ECONOMIC GROUP PROJECT Group No.

: 12 Theme: Macroeconomics

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Date: 12.12.2011

Title: Goods & Service Tax: Road block or Way ahead to stronger economy.

Introduction:

Goods & Service Tax is a new taxation regime, which has been in talks for past two years in India. It was scheduled to be implemented nationwide after the 2011 budget, but has been deferred till March 2012 as some of the state governments where not ready to implement an entirely new taxation system. The implementation of Goods & Service Tax (GST) will have huge impact on countrys economic growth and stability. There are much apprehension relating to proposed GST regime regarding the growth in Indian Economy and its effects thereof. As we know in India economy, destination based taxation requires high compliance cost and efficient administration. Taxation both direct and indirect plays an important role in promoting economic growth as well as equitable distribution. As we are facing the cascading system of indirect taxes in India and with the introduction of GST, all the cascading effects of Cenvat and service tax will be more comprehensively removed with a continuous chain set off from the producers point to the retailers point. Moreover, certain major Central and State taxes will also be subsumed in GST. We have also experienced the benefits from the VAT reform which include the growth in economics of States and business community. It will be an interesting study to see the effect of GST post implementation, its benefits in long run, from macro level to micro level and also why there has oppositions from various industrial groups.

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

We will try to enlighten how GST, when implemented will bring considerate change in Indian Economy, why the economy needs such new tax regime and what are the road blocks in implementation pan India.

What is GST?

GST is a comprehensive value added tax levied on both goods and services. This is unlike present scenario wherein Goods and Services are considered separately through separate taxation system. In a GST regime, goods and services are not differentiated as they move through the supply chain.

GST is typically levied on all transactions involving goods and services including import, supply of goods as well as provision of services. GST is levied on the value added at each stage of sale and purchase or supply with an inbuilt credit mechanism (input credits) such that the tax is a pass through for businesses, and the tax burden is borne by the ultimate end user of the product. Being a destination based consumption tax; GST is usually levied on import of goods and services with export transactions being zero rated under the GST scheme.

The government plans to introduce dual GST structure in India. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction. This dual structure will ensure a higher involvement from the states, and consequently their buy-in into the GST regime, thus facilitating smoother implementation. Both the tax components will be charged on the manufacturing cost. The government is deliberating on fixing the value of combined GST rate at the moment, which is expected to be between 14-16 per cent. After the combined GST rate is decided, the centre and the states will finalize the CGST and SGST rates. All kinds of goods and services, barring some exceptions, would be under the GST purview.

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

Provisions of GST:

The introduction of GST will subsumed certain existing taxes and certain taxes will be continued even in the new GST regime. These taxes are bifurcated and listed below:

The following taxes will be subsumed after GST in implemented: CENTRAL TAXES: Excise Duty, Additional Excise Duty Service Tax Countervailing Customs Duty, Special Additional Customs Duty Various Cess and Surcharges Excise Duty on products with alcohol (Taxed under M&TP Act)

STATE TAXES: Value Added Tax Entertainment Tax (levied by States) Luxury tax, Tax on Lottery, Batting and Gambling Entry Tax (other than for local government) Cesses and Surcharges

The following taxes will not be subsumed and continued with the GST:

CENTRAL TAXES:

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

Excise Duty on 3 Petroleum Products Excise Duty on Tobacco Products (In addition to GST)

STATE TAXES: State excise on Alcoholic Beverages Tax on 3 Petroleum Products Entertainment tax levied by local bodies Entry tax for local bodies Stamp Duty

Decision on the following taxes has been deferred:

Purchase Tax Electricity Duty Taxes On Natural Gas Taxes / Levies on Textile and Sugar Tax on vehicles and transport of goods & passengers

Taxable Events in GST: Taxable event for levy of tax under proposed GST regime will be supply of goods or service for consideration Hence the present taxable events such as Manufacture in case of Central Excise and Sale in case of VAT or CST will lose relevance Elaborate rules to determine the place and time of supply of goods and services will be formulated

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

Branch transfer will be treated as supply of goods thereby chargeable to GST

Key Feature of Indian GST Structure

Dual GST comprising of Central GST and State GST levied on the same tax base Comprehensive coverage of supply of goods and services except few exempted goods and services Similar tax treatment for goods and services Negative definition' of taxable service proposed Identical tax treatment for inter-state and intra-state supplies Common classification by Center as well as all states

Road Blocks, Opportunities & Challenges:

Road Blocks (Issues during transition from old to new tax regime) Compliance with Transitional Provisions provided in the GST legislation- e.g. Registration, pending adjudication etc. Treatment of un-utilized tax credit carried forward under CENVAT and State VAT Computing impact of withdrawing existing product based exemptions (where applicable) Taxability of works contract and sub-contractors Tax impact of purchases from unregistered dealer Tax treatment of goods sent for job work or for temporary servicing Refund procedures in the case of Exports, Supply to SEZ and in the case of large capital investment

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

Standardization of systems and procedures across states and at national level Issues related to compliance requirements Alignment of Accounting and IT System which can provide required details to avail full input tax credit and avoid tax losses

Opportunity

GST provide opportunity to re-engineer tax efficient business model and processes for sales and distribution, procurement, manufacturing Review full supply chain to ensure maintaining a seamless ITC chain & avoid tax losses Ensure availing carried forward unutilized credit under CENVAT and VAT by preserving documents, records and complying with procedure Ensure smooth transition by creating awareness about proposed GST regime in your organization

Challenges Consensus among all states on the GST design and rates Constitution amendment and GST legislation Stability of GST regime- no unilateral deviation by a state Integration of all taxes on goods & services like electricity duty, purchase tax, tax on natural gas. These affect competitiveness of certain industries Implementation of uniform documentation and procedures in all states and training of officers

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

Benefit in respect to Indian Economy & Business:

Manufacturing sector in India is one of the highly taxed sectors in the world. A complex and high taxation structure has the tendency to render products uncompetitive in the international market or eats up large portions of the cost arbitrage available in manufacturing set-ups in low cost economies such as India. For instance, the manufacturing cost of most products in India is nearly half than in the west. But, the incidence of multistage taxation i.e. customs duty on imports, central excise duty on manufacture, central sales tax (CST) / value added tax (VAT) on sale of goods, service tax on provision of services and levies such as entry tax, octroi and cess by the State or local municipal corporations and related costs such as loss of tax credit, compliance and litigation cost chip away this advantage to the extent of almost 50 per cent. GST will create single Indian Common Market leading to supply chain efficiency & scale economy Reduction in compliance cost on simplification of tax structure and uniform returns/ procedure Export cost will reduce due to zero rating of CGST & SGST (Annual saving estimated by NCEAR- 24000 to 48000Cr.) Duel GST on imports will change imports parity with indigenous goods Services will bear tax incidence of Duel GST Distributive trade will be impacted by Duel GST

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

GST Globally:

More than 140 countries have introduced GST in some form. It has been a part of the taxation in Europe for the past 50 years and is fast becoming the preferred form of indirect tax in the Asia Pacific region. It is interesting to note that there are over 40 models of GST currently in force, each with its own peculiarities. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. It is only recoverable on goods used in the production process, and GST on fixed assets is not recoverable. There is a separate business tax in the form of VAT.

For example, when the GST was introduced in New Zealand in 1987, it yielded revenues that were 45 per cent higher than anticipated, in large part due to improved compliance. Its more neutral and efficient structure could yield significant dividends to the economy in increased output and productivity. The GST in Canada replaced the federal manufacturers sales tax which was then levied at the rate of 13 per cent and was similar in design and structure as the CENVAT in India. It is estimated that this replacement resulted in an increase in potential GDP by 1.4 per cent, consisting of 0.9 per cent increase in national income from higher factor productivity and 0.5 per cent increase from a larger capital stock (due to elimination of tax cascading). The Canadian experience is suggestive of the potential benefits to the Indian economy. This means gains of about US$ 15 billion annually. Discounting these flows at a modest 3 per cent per annum, the present value of the GST works out to about half a trillion dollars. This is indeed a staggering sum and suggests the need for energetic action to usher the GST regime at an early date.

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

Analysis:

Analysis of impact of GST over current VAT regime can clearly be stated from the below mentioned data: The problem with the existing tax system is illustrated with an example for simple understanding. The normal price structure of a car in Jharkhand state will be as follows.

Description Ex plant value EXCISE DUTY @23.81875% Additional Excise TOTAL EXCISE DUTY Price with Excise duty CST 2% Transportation Price to dealer Dealer Margin Vat @ 14% CUSTOMER EX-SHOWROOM

Amount in Rs. 1,000,000 238,188 15,450 253,638 1,253,638 25,073 15,000 1,293,710 15,000 183,219 1,491,930

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ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

If we go through the details very carefully, it will come out that once paid TAX is again TAXED. In the above case Rs 39019 is taxed on the tax paid as EXCISE & CST. So this is a case of DOUBLE TAXATION.

Description Excise Duty CST Total

Amount in Rs 253638 25073 278710

State Vat on EXCISE + CST Tax 39019

So, the consumption tax system in India is complicated and multi-layered with levies both at the Central and State levels. Taxes on goods are levied by the Centre at the manufacturing level through CENVAT, on services through the Finance Act, and on sale of goods via the Central Sales Tax Act. States levy tax on the sale of goods independently, under their own laws.

HOW GST WILL WORK: - We have tried to show HOW GST will work through an example of Car manufacturing cycle to its retail cycle. We have assumed the GST rate at 10%.

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

Cost of all aggregates purchased to assemble the Car Car Manufacturer 500000 100000 600000 60000 Assembly cost Cost of finished Car GST on output @ 10%

GST credit on input @ 10% Net GST paid by Car Manufacturer

50000

10000

GST Purchase price of car Transportation to the distributors + Dealer Margin Retail Price to the customer GST on retail price @ 10% credit on Input @ 10% Net GST paid by the distributor

Distributor

600000

25000

625000

62500

60000

2500

So GST is levied at every stage of the production-distribution chain with applicable set-offs in respect of the tax remitted at previous stages.

Current status: An Empowered Committee of State Finance Ministers has been set up under the leadership of Asim Das Gupta, the Finance Minister of West Bengal, to support the implementation of GST. The Centre and states have on agreed to a dual structure for the GST, with multiple rates for goods and a single rate for services.

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)

ECONOMIC GROUP PROJECT Group No.: 12 Theme: Macroeconomics

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Date: 12.12.2011

The government is likely to release a draft paper for a final discussion between the stakeholders by late March, 2012. The combined GST rate is being discussed by government. The rate is expected to be around 14-16 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 10 per cent and the combined indirect taxes on most goods is around 20 per cent.

Conclusion:

On going through the white paper on GST published by Ministry of Finance & various other journals published by senior financial analyst and chartered accounts, we can clearly see that GST when implemented in India, will bring huge economic reforms for the country. There are certain road blocks, but central government are working towards finding solution to those problems and once every state is geared for GST, it will open various barriers created by earlier tax regime. Business will grow across India and end customer will be benefited with end of double taxation concept. It will also help the businessmen & professional by providing single window for all their taxation work.

When VAT was introduced in India, we saw huge repurcation from various trade groups and organization, but today we can easily see how beneficial it has been for the country, businessmen and the end customer. It had reduced double taxation to a larger extent and has somewhat created uniform taxation for certain products pan-India. Similarly, when GST will be implemented, there will definitely be roadblocks, repurcation, opposition by various organizations, traders, professionals and political parties, but when it brought into effect, it will surly lead India into a bigger and positive economic reforms. New avenues, geographical areas will be created for business. It will grow the revenue of both state and center and also help everyone concerned with GST.

Sent to : Prof. Amarendu Nandy

Drafted & Made By Ravi Shankar Kumar (181), Pradeep Kumar (223) & Kanishka Poddar (220)