Good and Services Tax is the most logical steps towards the comprehensive indirect tax reform in India since independence. Goods and Services Tax is to be implemented shortly by the Government of India. GST is leviable on every transaction involving supply of goods and/or services as well combination thereof. However, there is still no clarity for transactions relating to works contracts, government services and immovable property.
GST is a multipoint tax uses Value addition principle. GST is collected on the value added at each stage of supply or provision of service in the supply chain. GST paid on the procurement of goods and services can be set off against GST due on supply of goods and services. Tax credit mechanism of GST thus levies net tax at each stage of supply chain but the consumer bears entire GST charged by last person in supply chain. GST in true spirit, is a consumption based indirect tax.
Why Goods and service tax?
One of the main reasons of the introduction of GST is to avoid cascading effect of taxes in India. There are certain problems in the system that has not been solved till date. We shall talk about these problems now.
The credit of Input VAT is available against the output VAT. In the same manner, the credit of Input excise/service tax is available for set off against the output liability of excise/service tax. However, the credit of VAT is not available against excise and vice versa. We all know that VAT is computed on a value which includes excise duty. In the same manner, CENVAT credit is allowed only for excise duty paid on inputs, and not on the VAT paid on the input raw material .This shows that there is tax on tax.
India needs GST because it has to fill the divide of Goods and Services. Services at times are so interwoven in goods that it is difficult to slice each of them out resulting in cascading tax effect. GST as a unified tax on goods and services, permits input tax credit on purchase of goods and/or procuring services against tax due on supply there of. GST eliminates cascading effect of multiple taxes on goods and services levied through several indirect tax laws by the Central and State Governments and shall thus rationalize tax burden on entire chain of goods and/or services.
The present forms of CENVAT and State VAT have remained incomplete in removing fully the cascading burden of taxes already paid at earlier stages.
Besides, there are several other taxes, which both the Central Government and the State Government levy on production, manufacture and distributive trade, where no set-off is available in the form of input tax credit. These taxes add to the cost of goods and services through "tax on tax" which the final consumer has to bear.
Since, with the introduction of GST, all the cascading effects of CENVAT and service tax would be removed with a continuous chain of set-off from the producer's point to the retailer's point, other major Central and State taxes would be subsumed in GST and CST will also be phased out, the final net burden of tax on goods, under GST would, in general, fall. Since there would be a transparent and complete chain of set-offs, this will help widening the coverage of tax base and improve tax compliance. This may lead to higher generation of revenues which may in turn lead to the possibility of lowering of average tax burden.
Principle of taxation- “A tax treated under the destination principle becomes a consumption tax since goods are taxed where consumed, not where produced.”
Goods as well as services would be liable to GST on consumption basis as against the present origin basis. This will redefine the taxing jurisdiction.
Highlights of the GST as Per GST Bill 2014
1. Dual GST – [Central GST + State GST]
2. GST to be levied on all transactions whether comprising goods or services or both.
3. GST to be levied on value addition at each stage of supply of goods or services or both in entire supply chain.
4. Tax credit allowed to successive supplier on same pattern as in VAT and CENVAT.
5. Taxes recommended by GST Council levied by Union and states be subsumed under GST.
6. Stamp duty, toll tax, passenger tax, road tax – not decided
7. Comprehensive coverage of services with few exceptions
8. Exports continue to be zero rated.
9. Taxes to be subsumed:
(i) Union taxes/levies: Central Excise, Additional excise duties, Excise duties under the Medicinal and Toilet Preparations (Excise Duties ) Act,1955, Service tax, Additional duties of Customs (CVD), Special additional duties of Customs, Central sales Tax, Central surcharges and Cesses so far as they relate to the supply of goods and services. Note: No mention of Basic Custom duty, hence it shall remain in force.
(ii) State taxes/levies: State level VAT, Entertainment Tax (other than the tax levied by the local bodies), Octroi and Entry tax , Purchase tax, Luxury Tax, Taxes on Lottery, betting and gambling and State surcharges and Cesses so far as they relate to the supply of goods and services.
10. Central Government to compensate loss to States due to GST implementation for a period upto 5 yrs.
11. Item kept out of GST Alcoholic liquor for human consumption
GST Bill 2014-Important Definitions
1. GST [Article 366 (12A) of Constitution]
“Any tax on supply of goods or services or both except taxes on supply of alcoholic liquor or human consumption”
2. Goods [Article 366(12)]
“Goods include all materials, commodities and articles.”
3. Services [Article 366(26A)]
“Services means anything other than goods.”
4. Supply - The term 'supply' has not defined nor any conditions have been pre-fixed which imply that free supply will attract GST.
TAXABLE EVENT- Supply of goods and/or services
PERSON LIABLE TO TAX- Any person, providing or supplying goods or services
SITUS OF TAX/ PLACE OF TAXATION - GST is a consumption based levy as per place and time of supply provisions/rules.
Dual GST- means two GST taxes on all transactions both by the Central Government and the State across the value chain
An example to show how does it work?
The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholesaler and one retailer, how GST will work. 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 wholesaler. When the wholesaler 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.
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