GOODS AND SERVICES TAX

(GST) IN INDIA

A Presentation by

CA. Preeti Goyal

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Concept of GST

GST is a tax on goods and services with comprehensive and continuous chain of setoff
benefits from the Producers point and Service providers point up to the retailer level.
GST is expected be levied only at the destination point, and not at various points (from
manufacturing to retail outlets). It is essentially a tax only on value addition at each
stage and a supplier at each stage is permitted to setoff through a tax credit mechanism
which would eliminate the burden of all cascading effects, including the burden of
CENVAT and service tax.

Under GST structure, all different stages of production and distribution can be
interpreted as a mere tax pass through and the tax essentially sticks on final
consumption within the taxing jurisdiction.

Currently, a manufacturer needs to pay tax when a finished product moves out from the
factory, and it is again taxed at the retail outlet when sold. The taxes are levied at the
multiple stages such as CENVAT, Central sales tax, State Sales Tax, Octroi, etc. will be
replaced by GST to be introduced at Central and State level.
Continued.
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Concept of GST

All goods and services, barring a few exceptions, will be brought into the GST base.
There will be no distinction between goods and services.

Under GST, the taxation burden will be divided equitably between manufacturing and
services, through a lower tax rate by increasing the tax base and minimizing
exemptions.

However, the basic features of law such as chargeability, definition of taxable event
and taxable person, measure of levy including valuation provisions, basis of
classification etc. would be uniform across these statutes as far as practicable.

The existing CST will be discontinued. Instead, a new statute known as IGST will
come into place on the inter-state transfer of the Goods and Services.

By removing the cascading effect of taxes (CST, additional customs duty, surcharges,
luxury Tax, Entertainment Tax, etc. ),CGST & SGST will be charged on same price .
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Existing Tax structure in India

Tax Structure

Direct Tax

Income Tax

Indirect Tax

Wealth Tax

Central Tax

Excise

Service Tax

State Tax

Custome

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VAT

Entry Tax, luxury

tax, Lottery Tax,
etc.

Proposed Tax Structure in India

Tax Structure

Indirect Tax =
GST (Except
customs)

Direct Tax

Income Tax

Wealth Tax

Intra- state

CGST (Central)

SGST (State)
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Inter State

IGST (Central)

Subsuming of Existing
Taxes
CGST

VAT/sales tax
Entertainment Tax
Luxury Tax
Lottery Tax
Entry Tax
Purchase Tax
Stamp Duty
Goods and passenger Tax
Tax on vehicle
Electricity, banking, Real state

IGST

SGST

Central Excise
Additional duties of Custom (CVD)
Service Tax
Surcharges and all cesses

CST
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Model of GST

SGST and CGST for intrastate transaction : In the GST system, both Central and State
taxes will be collected at the point of sale. Both components (the Central and State GST)
will be charged on the manufacturing cost. This will benefit individuals as prices are likely
to come down. Lower prices will lead to more consumption, thereby helping companies.

IGST for Interstate transaction: IGST Model will be in place for taxation of inter State
transaction of Goods and Services. The scope of IGST Model is that center would levy
IGST which would be CGST plus SGST on all inter State transactions of taxable goods and
services with appropriate provision for consignment or stock transfer of goods and services.

The GST paid on the purchase of goods and services, to be paid on the supply of goods and
services.

There should be no distinction between raw materials and capital goods in allowing input
tax credit. The tax base should comprehensively extend over all goods and services up to
final consumption point on value addition.

Assessable value for all the taxes will be same.

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Stakeholder in Business
Chain
1.
1.
Manufactur
Manufactur
er
er

5.Governme
5.Governme
nt
nt and
and
Banks
Banks

4.Consumer
4.Consumer

2.
2.
Wholesaler
Wholesaler
Goods
Goods
+
+
Services
Services

3.Retailer
3.Retailer

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GST Set off Chain

Input
Input Credit
Credit of
of Goods+
Goods+ services
services

After
taking
set
off
of
Input
credit, pay the Output Liability on value addition
Manufacturer
Manufacturer After taking set off of Input credit, pay the Output Liability on value addition

Wholesaler
Wholesaler

Input
Input Credit
Credit of
of Goods+
Goods+ services
services from
from manufacturer
manufacturer
After
After taking
taking set
set off
off of
of Input
Input credit,
credit, pay
pay the
the Output
Output Liability
Liability on
on value
value addition
addition

Retailer
Retailer

Input
Input Credit
Credit of
of Goods+
Goods+ services
services from
from wholesaler
wholesaler
After
After taking
taking set
set off
off of
of Input
Input credit,
credit, pay
pay the
the Output
Output Liability
Liability on
on value
value addition
addition

Consumer
Consumer

Ultimate
Ultimate Output
Output Liability
Liability recovered
recovered from
from consumer
consumer

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Set-off methodology

Since the Central GST and State GST are to be treated

separately, in general, taxes paid against the Central GST
shall be allowed to be taken as input tax credit (ITC) for the
Central GST and could be utilized only against the payment
of Central GST. The same principle will be applicable for the
State GST.

Cross utilization of ITC between the Central GST and the

State GST would, in general, be allowed.

ADC paid on Import of goods and service would fall under

the IGST and this duty would be allowed for setoff of SGST
and CGST.

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Set off Heads

IGST
Input

CGST
Input

SGST
Input

IGST
Output

IGST
Output

IGST
Output

CGST
Output

CGST
Output

CGST
Output

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Functioning of GST
The illustration shown below indicates, in terms of a hypothetical example with a
manufacturer, one wholesaler and one retailer, how GST will work.
Manufacturer : Let us suppose that CGST rate is 10% and SGST rate is 5% ,
with the manufacturer making value addition of Rs.30 on his purchases worth
Rs.100 of input of goods CGST paid @10%) and services used in the
manufacturing process. The manufacturer will then pay net CGST of Rs. 3 after
setting-off Rs. 10 as CGST paid on his inputs (i.e. Input Tax Credit) from gross CGST
of Rs. 13 and Rs, 6.5 as SGST.
Gross Value:130 on that CGST 13/- and SGST 6.5/Input Credit:
CGST 10-/ and SGST NIL/Net Liability:
Rs. 3 + 6.5 = 9.5/

Wholesaler: 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 CGST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13, from the
gross CGST of Rs. 15 and net SGST of only Rs. 1, after setting-off of Input Tax
Credit of Rs. 6.5, from the gross SGST of Rs. 7.5 to the manufacturer.
Gross Value:150 on that CGST 15/- and SGST 7.5/Input Credit:
CGST 13-/ and SGST 6.5/Net Liability:
Rs. 2 + 1 = 3/Continued.
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Functioning of GST
Retailer: Similarly, when a retailer sells the same goods after a
value addition of (say) Rs. 10, he pays net CGST of only Re.1, after
setting-off Rs.15 from his gross GST of Rs. 16 and net SGST of only
Rs. 0.5, after setting-off of Input Tax Credit of Rs. 7.5, from the
gross SGST of Rs. 8/- paid to wholesaler.
Gross Value:160 on that CGST 16/- and SGST 8/Input Credit:
CGST 15-/ and SGST 7.5/Net Liability:
Rs. 1 + 0.5 = 1.5/

Total Liability: Thus, the manufacturer, wholesaler and retailer

have to pay only Rs. 6 (= Rs. 3+Rs. 2+Rs. 1) as CGST Rs. 8 (= Rs.
6.5+Rs. 1+Rs. 0.5) as SGST and on the value addition along the
entire value chain from the producer to the retailer, after settingoff GST paid at the earlier stages. This is shown in the table in next
slide. The same illustration will hold in the case of final service
provider as well.
Continued.
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CGST & SGST Tax Liability working

Stag
e of
Supp
ly
Chai
n

Value
at
Purc
Which
hase
Valu Supply Rate
Valu
e Goods of
e
Addi and
SGS
Of
tion Service T
Inpu
s Made
t
to Next
Stage

Man
ufact 100 30
urer
Whol
e
130 20
Selle
r
Retai
150 10
ler

130

150

160

Net
Inpu
Net
SGST
t
CGST= =SGS
Rat
CGS
Input
CGST
Tax
CGST T on
e of
T on
Tax
on
Cre
on
outpu
SGS
Outp
Credi
Outpu
dit
output- tT
ut
t on
t
on
Input Input
SGST
CGS
Tax
Tax
T
Credit Credit

10% 5% 13

10% 5% 15

10% 5% 16

6.5

7.5

10

13

15

1310
=3

6.50=
6.5

6.5

1513
=2

7.56.5=
1

7.5

1615
=1

87.5=
0.5

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Mechanism of Dual Taxation

After introduction of GST, all the traders including manufacturer will be paying both the types of taxes
i.e. CGST and SGST. The Central GST and the State GST would be levied simultaneously on every
transaction of supply of goods and services except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the prescribed threshold limits.
Further, both would be levied on the same price or value unlike State VAT which is levied on the value
of the goods inclusive of CENVAT, i.e CGST & SGST will be charged on same price
Supply of Goods: Suppose the rate of CGST is 10% and that of SGST is 10%. When a wholesale
dealer of steel in Uttar Pradesh supplies steel bars and rods to a construction company, which is also
located within the same State for , say Rs. 100, the dealer would charge CGST of Rs. 10 and SGST of
Rs. 10 in addition to the basic price of the goods.
Supply of Services : Suppose, that the rate of CGST is 10% and that of SGST is 10%. When an
advertising company located in Mumbai supplies advertising services, to a company manufacturing
soap which is also located within the State of Maharashtra for, Rs. 100, then the ad company would
charge CGST of Rs. 10 as well as SGST of Rs. 10 to the basic value of the service.
In both the cases, he would be required to deposit the CGST component into a Central Government
account and the SGST portion into concerned State Government account. He need not actually pay duty
in cash, as he would be entitled to set-off this liability against the CGST or SGST paid on his purchases
(say, inputs). But for paying CGST he would be allowed to use only the credit of CGST & SGST paid on
his purchases respectively. In other words, CGST credit cannot, in general, be used for payment of SGST.
Nor
can
SGST
credit
be
used
for
payment
of
CGST.
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GST on Import of Goods and services

With Constitutional Amendments, both CGST and SGST will be levied on

import of goods and services into the country.
The incidence of tax will follow the destination principle(Place of supply
rules).
Tax revenue in case of SGST will accrue to the State where the imported
goods and services are consumed.
Full and complete set-off will be available on the GST paid on import on
goods and services.
Thus, import of goods will attract BCD and IGST. It may be noted that
import of services, as against service tax at present, in GST regime, will
attract IGST.
Basic Custom Duty will continue to there under GST system. However,
the additional custom duty in lieu of CVD /Excise and the Special
Additional Duty (SAD) in lieu of sales tax/VAT will be subsumed in the
import GST.
The import of services will be subject to Central GST and State GST on a
reverse charge mechanism. In other words, the GST will be payable by
the Importer on a self declaration basis.
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Taxable Person

It will cover all types of person carrying on business

activities, i.e. manufacturer, job-worker, trader, importer,
exporter, all types of service providers, etc.
If a company is having four branches in four different states,
all the four branches will be considered as TP (Taxable
person) under each jurisdiction of SGs.
A dealer must get registered under CGST as it will make
him entitle to claim ITC of CGST thereby attracting buyers
under B2B (Business to Business) transactions.
Importers have to register under both CGST and SGST as
well.
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GST on Export of Goods and

Services

GST on export would be zero rated.

Similar benefits may be given to Special Economic
Zones (in processing zones only).
No benefit to the sales from an SEZ to Domestic Tariff
Area (DTA).

GST paid by Exporter on the procurement of

goods and services will be refunded.

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Registration under GST

Each taxpayer would be allotted a PAN linked taxpayer

identification number with a total of 13/15 digits.

This would bring the GST PAN-linked system in line with the
prevailing PAN-based system for Income tax facilitating data
exchange and taxpayer compliance.

The exact design would be worked out in consultation with

the Income-Tax Department.

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Returns under GST

The taxpayer would need to submit periodical returns to both
the Central GST authority and to the concerned State GST
authorities.
ITC credit can also be verified on the basis of the returns filed
and revenues reconciled against Challan data from banks.
Common standardized return for all taxes (with different
account heads for CGST, SGST, IGST) can come into picture.
Common standardized Challan for all taxes (with different
account heads for CGST, SGST, IGST) can come into picture.

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Taxable Event

Existing Practice

GST

Excise Duty-Manufacturing,

Taxable event is Supply of Goods &

service

Sales Tax/VAT- Sale of Goods

The location of the supplier and the

recipient within the country is
immaterial for the purpose of CGST.

Service Tax- Realization of Service

SGST would be chargeable only when

the supplier and the recipient are both
located within the State.
Inter state Supply of goods and
services will attract IGST.

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GST Invoice

The Task Force on GST said the computation of CGST and

SGST liability should be based on the Invoice credit method.
i.e., allow credit for tax paid on all intermediate goods and
services on the basis of invoices issued by the supplier.
Invoice level detail is necessary for the reconciliation of tax
deposits, and the end-to-end reconciliation of ITC. An effective
IGST implementation may also require invoice-level details.
A number of states are capturing invoice details even in the
existing VAT systems. It is proposed to follow a two-pronged
approach with Dealer level granularity of returns in the first
phase followed by invoice level in the next phase.

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Rate of Tax

The combined GST rate is being discussed by government.

The rate is expected around 16 per cent. After the total
GST rate is arrived at, the States and the Centre will decide
on the CGST and SGST rates. Currently, services are taxed
at 12 per cent and the combined charge indirect taxes on
most goods are around 20 per cent.

Today the Rate of GST in some countries are

Australia10%, France19.60%, Canada5%, Germany19%,
Japan5%, Singapore7%, Sweden25%, New Zealand15% &
Pakistan17%
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Exemption of Goods and Services

Alcohol, tobacco, petroleum products are likely to be out of the GST regime.
Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST.
Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the existing practice. In
case it has been made VA table by some States, there is no objection to that. Excise Duty, which is
presently
levied
by
the
States
may
not
also
be
affected.
Tax on Petroleum Products: Petroleum and petroleum products have also been constitutionally
brought under the GST. However, it has also been provided that petroleum and petroleum products
shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST
Council.
Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre may be
allowed to levy excise duty on tobacco products over and above GST with ITC.
Taxation of Services: As indicated earlier, both the Centre and the States will have concurrent power
to levy tax on goods and services. In the case of States, the principle for taxation of intra-State and
inter46 State has already been formulated by the Working Group of Principal Secretaries /Secretaries
of Finance / Taxation and Commissioners of Trade Taxes with senior representatives of Department
of Revenue, Government of India. For inter-State transactions an innovative model of Integrated GST
will be adopted by appropriately aligning and integrating CGST
and IGST.
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Composition scheme
A Composition/Compounding Scheme will be an important
feature of GST, to protect the interests of small traders and
small scale industries. The Composition/Compounding scheme
for the purpose of GST should have an upper ceiling on gross
annual turnover and a floor tax rate with respect to gross annual
turnover.
In particular there will be a compounding cut-off at Rs. 50 lakhs
of the gross annual turnover and the floor rate of 0.5% across
the States. The scheme would allow option for GST registration
for dealers with turnover below the compounding cut-off.

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GST and Information Technology

(IT) Interface
Based on the legal provisions and procedure
for GST, the content of work-flow software
such as ACES (Automated Central Excise &
Service Tax) would require review.
On the IT front, there has been consensus
that there will be a common portal
providing three core services (registration,
returns and payments).

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Information Flow and Associated Entities

Send Challan
Taxpayer

Banks and RBI

File Returns

Upload Challan
Details

CBEC
(Central
Portal)

State 1Portal
State 2 Portal

SGST and
IGST
Return

CBDT

MCA
NSDL

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State N Portal

CGST and
IGST Returns

Common
GST Portal
(Reconciliati
on system)

Increased Assessee Base

Under the CGST model proposed, with

threshold of annual turnover of Rs.10 lakhs,
the present Assessee base of Excise and
Service Tax of about 10 lakhs will increase
to about 50 lakhs as every manufacturer
and Trader above the specified threshold
will be liable to CGST.

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Tax reconciliation between

Central and State Govt.

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 output tax liability in his
own State,
The Centre will transfer to the importing State
the credit of IGST used in payment of SGST,
The relevant information will also be submitted
to the Central Agency which will act as a
clearing house mechanism.

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Flaws of GST Model

Major flaw of this model is ,Local Dealers have to pay

CGST in addition to SGST.
In Addition to this, CGST mainly represents the
Excise/service tax and SGST mainly represents the VAT
portion but, because of No differentiation between Goods
and Services service supply within the state would attract
SGST as GST is levied at each stage in the supply chain
and Assessee have to Pay CGST as well SGST.
The issue which still needs to be resolved are, the revenue
sharing between States and Centre, and a framework for
exemption, thresholds and composition .
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