During the presentation of Union Budget 2007-08,the Finance Minister P. Chidambaram indicated that an integrated Goods and Service Tax(GST) would be implemented by April 1,2010.Since then, the Finance Ministry and the Government of India have taken steps but have still not managed to implement GST and have postponed the implementation dates twice, firstly from 2010 to 2012 and know from 2012 to 2014. But one thing is certain that it will eventually be implemented, timing being the only area of indefiniteness.
Given the importance of this tax legislation, we will go through the key aspects relating to GST, its working, benefits , challenges and its implication on Indian economy. Before talking about GST, I would like to tell you about the taxes in India.
What is the concept of Goods & Service Tax (GST)?
Goods and Services Tax (GST) is a comprehensive indirect tax levied on goods and services which are manufactured, sold and consumed at national level. The key features of the proposed plan of the Goods and Services Tax for the Indian economy are:
–India will have dual-rate GST i.e. GST will have two components: one levied by the Centre and would be known as Central GST (CGST) and other by State and would be known as State GST (SGST).
–The CGST and the SGST would be applicable to all transactions of goods and services in India except for some exempted goods and services like alcohol, tobacco, petroleum products are likely to be out of the purview of GST regime.
–There will be two-rate structure – a lower rate for necessary items and goods of basic importance and a standard one for goods in general.
–The CGST & SGST would be levied on import of goods and services into the country.
Benefits of Introducing GST
–GST may be new to India but it has already been implemented in the world successfully. France was the first country to introduce GST system in 1954. Standard rate of GST is 15‐20%.
–GST is intended to eliminate multiplicity of taxes, exemptions and rates which are not included in Central VAT(CENVAT) and integrate the indirect tax framework covering manufacturing manufacture, sale and consumption of goods and services.
–CENVAT element is further taxed under state VAT leading to duplicating of tax i.e. ‘tax on tax’. In the proposed GST, such a cascading effect of CENVAT as well as service tax are removed and a continuous chain from original producer/service provider to retailer’s is established, thus reducing the burden of cascading effect. This is critical improvisation in GST.
–As the burden of tax under GST is expected to generally fall it becomes a positive driver for manufacturers, consumers and industry at large and this may lead to increase in revenue both for centre and state, primarily through widening of tax base and possibility of significant improvement in tax-compliance.
–GST will ensure uniformity of taxes across the territory, regardless of place of manufacture or distribution.
–General lowering of costs of raw materials and processes will reduce the cost of goods and services in the market.
–It will simplify India’s tax structure, create a common market across India and broaden the tax base . According to a report by the National Council of Applied Economic Research, it is expected that GST would increase our economic growth between 0.9% to 1.7%. Exports are expected to increase between 3.2% to 6.3%, while imports are expected to increase between 2.4% to 4.7%.
How does the proposed GST system work?
The tax burden in GST is applied across the entire ‘value chain’ and tax is levied proportional to the value addition at each point. Let us take an example of a flour manufacturer. Assume a packet of flour is sold at Rs.380 in the retail store. The GST on this packet of flour is applied across the flour manufacturing ‘value chain’. By ‘value chain’ we mean, the process of raw materials being supplied to the manufacturer by the raw material supplier, finished and packaged flour supplied to the whole seller and finally to the consumer purchasing the final packed flour from the retail stores.
The process in which GST will be calculated are as follows (assuming GST rate=10%):
–In the first stage the raw material supplier, who supplies the raw material worth Rs.200 to the manufacturer has already paid GST of Rs.20.
–The manufacturer processes the raw materials and add value to the extent of Rs.50 and sells the bulk flour to the whole seller at Rs.250.The manufacturer will then pay a GST on output of Rs.250, which is Rs.25 (GST rate of 10% on Rs.250), but will get an exemption of GST input tax credit which is Rs.20 (10% on Rs.200) thus paying a net GST of only Rs.5.
–Similarly as shown in the table below, the whole seller and the retailer will each have to pay a net GST of Rs.10 and Rs.3 respectively.
–In total, the entire value chain from the raw material supplier, manufacturer, whole seller and the retailer, all put together will have to pay Rs.38 as GST.
–Hence, GST is a tax which is levied only on the component of “value addition” at each stage and supplier at each stage is permitted to set-off the early payment through tax credit mechanism.
|
No
|
Stages of Supply Chain
|
Value of Input
(Rs.)
|
Value Addition
(Rs.)
|
Value of goods & services at next stage
(Rs.)
|
Rate of GST(%)
|
GST on Output
(Rs.)
|
Input Tax Credit
(Rs.)
|
Net GST= GST on output-Input Tax Credit
(Rs.)
|
|
1
|
Raw material supplier
|
200
|
—
|
200
|
10
|
20
|
0
|
20-0= 20
|
|
2
|
Manufacture
|
200
|
50
|
250
|
10
|
25
|
20
|
25-20= 5
|
|
3
|
Whole seller
|
250
|
100
|
350
|
10
|
35
|
25
|
35-25= 10
|
|
4
|
Retailer
|
350
|
30
|
380
|
10
|
38
|
35
|
38-35= 3
|
The table below shows the advantage of having GST over current taxes:
|
At Present under Excise & VAT
|
After implementation of GST
|
||
|
In Factory
|
Amount(Rs.)
|
In Factory
|
Amount(Rs.)
|
|
Assessable Value
|
1000
|
Assessable Value
|
1000
|
|
Add: Excise Duty@10%
|
100
|
Add: GST@10%
|
100
|
|
Sale Value
|
1100
|
Sale Value
|
1100
|
|
In Retail Shop
|
Amount(Rs.)
|
In Retail Shop
|
Amount(Rs.)
|
|
Cost Price
|
1100
|
Cost Price (Rs.1100 – Rs.100)
|
1000
|
|
Add: Expenses & Profit
|
400
|
Add: Expenses & Profit
|
400
|
|
Assessable Value
|
1500
|
Assessable Value
|
1400
|
|
Add: VAT@12%
|
180
|
Add: GST@12%
|
140
|
|
Sales Price
|
1680
|
Sales Price
|
1540
|
|
ANALYSIS
|
|||
|
Excise Duty Paid by Factory@10%
|
100
|
GST Paid by Factory@10%
|
100
|
|
VAT paid by Retail Shop@12%
|
180
|
GST paid by Retail Shop@12%
(Rs.140 – Rs.100)
|
40
|
|
Total Taxes Paid
|
280
|
Total Taxes Paid
|
140
|
|
Here, Excise Credit of Rs.100/- is not available.
|
Here, GST Credit of Rs.100/- is available.
|
||
What are the challenges in introducing GST?
1. Constitutional Amendments: Implementation of GST calls for amendments in
the Constitution and the various constitutional entries relating to taxation. For example‐ The States does not have the powers to levy a tax on supply of services. To give the States this power requires necessary changes in Constitution which is itself a very procedural task. Similarly the centre does not have the power to tax sales of goods and would require necessary changes in Constitution.
2. IT Infrastructure: The Government needs to develop/set up proper IT infrastructure to implement GST.
3. Sharing of resources: Given the current state level VAT variations, there are challenges in securing unanimous consent on the rate of GST, hence this is yet not been finalized. It is not only the matter of rates but the states will have to let go their powers of levying many form of taxes which will henceforth be covered under GST. Such loss of power have turned out to be a major hurdle for securing unanimous approvals from state government in implementing GST.
4. Compensation to States: There is likely to be significant loss of revenue to the state governments on account of GST implantation and so there is opposition for implementation of GST. To remove the resistance, the Centre is expected to put in place a mechanism in initial years to compensate the States for any revenue loss due to GST.
Every system has its own intricacies embedded at the initial stages and removing these difficulties involve various constitutional, political, technological and procedural barriers and it’s going to be a really tall task to design and implement an integrated goods and service tax in line of international best practices and at the same time match with the complexities of Indian state and central legislation. We have moved forward significantly in this initiative, but, it needs to be seen when we would be in a position to actually implement GST entirely.
[The article has been written by Madhur Gupta. He is presently pursuing his MBA from Prin.L.N.Welingkar Institute of Management Development & Research.]
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