Jyoti Raj, Tax Consultant
Value
Added Tax made in first opening in France in 1954. At that time it was
not a full VAT system, since it was restricted to manufacturers and
whole-sellers. The retailers and agriculturist were kept beyond its purview.
In the past three decades this new system was
introduced world-wide including India in about 130 countries.
VAT IN INDIA
Neither rain no hail could stop the Government
from introducing VAT w.e.f 1st day of April, 2005 in almost entire
country.
In the present form, VAT is a transition from the
present sales tax systems to a
full VAT and then onto a Goods and
Services Tax (GST). The transition phase will continue till CST is phased
out. In the long-run , once the Goods and Services Act comes into force, India
would become one market and there
would not be any difference in procuring goods or services within the State or
from outside the State.
FIVE YEAR OF VAT
No doubt that our tax collections have risen
between 20% to 30% since the introduction of VAT. But the main question that
arises is whether we have achieved the set-out objectives during these initial
three years. In the midst of political interferences, & in spite of it
teething problems while replacing such old established sales
tax system, reducing cascading effect, reducing large number of tax laws and large
number of tax
exemptions, in spite of lack of professionalism and poor expertise of the
State administrations have evolved as a solid measure for making the way for the
much awaited tax implementation of GST .
The consumer at large has been benefited by the
introduction of VAT. The dealers have also been benefited with introduction.
GLOBAL DEMAND OF A TAX
SYSTEM:-
Only honest tax payers payees regular taxes
whereas the offenders are still walk escort free. The idea to bring GST is to
make a chain which is difficult to break and base of tax collections may widen,
so that at lower rates better revenue may be garnered.
When an MNC wants to do business in India it
finds new laws in each State. Not only that but they find so many laws
applicable on them that find it impossible to work with such a country like
India and they reroute to some other neighboring country like China. Therefore,
it is almost imperative now to enter in the era of GST.
DOUBLE TAXATION
The GST will make no differentiation between Good and Services as the GST is
levied at each stage in the supply chain. The problem of double taxation was
addressed by the Supreme Court of India in the landmark decision of
BSNL Vs UOI (2006 (3)
SCC-1). The Supreme Court had held that the same activity
cannot be regarded as both goods and services and hence both service tax and VST
should not be applicable on the same set of transaction. However, inspite of the
ruling in the BSNL case, there has been a lot of confusion whether to treat
specified activities as goods or services . Implementation of GST will resolve
the dilemma of a large number of assessees
JUSTIFICATION IN IMPLEMENTATION OF GST
Inspite of the success of VAT at large there are
still some shortcomings both in the Central and State level. In the existing
State-level VAT Structure there are also certain shortcomings . There are, for
instance, even now several taxes which are in the nature of indirect tax on
goods and services, such as Entry Tax , luxury tax, entertainment tax etc., are
yet not subsumed in the VAT scheme . At present the Central Government is
charging Central Excise Duty at the point of removable of goods from the place
of manufacture. The Central Excise Duty is to be deposited irrespective of
payment against goods removed from the place of manufacture. Service tax is
charged on the date of rendition of services or the date of receipt of payment
whichever is earlier. The State VAT if chargeable at the time of sale of goods
irrespective of receipt of payment against such sale. The introduction of GST
will be a solution to it. GST would be chargeable on each transaction like sale
of goods, incorporation of goods in a individual contract, hiring equipment,
lease paid , consultation fee paid ,rendition of any service or may be a
transfer of immovable property etc.
The introduction of unified GST would bring VAT
in its true sense. Presently the VAT system, basically can be called
un-integrated GST, in the sense that at present goods and services are taxed
separately .
The taxable event under GST system will be the
“supply of goods” and the “supply of services”. The current taxable event such
as “manufacture”, “sale of goods” “render of services” will not be relevant
under GST system.
The prices
of commodities are expected to come down in the long run as dealers pass
on the benefits of reduced tax incidence to consumers by slashing the prices of
goods. Being a consumption based tax, dual GST will result in better revenue
collection for states with higher consumption of goods and services. This is
been explained with an example .
| (A) Goods-Producer to Whole-Seller
|
Under VAT (Rs.)
|
Under GST (Rs.)
|
| Cost of Production |
100000/- |
100000/- |
| Add:
Producers margin of profit |
20000/- |
20000/- |
| Producers basic price |
120000/- |
1200000/- |
Add:
Central Excise duty @ 8%
Add: Service Tax @ 10% on
Transportation & Job work paid |
8000/-
4000/- |
NIL
NIL (Included in GST)
|
| Add:
Value Added Tax @ 12.5% |
16500/- |
NIL |
| Add:
Central GST @ 12% |
NIL |
14400/- |
| Add:
State GST @ 8% |
NIL |
9600/- |
| Total Price |
148500/- |
144000/- |
| (B) Goods –Whole-Seller to
Retailer |
| Cost of goods to the Whole-seller |
132000/- |
120000/- |
| Add: Profit margin @ 10% |
13200/- |
12000/- |
| Total |
145200/- |
132000/- |
| Add:
Value Added Tax @ 12.5% |
1650/- |
NIL |
| Add:
Central GST @ 12% |
NIL |
1440/- |
| Add:
State GST @ 8% |
NIL |
960/- |
| (C) Goods-Retailer to Final
Consumer |
|
|
| Cost of goods to the Retailer |
145200/- |
132000/- |
| Add: Profit margin @ 20% |
29040/- |
26400/- |
| Total |
174240/- |
158400/- |
| Add:
Value Added Tax @ 12.5% |
3630/- |
NIL |
| Add:
Central GST @ 12% |
NIL |
3120/- |
| Add:
State GST @ 8% |
NIL |
2112/- |
| Total Price to the final Consumer |
177870/- |
163632/- |
| Tax component in price to Final Consumer |
21780/- |
31632/- |
| Final Price ex-taxes |
156090/- |
132000/- |
It is evident from the above example that due to
multiplicity of taxes and due to non-availability of input tax credit across the board the final price to the
consumer is much higher not only due to tax component but due to cascading
affect also.
Window to GST
Goods
and Service Tax (GST) is that tax credit
mechanism wherein the tax is
levied on goods and services at each point of sale or provision of service.
Under this tax regime the seller of goods or the service provider can claim the
input credit of tax paid / payable by him (i.e. input GST) for purchasing /
selling the goods or procuring the service. GST may be termed as a national
level VAT on goods and services with one of the differences that it also
covers.
It will evade the cascading effect in Indirect
tax regime. For instance, when a Auto
part making company produces auto part’s, the
central Government charges an excise duty on them as they leave the factory.
Whereas on lower end of the supply chain i.e. at the retail level. VAT is
charged without giving credit of the excise duty levied earlier. But in GST
system, both central and state
taxes will be collected at the point of sale. Both components will be
charged on the manufacturing cost., it will result in increased tax collections
due to wider tax base and better conformity.
1. Single versus multiple stage
Unlike the existing sales
tax and service tax, GST is generally charged on the consumption of goods
and services at every stage of the supply chain, with the
tax levels feature of GST in
Goods and Service subject to
tax
GST operates on a negative concept – all goods
and services are subject to GST unless specifically exempted.
Under a GST regime, a much wider range of
services will fall within the GST net then before.
2. Tax payment and accounting periods.
- Time of supply is an important feature under the GST regime as it determines
when one should account for GST in the GST returns.
The GST rules differ from the existing
sales tax structure where sales
tax becomes due and payable when there is a sale or disposal otherwise
than by sale. On the other hand, service tax is only due when payment is
received.
GST in India:
Single GST Model
Under this system there would be single Union GST
from each transaction which may comprise sale of goods or rendition of services.
Such transactions would be inter-State VATable. Each intermediary from
production level to consumer level shall pay GST on the value addition after
setting off input tax credit out of charged by it.
Dual GST Model
The JWC laid down various recommendation
including to have two GST components viz. Central tax and single uniform state
tax across the country, levying of a tax over and above GST by the states on
tobacco, petroleum and liquor, GST with a quadruple tax structure comprising of
a central tax on goods extending up to retail level, a central tax on goods
extending up to the retail level, a central service tax, state VAT on goods, and
a state VAT on services. Further it recommended that because of quadruple
structure, there may be at least four rate categories one for each of the
components given above. In this system the taxpayer may be required to calculate
tax liability separately for the different rates of tax.
- The states must tax intra-state services while inter-state services must
remain with the centre.
- Petroleum products, including crude, high speed diesel and petrol, may
remain outside the ambit of GST.
- Central cess like education and oil cess may be kept outside the dual GST
structure to be introduced from April 2010.
- Levies like the toll tax, environment tax and road tax to be kept outside
the GST ambit, as these are user charges; and
- That the levies which are in the nature of user chargers and royalty for use
of minerals must be kept out of the purview of the proposed tax.
GST MECHANISM
The Goods and Services Tax (GST) is a
comprehensive value added tax (VAT) on the supply of goods or services.
Benefits of Dual GST
- The Dual GST is expected to be a simple and transparent tax with one or two
CGST and SGST rates.
Applicability of other indirect
taxes:
It is proposed that the taxes to be subsumed
under CGST will include Central Excise Duty (CENVAT), Service Tax and Additional
Duties of Customs and the Taxes to be subsumed under the SGST will include value
Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax, Luxury Tax,
Octoroi, Lottery Taxes, Electricity Duty and State Surcharges relating to supply
of goods and services. Specific Cess, Excise duty on tobacco products and State
Taxes like taxes on items containing alcohol, entertainment tax (local Bodies),
entry tax for local bodies and electricity duty are proposed to be included in
GST.
GST collection model
(a) The GST shall have two
components: one levied by the Centre (CGST), and the other levied by the States
(SGST)..
(b) The Central GST and the
State GST would be applicable to all transactions of goods and services made for
a consideration except the exempted goods and services, the transactions which
are below the prescribed threshold limits.
(c) The Central GST and State GST are to be paid to the
accounts of the Centre and the States separately.
Threshold limits for levy of
GST
The present threshold prescribed in different
State VAT Acts below which VAT is not applicable varies from State to State. A
uniform State GST threshold across States is desirable and, therefore, it is
considered that a threshold of gross annual turnover of Rs.10 lakh both for
goods and services for all the States .
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
Compounding Scheme
The States are also of the view that Composition/
Compounding Scheme, there would be a compounding cut-off at Rs. 50 lakh of gross
annual turn over and a floor rate of 0.5% across the States. The scheme would
also allow option for GST registration for dealers with turnover below the
compounding cut-off.
Expected aggregate rate of
GST
The aggregate rate of GST, across the central and
State GST, is expected to be approximately 18%.
GST Rate Structure
GST is expected to have a dual structure with
multiple rates on goods at both the centre and state level. Officials said the
two rates being considered are 8-10% for the lower slab and 16-18% for the
higher slab. In addition states will levy a 1% on precious metalsand a list of
exempted items.
Purchase tax: Some of the States felt that they
are getting substantial revenue from Purchase Tax and, therefore, it should not
be subsumed under GST while majority of the States were of the view that no such
exemptions should be given.
Tax on items containing Alcohol: Alcoholic
beverages would be kept out of the purview of GST. Sales Tax/VAT can be
continued to be levied on alcoholic beverages as per the existing practice. In
case it has been made Vatable by some States, there is no objection to that.
Excise Duty, which is presently being levied by the States may not be also
affected.
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 without ITC.
Tax on Petroleum Products: As far as petroleum
products are concerned, it was decided that the basket of petroleum products,
i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is
the prevailing practice in India.
Taxation of Services : Both the Centre and the
States will have concurrent power to levy tax on all goods and services.
Cross utilization of credits between
goods and services
The taxes will be levied in parallel by the
Centre and the States who will levy the CGST and SGST respectively on each
supply of goods/ services. Since the Central GST and State GST are to be treated
separately, 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. A taxpayer or exporter would have to maintain separate details in books of
account for utilization or refund of credit. Further, the rules for taking and
utilization of credit for the Central GST and the State GST would be aligned.
Thus the cross utilization of credits for goods and services would be allowed
subject to the fact that cross utilization of credits between the CGST and SGST
would not be permissible.
Taxation of Stock Transfer
The GST regime would work under a destination/
consumption based concept and hence the tax on inter-state sale transactions
will accrue to the destination State. As a corollary, it will be zero rated in
the Origin State.
Inter-State Transactions of Goods and
Services
The Empowered Committee has accepted the
recommendations of the Working Group of concerned officials of Central and State
Governments for adoption of IGST model for taxation of inter-State transaction
of Goods and Services. The scope of IGST Model is that Centre 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 inter-State seller will pay IGST on value addition after
adjusting available credit of IGST, CGST, and SGST on his purchases. 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.
Single return or multiple
returns
It is expected that a single return will be
required to be prepared by the assessee and copies filed with the central GST
and State GST authorities.
Process of assessment under the dual
GST
The dual GST is expected to be a self assessed
tax. The tax administration would have powers to audit and re-assess the
taxpayers on a selective basis.
Benefits availed presently by EOU’s
(exemption from excise duty and Central Sales Tax (CST) on domestic procurement
of goods.
CST will be phased out and will have no place in
the GST regime. It is expected that the benefits presently availed by the EOUs
by way of exemptions would continue to be available in the GST regime as
well.
Continuation of exemption currently
available
After the introduction of GST, the tax
exemptions, remissions etc. related to industrial incentives should be
converted, if at all needed, into cash refund schemes after collection of tax,
so that the GST scheme on the basis of a continuous chain of set-offs is not
disturbed. Regarding Special Industrial Area Schemes, it is clarified that such
exemptions, remissions etc. would continue up to legitimate expiry time both for
the Centre and the States. Any new exemption, remission etc. or
continuation of earlier exemption, remission etc. would not be
allowed. In such cases, the Central and the State Governments
could provide reimbursement after collecting GST.
GST and works contract
Works contract can straddle three taxable
activities as per the current law. There is of course supply of goods. Then due
to the very nature of the contract, there is supply of services. Further, if in
the process of completing the works contract a new commodity comes into
existence, there is the taxable event of manufacture. As of now the supply of
goods is taxable in the form of Value Added Tax (VAT), while the services
element is taxable as service tax. Hence, different aspects of the same activity
have a potential to be taxed by different statutes.
GST AND ITS IMPACT ON VARIOUS
SECTORS
- Impact of GST on Revenue States
- GST to reduce Manufacturing cost
- Implications of GST on imports & exports
- Impact on Pharma Industry
- Impact on FMCG Industry
- Impact on Auto Industry
- Impact on Logistics Sector
- GST regime to Realign Firms’ Warehousing Needs.
Impact of GST on Revenue
States
GST is a consumption based tax and not origin
based. Under GST structure, the tax would be collected by the states where the
goods or services are actually consumed i.e., where the goods are actually sold
and not the goods where it is actually originated. Hence, losses could be heavy
for producing states. In view of the above, the Centre is considering a proposal
to compensate states for any revenue loss.
GST to reduce Manufacturing
Cost
The proposed Goods and Services Tax (GST) would
reduce manufacturing cost and benefit end-customers, Nothing that the Indian
manufacturing sector was highly taxed. The elimination of multiple tax structure
at central and State levels would make the sector viable and globally
competitive. “Our manufacturing sector is one of the highest taxed sectors in
the world. Even a two per cent reduction in production cost will increase
profits by over 20 per sent, giving headroom for reducing prices and benefiting
end-users”.
The GST will be a dual tax with both central and
state GST component levied on the same base. There will be no distinction
between goods and services for tax purpose with a common legislation applicable
to both.
Implications of GST on imports &
exports
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. Place of supply rules will determine which
state will have the authority to get the tax. However, the taxes so paid will be
available as Input Tax Credit and therefore it would be a revenue neutral.
Exports, however, will be zero rated, meaning exporters of goods and services
need not pay GST on their exports. GST paid by them on the procurement of goods
and services will be refunded.
Impact on Pharma Industry
The Indian Pharmaceuticals Industry (IPI),
estimated turnover at 450 billion, ranks fourth globally in terms of volume and
is amongst the largest producer of Pharma products in the world along with USA.
Japan, Europe and China. The cutting edge that IPI enjoys over most other
nations is the cost advantage, given that the cost of labour and overall
production is lower in India as compared to other nations. To cite an example,
the manufacturing cost of Pharma products in India is nearly half the cost
incurred in the US. But the multistage taxation in the Pharma Industry i.e.
Customs Duty on imports, Central excise duty on manufacture, Central Sales Tax
(CST)/VAT on sale of goods. Service tax on provision of services and levies such
as entry tax, Octoroi, cess by the State or Local municipal corporations/
municipalities is one of the key stumbling block in its progress. Levy of
multiple taxes, loss of credit of tax paid, compliance and litigation cost
associated with the present tax set up are causing problems to the Pharma
Industry.
Introduction of GST is a positive step and if
implemented in the right spirit could result in reduction in transaction cost.
The most visible and immediate impact of GST appears to be the proposed
discontinuance of (Central Sales Tax (CST) levy. As on date, CST is a cost to
Pharma manufacturers whenever they procure raw materials from outside their
state and if sale is on inter-state basis. This is on account of the fact that
CST paid in purchases cannot be set off against the local value added tax (VAT)
liability of manufacturer/ dealer. Though, over the last couple of years CST
rates have reduced from four to two percent, the said levy continues to be a
cost to the manufacturers and traders dealing in interstate transactions. The
phasing out of CST with the advent of GST could do away with the perennial issue
of credit leakage on this front.
Another evident impact of GST would be a definite
re-look and review of the present warehousing strategies followed by the Pharma
Industry. As it stands on date, most Pharma manufacturers maintain warehouses in
different states to evidence movement of goods from one warehouse to another so
as to save on the CST. Also, quite a few entities set up warehouses on hitherto
attractive locations like Pondicherry or Daman as the CST rate at such locations
were previously lower than the rate at such locations were previously lower than
the rates prevalent in other states. Warehouses across various states and
movement of goods thereof have been a nightmare to the Pharma Industry from the
logistics perspective – not to mention the increased compliance requirements and
transaction costs. With GST in the anvil, Pharma manufacturers can set up
warehouses for distribution at select strategic location without looking at the
same tax planning options resulting in cost of operations.
Currently, certain locations such as Himachal
Pradesh, Uttranchal enjoy an excise tax holiday on their manufacturing
activities. However, since the output is exempt the tax paid in inputs/capital
goods tend to be a cost to the entitles located in such areas. Though, area
based exemptions may not continue in the GST era, based on past experience of
VAT and on a generic basis, it appears that the presently exempted units may be
required to pay GST on their finished goods but, would be entitled to claim
refund in order to ensure continuity of GST at every stage. By doing so, the
credit chain remains intact and at the same time incentives already agreed by
the Centre and the State Government for both Central and State Level GST is
passed on to the manufacturers. Such a move would ensure that the various
manufacturing hubs of the Pharma Industry in said areas continue manufacturing
operations in such locations.
Pharma goods attract excise duty at 4.12 percent
whereas the Active Pharmaceuticals Ingredients (API), which are inputs for
manufacture of Pharma products typically, attracts duty at 8.24 percent. The
difference n duty rates of inputs vis-à-vis the finished goods has resulted in
accumulation of differential Cenvat Credit for the manufacturers not engaged of
export of Pharma goods. The Central Excise/Cenvat Credit legislation does not
provide any mechanism for refund of such accumulated Cenvat credit. With the
Central GST presumed to have a single rate for both goods and services, going
forward accumulation of credit may cease to be an issue for the industry. It is
not clear as on date whether the proposed GST will have transitional provisions
to carry forward the unutilized accumulated Cenvat credit from the Central
excise law to Central GST legislation and how the same would be implemented.
Impact on Auto Industry
The Auto Industry is sensitive to the changes in
the economy as well as fiscal policy and is accepted as the barometer of
economic well-being of a country. The imminent introduction of the goods and
service tax (GST) replacing central excise duty, service tax, state value added
tax (VAT) and central sales tax (CST) may change the way business is done
today.
The Practice in this industry is to sell vehicles
to a dealer network that sells as well as services the vehicles. More than 80%
of the sales is generally outside the state of manufacture. The distribution of
the vehicles may be by way of direct sales to dealers, currently subjected to
CST or by stock transfers to depots and stockyards across the country. Both
these models entail a tax cost, which gets embedded in the final price to the
customers. Though the rate of CST cannot be set off by the dealer against his
VAT liability. Similarly, though stock transfers are not eligible to tax, state
VTA laws provide for retention or reduction of input tax credits.
Currently, stock transfers do not attract any tax
(other than the loss of input tax credit in the exporting state). It is possible
GST would be applicable on all ‘supplies’ including stock transfers. This would
have its own challenges. The valuation of such stock transfers have to be
tackled as there would be no sale value available to calculate tax. There could
be significant cash flow issues as well. Special transition provisions will be
required for the in-movement stock from factory to depot on the date of
introduction of GST.
Most of the new investments by auto companies
have gone to the states that have offered most competitive tax incentives. Such
incentives are largely in the form of subsidies/loan equal to the VAT/CST paid
in the state govt. For instance, under the GST regime, the state of manufacture
will not collect any existing incentives (in terms of CST exemption/deferral)
can continue. Himachal Pradesh etc would also be effected.
One of the reasons for auto component
manufacturers to set up units close to OEM plants is to avoid breaking of the
VAT credit chain. The removal of CST in the new regime would provide a new
opportunity for consolidation of theses units into larger units, which would be
good for economic efficiency of the sector as a whole.
If the GST rate is fixed anywhere between 16-18%
as being discussed currently, it may be a good news for the industry. The
current effective rate works out to be more, particularly for the bigger cars,
where the excise duty is higher.
Impact on Logistics Sector
The introduction of a national sales tax in India
next year could have a similar impact on freight demand as the creation of the
European single market and customs union, according to leading logistics
operations.
Logistics firms are building warehouses and
logistics parks across India as the country gets ready for a centrally
administrated goods and services tax (GST).
The GST will standardize rates across the nation,
allowing many corporations to move away from having warehouses in different
states to adhere to each state tax code and employ logistics companies to manage
distribution and supply chain.
With GST coming in place, a lot of consolidation
is expected in this space. The case for having a warehouse in each state will
disappear.
“Big Corporations such as Larsen and Toubro, ITC
and Philips are planning to close down their regional warehouse in the wake of
GST coming in.
Many corporations have approached their
distribution and logistics part to cut down the cost.
Logistics firm such as Safeexpress Pvt. Ltd.
Transport Corp. of India Ltd. Gati Ltd. are new building warehouses or logistics
parks.
Most of the leading manufacturers currently have
20, 25 warehouses across the country. “With GST, this will change and companies
like Safeexpress will take charge” Safeexpress building 32 logistics parks with
an investments of Rs. 650 crore by 2011.
Let’s hope GST
is
Good & Simplified Tax
!!!
