of the schedule. Therefore, there is a clearly
defined and multiple tax regime in India.

Taxation structure existing in country: -

Taxes levied by Centre Taxes Levied by State

Central Excise and Custom Value Added Tax(state sales tax)
Service Tax Local taxes
Direct Taxes

Prior to the introduction of VAT in the Centre and in the States, there was a burden of
multiple taxation in the pre-existing Central excise duty and the State sales tax
systems. Before any commodity was produced, inputs were first taxed, and then after

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the commodity got produced with input tax load, output was taxed again. This was
causing a burden of multiple taxation (i.e. “tax on tax”) with a cascading effect.
Moreover, in the sales tax structure, when there was also a system of multi-point sales
taxation at subsequent levels of distributive trade, then along with input tax load,
burden of sales tax paid on purchase at each level was also added, thus aggravating
the cascading effect further.

In India, VAT was introduced at the Central level for a selected number of
commodities in terms of MODVAT with effect from March 1, 1986, and in a
step-by-step manner for all commodities in terms of CENVAT in 2002-03.
Subsequently, after Constitutional Amendment empowering the Centre to levy taxes
on services, these service taxes were also added to CENVAT in 2004-05.

When VAT is introduced in place of Central excise duty, a set-off is given, i.e., a
deduction is made from the overall tax burden for input tax. In the case of VAT in
place of sales tax system, a set-off is given from tax burden not only for input tax paid
but also for tax paid on previous purchases. With VAT, the problem of “tax on tax”
and related burden of cascading effect is thus removed.

Before introduction of VAT, in the sales tax regime, apart from the problem of multiple
taxation and burden of adverse cascading effect of taxes as already mentioned, there
was also no harmony in the rates of sales tax on different commodities among the
States. Not only were the rates of sales tax numerous (often more than ten in several
States), and different from one another for the same commodity in different States, but
there was also an unhealthy competition among the States in terms of sales tax rates
– so-called “rate war” – often resulting in, revenue-wise, a counter-productive situation.

It is in this background that the States made attempts to introduce a harmonious VAT
in the States, keeping at the same time in mind the issue of sovereignty of the States
regarding the State tax matters.

The States started implementing VAT beginning April 1, 2005. After overcoming the
initial difficulties, all the States and Union Territories have now implemented VAT.

In the existing State-level VAT structure there are also certain shortcomings as follows:
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several taxes which are indirect tax on goods and services, such as luxury tax,
entertainment tax, etc., have yet not been subsumed in the VAT.

CENVAT load on the goods remains included in the value of goods to be taxed under
State VAT, and contributing to that extent a cascading effect because CENVAT
element.

non integration of VAT on goods with tax on services at the State level and cascading
effect of service tax.

Despite this success with VAT, there are still certain shortcomings in the structure of
VAT both at the Central and at the State level.

The shortcoming in CENVAT of the Government of India are as follows: -

non-inclusion of several Central taxes in the overall framework of CENVAT, such as

additional customs duty, surcharges, etc., and thus keeping the benefits of
comprehensive input tax and service tax set-off out of reach for
manufacturers/dealers.

no step has yet been taken to capture the value-added chain in the distribution trade
below the manufacturing level in the existing scheme of CENVAT.

The introduction of GST at the Central level will not only include comprehensively more
indirect Central taxes and integrate goods and service taxes for the purpose of set-off
relief, but may also lead to revenue gain for the Centre through widening of the dealer
base by capturing value addition in the distributive trade and increased compliance.

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3. Overview of GST

GST is not simply VAT plus service tax but an improvement over the previous system
of VAT and disjointed service tax.

In the GST, both the cascading effects of CENVAT and service tax are removed with
set-off, and a continuous chain of set-off from the original producer’s point and service
provider’s point up to the retailer’s level is established which reduces the burden of all
cascading effects.

WHAT IS GOODS AND SERVICE TAX?

Goods and Service Tax is a tax on goods and services, which is leviable at each point
of sale or provision of service, in which at the time of sale of goods or providing the
services the seller or service provider can claim the input credit of tax which he has
paid while purchasing the goods or procuring the service.

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HOW WILL IT WORK?

GST will be paid at each step till final distribution stage. It will be charged by
dealers(manufacturer, trader and service provider) on the price of goods and services.
While GST is paid at each step in the supply chain of goods and services, the paying
dealers don’t actually bear the burden of the tax because GST is an indirect tax and
ultimate burden of the GST has to be taken by the last Customer. This is because they
include GST in the price of the goods and services they sell and can claim credits for
the most GST included in the price of goods and services they buy. The cost of GST
is borne by the final consumer, who can’t claim GST credits, i.e. input credit of the tax
paid.

The working of GST with respect to manufacturer, trader and consumer can be seen
in the illustrations given below. The manufacturers will get the input credit of all the
taxes paid by them on the raw material and also on the services.

Let us assume the rate of GST is 16 percent and a toy manufacturer used following
inputs for manufacturing toys and sells the goods at Rs 120 lakh to trader:-

Manufacturer

Item Particulars Amount (Rs Rate of tax Input tax paid

no in lakhs) ( in percent)
(Rs in lakhs)

1 Raw material 50 16 8

2 Stores and spares 25 16 4

3 Services 25 16 4

Total value of inputs 100 16

The output tax to be paid

Sale Value Rate of tax ( in percent) output tax to be paid

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(Rs in lakhs)

Rs 120 lakh 16 19.2

Net Tax payable by manufacturer

Total output tax to be paid Rs 19.2 lakh

Total Input tax Paid Rs 16 lakh

Net Tax to be Paid Rs 3.2 lakh

Suppose trader use services amounting to Rs 5 lakh paying service tax at rate of 16
percent amounting to Rs 0.8 lakh. Therefore total input tax paid by trader is:-

Trader

Item Particulars Amount (Rs Rate of tax Input tax paid

no in lakhs) ( in percent)
(Rs in lakhs)

1 Goods purchased 120 16 19.2

from manufacturer

2 Services 5 16 0.8

Total value of inputs 125 20

If trader sell goods to consumer by adding Rs 5 lakh profit margin .The output tax
payable by trader is :-

Sale Value Rate of tax ( in percent) output tax to be paid

(Rs in lakhs)

Rs 130 lakh 16 20.8

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Net Tax payable by Trader

Total output tax to be paid Rs 20.8 lakh

Total Input tax Paid Rs 20 lakh

Net Tax to be Paid Rs 0.8 lakh

Net Tax payable by consumer

Sale Value Rate of tax ( in percent) output tax to be paid

(Rs in lakhs)

Rs 130 lakh 16 20.8

From the above illustration it can be seen that the manufacturer and the trader gets
credit of the tax paid on good and services and had to pay tax on value added only.
Further, the government will get tax of Rs 20.8 lakh which is tax on final sale value of
the product though from different sources as detailed below:-

Description Output tax Input tax credit Net tax payable to

government
(Rs in lakh) (Rs in lakh)
(Rs in lakh)

Raw material 8 0 8
supplier

Stores and spares 4 0 4

supplier

Service provider I 4 0 4

Manufacturer 19.2 16 3.2

Service Provider II 0.8 0 0.8

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Trader 20.8 20 0.8

Total Tax payable 20.8

to Government

GST composition of manufacturer and dealer

25

20

15
Output Tax
10

0
Manufacturer Trader

Composition of tax paid by the consumer

raw material

stores& spares

service
providerI

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4. System of GST

Internationally, there are three systems in vogue:

(a) Invoice System

(b) Payment System

(c) Hybrid System

Brief description of three systems is:

Type of System Input Credit Output Tax

Invoice system On receipt of invoice On issue of invoice

Payment system On making payment On making payment

Hybrid At the option of dealer to At the option of dealer to

be declared in advance be declared in advance

(a) Invoice System: In the invoice system, the GST (Input) is claimed on the basis of
invoice and it is claimed when the invoice is received, it is immaterial whether payment
is made or not. Further the GST (Output) is accounted for when invoice is raised. Here
also the time of receipt of payment is immaterial. One may treat it as mercantile system
of accounting. In India the present system of sales tax on goods is an invoice system
of VAT and here it is immaterial whether the taxpayer is following the cash basis of
accounting or mercantile basis of accounting. The advantage of invoice system is that
the input credit can be claimed without making the payment. The disadvantage of the
invoice system is that the GST must be paid without receiving the payment.

(b) Payment System: In the payment system of GST, the GST (Input) is claimed when
the payment for purchases is made and the GST (Output) is accounted for when the
payment is made. In this system, it is immaterial whether the assessed is maintaining
the accounts on cash basis or not. The advantage of cash invoice system is that the
Tax (output) need not be deposited until the payment for the goods and/or services is

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received. The disadvantage of the payment system is that the GST (input) cannot be
claimed without making the payment.

The Taxes on services in India are based on this payment system since service tax is
payable on receipt basis and further Cen vat credit is only allowable when payment of
the service is made. In some countries, this system is also adopted for small traders
to keep them away from the complexities of the Invoice system, which is purely a
mercantile system.

(c) Hybrid System: In hybrid system the GST (Input) is claimed based on invoice and
GST (Output) is accounted for based on payment, if allowed by the law. In some
countries the dealers must put their option for this system or for a reversal of this
system before adopting the same.

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5. Features of GST

Rate Structure

The GST shall have two components: one levied by the Centre (hereinafter referred
to as Central GST), and the other levied by the States (hereinafter referred to as State
GST). Rates for Central GST (CGST) and State GST ( SGST) would be prescribed
appropriately, reflecting revenue considerations and acceptability. This dual GST
model would 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, basis of classification etc. would be uniform across these statutes as far as
practicable.

The proposed rate structure is as follows:

 A lower rate for essential structure.

 Standard rate for general goods.
 Special rates for precious metals.
 For services there shall be single rate for SGST and CGST.

These GST rates are yet not announced by the government.

Applicability

The Central GST and the State GST would be applicable to all transactions of goods
and services made for a consideration except the exempted goods and services,
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. It would have to be ensured that account-heads for all services and
goods would have indication whether it relates to Central GST or State GST (with
identification of the State to whom the tax is to be credited).

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Input Credit

Since the Central GST and State GST are to be treated separately, 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. A taxpayer or exporter would have to
maintain separate details in books of account for utilization or refund of credit.

Cross utilization of Income Tax Credit between the Central GST and the State GST
would not be allowed except in the case of inter-State supply of goods and services
under the IGST model which is explained later.

Ideally, the problem related to credit accumulation on account of refund of GST should
be avoided by both the Centre and the States except in the cases such as exports,
purchase of capital goods, input tax at higher rate than output tax etc. where, again
refund/adjustment should be completed in a time bound manner.

Procedures

To the extent feasible, uniform procedure for collection of both Central GST and State
GST would be prescribed in the respective legislation for Central GST and State GST.

Administration

The administration of the Central GST to the Centre and for State GST to the States
would be given. This would imply that the Centre and the States would have concurrent
jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds
for goods and services prescribed for the States and the Centre.

The taxpayer would need to submit periodical returns, in common format as far as
possible, to both the Central GST authority and to the concerned State GST
authorities.

Each taxpayer would be allotted a PAN-linked taxpayer identification number with a

total of 13/15 digits. This would bring the GST PAN-linked system in line with the
prevailing PAN-based system for Income tax, facilitating data exchange and taxpayer
compliance.

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Keeping in mind the need of tax payer’s convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is
collecting the tax, with information sharing between the Centre and state

a) Tax cascading –

The Goods and Services Tax Act will overcome the problem of tax- cascading through
input tax credit mechanisms. Under this system, sellers or vendors of goods and
services are eligible to avail tax credits on the amount of GST paid to eligible
procurements. Manufacturers can avail credits for the GST paid to procure inputs,
capital goods and services used in the manufacturing process. In the same way,
wholesalers and retailers can avail credits for the GST paid on procurement of stock.
But the final customer who purchases the product for consumption will not be able to
avail and utilize any tax credit. Tax cascading can be understood by the following
example: -

A tax is applied on a product at each stage and no credit is available, then tax will be
charged at each stage whenever a good or service changes hands. In other words,
tax is applied several times and is charged even on the tax which forms part of the
inputs.

The following taxes will be applied to the product:

While purchasing inputs i.e. raw materials for the product, the manufacturer pays sales
tax.

When a wholesaler purchases the product from the manufacturer, then he pays tax on
procurement of the product.

When the retailer purchases the product from the wholesaler, the wholesale again
charges tax.

Lastly, the customer purchases the product from the retailer; the retailer again charges
a tax. This layering of sales tax will significantly increase the final sales price as each
party in the supply chain increases the price of the product to recover the tax they
paid. The cascading effect will increase then tax is paid on tax.

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There are many products and range of services that are outside the ambit of CENVAT
and service tax. The exempts sectors are not allowed to claim any credit of the input
tax. In the same way, under the state VAT, no credits are allowed for the inputs
procured and used towards exempted sectors. Non-eligibility for ailment of credits
leads to

tax cascading. Due to large number of exemptions, the effect of tax cascading in India
is significantly high.

b) Complexity –

Presently in India, for taxing sale of goods, there is Central Sales tax and

respective VAT Acts for each state and Union territory. The Goods and Services Tax
will remove this complication by having a unified code for implementation of State GST
in different states. The GST will not only subsume many indirect taxes but also solve
the classification issues by introducing only one or two rates of tax. Other than this
there would be categories that are exempted or zero rated.

Presently the activities in a supply chain are subject to several taxes. For example –
the manufacture of goods is subject to excise duty and sale of these manufactured
goods is subject to state VAT or CST. The GST will ensure uniform single tax across
the entire supply chain.

c) Double taxation –

The GST will not make any difference between goods and services as GST will be
levied at each stage in the supply chain. This will help in solving the problem of double
taxation. The issue is not only between the taxes of customs duties, excise duties and
service tax but also between service tax and VAT. The issue of double taxation was
addressed by the Honorable Supreme Court in the case of BSNL vs. UOI
(2006(3)SCC-1), wherein the Court held that the same activity cannot be regarded as
both goods and services and hence both service tax and VAT should not be applicable
on the same set of transactions.

The implementation of GST will resolve the dilemma of many assessed who are not
sure of application of the type of tax on certain specified transactions like software
development, sale of sim cards by telecom operators, online subscription of

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newspapers, value added services provided by telecom operators, right to distribute

movies etc.

d) Composite contracts –

There are many works contracts which involve the supply of goods and services which
are available to customers under different supply chain arrangements. Such situations
arise in a gap or overlapping in taxation of goods and services as the States do not
have the power to impose tax on services and the Centre does not have the power to
impose tax on sale of goods within the state. In such cases, a comprehensive solution
can be provided only by implementation of GST.

e) Revenue growth-

The introduction of GST along with prudent accounting policies, transparency and
supported by a robust electronic control will bring down the peak rates of taxation and
enhance revenue growth. This can be understood by the following table by comparing
the present rates of tax and the proposed GST.

Goods from producer to wholesaler Present taxes (Rs.) GST (Rs.)

Cost of production 80,000 80,000

Producers margin of profit 20,000 20,000

Producer’s price 1,00,000 1,00,000

Central Excise duty at 14% 14,000 Nil

VAT at 12.5% 14250 Nil

Central GST at (expected rate )12% Nil 12,000

State GST at (expected rate) 8% Nil 8,000

Total Price 1,28,250 1,20,000

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Goods from wholesaler to retailer Present taxes (Rs.) GST (Rs.)

Cost of goods to wholesaler 1,14,000 1,00,000

Profit margin at 5% 5,700 5,000

Total 1,19,700 1,05,000

VAT at 12.5% 712.5 Nil

Central GST (expected rate )12% Nil 600

State GST at (expected rate) 8% Nil 400

Total 1,20,412.5 1,06,000

Goods from retailer to final consumer Present taxes (Rs.) GST (Rs.)

Cost of goods to wholesaler 1,20,412.5 1,06,000

Profit margin at 10% 12,041.25 10,500

Total 1,32,453.75 1,16,500

VAT at 12.5% 1,505.15 Nil

Central GST (expected rate )12% Nil 1,050

State GST at (expected rate) 8% Nil 840

Total price to the final consumer 1,33,958.9 1,18,390

Tax component in the price to the final 30,467.65 22,890

consumer

Final price exclusive of taxes 1,03,491.25 95,500

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6. Benefits of GST

Benefits for center

As per the existing taxation system the center does not has power to tax on production
of goods. The power to levy tax on sales rests with state except in case of inter state
sales. Therefore, introduction of GST would empower center to tax sales also.

Benefits of GST for Centre:

Increase in GDP

Increase in exports

Power to tax after production down to distribution point

Ensures better compliance and prevent tax evasion

Benefits to state

There is no uniformity in rate of taxes among the states. Even after introduction of VAT
there are different rates of tax in different states. Therefore, there was rate war among
states. GST will lead to uniformity in tax rates. Other benefits for state are: -

Benefits for states

Will get power to tax services

Will reduce rate wars, therefore, outflow of investment to other states due to rate
war will be prevented

Introduction of comprehensive system of reliefs including set off of CENVAT and

service taxes

Increase in revenue due to broadening of tax base

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Removal of burden of CST

Benefits to industry

Benefits to industry

Will provide comprehensive input tax credit, the service tax can be set off with sales
tax

No need to pay CST

Many central and state indirect taxes will be subsumed in GST, therefore, a single
tax is to be paid.

Uniformity in tax procedure throughout the country

Reduced tax burden will increase competitiveness of Indian products in foreign

markets

Benefits to consumer

Benefits to consumer

Reduced tax burden will be passed on to consumers in form of reduced prices.

Better compliance and increased tax revenue will enable the government to spend
more on welfare

The GST at the Central and at the State level will thus give more relief to industry,
trade, agriculture, and consumers through a more comprehensive and wider coverage
of input tax set-off and service tax set-off, subsuming of several taxes in the GST and
phasing

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out of CST. With the GST being properly formulated by appropriate calibration of rates
and adequate compensation where necessary, there may also be revenue/ resource
gain for both the Centre and the States, primarily through widening of tax base and
possibility of a significant improvement in tax compliance. In other words, the GST
may usher in the possibility of a collective gain for industry, trade, agriculture and
common consumers as well as for the Central Government and the State
Governments. The GST may, indeed, lead to the possibility of collectively positive-
sum game.

There are several other advantages of introducing a GST in India:

 Reduction in prices

 Increase in Government Revenues

 Less compliance and procedural cost

 Move towards standard international level

 One AO per state.

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7. Taxes to be subsumed under GST

The following taxes levied at center will get subsumed under GST: -

i. Central Excise Duty

ii. Additional Excise Duties
iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
iv. Service Tax
v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
vi. Special Additional Duty of Customs - 4% (SAD)
vii. Surcharges, and
viii. Cesses.

The following State taxes and levies would be, to begin with, subsumed under
GST:
i. VAT / Sales tax
ii. Entertainment tax (unless it is levied by the local bodies).
iii. Luxury tax
iv. Taxes on lottery, betting, and gambling.
v. State Cesses and Surcharges as far as they relate to supply of goods and
services.
vi. Entry tax not in lieu of Octroi.

Taxes to be kept out of purview of GST

However following taxes are proposed to be kept out of purview of GST due the
reasons as detailed: -

Purchase tax: Some of the States felt that they are getting substantial revenue from
Purchase Tax and, therefore, it should not be subsumed under GST while majority of
the States were of the view that no such exemptions should be given. The difficulties
of the food grain producing States was appreciated as substantial revenue is being

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earned by them from Purchase Tax and it was, therefore, felt that in case Purchase
Tax must be subsumed then adequate and continuing compensation must be provided
to such States. This issue is being discussed in consultation with the Government of
India.

Tax on items containing Alcohol: Alcoholic beverages would be kept out of the
purview of GST. Sales Tax/VAT could be continued to be levied on alcoholic
beverages as per the existing practice. In case it has been made Vatable by some
States, there is no objection to that. Excise Duty, which is presently levied by the
States may not also be affected.

Tax on Tobacco products: Tobacco products would be subjected to GST with ITC.
Centre may be allowed to levy excise duty on tobacco products over and above GST
with ITC.

Tax on Petroleum Products: As far as petroleum products are concerned, it was

decided that the basket of petroleum products, i.e. crude, motor spirit (including ATF)
and HSD would be kept outside GST as is the prevailing practice in India. Sales Tax
could continue to be levied by the States on these products with prevailing floor rate.
Similarly, Centre could also continue its levies. A final view whether Natural Gas
should be kept outside the GST will be taken after further deliberations.

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8. INTEGRATED GOODS AND SERVICE TAX

(IGST):

The scope of IGST model is that, Centre would levy IGST which would be CGST plus
SGST on all Inter-State transactions of taxable goods and services with appropriate
provision for consignment or stock transfer of goods and services. The inter-State
seller will pay IGST on value addition after adjusting available credit of IGST, CGST,
and SGST on his purchases. The Exporting State will transfer to the Centre the credit
of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while
discharging his output tax liability in his own State. The Centre will transfer to the
importing State the credit of IGST used in payment of SGST. The relevant information
is also submitted to the Central Agency which will act as a clearing house mechanism,
verify the claims and inform the respective governments to transfer the funds.

The major advantages of IGST Model are:

(i) Maintenance of uninterrupted ITC chain on inter-state transactions.

(ii) No upfront payment of tax or substantial blockage of funds for the inter-state seller
or buyer.
(iii) No refund claim in exporting State, as ITC is used up while paying the tax.
(iv) Self monitoring model.
(v) Level of computerization is limited to inter-state dealers and Central and State
Governments should be able to computerize their processes expeditiously.
(vi) As all inter-state dealers will be e-registered and correspondence with them will
be done by e-mail, the compliance level will improve substantially.
(vii) Model can take ‘Business to Business’ as well as ‘Business to Consumer’
transactions into account.

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9. GST on Export and Imports

Zero Rating of Exports

Exports would be zero-rated. Similar benefits may be given to Special Economic

Zones (SEZs). However, such benefits will only be allowed to the processing zones of
the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be
allowed.

GST on Imports:

The GST will be levied on imports with necessary Constitutional Amendments. Both
CGST and SGST will be levied on import of goods and services into the country. The
incidence of tax will follow the destination principle and the tax revenue in case of
SGST will accrue to the State where the imported goods and services are consumed.
Full and complete set-off will be available on the GST paid on import on goods and
services.

Special Industrial Area Scheme

After the introduction of GST, the tax exemptions, remissions etc. related to industrial
incentives should be converted, if at all needed, into cash refund schemes after
collection of tax, so that the GST scheme based on a continuous chain of set-offs is
not disturbed. Regarding Special Industrial Area Schemes, it is clarified that such
exemptions, remissions etc. would continue up to legitimate expiry time both for the
Centre and the States. Any new exemption, remission etc. or continuation of earlier
exemption, remission etc. would not be allowed. In such cases, the Central and the
State Governments could provide reimbursement after collecting GST.

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10. Examples to understand GST

Case 1: Sale in one state, resale in same state

In the example illustrated below, goods are moving from Mumbai to Pune. Since it
is a sale within a state, CGST and SGST will be levied. The collection goes to the
Central Government and the State Government as pointed out in the diagram. Then
the goods are resold from Pune to Nagpur. This is again a sale within a state, so CGST
and SGST will be levied. Sale price is increased so tax liability will also increase. In
the case of resale, the credit of input CGST and input SGST (Rs. 9) is claimed as
shown; and the remaining taxes go to the respective governments.

Case 2: Sale in one state, resale in another state

In this case, goods are moving from Indore to Bhopal. Since it is a sale within a
state, CGST and SGST will be levied. The collection goes to the Central Government
and the State Government as pointed out in the diagram. Later the goods are resold
from Bhopal to Lucknow (outside the state). Therefore, IGST will be levied. Whole
IGST goes to the central government.

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Against IGST, both the input taxes are taken as credit. But we see that SGST
never went to the central government, still the credit is claimed. This is the crux of
GST. Since this amounts to a loss to the Central Government, the state government
compensates the central government by transferring the credit to the central
government.

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Case 3: Sale outside state, resale in that state

In this case, goods are moving from Delhi to Jaipur. Since it is an interstate sale,
IGST will be levied. The collection goes to the Central Government. Later the goods
are resold from Jaipur to Jodhpur (within the state). Therefore, CGST and SGST will
be levied.
Against CGST and SGST, 50% of the IGST, that is Rs. 8 is taken as a credit.
But we see that IGST never went to the state government, still the credit is claimed
against SGST. Since this amounts to a loss to the State Government, the Central
government compensates the State government by transferring the credit to the
State government.

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11. Miscellaneous Matters

1 Refunds:
If for a tax period the input credit of a dealer is more than the output credit then he is
eligible for refund subject to the provisions of law applicable in this respect. The excess
may be carried forward to next period or may be refunded immediately depending
upon the provision of law.

2 Exempted Goods and Services:

Certain goods and services may be declared as exempted goods and services and in
that case the input credit cannot be claimed on the GST paid for purchasing the raw
material in this respect or GST paid on services used for providing such goods and
services.

3 Tax Exemptions:
Various tax exemptions have been granted both by the Centre and States to achieve
objectives of promoting a particular sector or to reduce tax burden on a particular
segment of society in the interest of fairness or to promote a particular economic
activity etc. Tax exemptions have the effect of narrowing the tax base and increasing
the administrative and compliance cost of GST. Therefore, it is felt that exemptions
should be minimized. Direct and transparent subsidies, instead of tax exemptions,
are more efficient way to achieve the targeted objective. It is recommended that
apart from a dual rate GST structure at the Central and the State levels, there should
be a common exemption list. Further, specific provisions to provide limited flexibility
to the States within a set of prescribed criteria may need to be incorporated, as in the
prevailing VAT structure, in order to accommodate exemption of goods of local
importance. Similar limited flexibility would need to be provided to the Centre to
address exceptional situations such as natural disasters.

4 Advance Ruling

Advance ruling and dispute resolution authorities should be set up by the Centre and
States to ensure uniformity and fairness in decision-making.

5 Joint Authority and Legislation

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The authority to amend the common exempted list and the common composition
scheme should rest with a joint authority of Central and State Governments to ensure
that no single State or Central Government amends either of these unilaterally.

6 IT Infrastructure
The success of the GST largely depends upon IT infrastructure available for collection,
compilation and exchange of data at the shortest possible time. IT infrastructure with
national coverage and extensive reach is critical for the successful implementation of
GST. For this, an initiative at the Central Government level needs to be taken in order
to put in place a strong IT infrastructure.

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12. Some of terms and there meaning

Goods
“goods” means every kind of movable property other than money and securities but
includes actionable claim, growing crops, grass and things attached to or forming part
of the land which are agreed to be severed before supply or under a contract of supply

Services
“services” means anything other than goods, money and securities but includes
activities relating to the use of money or its conversion by cash or by any other mode,
from one form, currency or denomination, to another form, currency or denomination
for which a separate consideration is charged;

Money
money” means the Indian legal tender or any foreign currency, cheque, promissory
note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order,
postal or electronic remittance or any other instrument recognized by the Reserve
Bank of India when used as a consideration to settle an obligation or exchange with
Indian legal tender of another denomination but shall not include any currency that is
held for its numismatic value;

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13. Roadblock to implementation of GST

Bringing about an integration of all taxes levied on goods and services in a federal
polity with sharp distribution of legislative powers is a Herculean task to say the least.
The Constitution of India, 1950 demarcates taxing powers in a two-tier structure
wherein levies on production and international imports are with the Union and post-
production levies rest with the states. The Centre levies duties of excise on
manufactures and import/countervailing duties on international imports apart from
levying a tax on services under various taxing and the residuary entry in the Union
List. The states levy VAT on goods sold or entering in the state under various entries
of the state list. Even if all Union-level levies are integrated into a single levy and all
state level levies culminate in a single State level levy; this may still have two levies
and the resultant cascading and administrative burdens may nevertheless remain to
an extent, though this may go a long way in harmonizing levies. A harmonized,
integrated and full-fledged GST calls for the following:

(1) Constitutional Amendments: Implementation of GST calls for effecting

widespread amendments in the Constitution and the various constitutional
entries relating to taxation. As per provisions of Article 368 of the constitution,
the bill for amendment is to be passed by majority of the members of both
houses and two third of the members present and voting. Also, the
amendment is to be approved by fifty percent of the state legislative
assemblies. In the current scenario it is difficult to visualize constitutional
amendments of such far reaching implications going through, more so in view
of the fact that sharing of legislative powers is such an essential element of
our federal polity and it may be perceived to be a basic feature of the
Constitution;

(2) Integration of Services: Services must be appropriately integrated in the tax

network;

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(3) Design and structure of GST: No less significant is the issue of an

appropriate design and structure of GST. For instance, how the issue of inter-
state movement of goods and services may be addressed. The phasing out
of CST may go a long way in addressing the issue of inter-state trade and
commerce in goods but the crucial issue regarding services originating in one
state and being consumed in other state remains;

(4) Resources Sharing: Another contentious issue that is bound to crop up in

this regard is the manner of sharing of resources between the Centre and the
states and among the states inter seas also the basis of their devolution;

(5) Flow of Goods and Services: Apart from all these, there must be a robust
and integrated MIS dedicated to the task of tracking flow of goods and
services across the country and rendering accurate accounting of levies
associated with such flow of goods and services; and

(6) Determination of Revenue Neutral Rate (RNR): At present States are

charging VAT rates 0%, 4%, 12.5% and 20% besides other levies and thus
the average rate of tax comes to 17%. Similarly, Centre is charging Central
Excise duty @ 14%, CST 2%, Service Tax 10%. The combined effect of all
the taxes taken together comes to an average rate of tax @ 27.5%. The
proposed GST rate is mooted @ 20% both for the Central GST @ 12% and
the State GST @ 8%. Assuming that the States may agree on the
implementation of GST based on compensation being given to them like what
was decided at the time of introduction of VAT i.e. 1st April, 2005, the Centre
may suffer loss while satisfying the needs of about 30 states.

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14. Some questions to be answered

The following issues are yet to be answered even after the release of the Discussion paper

1. Does Exemption of 1.5 Crores in CGST for goods equally apply to dealers?
As GST will cover in its scope the levy of excise and VAT therefore the exemption limit of 1.5
Crores specified in the discussion paper will extend its hands to dealers also or the same will
be limited to the manufacturers. If the second view is opted then the definition of Manufacture
will be rolled back in the GST tax regime.

2. What is the Service tax threshold exemption limit under CGST?

The Empowered Committee has not specified the threshold exemption limit applicable to
services under CGST. However, they have clarified that the same will be in conformity with
the existing threshold exemption of Rs. 10 Lakhs.

3. IGST (Inter-state transaction of GST) levy will be equal to CGST plus SGST, thus the same
will be single rates. Are separate records are to be maintained in this respect also?
It has been clarified that the IGST credit will be allowed to be set off against IGST, CGST or
SGST payable by the taxpayer. In the current scenario CST is levied on interstate sale of
goods, but the dealers aren't allowed to avail the credit of the same and they are emphasizing
on the scenario to buy the goods from within the state so as to avail the credit of VAT.
However, in this new tax regime the IGST will be levied at the rate which will be equal to CGST
plus SGST, this leads to a new issue that IGST will be levied at a single compound rate or two
different rates i.e. CGST and SGST will be levied differently or not.
If the rear view is adopted then the question arises that the credit of the IGST will be allowed
to be set off against both CGST and SGST separately or cross adjustments will be allowed. If
the cross adjustment is allowed then the taxpayers availing exemption of 1.5 Crores under
CGST will be willing to purchase goods and sale them outside the state as in that situation
they will be getting the full credit of IGST thus benefiting them utmost. This scenario changes
the complete situation as it exists presently. This difficulty is yet to be sorted and clarified by
the Government.

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4 The dual GST model would be implemented through multiple statutes one for CGST and
SGST statute for every State.
Different statues will govern the SGST levy. This will lead to non-uniformity in the tax structure
at state levels. Further, there may be complexities for smooth implementation of GST across
the nation.

5 Transitional Issues The transition would cause ambiguity with respect to issues like
treatment of "stock in hand", available CENVAT (Central Value Added Tax), credit / VAT
(Value Added Tax) credit. However, these should be provided for much before the
implementation of GST.

6 Exemptions There should be a common exemption list for CGST (Central Goods and
Services Tax) and SGST (State Goods and Services Tax) so that there is no discrepancy in
the collection of taxes. Another important issue are area-based exemptions.

A scheme for the treatment of such exemptions should be well devised so that there is no
adverse effect on the industry. Though Customs will remain outside the GST regime, many
bonds executed by importers and exporters with Government will have to be suitably
amended for changed liability in view of new GST.

7 Job Work Issues such as what documents and records need to be prepared by the job
worker and the principal and time limits for claiming CENVAT credit are to be decided.
Since, the focus would be on 'supply' after the implementation of GST, the status of job
workers needs to be determined.

8 Assessable Value The calculation of assessable value under GST is ambiguous since it
still unknown what the components of the assessable value are. Are discounts and other
charges such as loading/unloading, freight, cartage and packing includible in the assessable
value or would they be chargeable separately?
9 Place of Supply In the GST regime, the taxable event would be 'supply' and it is very
essential to understand as to where the 'supply' actually takes place. "Place of Supply" rules
refers to the rules that allocate the right to tax between the states. The main concern here is
which state will collect the SGST.

10 Branch / Stock Transfer An efficient provision for branch transfer / stock transfer should
be put in place under the GST regime. The system should enable the businesses to make
branch transfers without payment of tax and the procedure should be simple to ensure

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maximum compliance and minimize disputes.

11 Return / Rejection / Replacement of Goods There has been no clarification on the

treatment of goods which are returned, rejected, or replaced. A major question here is
whether the treatment would be like the present system of reversing the credit or whether
new provision would be introduced.

12. Common Procedures The industry expects that there would be similar formats for
registration, returns and other records for both CGST and SGST. Functions such as
assessment, enforcement, scrutiny and audit should be undertaken by the authority which is
collecting the tax with information sharing between the Centre and the States.

Conclusion
GST, if implemented efficiently, could prove to be a "Good Sensible Tax". But the
Government should come up with the draft rules as soon as possible so that there is enough
time for industry to analyse the draft and make representations to the concerned authorities
with their suggestions.

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15. SUGGESTIONS FOR EFFECTIVE

IMPLEMENTATION

Some suggestions for better administrative machinery to handle the implementation

of Goods and Services Tax Act in India are:

 Standardization of systems and procedures.

 Tax relief in case of branch transfer
 Well defined procedures in case of Job works
 Uniform dispute settlement machinery.
 Adequate training for both tax payers and tax enforcers.
 Re-organization of administrative machinery for GST implementation.
 Building information technology backbone – the single most important initiative
for GST implementation.
 Uniform Implementation of GST should be ensured across all states (unlike the
staggered implementation of VAT) as many issues might arise in case of
transactions between states who comply with GST and states who are not
complying with GST.

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16. GST Implications for organizations

GST shall be the mother of all Indian tax reforms of this century and it would subsume most
(if not all) of the existing Central and State level taxes on supply of goods and services.
Accordingly, GST would have a significant impact on business environment and its operations.
When undertaking oversight of organizational readiness to adopt GST, independent directors
need to focus on the following aspects:

1 GST will have a multi-fold impact on operations – Besides the fiscal impact and tax
compliance, GST will have an impact on cash flows, product pricing, supply chain
arrangements, procurement, revenue recognition and the IT systems. It is therefore important
to assess whether the organization is undertaking a holistic impact assessment of GST
encompassing all of the above.

2 Assess the impact on financial results – GST will have an impact on the financial
statements; for example, the top-line may get reduced in some cases (e.g. traded items) due
to elimination of tax cascading. The gross margins will also undergo changes as Cost of Goods
Sold may undergo changes as a result on input tax credits. For listed companies, these
changes will need to be factored in quarterly forecasts and earning releases to the stock
markets.

3 Monitor the impact on cash flows – Most of the planning in GST will revolve around
optimizing cash flows. The impact will be because of GST on imports, stock transfers and
changes in point of taxation/ tax credits.

4 Organizations may need to re-design certain aspects of their Supply Chain – The
concept of mere supply of goods and services trigger tax liability under GST as opposed to
sale under the present VAT, will impact Sourcing, Production and Distribution aspects of the
Supply Chain. For instance, sourcing considerations would involve revisiting sourcing mix
(local, inter-state and imports), stock transfer policy and renegotiation of vendor price due to
the GST impact. From a production perspective, GST impact would vary depending upon the
manufacturing and distribution arrangements e.g. own/ job-work/ contract manufacturing. The
“Place of Supply” rules will determine state where GST is to be deposited.

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5 Understand the linkages, differences for companies implementing IFRS – For

companies implementing IFRS, the requirements under IFRS vary with those under GST.
Organizations will need to consider necessary re-alignments within their IT systems to
effectively manage these differences. For instance, there could be possible differences
between GST levy date and date of revenue recognition, accounting for multiple element
arrangements (e.g. the invoice value includes a supply and maintenance element), accounting
for barter transactions, reconciliation of GST on stock transfers with accounting records etc.

6 Understand the implications on product pricing, marketing, and HR – The impact of

GST needs to be considered in the margins of various stakeholders in the distribution chain
to ensure that GST does not negatively impact product pricing and consequently market share.
This calls for a reassessment of exchange, discount and incentive schemes. From a HR
perspective, there may be a need to reconsider the indirect tax management structure, training
requirements of key indirect tax personnel depending upon the impact assessment.

7 Assess if the IT systems are geared to address GST requirements effectively with
minimal manual workarounds – The Audit Committee should at the outset require
management to undertake necessary enhancements to IT systems so that the necessary
systemic alignments are in place to manage GST MIS requirements. Changes in the system
are likely to be required primarily on account of change in taxes/ tax rates, availability of credits
for input taxes on purchases including inter-state purchases and Import GST, availability of
cross credits for goods and services and GST on stock transfer.

To summaries, organizations need to undertake the following to enable a smooth

transition to GST:
 Have an internal core team which will closely monitor the GST developments.
 Identify existing bottlenecks and those likely to arise from proposed GST framework.
 Representation to the implementing agencies through appropriate industry
associations to
 highlight issues and propose solutions in the proposed GST framework.
 Ensure flexibility in new systems/ processes/ contracts, to accommodate changes
warranted by GST
 Identify need for restructuring business/ transactions/supply chain in the light of the
GST framework
 Modify internal IT, invoicing, and other systems/ processes/ policies to make them GST
compliant

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BIBLOGRAPHY

Wikipedia

Data from Finance Plus India

Gst.gov.in

Bankbazaar.com

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