Before asking for the GST we need to understand what is tax , what kind of tax imposed on citizens of INDIA etc , So in this blog we are trying to clear out the taxation system
What is TAX?
A fee charged (“levied”) by a government on a product, income, or activity is called as TAX.
How many type of tax was there?
There are two types of tax, direct and indirect tax. Direct tax is the tax which is implemented directly to the people of India, the tax which comes under direct tax is income tax. The other tax is indirect tax, which is applied to the people from different ways, like retail has to give some tax to the government.
How many taxes are there in India?
There are 18-19 different tax in India such as,
Sales Tax: Selling or buying things within in the state and the central.
Service Tax: These is the tax which has to be given to the central government.
Entry Tax: If we are moving from one state to another state with goods or without any goods than the entry tax is levied on the individuals.
Central Excise Tax: These is the tax which is applied on the manufacturer for producing the goods.
Custom Duty: The tax which is applied to the individuals when they are entering to there own nations from another nationals while carrying some goods from that country.
Professional Tax: Professional tax is the tax by the state governments in India. Anyone earning an income from salary or anyone practicing a profession such as chartered accountant, company secretary, lawyer, doctor etc. are required to pay this professional tax.
Entertainment Tax: The tax which has to be paid while watching movies or while visiting any amusement park.
Luxury Tax: If you are living in Taj hotel, Mumbai which comes under luxury item, than we have to paid luxury tax to the hotel, which will be paid to government by hotel, Luxury tax can be applied to cars, watches etc.
So why GST introduces in India?
On an average in India, people had to pay about 30%-35% on any good, it can go upto 45%, we don’t know but we are paying tax every time. How the tax system is working now and how it will work after GST.
Suppose Mr. A sells goods to Mr. B and charges sales tax; then Mr. B re-sells those goods to Mr. C after charging sales tax. While Mr. B was computing his sales tax liability, he also included the sales tax paid on previous purchase, which is how it becomes a tax on tax.
This was the case with the sales tax few years ago. At that time, VAT was introduced whereby every next stage person gets credit of the tax paid at earlier stage. This means that when Mr. B pays tax of Rs. 11, he deducts Rs. 10 paid earlier.
Similar concept came in Excise Duty and Service Tax also, which is called Cenvat credit scheme. To a huge extent, the problem of cascading effect of taxes is resolved by these measures.
However, there are still problems with the system that have not been solved till date. We shall talk about these problems now.
- The credit of Input VAT is available against Output VAT. The credit of input excise/service tax is available against output excise/service tax. However, the credit of VAT is not available against excise and vice versa.
- VAT is computed on a value which includes excise duty. This shows that there is still a tax on tax!
GST will solve this problem. Let us see how.
PRESENT SYSTEM OF INDIRECT TAXES
Let us first understand the various indirect taxes that are presently being levied by the Central & State Governments.
(*CVD – Countervailing Duty; SAD – Special Additional Duty)
- The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be charged even after the introduction of GST.
- India shall adopt a Dual GST model, meaning that the GST would be administered both by the Central and the State Governments.
DUAL GST MODEL
We begin by stating the dual GST model and the taxes levied on each kind of transaction. See these abbreviations before we understand them-
- SGST – State GST, collected by the State Govt.
- CGST – Central GST, collected by the Central Govt.
- IGST – Integrated GST, collected by the Central Govt.
Now look at the chart that follows:
These are the taxes that shall be levied under the new system of GST. Let us understand how this operates –
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. Sale price is increased so tax liability will also increase. In the 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. Whole IGST goes to the central government.
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.
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 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.
ADVANTAGES 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 credit, 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 the same. 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 comfortable under GST as the compliance cost will be reduced. It should be noted that the assessees are, nevertheless, required to keep record of CGST, SGST and IGST separately
POINTS TO PONDER : FOOD FOR THOUGHT
The GST is a very good type of tax. However, for the successful implementation of the same, we must be cautious about a few aspects. Following are some of the factors that must be kept in mind about GST:
- Firstly, it is really required that all the states implement the GST together and that too 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 taxableevent. 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.
- The GST is a destination based tax, not the origin one. In such circumstances, it should be clearly identifiable as to where the goods are going. This shall be difficult in case of services, because it is not easy to identify where a service is provided, thus this should be properly dealt with.
- More awareness about GST and its advantages have to be made, and professionals like us really have to take the onus to assume this responsibility.
Different terms in GST
CGST – The tax will be imposed by the central government of India. It will replace excise duty, service tax, SAD (Special Additional Duty), CVD (Countervailing Duty), ADE (Additional Duties of Excise) and other indirect taxes levied by the central government. CGST will be applicable on supplies within a state and the tax revenue will go only to the central government.
SGST – The tax will be imposed by the state government. It will replace sales tax, VAT, entertainment tax, entry tax, luxury tax, Octroi, purchase tax and taxes on lottery. SGST will be applicable on supplies within a state and the tax revenue will go only to the state government.
UTGST – The tax will be imposed by the Union Territory of Chnadigarh, Lakshadweep, Daman and Diu, Dadra and Nagar Haveli, Andaman and Nicobar Islands, Delhi and Puducherry. It will replace sales tax, VAT, entertainment tax, entry tax, luxury tax, Octroi, purchase tax and taxes on lottery. UTGST will be applicable on supplies within a union territory.
Both CGST and SGST will be levied only if the annual turnover is more than Rs.20 lakhs. They both are applicable on free supplies. Registration for both is required only if the turnover is more than Rs.20 lakhs. Dealers can use the Composition Scheme to avail benefits, if the turnover is Rs.50 lakhs.
IGST – It will be imposed by state and central government together, but is collected by the central government. The revenue is shared by both central and state governments. It will replace Central Sales Tax (CST). It will be applicable on interstate import and supplies. No exemption limit has been defined by the government for this type of GST. If dealers supply in different states, then they have to register for this GST. It will also be applicable on free supplies. For this type of GST, the composition scheme is not available.
Positive and Negative Aspects of GST
- The main reason to implement GST is to abolish the cascading effect on tax. A product on which excise duty is paid can also be liable for VAT. Suppose a product A is manufactured in a factory. As soon as it releases from factory, excise duty has to be paid to central government. When that product A is sold in same state then VAT has to be paid to state government. Also no credit on excise duty paid can be taken against output VAT. This is termed as cascading effect since double tax is levied on same product.
- The GST is being introduced to create a common market across states, not only to avoid enfeebled effect of indirect tax but also to improve tax compliance.
- GST will lead a more transparent and neutral manner to raise revenue.
- Price reduction as credit of input tax is available against output tax.
- Simplified and cost saving system as procedural cost reduces due to uniform accounting for all types of taxes. Only three accounts; CGST, SGST, IGST have to be maintained.
- GST is structured to simplify the current indirect system. It is a long term strategy leading to a higher output, more employment opportunities, and economic boom.
- GST is beneficial for both economy and corporations. The reduced tax burden on companies will reduce production cost making exporters more competitive.
- GST is being referred as a single taxation system but in reality it is a dual tax in which state and centre both collects separate tax on a single transaction of sale and service.
- At present the main Indirect tax system of central Government is central excise. All the goods and commodities are not covered by the central excise and further there is an exemption limit of Rs. 1.50 Crores in the central excise and further traders are not liable to pay central excise. The central excise is payable up to the stage of Manufacturing but now GST is payable up to the stage of sale.
- Majority of dealers are not covered with the central excise but are only paying VAT in the state. Now all the Vat dealers will be required to pay “Central Goods and service tax”.
- The calculation of RNR (Revenue Neutral Rate) is very difficult and further Govt. wants to enhance its revenue hence rate of Tax will be a problem. As per the News reports the proposed rate for State GST is 12% and Central GST is 14% Plus Govt. wants to impose 1% CST at the initial stage of GST on the interstate sale of Goods and services. So the normal rate of overall tax will be 26%. This rate is very high comparing to the fact that small and medium Industries are at present not covered by the central excise and most of the Goods such as agricultural products are out of the preview of the Central Excise.
- Improvement in the Manufacturing and distribution of Goods and service, increase in exports, various reforms, check on corruption, less Government control are some of the factors which are responsible for the economic growth of the country. A tax system can make a revolution in the economy of the country is “rarest of the rare” thing.