Input Credit mechanism under proposed GST regime-The milestone to achieve
Before I begin this article it is worthwhile to discuss the background behind this since as of today no professional as well dealer is sure about the consequences of proposed GST legislation. There is Gernal perception among professional and society that GST will remove cascading effect, make administration simple and system will become more transparent. All the perception hold good undoubtedly and there is need to go one more step further to understand he exact scenario of Indirect taxes under proposed GST regime. In this article I would discuss the input credit mechanism under GST, glimpse of IT infrastructure under GST and other administrative issues like registration of dealers, filing of returns etc.
INPUT CREDIT MACHANISM IN CASE OF INTRASTATE TRANSACTION (WITHIN A STATE):
Those dealers dealing exclusively within a state have to charge CGST and SGST at the respective rate and will make the payment of CGST and SGST on value addition in the account of Center and State Government respectively. In the above scenario we have assumed that the dealer is not purchasing goods and services from outside state. We can understand this concept with the help of an illustration where M/s New Delhi trading company is buying goods from M/s Old Delhi traders for Rs. 100 and the seller is charging CGST @ 12% and SGST @ 10%. The buyer can book input credit of both the CGST and SGST in his book and use this tax for making payment of his output tax liability. M/s Old Delhi is selling the same product for Rs. 120 (20 profit) and charging Rs. 14.40 as CSGT and Rs. 12 as SGST and making payment to Central Government @ Rs. 2.40 as CGST and Rs. 2.00 @ SGST to State Government . The professionals have no difficulty in understanding this as this system is already in place under existing VAT and Excise law.
INPUT CREDIT UNDER INTER STATE TRANSACTION –MILE STONE TO ACHIVE:
We all are advising on C Forms, F Forms and H Forms and so many other forms which are used if any Dealer makes interstate sales or stock transfer. This system is being followed by us from so many years and the same is full of cascading effect and administrative hurdles. The proposed GST law shall overcome all the above hurdles and remove cascading impact of the same by allowing input credit on the interstate purchase to the importing dealers .To make the above scenario more understandable I shall use one illustration to make it more clear. Under the proposed model the exporting dealer shall charge one single consolidated tax called IGST (CGST+SGST) from importing dealer and the same shall be cenvatable for the importing state dealer. In the above process an agency already setup by the Central Government shall act as a clearing house which will make the settlement of funds between Centre and State. The IGST and CGST shall be administered by Central Govt. and the SGST shall be managed by State Govt. by respective legislation. The loss suffered to each other shall be compensated together through clearing house mechanism which has been setup as GSTN.
UNDERSTANDING OF IGST WITH A HELP OF LLUSTRATION:
A dealer in Delhi sells goods to a buyer in Haryana worth Rs. 100 by charging IGST @ 20% (CGST+IGST) i.e. Rs. 20 and the buyer in Haryana shall book Rs. 20 as input credit and shall use the same while making payment of output tax on his sales either in same state or interstate. If the seller in Delhi has procured the goods sold by him from Delhi or outside Delhi his input shall be cenvatable in every case.
FLOW OF CREDIT FROM ONE STATE TO ANOTHER:
Under the proposed GST regime the exporter dealer shall use his CGST credit first to pay the IGST liability and after this SGST shall be used to pay the IGST liability and in the same manner the importer dealer shall use his IGST credit first to pay the CGST liability and at last to pay SGST. At the end of every month the clearing house shall make settlement of funds between center and state to make the final payment to the losing party.
REGISTRATIONS, RETURNS AND OTHER ADMINISTRATIVE ISSUES:
The dealer has to obtain a GSTIN (Goods and service tax identification number) on pan India basis and there will be no need to obtain separate GSTIN in respective states. The GSTIN shall be PAN based which shall also be used to link the dealers with Income tax and Ministry of corporate affairs and sharing of information shall be online. Returns shall be monthly or quarterly depending on size of dealer and there will be online matching mechanism to match input tax booked by buyer with the output tax shown by the selling dealer. The defaulting dealers shall be categorized as blacklisted in the system and their status shall reach to every buyer who has made purchase from said dealer.
All hopes are on the budget session of Union Govt. and the promptness of Centre to pass the 122nd Constitutional amendment bill in upcoming session. I pray to God for smooth functioning of parliament and passage of this bill to make the GST law a reality by 01-04-2016.
By: Vinod Kaushik, ACA
Disclaimer: Views of writer are his personal and based on the law as on date and before taking any action cross check the relevant section and rules.