All you want to know about GST

The Indian taxation system for goods and services is defined by a cascading, distorted tax structure which leads to misallocation of resources, hampering productivity and slower economic growth. To remove this hurdle, a unified and a simple tax system like GST (Goods and Service Tax) is needed to unite the nation. The GST system will start across India on 01 April 2017.

Present System of Indirect Taxes

Before discussing the effects of the new GST system, it's important to first understand the various indirect taxes that are presently being levied by the Central & State Governments.

S. no. Tax Levy by
Nature (Levied on) Covered by GST
1 Central Excise
Center Manufacturing
Yes
2 Service Tax
Center Services Yes
3 Customs
Center Imports No
4 CVD* under Customs
Center Additional Import Duty (Compensating Excise)
Yes
5 SAD* under Customs
Center Additional Import Duty (compensating Sales Tax)
Yes
6 CST Center Interstate sales
Yes
7 VAT State Sales within a state
Yes

(*CVD – Countervailing Duty; SAD – Special Additional Duty)

About Goods and Services Tax (GST)

Under the GST, all transactions, such as sale, transfer, barter, lease, or importation of goods and/or services made for consideration will attract CGST (to be levied by Centre) and SGST (to be levied by states). GST is a destination-based taxation system, which means the liability to pay CGST / SGST will arise at the time of supply as determined for goods and services.

Here are few important features, benefits and apprehensions for GST:

Dual GST Model

India shall adopt a Dual GST model, which means that the GST would be administered by both the Central and the State Governments. The dual GST model and the taxes levied on each kind of transaction can be seen as below:

Transaction New System Old System Comments
Sale within the state
SGST and CGST
VAT & Excise/Sales Tax
Under the new system, a transaction of sale within the state shall have two taxes: SGST, which goes to the State, and CGST which goes to the Centre
Sale outside the state
IGST CST & Excise/Sales Tax
Under the new system, a transaction of sale from one state to another shall have only one type of tax, the IGST, which goes to the Centre

How GST Operates?

  • Case 1: Sale in one state, resale in the 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. The sale price increases and so does the tax liability. In case of resale, the credit of input CGST and input SGST (Rs.8) 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. IGST goes to the central government.

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

  • Case 3: Sale outside the 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 although IGST never went to the state government, the credit is still 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.

Merits of GST

Apart from full allowance of credit, there are several other advantages of introducing a GST in India:

  • Possible reduction in prices: Due to full and seamless credits, manufacturers or traders do not have to include taxes as a part of their cost of production, which is a very big reason to say that we can see a reduction in prices. However, if the government seeks to introduce GST with a higher rate, this might be lost.
  • Increase in Government Revenues: This might seem to be a little vague. However, even at the time of introduction of VAT, the public revenues actually went up instead of falling because many people resorted to paying taxes rather than evading them. However, the government may wish to introduce GST at a revenue-neutral rate, in which case the revenues might not see a significant increase in the short run.
  • Less compliance and procedural cost: Instead of maintaining big records, returns, and reporting under various different statutes, all assessees will find their compliance costs reduced under GST. It should be noted that the assessees are, nevertheless, required to keep record of CGST, SGST and IGST separately

Points to Ponder

GST is a long-awaited tax reform. However, for the successful implementation of the reform, we must be cautious about a few aspects. Here are some thoughts to keep in mind about GST:

  • First, it is absolutely essential that all states implement the GST together, at the same rates. Otherwise, it will be really cumbersome for businesses to comply with the provisions of the law. Further, GST will be very advantageous if the rates are same, because in that case, taxes will not be a factor in investment location decisions, and people will be able to focus on profitability.
  • For smooth functioning, it is important that the GST clearly sets out the taxable event. Presently, the CENVAT credit rules, the Point of Taxation Rules are amended/ introduced for this purpose only. However, the rules should be more refined and free from ambiguity.

GST Business Impact Parameters

  • Tax Advocacy
  • Impact Assessment
  • Supply Chain Planning
  • Business Program Management
  • Accounting and Compliance Process Streamlining
  • Change Management and Training

GST Impact on Different Sectors

Fact Check

The government says the GST will boost revenue in the coming years. History shows, however, that India must brace for some pain before reaping the benefits of a national sales tax.

  • Inflation

Prices will mostly depend on the tax rate set in the coming months. Finance Ministry officials have projected that it will be somewhere around 18% to 20%, higher than India's 15% levy on services. That is prompting many private-sector economists to predict that inflation will accelerate between 0.2 and 0.7 percent in the first year an increase that would be in line with trends in many other countries that have implemented GST.

  • Consumption

Because the goods-and-services tax is targeted at consumers rather than producers, consumption could take a hit initially before companies pass on cost benefits.

  • Growth

Finance Minister Arun Jaitley predicts the GST could add as much as 2 percent to gross domestic product (GDP) in the years ahead, without specifying the time frame. HSBC Holdings Plc forecasts that it will add 0.8 percent to economic growth over three to five years, while IHS Markit sees a 0.4 percent boost annually over five years.

Global trends, however, are more mixed. For Instance, while Australia experienced a positive impact of GST Implementation, the more recent GST implementation in Malaysia faced a lot of initial hiccups.

To summarise, the GST requires strict policy, swift and effective implementation, and most importantly, the accrual and sharing of benefits down distribution and sales channels for a smooth sailing.

To learn more about how Avalara can help you with GST automation, contact us through http://www.avalarabharat.com/contact/

This whitepaper is contributed by CA Harshad Shinde.