Deepak Gupta | Aug 13, 2016 |
The Goods and Service Tax (GST) Detailed Discussion with Examples
Introduction of Goods and Services Tax (GST) is one of the important perfection and the next logical step towards a widespread indirect tax reforms in India. GST shall also apply in Jammu & Kashmir (J&K).
Passage of 122nd Constitutional Amendment Bill by Parliament paves the way for GST.
Need for Constitutional Amendment: While the Centre is empowered to tax services and goods upto the production stage, the States have the power to tax sale of goods. The States do not have the powers to levy a tax on supply of services while the Centre does not have power to levy tax on the sale of goods. Thus, the Constitution does not vest express power either in the Central or State Government to levy a tax on the supply of goods and services. Moreover, the Constitution also does not empower the States to impose tax on imports. Therefore, to give power to both centre and state to levy tax on supplies of goods and services constitutional amendment bill was passed.
What Next: Two legislationsCentral GST (CGST) and Integrated GST (IGST) will have to be passed by Parliament and State GST (SGST) legislation by each of the State Legislatures.
What is GST
G Goods
S Services
T Tax
Goods and Service Tax (GST) is a comprehensive tax levy on supply of goods and service at Central and State level under which no distinction is made between manufacture, production, sale of goods and services for levying of tax. It will mostly substitute all indirect taxes levied on goods and services by the Central and State governments in India.
GST is a tax on goods and services under which every person is liable to pay tax on his output/supply and is entitled to get input tax credit (ITC) on the tax paid on its inputs(therefore a tax on value addition only) and ultimately the final consumer shall bear the tax.
OBJECTIVES OF GST: One of the main objective of Goods & Service Tax (GST) would be to eliminate the doubly taxation i.e. cascading effects of taxes on supply of goods and services. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle.
Model GST Law: The Ministry of Finance released model GST law so as to give stakeholders idea and understanding as to how this GST provisions will be framed and implemented.
Key definitions and issues of Model GST Law are discussed below.
Indirect taxes that will be included under GST:-
State taxes which will be subsumed in SGST
VAT/Sales Tax
Entertainment Tax (unless it is levied by local bodies)
Luxury Tax
Taxes on lottery, betting and gambling.
State cess and surcharges to the extent related to supply of goods and services.
Entry tax not on in lieu of octroi.
Central Taxes which will be subsumed in CGST
Central Excise Duty.
Additional Excise Duty.
The Excise Duty levied under the medical and Toilet Preparation Act
Service Tax.
Additional Customs Duty, commonly known as countervailing Duty (CVD) or Special Additional duty of customs(SAD)
Education Cess
Surcharges
Taxes that will not be subsumed
Registration:
Registration shall be taken the place from where the goods and services are supplied.
Liability to get registration after the aggregate turnover in a financial year exceeds INR 9 lakhs(Rs. 4 lakhs for North Eastern States).
However, tax liability shall arise only once the aggregate turnover in a financial year exceeds INR 10 lakhs(Rs.5 lakhs for North eastern states).
Following persons are mandatory required to get registration without above limit:
o Persons affecting Inter-state taxable supply;
o Where payment of tax is required under reverse charge;
o Non Resident taxable persons;
o Persons supplying on behalf of other registered taxable persons;
o Every Electronic commerce operator and persons supplying through such electronic commerce operator;
o Persons on whom TCS/TDS is applicable;
o Etc
Rate of GST:
There would be three-rate structure
A lower rate for necessary items and items of basic importance
Higher rate for some ‘demerit goods’
Standard rate for goods in general. For goods in general, government is considering pegging the rate of GST from 18% to 20%.
There will also be a special rate for precious metals and a list of exempted items.
Returns:
| Return Type | Due Date |
| Outward supplies | 10th of the next month |
| Inward supplies | 15th of the next month |
| Monthly return (other than compounding taxpayer and ISD) | 20th of the next month |
| Quarterly return for compounding Tax Payer | 18th of the month next to Quarter |
| Periodic return by Non-Resident Foreign Taxpayer | Last day of Registration |
| Input Service Distributor (ISD) | 15th of the next month |
| Tax Deducted at Source(TDS) Payment and Return | 10th of the next month |
| Payment of Tax | 20th of the next month |
| Annual Return | 31st December of next FY |
Composition Scheme:
Available to a registered taxable person affecting intra state transactions, whose aggregate turnover in a financial year does not exceed INR 50 lakhs (approximate 1% tax rate).
Person having Interstate transactions are not eligible.
No input tax credit is available.
Shall not charge GST on supply transactions.
Branch Transfers, Job Work, Ecommerce operator:
Branch transfers will also attract GST, but this case needs to be revisited as branch transfer is not a commercial transaction but a simple movement of goods between two premises of same person.
Supply of goods to a job worker shall not be considered as a supply of goods for levy of GST.
Every e-commerce company/market place shall collect tax (TCS) from each supplier to whom they provide online platform and delivery of goods on their behalf. (For. Ex: Seller X is selling goods to Buyer Y using Flipkart platform. Delivery and collection of payment is done by Flipkart on behalf of Seller X. Then in that case, Flipkart will remit net amount to supplier after deducting its service charges and tax(TCS))
Taxability of Specific Transactions (being high revenue generating):
The Central Government has retained the right to impose excise duty on petroleum and tobacco products. State Governments continue to be eligible to impose VAT on sale of the same.
Tax on supply of alcohol for human consumption has been kept outside the GST.
State Governments have also reserved their right to impose electricity duties.
Inter State and Intra State Supply:
Inter-state supply means any supply where the location of supplier and the place of supply are in different states.
Intra-state supply means any supply where the location of supplier and the place of supply are in the same state.
Components of GST with example:
The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST). These 2 components to be levied on intra state transactions of goods and services.
GST will have another component to be levied in case of interstate supply called Goods and Services Tax levied on supplies in the course of inter-state trade or commerce under article 269A (Integrated GST, in short, IGST). The rate for the same will approximately equal to combined rate of CGST and SGST.
The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his SGST liability (while selling the goods in state itself).Thereafter, the Centre will transfer to the importing State the credit of IGST used in payment of SGST.
| Example: 1(Comprehensive Comparison) | ||
| Comparison between Multiple Indirect tax laws and under GST | ||
| Particulars | Without GST | With GST |
| (Rs.) | ||
| Manufacture to Wholesaler | ||
| Cost of Production | 5,000.00 | 5,000.00 |
| Add: Profit Margin | 2,000.00 | 2,000.00 |
| Manufacturer Price | 7,000.00 | 7,000.00 |
| Add: Excise Duty @ 12% | 840.00 | – |
| Total Value(a) | 7,840.00 | 7,000.00 |
| Add: VAT @ 12.5% | 980.00 | – |
| Add: CGST @ 9% | – | 630.00 |
| Add: SGST @ 9% | – | 630.00 |
| Invoice Value | 8,820.00 | 8,260.00 |
| Wholesaler to Second level Wholesaler located outside State | ||
| COG to Wholesaler(a) | 7,840.00 | 7,000.00 |
| Add: Profit Margin@10% | 784.00 | 700.00 |
| Total Value(b) | 8,624.00 | 7,700.00 |
| Add: CST @ 2% | 172.48 | – |
| Add: IGST @ 18% | – | 1,386.00 |
| Invoice Value(b) | 8,796.48 | 9,086.00 |
| Second Level Wholesaler to Retailer | ||
| COG to Wholesaler(b) | 8,796.48 | 7,700.00 |
| Add: Profit Margin@10% | 879.65 | 770.00 |
| Total Value(c) | 9,676.13 | 8,470.00 |
| Add: VAT @ 12.5% | 1,209.52 | – |
| Add: CGST @ 9% | – | 762.30 |
| Add: SGST @ 9% | – | 762.30 |
| Invoice Value | 10,885.64 | 9,994.60 |
| Retailer to Consumer: | ||
| COG to Retailer (c) | 9,676.13 | 8,470.00 |
| Add: Profit Margin@10% | 967.61 | 847.00 |
| Total Value(d) | 10,643.74 | 9,317.00 |
| Add: VAT @ 12.5% | 1,330.47 | – |
| Add: CGST @ 9% | – | 838.53 |
| Add: SGST @ 9% | – | 838.53 |
| Total Price to the Final consumer | 11,974.21 | 10,994.06 |
| Cost saving to consumer | – | 980.15 |
| % Cost Saving | – | 8% |
| Notes: | ||
| Input tax credit available to wholesaler is Rs.980 and Rs.1,260 in case of without GST and with GST respectively. | ||
| Likewise Input tax credit available to Retailer is Rs.1,210 and Rs.1,525 in case of without GST and with GST respectively. | ||
| In case, VAT rate is also considered to be 5%, the wholesaler, retailer, consumer would be paying lesser tax. In that case price of consumer will be reduced by Rs.711.48 and in that case with and without GST approximately provide same price to consumer. | ||
| In case, GST rate is considered to be 20%, percentage cost saving would be 7% | ||
| Excise Duty and CST becomes part of cost of supply of goods for levy of further tax. | ||
Input Tax Credit:
Available for inputs/ input services used or intended to be used by a supplier for making supply of taxable goods and services subject to:
o Possession of tax invoice or other prescribed taxpaying document.
o Receipt of the goods and or services
o Actual payment of tax charged in respect of such supply
o Furnishing of return
Not available for goods/services used primarily for personal consumption or use by employees, goods/ services used acquired for construction of immoveable property.
Not available beyond a period of one year from the date of issue of invoice in case of new registration.
ITC will not be available in respect of any invoice after September following the end of financial year or filing of the annual return, whichever is earlier.
Utilisation of credit:
IGST shall be utilised first towards payment of IGST and thereafter for CGST and balance with SGST.
CGST shall be utilised first towards payment of CGST and thereafter for IGST.
SGST shall be utilised first towards payment of SGST and thereafter for IGST.
There is no cross credit utilization permitted between CGST and SGST.
| Credit Available Credit Utilisation (Order of Use) | IGST | CGST | SGST |
| IGST | Yes(1) | Yes(2) | Yes(2) |
| CGST | Yes(2) | Yes(1) | No |
| SGST | Yes(3) | No | Yes(1) |
Example-2 (Import)
Shri Shiva imported goods for Rs. 10,000/- and incurred expenses to produce final saleable goods. BCD @ 10 % was chargeable on imported goods. These manufactured goods were sold within the state at Rs. 45,000 plus applicable GST. Rate of CGST and SGST is 9% and 9% respectively. Compute Cost, Sale value and tax payable for the transaction.
Solution:
| Calculation of Net cost of imported goods Particulars | Amount |
| (Rs) | |
| Cost of Goods imported | 10,000 |
| Add: Basic Customs Duty @ 12% | 1,200 |
| Cost of imported goods (including BCD) | 11,200 |
| Add: CGST on Import @ 9% | 1008 |
| Add: SGST on Import @ 9% | 1008 |
| Cost of imported goods (including BCD & GST) (Note below) | 13,216 |
| Calculation of Sale value after import | |||
| Particulars | Amount(Rs) | ||
| Sale Value | 45,000 | ||
| Add: CGST @ 9% | 4,050 | ||
| Add: SGST @ 9% | 4,050 | ||
| Sales Value including Tax | 53,100 | ||
| Tax Payable Calculation | |||
| Particulars | CGST | SGST | |
| (Rs.) | (Rs.) | ||
| Output tax | 4,050 | 4,050 | |
| Less: Input tax credit | – | – | |
| CGST | 1008 | – | |
| SGST | – | 1008 | |
| Net tax payable | 3,042 | 3,042 | |
Note: GST shall be levied on value including Basic Customs Duty.
Example-3 (Export)
Now continuing with the above example 4, suppose the same good is exported after 1 year of use after adding margin and modification amounting Rs.10,000/- and use factor of 1 year for refund calculation is 0.20. Therefore the refund will be 0.80 of Duty amount. Compute Export Value and Refund Value.
Solution: Export Value calculation
| Particulars | Amount |
| (Rs) | |
| Cost of Imported Goods(from above example) | 53,100 |
| Add: Margin and Modification Amt. | 10,000 |
| Sale Value | 63,100 |
| Add: CGST on Export(Not Applicable) | – |
| Add: SGST on Export(Not Applicable) | – |
| Export Value | 63,100 |
| Refund Calculation | |
| Particulars | Amount |
| (Rs) | |
| Basic Customs Duty(BCD, from above example) | 1,200.00 |
| Refund Factor | 0.8 |
| Refund amount of BCC | 960 |
| Add: CGST(from above example) | 4050 |
| Add: SGST(from above example) | 4050 |
| Total Refund amount | 9,060.00 |
The above example withstand two basic principles of Taxation Laws i.e. Exports are zero rated and the incidence of tax will follow the destination principle (The taxes will remain with the state where the goods are used, however use factor can be prescribed by the law)
Meaning of Goods:
Meaning of Services:
| Example: (A Comparison on Intangibles) | ||
| Comparison between Multiple Indirect tax laws and proposed GST | ||
| Particulars | Without GST | With GST |
| (Rs.) | ||
| Supply of Intangibles (Software, online support, Cloud, development, Programming, Customization, upgrade, implementation, designing, testing, maintenance, etc) | ||
| Cost of Provider | 5,000.00 | 5,000.00 |
| Add: Profit Margin | 2,000.00 | 2,000.00 |
| Price Before Taxes | 7,000.00 | 7,000.00 |
| Add: Average Excise Duty @ 6% | 420 | – |
| Total Value(a) | 7,000.00 | 7,000.00 |
| Add: Service Tax @ 14% | 980 | – |
| Add: Average VAT @ 8% | 560 | – |
| Add: GST @ 18% | – | 1260 |
| Invoice Value | 8,540.00 | 8,260.00 |
| Cost saving | – | 280.00 |
| % Cost Saving | – | 3% |
| Notes: | ||
| Excise Duty taken at average rate as on some transactions, the tax is levied and in some cases it is not. | ||
| VAT is taken at average rate as on some transactions, tax is levied at 12.5% and on same at 5%. | ||
| The Litigation as to whether the transaction is sale or service will be stopped since earlier, sale tax used goes to State Govt. and service tax used goes to Central govt. and each government wanted to tax this transaction. | ||
| As per GST, the transaction is deemed to be service and there will no need to classify this between goods or service. | ||
| Further, the state and central govt. both now has power to tax on service. Therefore, both governments would be getting revenue out of this transaction. | ||
| Example: (A Comparison on Work Contract) | ||
| Comparison between Multiple Indirect tax laws and proposed GST | ||
| Particulars | Without GST | With GST |
| (Rs.) | ||
| Work Contract Transaction | ||
| Cost of Service | 5,000.00 | 5,000.00 |
| Cost of Goods | 4,000.00 | 4,000.00 |
| Add: Profit Margin | 2,000.00 | 2,000.00 |
| Total Value | 11,000.00 | 11,000.00 |
| Add: Service Tax @ 14% on 70% of Total Value | 1078 | – |
| Add: VAT @ 12.5% on 70% of Total Value | 962.5 | – |
| Add: GST @ 18% | – | 1980 |
| Invoice Value | 2,040.50 | 1,980.00 |
| Cost saving | – | 60.50 |
| % Cost Saving | – | 3% |
| Notes: | ||
| Work contract is simply a transaction which involves transfer of goods while rendering service. For Ex: Beauty parlor services, Disaster Management Service, etc | ||
| Deeming Work Contract to be service will reduce the cost as earlier tax was actually levied on 120% to 150% of transaction value as can be seen in example. | ||
| Transfer of goods while rendering service has been deemed to be Service. Thus ending surrounding litigation. | ||
Transitional Provisions for carry forward of Existing ITC:
Transfer of unutilised CENVAT credit and VAT Input tax credit (ITC) on capital goods and inputs availed under the existing laws subject to following:
o Amount is reflected as carry forward in the return.
o Such credit is admissible under the earlier Law as well as the GST Law.
Provided that unavailed CENVAT credit on capital goods, not carried forward in a return, will be allowed in certain situations.
Constitution of Goods and Service Tax Network (GSTN): Goods and Services Tax Network (GSTN) is a Section 25 (not for profit), non-Government, private limited company. The Company has been set up primarily to provide IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders for implementation of the Goods and Services Tax (GST).
Ending words: GST, being a dynamic and comprehensive legislation which shall replace most of the Indirect taxes is going to be a game changing legislation which will have multiple fold effect in our economy. The biggest task before the government as of now is get the bill passed from the legislative assemblies of states and successful implementation of GST. Further, Chartered Accountants and allied professionals are going to play the leading role in helping the business houses to transition towards this biggest reform in Indian Taxation till date.
Hope you got the sound understanding of the provisions of GST.
For any kind of professional Assistance, please reach out to me freely and preferably by mail.
Regards,
CA. Shivashish Kumar
Practicing Chartered Accountant
B.Com(H), ACA (Former Tax Consultant at Ernst & Young)
+91-9818472772
[email protected]
Add: F-50, Near Gurudwara, MadhuVihar, I.P. Extension, Patparganj, Delhi-92
No part of this article shall be reproduced, copied in any material form (including e-medium) without written permission of CA. Shivashish Kumar.
The information provided is not a substitute for legal and other professional advice where the facts and circumstances warrant.
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