DISCUSSION PAPER ON GST
GOODS AND SERVICE
TAX
- BY CA SUDHIR HALAKHANDI-
THE DISCUSSION PAPER
(IN i TO iv PART)
The much awaited discussion paper on GST is released by the empowered committee of state Finance Ministers on 10th Nov. 2009 and it can be considered as first concrete efforts towards the introduction of GST in our country. Since the discussion paper can be considered as the official pronouncement of the introduction of GST in the country hence let us see the basic characteristics of the GST model. The discussion paper is divided in the 4 parts detailed as under:-
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Part-I – Since introduction of VAT at central Level (Cenvat- Central Excise and Service Tax) and State level (State VAT) are considered as the major step towards the simplification and reforms of the Indirect tax system of the country. The Next Logical step after that was GST. The first part of the discussion paper is devoted to the brief history of successful introduction of VAT and CENVAT. It is theoretical part and now it is history hence not discussed here. |
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Part –II - The then union finance Minister Mr. P. Chidambaram first mentioned the Goods and service Tax in his Budget speech in 2006 after successful implementation of VAT in most of the states in the country. The date for introduction was fixed as 1st. April 2010. After that preparation for the GST was started by formation joint working group by the Empowered committee of state finance Minister. This part is devoted to the various steps of preparation of the GST and presentation of this discussion paper. |
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Part III- This part is of real interest to all of us i.e. to the Trade, Industry , the tax consultants, the tax administrators and chartered accountants and it is devoted to describing the comprehensive structure of the GST in our country. We will discuss this part in detail. |
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Part IV – FAQs on the Part III and in this part the structure of GST mentioned in part III is again described in question answer manner and in practical it is repetition of Part III hence this part is also covered in this paper i.e. this article so that we can have a better understanding of the subject. |
| 1. The Basics of GST. | 2. How it will work in our country. |
| 3. Taxes to be merged with SGST. | 4. Taxes to be merged with CGST. |
| 5. Interstate Transaction – IGST. | 6. The Threshold Limit. |
| 7. The Composition Scheme. | 8. Imports under GST. |
| 9. Constitutional Amendments. | 10. Exports under GST. |
| 11. Why Dual GST? | 12. Time of Introduction. |
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1. The Basics of GST |
A Tax on Goods and services Sold and/ or provided by the dealer and it is collected by the dealer at each state of sales or supply but at the time of deposit of the same the credit of tax paid by the dealer on his input purchases can be claimed so that at each the tax burden is exactly the tax on the value added by the dealer. Let us try to understand it with the help of an example:-
Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) 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 much less.
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2. How it will work in our country (The GSTC and SGST) |
It will be dual GST in our country. One SGST (State Goods and Service Tax- Each state will make its separate law- The Department will naturally be the Commercial Taxes department, may be with changed name of State Goods and Service Tax department) and the other one is CGST (Central Goods and Service Tax- to be administered under one Central Law- Naturally be the central excise department- may be with changed name Central Goods and Service Tax Department). The states will also tax the services under the State GST
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Example |
Suppose that the rate of CGST is 10% and that of SGST is 10%. When a wholesale dealer of steel in Rajasthan supplies steel bars and rods to a construction company also located in Rajasthan for, say Rs. 100, the dealer would charge CGST of Rs. 10 and SGST of Rs. 10 in addition to the basic price of the goods.
He would be required to deposit the CGST to the Central Government account while the SGST into the account of the State Government.
Further he need not actually pay Rs. 20 (Rs. 10 + Rs. 10 ) in cash as he would be entitled to set-off this liability against the CGST or SGST paid on his purchases (say, inputs).
But for paying CGST he would be allowed to use only the credit of CGST paid on his purchases while for SGST he can utilize the credit of SGST alone. Cross credit will not be allowed.
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3. Taxes to be merged with SGST |
State Indirect taxes will merge with the State Goods and service Tax. Following are mentioned in the Discussion paper:-
(i)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 in so far as they relate to supply of goods and services (vi) Entry tax not in lieu of Octroi.
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4. Taxes to be merged with CGST |
Central Indirect taxes will merge with the Central Goods and service Tax. Following are mentioned in the Discussion paper:-
(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
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5. Inter-state Transaction under GST (IGST MODEL) |
If there isa transaction of sale then CGST has to be paid in any condition irrespective the location of the buyer but SGST is applicable only if the Seller and purchaser is of the same state. See the following situations:-
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Transactions within the state |
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If seller is from Rajasthan and the Purchaser is also from Rajasthan then the seller has to collect both the taxes from the Purchaser i.e. SGST (State GST – to be deposited with the state) and CGST (Central GST – to be deposited with the central Government) |
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Inter-state Transactions |
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If seller is from Rajasthan and purchaser is from Maharashtra then there is no question of charging any State GST by the state Government but Central GST will be applicable and the central will also collect the amount of equal to the SGST along with the abovementioned amount of CGST under the head IGST (The interstate Goods and service tax) to transfer this SGST amount to the consumer state (purchasing state). |
If the selling dealer is from one state and the purchasing dealer from another state than the transaction will fall under the head of IGST (Inter-state Goods and service tax) and in this particular transaction the taxability will be as under:-
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(i).No SGST will be charged by the selling State. |
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(ii).Central Government will collect IGST and the amount of IGST will be equal to the tax chargeable under SGST and CGST). |
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(iii).Against this IGST (i.e. Tax equal to SGST plus GGST) the dealer of selling state will claim the input credit of SGST and CGST paid by him on his purchases. |
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(iv).The selling state will transfer the input credit of SGST claimed by the dealer while paying the amount of IGST to the central Government. |
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(v).The dealer of purchasing state will charge the SGST and CGST on his sale within his state and will also claim the IGST paid by him on the transaction. |
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(vi).The Centre will transfer the amount of IGST claimed by the purchasing state dealer while paying his SGST on the transaction. |
See here the whole exercise of Introducing the IGST Model is being done to:-
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(i).Ensure that centre will get the CGST up to the point of Last sale (in the case of central excise the centre was getting the tax up to the point of production only) |
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(ii).Since the GST is consumer based tax hence whole the tax on last sale is received by the purchasing i.e. consuming state. |
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6. The Thereshold Limit |
The threshold limit (The limit where no payment of tax or registration is required):-
| 1. CGST for Goods – Rs. 1.50 Crore (Same as given in central Excise). |
| 2. CGST for Services- Higher than present threshold (Rs. 10 Lakhs at present under Finance Act, 1994 for service tax.) |
| 3. SGST – Rs. 10 Lakhs (At present it is Rs. 5 Lakhs in most of the states but in North east state it is lower than Rs. 5 Lakhs) |
Certainly this will give a big relief for the Small traders in the state from VAT and further in case of CGST the limit for Goods will be Rs. 1.50 Crores hence in the distribution system every dealer will not be covered under dual taxation.
The reasons given for threshold limit are: -
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(i). To reduce the cost of administration of managing the large number of small dealers where cost of collecting the tax is higher than the collection of net tax. |
| (ii). To relieve the small dealers from complications of GST |
| (iii). Give the small dealers a better competitive field due to lower tax incidence. |
| 7. THE Composition Scheme |
There will be composition schemes under SGST and the limit for turnover will be Rs. 50 Lakhs and the rate will be 0.50 % as per the discussion paper. - At present the state have their own composition schemes with varied rates hence it is mentioned in the discussion paper that there will be a similarity in the turnover and rates in this respect.
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8. Imports Under GST |
Imports under the Goods and service tax will be taxable both under SGST and CGST and in both the cases the tax paid on imports can be set off against the final sale or provision of the service.
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9. Constitional Amendment |
At present the Central Government has the power to tax the Goods up to the stage of production and the states have the power to tax the sale of goods. Further the central Government has the power to tax the service hence constitutional amendment is required to enable the:-
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1. State Governments to tax the services. |
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2. Central Government to tax the sale of Goods. |
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3. State Government to tax the imports. |
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10. Exports under GST |
Will be zero rated and all the taxes paid with respect to Exports will be refunded hence the GST will further of useful for the exporters since there will also a good bye to the CST.
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11. Why Dual GST? |
Since we have federal system of Governance and the states have also the right to tax hence it is not possible to have a single and National Level GST hence the only possibility is dual GST which is explained above.
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12. Time of implementation – will it be 1ST APRIL 2010? |
Certainly not! Since the Finance Minister Mr. Pranab Mukharjee has said that it will take time hence it is very rare possibility of meeting the deadline of 1st. April 2010 but since the discussion paper issued by the empowered committee has set a direction towards introduction of GST hence sooner or later it will be a reality. Perhaps on or before 1st April 2011.
E-mail ID- Sudhir@halakhandi
Visit – www.halakhandi.com
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