GST: Goods and Services Tax (Part 3)

Worldwide GST:

France was the first country to introduce GST in 1954. Worldwide, Almost 150 countries have introduced GST in one or the other form since now. Most of the countries have a unified GST system. Brazil and Canada follow a dual system vis-à-vis India is going to introduce. In China, GST applies only to goods and the provision of repairs, replacement and processing services. 

Country	Rate of GST
Australia	10%
France	19.6%
Canada	5%
Germany	19%
Japan	5%
Singapore	7%
New Zealand	15%

 Rate of GST:

There would be two-rate structure –a lower rate for necessary items and items of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For goods in general, government is considering pegging the rate of GST from 20% to 23% that is well above the global average rate of 16.4% for similar taxes, however below the revenue neutral rate of 27%.

Model 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). Rates for Central GST and State GST would beapproved appropriately, reflecting revenue considerations and acceptability.
• The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services.
• Cross utilization of ITC both in case of Inputs and capital goods between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services (i.e. IGST).
• The Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.
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Example: 1 (Comprehensive Comparison)
Comparison between Multiple Indirect tax laws and proposed one law
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 @ 12%	–	840.00
Add: SGST @ 12%	–	840.00
Invoice Value	8,820.00	8,680.00
Wholesaler to Retailer
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: VAT @ 12.5%	1,078.00	–
Add: CGST @ 12%	–	924.00
Add: SGST @ 12%	–	924.00
Invoice Value	9,702.00	9,548.00
Retailer to Consumer:
COG to Retailer (b)	8,624.00	7,700.00
Add: Profit Margin	862.40	770.00
Total Value(c)	9,486.40	8,470.00
Add: VAT @ 12.5%	1,185.80	–
Add: CGST @ 12%	–	1,016.40
Add: SGST @ 12%	–	1,016.40
Total Price to the Final consumer	10,672.20	10,502.80
Cost saving to consumer	–	169.40
% Cost Saving	–	1.59
Notes:·         Input tax credit available to wholesaler is Rs.980 and Rs.1,680 in case of without GST and with GST respectively.
·         Likewise Input tax credit available to Retailer is Rs.1,078 and Rs.1,848 in case of without GST and with GST respectively.
·         In case, VAT rate is also considered to be 12%, the saving to consumer would be 1.15%.

IGST Model (Inter-State Transactions of Goods & Services) and Input tax credit (ITC) with example: 

·         Existing CST (Central state tax, tax on interstate movement of goods) shall be discontinued.

·         Center would levy IGST (cumulative rate for CGST and SGST)on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.

·         The ITC of SGST, CGST shall be allowed as applicable.

·         Since ITC of SGST shall be allowed, 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. (Please see example 4 & 5)

·         The relevant information shall be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective state governments or central government to transfer the funds.

·         Advantage of IGST:

·         No refund claim in exporting State, as ITC is used up while paying the tax.

·         Maintenance of uninterrupted ITC chain on inter-State transactions.

·         No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.

Example –2 (Input Tax Credit)

Shiva, a registered dealer had input tax credit for CGST and SGST Rs.750/- and Rs.1,050/- respectively in respect of purchase of inputs and capital goods. He manufactured 1800 liters of finished products. 200 liters was normal loss in the process. The final product was sold at uniform price of Rs.10 per liter as follows:-

Goods sold within State – 800 liter.

Finished product sold in inter-State sale – 650 liter.

Goods sent on stock transfer to consignment agents outside the State – 350 liter.

Further, CGST and SGST rate on the finished product of dealer is 5% and 7% respectively. Further IGST rate is 12%.Calculate tax liability of SGST and CGST to be paid after tax credit.

Solution:

Output Tax Calculation

Particulars	Sales Within State	Stock Transfer Outside State	Inter State Sales	Total
Qty. Sold	800	350	650
Price per unit	10	10	10
Value of Goods Sold	8,000	3,500	6,500	18,000
Tax Amount:
Tax Amount – CGST(5%)	400	–	–	400
Tax Amount – SGST(7%)	560	–	–	560
Tax Amount – IGST(12%)	–	420	780	1,200

Calculation of Tax Payable

Particulars	CGST	SGST	IGST	Total
Tax Payable Amount	400	560	1200
Less: Input Tax Credit
CGST	400	–	350	750
SGST	–	560	490	1050
Balance Payable	–	–	360	360

Notes:

·         There would be no treatment for normal loss.

·         Input tax credit of CGST and SGST of Rs. 750 and Rs. 1050 are paid on inputs. This input tax credit should first be utilized for payment of CGST and SGST, respectively, and balance is to be used for payment of IGST. Thus, balance available for payment of IGST is Rs. 350 of CGST and Rs. 490 of SGST and he is liable to pay balance amount of IGST of Rs. 360 by cash (1200-350-490 = 360). Since credit of SGST of Rs.490 has been utilized for payment of IGST, the State Government will get debit of Rs. 490 from the Central Government.

Example –3 (Input Tax Credit)

Now, continuing with the above example 2, suppose the dealer purchases goods interstate and have input tax credit of IGST available is Rs.2,000/-. Compute the tax payable.

Solution:

Calculation of Tax Payable

Particulars	CGST	SGST	IGST
Tax Payable Amount	400	560	1,200
Less: Input Tax Credit
CGST	–	–	–
SGST	–	–	–
IGST	400	400	1,200	2000
Balance Payable	–	160.00	–	160

Note: Input tax credit of Rs.2000, IGST is available. This input tax credit should first be utilized for payment of IGST and balance is to be used first for payment of CGST and remaining for SGST. Likewise in this case Rs.400 and balance Rs.400 are utilized for CGST and SGST respectively. He is liable to pay balance amount of SGST of Rs.160 by cash.(2000-1200-400-560 = 160).

Some Specific points for specific products (being high revenue generating products)

·         This tax does not apply to alcohol and petroleum products. They will be continued to be taxed as per the existing practices.

·         Tax on Tobacco products will be subject to GST. But government can levy the extra tax percent over and above GST rate.

Other key points:

·         Manufacturing state (the state in India in which the goods are manufactured) will be allowed to levy an additional tax percent (say 1%) on supply of goods.

·         PAN based identification number will be allowed to each taxpayer to have integration of GST withDirect Tax.

·         The taxpayer would need to submit periodical returns, in common format as far as possible, to both the CGST authority and to the concerned SGST authorities.

Exemption/Composition Scheme under GST:

·         The Small Taxpayer: The small taxpayers whose gross annual turnover is less than 1.5 Crore will not be covered by GST law and no need to pay tax.

·         Scope of composition and compounding scheme under GST to be provided for this purpose, an upper ceiling on gross annual turnover (say Rs.50 Lacs) and a floor tax rate (say 0.5%) with respect to gross annual turnover should be provided.

·         Treatment for goods exempt under one state and taxable under the other to be provided.

·         List of exempt items which shall be outside the purview of GST shall be provided.

GST on Export & Import with example

·         GST on export would be zero rated

·         Both CGST and SGST will be levied on import of goods and services into India. The incidence of tax will follow thedestination principle i.e. SGST goes to the state where it is consumed. Complete set-off will be available on the GST paid on import on goods and services.

Example-4 (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 5% and 7% 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 @ 10%	1,000
Cost of imported goods (including BCD)	11,000
Add: CGST on Import @ 5%	550
Add: SGST on Import @ 7%	770
Cost of imported goods (including BCD & GST) (Note below)	12,320

Calculation of Sale value after import

Particulars	Amount(Rs)
Sale Value (before tax)	45,000
Add: CGST on Import @ 5%	2,250
Add: SGST on Import @ 7%	3,150
Sales Value	50,400

Tax Payable Calculation

Particulars	CGST	SGST
	(Rs.)	(Rs.)
Output tax	2,250	3,150
Less: Input tax credit	–	–
CGST	550	–
SGST	–	770
Net tax payable	1,700	2,380

Note: Please note that GST shall be levied including Basic Customs Duty considering.

Example-5 (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)	50,400
Add: Margin and Modification Amt.	10,000
Sale Value	60,400
Add: CGST on Export @ 5%	–
Add: SGST on Export @ 7%	–
Export Value	60,400

Refund Calculation

Particulars	Amount
	(Rs)
Basic Customs Duty(BCD, from above example)	1,000.00
Refund Factor	0.80
Refund amount of BDC	800.00
Add: CGST(from above example)	550.00
Add: SGST(from above example)	770.00
Total Refund amount	2,120.00

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).