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Foreword

Tax policies play an important role on the economy through their impact on both efficiency
and equity. A good tax system should keep in view issues of income distribution and, at the
same time, also endeavour to generate tax revenues to support government expenditure on
public services and infrastructure development. Cascading tax revenues have differential
impacts on firms in the economy with relatively high burden on those not getting full offsets.

This argument can be extended to international competitiveness of the adversely affected


sectors of production in the economy. Such domestic and international factors lead to
inefficient allocation of productive resources in the economy. This results in loss of income
and welfare of the affected economy.

Value added tax was first introduced by Maurice Laure, a French economist, in 1954. The tax
was designed such that the burden is borne by the final consumer. Since VAT can be applied
on goods as well as services it has also been termed as goods and services tax (GST). During
the last four decades VAT has become an important instrument of indirect taxation with 130
countries having adopted this, resulting in one-fifth of the world’s tax revenue. Tax reform in
many of the developing countries has focused on moving to VAT. Most of these countries
have gained thus indicating that other countries would gain from its adoption. For a
developing economy like India it is desirable to become more competitive and efficient in its
resource usage. Apart from various other policy instruments, India must pursue taxation
policies that would maximise its economic efficiency and minimise distortions and
impediments to efficient allocation of resources, specialisation, capital formation and
international trade.
Traditionally India’s tax regime relied heavily on indirect taxes including customs and excise.
Revenue from indirect taxes was the major source of tax revenue till tax reforms were
undertaken during nineties. The major argument put forth for heavy reliance on indirect taxes
was that the India’s majority of population was poor and thus widening base of direct taxes
had inherent limitations. Another argument for reliance on indirect taxes was that agricultural
income was not subjected to central income tax and there were administrative difficulties
involved in collecting taxes.
The broad objectives of our report relates to analysing the impact of introducing
comprehensive goods and services tax (GST) on economic growth and international trade;
changes in rewards to the factors of production; and output, prices, capital, employment,
efficiency and international trade at the sectoral level.
Analysis in this report indicates that implementation of a comprehensive GST in India is
expected to lead to efficient allocation of factors of production thus leading to gains in GDP
and exports. It will also ensure better compliance of tax law and will remove cascading
effective which is still present in the taxation system. This would translate into enhanced
economic welfare and returns to the factors of production, viz. land, labour and capital.
Table of Contents

Executive Summary

I. Backdrop 1-

II. India’s Tax Regime

III. Rationale for GST

IV. Overview of GST:-


 How GST works
 System of GST

V. Salient features of GST model


VI. Proposed GST Model
Taxes to be subsumed under GST
Rate Structure
Taxes out of purview of GST
Threshold Limits
Exemptions
Tax Credit
VII. How integrated GST will work?

VIII GST on Import


GST on Export
IX Miscellaneous
X Road Blocks in implementation of GST?

XI Proposed amendments in legislations.


XII Suggestion for effective Implementation
XIII GST Implications for organisations
Executive Summary

The differential multiple tax regime across sectors of production leads to distortions in
allocation of resources thus introducing inefficiencies in the sectors of domestic production.
While indirect taxes paid by the producing firms get offsets under state VAT and CENVAT,
the producers do not receive full offsets particularly at the state level. The multiplicity of
taxes further adds the difficulty in getting full offsets.
Add to this, the lack of full offsets of taxes loaded on to the fob export prices. The export
competitiveness gets negatively impacted even further. Efficient allocation of productive
resources and providing full tax offsets is expected to result in gains for GDP, returns to the
factors of production and exports of the economy.
The Joint Working Group of the Empowered Committee of the State Finance Ministers
submitted its report on the proposed Goods and Services Tax (GST) to the Finance Minister
in November 2007. A dual GST, one for the Centre and other for the states, was to be
implemented by 1 April 2010. The new system would replace the state VAT , CENVAT, and
some other taxes.
The proposed GST would eliminate the cascading effect and would integrate hitherto
disjointed goods and service taxes. It will lead to uniformity in tax rates and procedures
throughout the country. It will ensure better compliance and thus will increase the revenue of
both centre and states. The export sector will also gain from this integration of state and
centre taxes. Consumer will be benefited in form of lower tax rates.
There will be dual tax rate viz Central GST(CGST) and State GST(SGST). Also, for
interstate sales there will be an Integrated GST. However cross credits among CGST and
SGST will not be allowed. The rates for CGST and SGST are yet to be decided. It is also
proposed to keep certain taxes such as taxes on petroleum products to be kept out of
purview of GST.
However, there are major challenges to introduction of GST like amendment of constitution
of India to alter power of taxation of centre and state, rates of SGST and CGST,
standardisation of procedure, compensation for revenue loss to states, etc.
INTRODUCTION

The Goods and Services Tax Bill or GST Bill is a national Value added Tax to be
implemented in India from 1 April 2017. "Goods and Services Tax" would be a
comprehensive indirect tax on manufacture, sale and consumption of goods and services
throughout India, to replace taxes levied by the central and state governments. Goods and
Services Tax would be levied and collected at each stage of sale or purchase of goods or
services based on the input tax credit method. This method allows GST-registered businesses
to claim tax credit to the value of GST they paid on purchase of goods or services as part of
their normal commercial activity. Taxable goods and services are not distinguished from one
another and are taxed at a single rate in a supply chain till the goods or services reach the
consumer. Administrative responsibility would generally rest with a single authority to levy
tax on goods and services. Exports would be zero-rated and imports would be levied the same
taxes as domestic goods and services adhering to the destination principle.

A dual GST system is planned to be implemented in India as proposed by the Empowered


Committee under which the GST will be divided into two parts:

 State Goods and Services Tax (SGST)


 Central Goods and Services Tax (CGST)

Both SGST and CGST will be levied on the taxable value of a transaction. All goods and
services, leaving aside a few, will be brought into the GST and there will be no difference
between goods and services. The GST system will combine Central excise duty, additional
excise duty, services tax, State VAT entertainment tax etc. under one banner. The GST rate is
expected to be around 14-16 per cent. After the combined GST rate is fixed, the States and
the Centre will decide on the SGST and CGST rates. At present, 10 per cent is levied on
services and the indirect taxes on most goods are around 20 per cent.
Backdrop

1.1 Tax policies play an important role on the economy through their impact on both
efficiency and equity. A good tax system should keep in view issues of income distribution
and, at the same time, also endeavour to generate tax revenues to support government
expenditure on public services and infrastructure development. Cascading tax revenues
have differential impacts on firms in the economy with relatively high burden on those not
getting full offsets.
1.2 Traditionally India’s tax regime relied heavily on indirect taxes including customs and
excise. Revenue from indirect taxes was the major source of tax revenue till tax reforms
were undertaken during nineties. The major argument put forth for heavy reliance on indirect
taxes was that the India’s majority of population was poor and thus widening base of direct
taxes had inherent limitations. Another argument for reliance on indirect taxes was that
agricultural income was not subjected to central income tax and there were administrative
difficulties involved in collecting taxes.
However, it became evident that indirect taxes lead to undesirable effects on prices and
allocation of resources. The Government of India constituted Indirect Taxation Enquiry
Committee in 1976 headed by Shri L. K. Jha to study the structure of indirect taxes, central,
state and local level taxes and suggest policy reforms. Indirect Taxation Enquiry Committee
submitted its report in 1978. The committee found a major problem with indirect tax regime
as it had caused unintended distortion in the allocation of resources and cascading effects.
The committee recommended that indirect taxation should move towards taxation of final
products and introduce modified form of value added tax. However, a major obstacle in
rationalisation of indirect tax system was the levy of tax on commodities by government at
different levels viz., centre, state and local authorities. This multiple taxation provides
incentives for tax evasion and undermines efficiency. Further, there is lack of uniformity in
the pattern of commodity taxation resulting in harassment to the public by multiple tax
authorities. Heavy reliance on indirect taxes for raising revenue was also found to increase
cost and fuel inflation.
1.3 The Government of introduced the Long Term Fiscal Policy (LTFP) on 19 December
1985 for prudent fiscal management. Major excise and custom reforms were introduced in
LTFP. The reforms in excise relates to introduction of modified value added tax i.e MODVAT.
However, fill up in the tax policy came with introduction of economic reforms in 1990. The
system of MODVAT was progressively converted into VAT and CENVAT was introduced at
centre level. Subsequently, after Constitutional Amendment empowering the Centre to levy
taxes on services, these service taxes were also added to CENVAT in 2004-05.At state level
also VAT was introduced in 2005.
1.4 Despite all the various changes the overall taxation system continues to be complex and
has various exemptions. The Government of India constituted a Task Force on
implementation of Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) to
chalk out a framework for fiscal policies to achieve FRBM targets. The Report of the Task
Force on implementation of the FRBMA, chaired by Dr. Vijay Kelkar, submitted its Report in
July 2004. It has recommended introduction of a national VAT on goods and services (GST)
which would help improve the revenue productivity of domestic indirect taxes and enhance
welfare through efficient resource allocation.
The Joint Working Group of the Empowered Committee of the State Finance Ministers
submitted its report on the proposed Goods and Services Tax (GST) to the Finance Minister
in November 2007. A dual GST, one for the Centre and other for the states, was to be
implemented by 1 April 2010
II INDIA’S TAX REGIME

2.1 In India the power for taxation has been divided between centre and state under article
246 of the constitution. As per the said article the centre has power to tax under list I of the
Schedule VII of the constitution, the state can tax under list II of the schedule and both can
make law under list III of the schedule. Therefore, there is a clearly defined and multiple tax
regime in India.

Taxation structure existing in country:-


Taxes levied by Centre Taxes Levied by State
Central Excise and Custom Value Added Tax( state sales
tax)
Service Tax Local taxes
Direct Taxes

2.2 Prior to the introduction of VAT in the Centre and in the States, there was a burden of
multiple taxation in the pre-existing Central excise duty and the State sales tax systems.
Before any commodity was produced, inputs were first taxed, and then after the commodity
got produced with input tax load, output was taxed again. This was causing a burden of
multiple taxation (i.e. “tax on tax”) with a cascading effect. Moreover, in the sales tax
structure, when there was also a system of multi-point sales taxation at subsequent levels of
distributive trade, then along with input tax load, burden of sales tax paid on purchase at
each level was also added, thus aggravating the cascading effect further.

2.3 In India, VAT was introduced at the Central level for a selected number of commodities in
terms of MODVAT with effect from March 1, 1986, and in a
step-by-step manner for all commodities in terms of CENVAT in 2002-03. Subsequently, after
Constitutional Amendment empowering the Centre to levy taxes on services, these service
taxes were also added to CENVAT in 2004-05.

2.4 When VAT is introduced in place of Central excise duty, a set-off is given, i.e., a
deduction is made from the overall tax burden for input tax. In the case of VAT in place of
sales tax system, a set-off is given from tax burden not only for input tax paid but also for tax
paid on previous purchases. With VAT, the problem of “tax on tax” and related burden of
cascading effect is thus removed. .
2.5 Before introduction of VAT, in the sales tax regime, apart from the problem of multiple
taxation and burden of adverse cascading effect of taxes as already mentioned, there was
also no harmony in the rates of sales tax on different commodities among the States. Not
only were the rates of sales tax numerous (often more than ten in several States), and
different from one another for the same commodity in different States, but there was also an
unhealthy competition among the States in terms of sales tax rates – so-called “rate war” –
often resulting in, revenue-wise, a counter-productive situation.

2.6 It is in this background that attempts were made by the States to introduce a harmonious
VAT in the States, keeping at the same time in mind the issue of sovereignty of the States
regarding the State tax matters.

The States started implementing VAT beginning April 1, 2005. After overcoming the initial
difficulties, all the States and Union Territories have now implemented VAT.
III Rationale for GST
3.1 Despite this success with VAT, there are still certain shortcomings in the structure of VAT
both at the Central and at the State level.

The shortcoming in CENVAT of the Government of India are as follows:-

 non-inclusion of several Central taxes in the overall framework of CENVAT, such as


additional customs duty, surcharges, etc., and thus keeping the benefits of
comprehensive input tax and service tax set-off out of reach for
manufacturers/dealers.

 no step has yet been taken to capture the value-added chain in the distribution trade
below the manufacturing level in the existing scheme of CENVAT.

The introduction of GST at the Central level will not only include comprehensively more
indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief,
but may also lead to revenue gain for the Centre through widening of the dealer base by
capturing value addition in the distributive trade and increased compliance.

3.2 In the existing State-level VAT structure there are also certain shortcomings as follows:-

 several taxes which are in the nature of indirect tax on goods and services, such as
luxury tax, entertainment tax, etc., have yet not been subsumed in the VAT.

 CENVAT load on the goods remains included in the value of goods to be taxed
under State VAT, and contributing to that extent a cascading effect on account of
CENVAT element.

 non integration of VAT on goods with tax on services at the State level and
cascading effect of service tax.

3.3 In the GST, both the cascading effects of CENVAT and service tax are removed with set-
off, and a continuous chain of set-off from the original producer’s point and service provider’s
point upto the retailer’s level is established which reduces the burden of all cascading
effects.

GST is not simply VAT plus service tax but an improvement over the previous system of
VAT and disjointed service tax.

3.4 Implementation of GST will also remove several roadblocks in the existing taxation
system in India.
Some of these are:
a)Tax cascading – The Goods and Services Tax Act will overcome the problem of tax-
cascading through input tax credit mechanisms. Under this system, sellers or vendors of
goods and services are eligible to avail tax credits on the amount of GST paid to eligible
procurements. Manufacturers can avail credits for the GST paid to procure inputs, capital
goods and services used in the manufacturing process. In the same way, wholesalers and
retailers can avail credits for the GST paid on procurement of stock. But the final customer
who purchases the product for consumption will not be able to avail and utilize any tax credit.
Tax cascading can be understood by the following example:-
A tax is applied on a particular product at each stage and and no credit is available, then tax
will be charged at each stage whenever a good or service changes hands. In other words,
tax is applied several times and is charged even on the tax which forms part of the inputs.
The following taxes will be applied to the product:
 While purchasing inputs i.e. raw materials for the product, the manufacturer pays
sales tax.
 When a wholesaler purchases the product from the manufacturer, then he pays tax
on procurement of the product.
 When the retailer purchases the product from the wholesaler, the wholesale again
charges tax.
 Lastly, the customer purchases the product from the retailer; the retailer again
charges a tax. This layering of sales tax will significantly increase the final sales price
as each party in the supply chain increases the price of the product to recover the tax
they paid. The cascading effect will increase then tax is paid on tax.
There are a large number of products and range of services that are outside the ambit of
CENVAT and service tax. The exempts sectors are not allowed to claim any credit of the
input tax. In the same way, under the state VAT, no credits are allowed for the inputs
procured and used towards exempted sectors. Non-eligibility for availment of credits leads to
tax cascading. Due to large number of exemptions, the effect of tax cascading in India is
significantly high.
b) Complexity – Presently in India, for taxing sale of goods, there is Central Sales tax and
respective VAT Acts for each state and Union territory. The Goods and Services Tax will
remove this complication by having a unified code for implementation of State GST in
different states. The GST will not only subsume a large number of indirect taxes but also
solve the classification issues by introducing only one or two rates of tax. Other than this
there would be categories that are exempted or zero rated.
Presently the activities in a supply chain are subject to several taxes. For example – the
manufacture of goods is subject to excise duty and sale of these manufactured goods is
subject to state VAT or CST. The GST will ensure uniform single tax across the entire supply
chain.
c) Double taxation – The GST will not make any difference between goods and services as
GST will be levied at each stage in the supply chain. This will help in solving the problem of
double taxation. The issue is not only between the taxes of customs duties, excise duties
and service tax but also between service tax and VAT. The issue of double taxation was
addressed by the Honorable Supreme Court in the case of BSNL vs. UOI (2006(3)SCC-1),
wherein the Court held that the same activity cannot be regarded as both goods and
services and hence both service tax and VAT should not be applicable on the same set of
transactions.
The implementation of GST will resolve the dilemma of a large number of assessee who are
not sure of application of the type of tax on certain specified transactions like software
development, sale of sim cards by telecom operators, online subscription of newspapers,
value added services provided by telecom operators, right to distribute movies etc.
d) Composite contracts – There are a large number of works contracts which involve the
supply of goods and services which are available to customers under different supply chain
arrangements. Such situations arise in a gap or overlapping in taxation of goods and
services as the States do not have the power to impose tax on services and the Centre does
not have the power to impose tax on sale of goods within the state. In such cases, a
comprehensive solution can be provided only by implementation of GST.
e)Revenue growth- The introduction of GST along with prudent accounting policies,
transparency and supported by a robust electronic controls will bring down the peak rates of
taxation and enhance revenue growth. This can be understood by the following table by
comparing the present rates of tax and the proposed GST.

Goods from producer to wholesaler Present taxes GST (Rs.)


(Rs.)
Cost of production 80,000 80,000
Producers margin of profit 20,000 20,000
Producer’s price 1,00,000 1,00,000
 Central Excise duty at 14% 14,000 Nil
 VAT at 12.5% 14250 Nil
 Central GST at (expected rate )12% Nill 12,000
 State GST at (expected rate) 8% Nill 8,000
Total Price 1,28,250 1,20,000
Goods from wholesaler to retailer Present taxes GST (Rs.)
(Rs.)
Cost of goods to wholesaler 1,14,000 1,00,000
 Profit margin at 5% 5,700 5,000
Total 1,19,700 1,05,000
 VAT at 12.5% 712.5 Nill
 Central GST (expected rate )12% Nil 600
 State GST at (expected rate) 8% Nill 400
Total 1,20,412.5 1,06,000
Goods from retailer to final consumer Present taxes GST (Rs.)
(Rs.)
Cost of goods to wholesaler 1,20,412.5 1,06,000
 Profit margin at 10% 12,041.25 10,500
Total 1,32,453.75 1,16,500
 VAT at 12.5% 1,505.15 Nill
 Central GST (expected rate )12% Nill 1,050
 State GST at (expected rate) 8% Nill 840
Total price to the final consumer 1,33,958.9 1,18,390

Tax component in the price to the final 30,467.65 22,890


consumer
Final price exclusive of taxes 1,03,491.25 95,500
IV Benefits of GST

4.1 Benefits for centre

As per the existing taxation system the centre does not has power to tax on production of goods. The
power to levy tax on sales rests with state except in case of inter state sales. Therefore, introduction
of GST would empower centre to tax sales also.

Benefits of GST for Centre:

Increase in GDP

Increase in exports

Power to tax after production down to distribution point

Ensures better compliance and prevent tax evasion

4.2 Benefits to state

There is no uniformity in rate of taxes among the states. Even after introduction of VAT there
are different rates of tax in different states. Therefore, there was rate war among states. GST
will lead to uniformity in tax rates. Other benefits for state are:-

Benefits for states

Will get power to tax services

Will reduce rate wars, therefore, outflow of investment to other states due to rate war
will be prevented

Introduction of comprehensive system of reliefs including set off of CENVAT and


service taxes

Increase in revenue due to broadening of tax base

Removal of burden of CST

4.3 Benefits to industry

Benefits to industry

Will provide comprehensive input tax credit, the service tax can be set off with sales
tax
No need to pay CST
Many central and state indirect taxes will be subsumed in GST, therefore, a single tax
is to be paid.
Uniformity in tax procedure throughout the country
Reduced tax burden will increase competitiveness of Indian products in foreign
markets

4.4 Benefits to consumer

Benefits to consumer

Reduced tax burden will be passed on to consumers in form of reduced prices.


Better compliance and increased tax revenue will enable the government to spend
more on welfare

4.5 The GST at the Central and at the State level will thus give more relief to industry,
trade, agriculture and consumers through a more comprehensive and wider coverage of
input tax set-off and service tax set-off, subsuming of several taxes in the GST and phasing
out of CST. With the GST being properly formulated by appropriate calibration of rates and
adequate compensation where necessary, there may also be revenue/ resource gain for
both the Centre and the States, primarily through widening of tax base and possibility of a
significant improvement in tax compliance. In other words, the GST may usher in the
possibility of a collective gain for industry, trade, agriculture and common consumers as well
as for the Central Government and the State Governments. The GST may, indeed, lead to
the possibility of collectively positive-sum game.
V Overview of GST

WHAT IS GOODS AND SERVICE TAX ?

5.1 Goods and Service Tax is a tax on goods and services, which is leviable at each point of
sale or provision of service, in which at the time of sale of goods or providing the services
the seller or service provider can claim the input credit of tax which he has paid while
purchasing the goods or procuring the service.

HOW WILL IT WORK?

5.2 GST will be paid at each step till final distribution stage. It will be charged by
dealers(manufacturer, trader and service provider) on the price of goods and services. While
GST is paid at each step in the supply chain of goods and services, the paying dealers don’t
actually bear the burden of the tax because GST is an indirect tax and ultimate burden of the
GST has to be taken by the last Customer. This is because they include GST in the price of
the goods and services they sell and can claim credits for the most GST included in the price
of goods and services they buy. The cost of GST is borne by the final consumer, who can’t
claim GST credits, i.e. input credit of the tax paid.

The working of GST with respect to manufacturer, trader and consumer can be seen in the
illustrations given below. The manufacturers will get the input credit of all the taxes paid by
them on the raw material and also on the services.

Let us assume the rate of GST is 16 percent and a toy manufacturer used following inputs
for manufacturing toys and sells the goods at Rs 120 lakh to trader:-
Manufacturer
Item Particulars Amount Rate of tax Input tax paid
no (Rs in lakhs) ( in percent) (Rs in lakhs)
1 Raw material 50 16 8
2 Stores and spares 25 16 4
3 Services 25 16 4
Total value of inputs 100 16

The output tax to be paid


Sale Value Rate of tax ( in percent) output tax to be paid
(Rs in lakhs)
Rs 120 lakh 16 19.2
Net Tax payable by manufacturer

Total output tax to be paid Rs 19.2 lakh


Total Input tax Paid Rs 16 lakh
Net Tax to be Paid Rs 3.2 lakh

Suppose trader use services amounting to Rs 5 lakh paying service tax at rate of 16 percent
amounting to Rs 0.8 lakh. Therefore total input tax paid by trader is:-
Trader
Item Particulars Amount Rate of tax Input tax paid
no (Rs in lakhs) ( in percent) (Rs in lakhs)
1 Goods purchased from 120 16 19.2
manufacturer
2 Services 5 16 0.8
Total value of inputs 125 20

If trader sell goods to consumer by adding Rs 5 lakh profit margin .The output tax payable by trader is
:-
Sale Value Rate of tax ( in percent) output tax to be paid
(Rs in lakhs)
Rs 130 lakh 16 20.8

Net Tax payable by Trader

Total output tax to be paid Rs 20.8 lakh


Total Input tax Paid Rs 20 lakh
Net Tax to be Paid Rs 0.8 lakh

Net Tax payable by consumer

Sale Value Rate of tax ( in percent) output tax to be paid


(Rs in lakhs)
Rs 130 lakh 16 20.8

From the above illustration it can be seen that the manufacturer and the trader gets credit of
the tax paid on good and services and had to pay tax on value added only. Further, the
government will get tax of Rs 20.8 lakh which is tax on final sale value of the product though
from different sources as detailed below:-
Description Output tax Input tax credit Net tax payable to
(Rs in lakh) (Rs in lakh) government
(Rs in lakh)
Raw material 8 0 8
supplier
Stores and spares 4 0 4
supplier
Service provider I 4 0 4
Manufacturer 19.2 16 3.2
Service Provider II 0.8 0 0.8
Trader 20.8 20 0.8
Total Tax payable to 20.8
Government

GST composition of manufacturer and dealer


Composition of tax paid by the consumer
Systems of GST
5.3 Internationally, there are three systems in vogue:
(a) Invoice System
(b) Payment System
(c) Hybrid System
Brief description of three systems is:
Type of System Input Credit Output Tax
Invoice system On receipt of invoice On issue of invoice
Payment system On making payment On making payment
Hybrid At the option of dealer to be At the option of dealer to be
declared in advance declared in advance

(a) Invoice System: In the invoice system, the GST (Input) is claimed on the basis of
invoice and it is claimed when the invoice is received, it is immaterial whether payment is
made or not. Further the GST (Output) is accounted for when invoice is raised. Here also the
time of receipt of payment is immaterial. One may treat it as mercantile system of
accounting. In India the present system of sales tax on goods is an invoice system of VAT
and here it is immaterial whether the taxpayer is following the cash basis of accounting or
mercantile basis of accounting. The advantage of invoice system is that the input credit can
be claimed without making the payment. The disadvantage of the invoice system is that the
GST has to be paid without receiving the payment.
(b) Payment System: In the payment system of GST, the GST (Input) is claimed when the
payment for purchases is made and the GST (Output) is accounted for when the payment is
made. In this system, it is immaterial whether the assessee is maintaining the accounts on
cash basis or not. The advantage of cash invoice system is that the Tax (output) need not be
deposited until the payment for the goods and/or services is received. The disadvantage of
the payment system is that the GST (input) cannot be claimed without making the payment.
The Taxes on services in India are based on this payment system since service tax is
payable on receipt basis and further Cenvat credit is only allowable when payment of the
service is made. In some countries, this system is also adopted for small traders to keep
them away from the complexities of the Invoice system, which is purely a mercantile system.
(c) Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and
GST (Output) is accounted for on the basis of payment, if allowed by the law. In some
countries the dealers have to put their option for this system or for a reversal of this system
before adopting the same.
VI Salient features of the GST model proposed in India

Rate Structure

6.1 The GST shall have two components: one levied by the Centre (hereinafter referred to
as Central GST), and the other levied by the States (hereinafter referred to as State GST).
Rates for Central GST (CGST) and State GST ( SGST) would be prescribed appropriately,
reflecting revenue considerations and acceptability. This dual GST model would be
implemented through multiple statutes (one for CGST and SGST statute for every State).
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 proposed rate structure is as follows:

 A lower rate for essential structure.

 Standard rate for general goods.

 Special rates for precious metals.

 For services their shall be single rate for SGST and CGST.

These GST rates are yet not announced by the government.

Applicability

6.2 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, goods which
are outside the purview of GST and the transactions which are below the prescribed
threshold limits.

The Central GST and State GST are to be paid to the accounts of the Centre and the States
separately. It would have to be ensured that account-heads for all services and goods would
have indication whether it relates to Central GST or State GST (with identification of the
State to whom the tax is to be credited).

Input Credit
6.3 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.

Cross utilization of Income Tax Credit between the Central GST and the State GST would
not be allowed except in the case of inter-State supply of goods and services under the
IGST model which is explained later.

Ideally, the problem related to credit accumulation on account of refund of GST should be
avoided by both the Centre and the States except in the cases such as exports, purchase of
capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment
should be completed in a time bound manner.

Procedures

6.4 To the extent feasible, uniform procedure for collection of both Central GST and State
GST would be prescribed in the respective legislation for Central GST and State GST.

Administration

6.5 The administration of the Central GST to the Centre and for State GST to the States
would be given. This would imply that 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.

The taxpayer would need to submit periodical returns, in common format as far as possible,
to both the Central GST authority and to the concerned State GST authorities.

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.

Keeping in mind the need of tax payer’s convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is collecting the
tax, with information sharing between the Centre and state
VII Taxes to be subsumed under GST

7.1 The following taxes levied at centre will get subsumed under GST:-
i. Central Excise Duty

ii. Additional Excise Duties

iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act

iv. Service Tax

v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)

vi. Special Additional Duty of Customs - 4% (SAD)

vii. Surcharges, and

viii. Cesses.

7.2 The following State taxes and levies would be, to begin with, subsumed under
GST:

i. VAT / Sales tax

ii. Entertainment tax (unless it is levied by the local bodies).

iii. Luxury tax

iv. Taxes on lottery, betting and gambling.

v. State Cesses and Surcharges in so far as they relate to supply of goods and
services.

vi. Entry tax not in lieu of Octroi.

Taxes to be kept out of purview of GST

7.3 However following taxes are proposed to be kept out of purview of GST due the reasons
as detailed:-

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. The difficulties of the
foodgrain producing States was appreciated as substantial revenue is being earned by them
from Purchase Tax and it was, therefore, felt that in case Purchase Tax has to be subsumed
then adequate and continuing compensation has to be provided to such States. This issue
is being discussed in consultation with the Government of India.
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 Vatable 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 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.

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. Sales Tax could continue to be
levied by the States on these products with prevailing floor rate. Similarly, Centre could also
continue its levies. A final view whether Natural Gas should be kept outside the GST will be
taken after further deliberations.
.VIIIThreshold Limits- Services
8.1 In order to give relief to small dealers government has proposed to provide exemption
from SGST and CGST. Different threshold limits may be specified for taxes on
services and taxes on goods.  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 and Union Territories
may be adopted with adequate compensation for the States (particularly, the States in North-
Eastern Region and Special Category States) where lower threshold had prevailed in the
VAT regime. Keeping in view the interest of small traders and small scale industries and to
avoid dual control, the States also considered that the threshold for Central GST for goods
may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be
appropriately high. It may be mentioned that even now there is a separate threshold of
services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.

The present threshold limit vis a vis proposed limit is:-

Turnover of Services Present System Proposed Syatem


Below Rs. 10 Lakh No Service Tax Neither SGST nor CGST
Between Rs 10 lakh and Rs Service tax payable Only SGST
150 lakh
Above Rs 150 lakh Service tax payable Both SGAT and CGST
Thresh hold limit for goods Differs from state to state No exemption
In case of Centre it is Rs Threshold limit of Rs 150 lakh
150 lakh
IX INTEGRATED GOODS AND SERVICE TAX (IGST):

9.1 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. The relevant information is also submitted to the Central Agency
which will act as a clearing house mechanism, verify the claims and inform the respective
governments to transfer the funds.

The major advantages of IGST Model are:

(i) Maintenance of uninterrupted ITC chain on inter-state transactions.


(ii) No upfront payment of tax or substantial blockage of funds for the inter-state seller or
buyer.
(iii) No refund claim in exporting State, as ITC is used up while paying the tax.
(iv) Self monitoring model.
(v) Level of computerization is limited to inter-state dealers and Central and State
Governments should be able to computerize their processes expeditiously.
(vi) As all inter-state dealers will be e-registered and correspondence with them will be done
by e-mail, the compliance level will improve substantially.
(vii) Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions
into account.
X GST on Export
Zero Rating of Exports

10.1 Exports would be zero-rated. Similar benefits may be given to Special Economic Zones
(SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No
benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.

GST on Imports:

10.2 The GST will be levied on imports with necessary 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 and the 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.

Special Industrial Area Scheme

10.3 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.
XI Miscellaneous Matters

11.1 Refunds: If for a tax period the input credit of a dealer is more than the output credit
then he is eligible for refund subject to the provisions of law applicable in this respect. The
excess may be carried forward to next period or may be refunded immediately depending
upon the provision of law.

11.2 Exempted Goods and Services: Certain goods and services may be declared as
exempted goods and services and in that case the input credit cannot be claimed on the
GST paid for purchasing the raw material in this respect or GST paid on services used for
providing such goods and services.

11.3 Tax Exemptions

Various tax exemptions have been granted both by the Centre and States to achieve objectives of
promoting a particular sector or to reduce tax burden on a particular segment of society in the interest
of fairness or to promote a particular economic activity etc. Tax exemptions have the effect of
narrowing the tax base and increasing the administrative and compliance cost of GST. Therefore, it is
felt that exemptions should be minimized. Direct and transparent subsidies, instead of tax exemptions,
are more efficient way to achieve the targeted objective. It is recommended that apart from a dual rate
GST structure at the Central and the State levels, there should be a common exemption list. Further,
specific provisions to provide limited flexibility to the States within a set of prescribed criteria may
need to be incorporated, as in the prevailing VAT structure, in order to accommodate exemption of
goods of local importance. Similar limited flexibility would need to be provided to the Centre to
address exceptional situations such as natural disasters .

11.4 Advance Ruling

Advance ruling and dispute resolution authorities should be set up by the Centre and States
to ensure uniformity and fairness in decision-making.

11.5 Joint Authority and Legislation


The authority to amend the common exempted list and the common composition scheme
should rest with a joint authority of Central and State Governments to ensure that no single
State or Central Government amends either of these unilaterally.
11.6 IT Infrastructure
The success of the GST largely depends upon IT infrastructure available for collection,
compilation and exchange of data at the shortest possible time. IT infrastructure with
national coverage and extensive reach is critical for the successful implementation of GST.
For this, an initiative at the Central Government level needs to be taken in order to put in
place a strong IT infrastructure.
XII Roadblock to implementation of GST
12.1 Bringing about an integration of all taxes levied on goods and services in a federal
polity with sharp distribution of legislative powers is a Herculean task to say the least. The
Constitution of India, 1950 demarcates taxing powers in a two-tier structure wherein levies
on production and international imports are with the Union and post- production levies rest
with the states. The Centre levies duties of excise on manufactures and
import/countervailing duties on international imports apart from levying a tax on services
under various taxing and the residuary entry in the Union List. The states levy VAT on goods
sold or entering in the state under various entries of the state list. Even if all Union-level
levies are integrated into a single levy and all state level levies culminate in a single State
level levy; this may still have two levies and the resultant cascading and administrative
burdens may nevertheless remain to an extent, though this may go a long way in
harmonising levies. A harmonised, integrated and full fledged GST calls for the following:

(1) Constitutional Amendments: Implementation of GST calls for effecting


widespread amendments in the Constitution and the various constitutional entries
relating to taxation. As per provisions of Article 368 of the constitution , the bill for
amendment is to be passed by majority of the members of both houses and two
third of the members present and voting. Also, the amendment is to be approved by
fifty percent of the state legislative assemblies.In the current scenario it is difficult to
visualise constitutional amendments of such far reaching implications going
through, more so in view of the fact that sharing of legislative powers is such an
essential element of our federal polity and it may be perceived to be a basic feature
of the Constitution;

(2) Integration of Services: Services have to be appropriately integrated in the tax


network;

(3) Design and structure of GST: No less significant is the issue of an appropriate
design and structure of GST. For instance, how the issue of inter-state movement
of goods and services may be addressed. The phasing out of CST may go a long
way in addressing the issue of inter-state trade and commerce in goods but the
crucial issue regarding services originating in one state and being consumed in
other state still remains;

(4) Resources Sharing: Another contentious issue that is bound to crop up in this
regard is the manner of sharing of resources between the Centre and the states
and among the states inter se as also the basis of their devolution;
(5) Flow of Goods and Services: Apart from all these, there has to be a robust
and integrated MIS dedicated to the task of tracking flow of goods and services
across the country and rendering accurate accounting of levies associated with
such flow of goods and services; and

(6) Determination of Revenue Neutral Rate (RNR): At present States are charging
VAT rates 0%, 4%, 12.5% and 20% besides other levies and thus the average rate
of tax comes to 17%. Similarly, Centre is charging Central Excise duty @ 14%,
CST 2%, Service Tax 10%. The combined effect of all the taxes taken together
comes to an average rate of tax @ 27.5%. The proposed GST rate is mooted @
20% both for the Central GST @ 12% and the State GST @ 8%. Assuming that the
States may agree on the implementation of GST based on compensation being
given to them like what was decided at the time of introduction of VAT i.e. 1st April,
2005, the Centre may suffer loss while satisfying the needs of about 30 states.
XIII Some questions to be answered

The following issues are yet to be answered even after the release of the Discussion paper
1. Does Exemption of 1.5 Crores in CGST for goods equally apply to dealers?
As GST will cover in its scope the levy of excise and VAT therefore the exemption limit of 1.5
Crores specified in the discussion paper will extend its hands to dealers also or the same will
be limited to the manufacturers. If the second view is opted then the definition of
Manufacture will be rolled back in the GST tax regime.
2. What is the Service tax threshold exemption limit under CGST?
The Empowered Committee has not specified the threshold exemption limit applicable to
services under CGST. However they have clarified that the same will be in conformity with
the existing threshold exemption of Rs. 10 Lakhs.
3. IGST (Inter-state transaction of GST) levy will be equal to CGST plus SGST, thus the
same will be single rates. Are separate records are to be maintained in this respect also?
It has been clarified that the IGST credit will be allowed to be set off against IGST, CGST or
SGST payable by the taxpayer. In the current scenario CST is levied on interstate sale of
goods, but the dealers aren't allowed to avail the credit of the same and they are
emphasizing on the scenario to buy the goods from within the state so as to avail the credit
of VAT. However in this new tax regime the IGST will be levied at the rate which will be equal
to CGST plus SGST, this leads to a new issue that IGST will be levied at a single compound
rate or two different rates i.e. CGST and SGST will be levied differently or not.
If the rear view is adopted then the question arises that the credit of the IGST will be allowed
to be set off against both CGST and SGST separately or cross adjustments will be allowed.
If the cross adjustment is allowed then the taxpayers availing exemption of 1.5 Crores under
CGST will be willing to purchase goods and sale them outside the state as in that situation
they will be getting the full credit of IGST thus benefiting them utmost. This scenario
changes the complete situation as it exists presently. This difficulty is yet to be sorted and
clarified by the Government.
4 The dual GST model would be implemented through multiple statutes one for CGST and
SGST statute for every State.
Different statues will govern the SGST levy. This will lead to non uniformity in the tax
structure at state levels. Further, there may be complexities for smooth implementation of
GST across the nation.

5 Transitional Issues
The transition would cause ambiguity with respect to issues like treatment of "stock in hand",
available CENVAT (Central Value Added Tax), credit / VAT (Value Added Tax) credit. However, these
should be provided for much before the implementation of GST.

6 Exemptions
There should be a common exemption list for CGST (Central Goods and Services
Tax) and SGST (State Goods and Services Tax) so that there is no discrepancy in
the collection of taxes. Another important issue are area-based exemptions.

A scheme for the treatment of such exemptions should be well devised so that
there is no adverse affect on the industry. Though Customs will remain outside
the GST regime, a large number of bonds executed by importers and exporters
with Government will have to be suitably amended for changed liability in view of
new GST.

7 Job Work
Issues such as what documents and records need to be prepared by the job
worker and the principal and time limits for claiming CENVAT credit are to be
decided. Since, the focus would be on 'supply' after the implementation of GST,
the status of job workers needs to be determined.

8 Assessable Value
The calculation of assessable value under GST is ambiguous since it still
unknown what the components of the assessable value are. Are discounts and
other charges such as loading/unloading, freight, cartage and packing includible
in the assessable value or would they be chargeable separately?

9 Place of Supply
In the GST regime, the taxable event would be 'supply' and it is very essential to
understand as to where the 'supply' actually takes place. "Place of Supply" rules
refers to the rules that allocate the right to tax between the states. The main
concern here is which state will collect the SGST.

10Branch / Stock Transfer


An efficient provision for branch transfer / stock transfer should be put in place
under the GST regime. The system should enable the businesses to make branch
transfers without payment of tax and the procedure should be simple to ensure
maximum compliance and minimise disputes.

10 Return / Rejection / Replacement of Goods


There has been no clarification on the treatment of goods which are returned,
rejected or replaced. A major question here is whether the treatment would be
similar to the present system of reversing the credit or whether new provision
would be introduced.

9. Common Procedures
The industry expects that there would be similar formats for registration, returns
and other records for both CGST and SGST. Functions such as assessment,
enforcement, scrutiny and audit should be undertaken by the authority which is
collecting the tax with information sharing between the Centre and the States.

Conclusion
GST, if implemented efficiently, could prove to be a "Good Sensible Tax". But the
Government should come up with the draft rules as soon as possible so that there
is enough time for industry to analyse the draft and make representations to the
concerned authorities with their suggestions.
XIV SUGGESTIONS FOR EFFECTIVE IMPLEMENTATION
14.1 Some suggestions for better administrative machinery to handle the implementation of
Goods and Services Tax Act in India are:

 Standardization of systems and procedures.


 Tax relief in case of branch transfer
 Well defined procedures in case of Job works
 Uniform dispute settlement machinery.
 Adequate training for both tax payers and tax enforcers.
 Re-organization of administrative machinery for GST implementation.
 Building information technology backbone – the single most important initiative for
GST implementation.
 Uniform Implementation of GST should be ensured across all states (unlike the
staggered implementation of VAT) as many issues might arise in case of transactions
between states who comply with GST and states who are not complying with GST.
XV GST Implications for organisations
15.1 GST shall be the mother of all Indian tax reforms of this centaury and it would subsume
most (if not all) of the existing Central and State level taxes on supply of goods and services.
Accordingly, GST would have a significant impact on business environment and its
operations. When undertaking oversight of organizational readiness to adopt GST,
independent directors need to focus on the following aspects:
1 GST will have a multi-fold impact on operations – Besides the fiscal impact and tax
compliance, GST will have an impact on cash flows, product pricing, supply chain
arrangements, procurement, revenue recognition and the IT systems. It is therefore
important to assess whether the organization is undertaking a holistic impact assessment of
GST encompassing all of the above.
2 Assess the impact on financial results – GST will have an impact on the financial
statements; for example the top-line may get reduced in some cases (e.g. traded items) due
to elimination of tax cascading. The gross margins will also undergo changes as Cost of
Goods Sold may undergo changes as a result on input tax credits. For listed companies,
these changes will need to be factored in quarterly forecasts and earning releases to the
stock markets.
3 Monitor the impact on cash flows – Most of the planning in GST will revolve around
optimizing cash flows. The impact will be as a result of GST on imports, stock transfers and
changes in point of taxation/ tax credits.
4 Organisations may need to re-design certain aspects of their Supply Chain – The
concept of mere supply of goods and services trigger tax liability under GST as opposed to
sale under the present VAT, will impact Sourcing, Production and Distribution aspects of the
Supply Chain. For instance, sourcing considerations would involve revisiting sourcing mix
(local, inter-state and imports), stock transfer policy and renegotiation of vendor price due to
the GST impact. From a production perspective, GST impact would vary depending upon the
manufacturing and distribution arrangements e.g. own/ job-work/ contract manufacturing.
The “Place of Supply” rules will determine state where GST is to be deposited.
5 Understand the linkages, differences for companies implementing IFRS – For
companies implementing IFRS, the requirements under IFRS vary with those under GST.
Organizations will need to consider necessary re-alignments within their IT systems to
effectively manage these differences. For instance, there could be possible differences
between GST levy date and date of revenue recognition, accounting for multiple element
arrangements (e.g. the invoice value includes a supply and maintenance element),
accounting for barter transactions, reconciliation of GST on stock transfers with accounting
records etc.
6 Understand the implications on product pricing, marketing and HR – The impact of
GST needs to be considered in the margins of various stakeholders in the distribution chain
to ensure that GST does not negatively impact product pricing and consequently market
share. This calls for a reassessment of exchange, discount and incentive schemes. From a
HR perspective, there may be a need to reconsider the indirect tax management structure,
training requirements of key indirect tax personnel depending upon the impact assessment.
7 Assess if the IT systems are geared to address GST requirements effectively with
minimal manual workarounds – The Audit Committee should at the outset require
management to undertake necessary enhancements to IT systems so that the necessary
systemic alignments are in place to manage GST MIS requirements. Changes in the system
are likely to be required primarily on account of change in taxes/ tax rates, availability of
credits for input taxes on purchases including inter-state purchases and Import GST,
availability of cross credits for goods and services and GST on stock transfer.

15.2 To summarise, organizations need to undertake the following to enable a smooth


transition to GST:
 Have an internal core team which will closely monitor the GST developments.
 Identify existing bottlenecks and those likely to arise from proposed GST framework.
 Representation to the implementing agencies through appropriate industry
associations to
 highlight issues and propose solutions in the proposed GST framework.
 Ensure flexibility in new systems/ processes/ contracts, to accommodate changes
warranted by GST
 Identify need for restructuring business/ transactions/supply chain in the light of the
GST framework
 Modify internal IT, invoicing and other systems/ processes/ policies to make them
GST compliant
 Create awareness within organization about changes, modifications in roles/
responsibilities of team
Understand The Difference between VAT and GST

Last Update Date : June 25, 2018

Email Me This Guide

GST and VAT are both counter approach taxation systems by the government to charge taxes
on goods and services across the nation. The old tax system, i.e. value added tax, was the
method of applying taxes on goods while the goods and services tax is set to change this
course of action towards consumers.

Table of Content

1. What is VAT and it’s disadvantages


2. Difference between VAT and GST
3. Difference between GST and VAT presented in Tabular Format
4. GST vs VAT Example

What is VAT?

VAT or Value Added Tax was one of the indirect taxes which has been subsumed by GST.
Although the concept of VAT was introduced in 2005, it was implemented in 2014 and
applied to the sale of goods. Similarly, service tax applied to services.

Here are a few disadvantages of VAT


 Different states had their own version of VAT law
 Rate of VAT was different in different states
 Cascading effect of taxes was prominent under the VAT regime
[ Read: What is GST ]

How GST is different from VAT


Difference between VAT and GST

Number of key differences between VAT and GST are listed below:

Applicability

VAT is applicable only on the sale of goods while GST is applicable both on goods and
services.

Taxable event

A key difference between VAT and GST is that the taxable event in case of VAT is the sale of
goods. However, in case of GST it is the supply of goods or services.

Tax distribution between state and centre

VAT laws and tax rates were different in each state and each of them kept the whole share of
collected tax with themselves. However, under the GST regime, both SGST and CGST is
collected from the supply of goods and services and later bifurcated by the central and state
governments.
[ Read: Types of GST ]
Calculation of input credit

In case of the VAT, the dealer has the right to deposit his net tax liability by deducting input
VAT on goods purchased from output VAT on goods sold. However, as GST applies to goods
as well as services provided, the GST portal system calculates the input credit which is used
for payment of the next GST liability.

Input tax credit

The credit of input tax cannot be claimed for services in case of VAT as it is applicable only
to goods. But, input tax credit can be claimed for both goods as well as services in case of
GST as it applies to both.

[ Read: Input Tax Credit under GST ]


Declaration System

VAT used to have a declaration system (i.e. issuance of various forms for a particular pool of
transactions) for interstate sales (Form C), Branch Transfer (Form F), Deemed Exports (Form
H), SEZ sales (Form I), etc. Hence the VAT system was a bit complicated and paperwork
driven.
This concept of Declaration has been done away with under the GST regime.

Input Tax Credit Mismatch


Under VAT, the taxpayer was informed about the mismatches only at the time of assessment
of that particular tax period which was resulting in the cash outflow for such mismatches or
the follow-up with such vendors after almost 2-3 years after the transaction took place. This
used to have very serious repercussions on the taxpayers, particularly if the amount was huge.
This was in substance resulting in the irreversible credit loss to the taxpayer.

Under GST, automated monthly reconciliation of transactions has been introduced which will
make the taxpayers identify the differences immediately and take follow up and rectify the
mismatches at that point itself. This will substantially reduce the credit loss.

Taxation on services

VAT is not applicable to provided or sold services. Service tax was charged additionally @
15%. GST rates for services depend on nature of service. It may be 12% and 18% and 28%
depending on the sector. Most services come under 18% GST.

Return Filing

Under the VAT regime, the due date to file a return was 20th of succeeding month.
Under the GST regime, the due date to file a return for sales is 10th, the purchase is 15th, and
payment is 20th of succeeding month. Those applying for composition scheme have to file a
return only once every quarter.
[ Read: Returns under GST ]
Compulsion for VAT number & GSTIN

Obtaining registration under VAT was mandatory for businesses exceeding an annual
turnover of Rs 5 lakh (5 lakh was for Maharashtra VAT, it differed from state to
state). Registration under GST is mandatory for businesses exceeding an annual turnover of
Rs 20 lakh.
Seamless flow of credit

Under VAT, excise charged used to become a cost for the dealer as the credit of the same was
not available, which lead to double taxation. But under GST, there is a seamless flow of
credit.

Online payment
Online payment was not a compulsory thing under VAT, but GST makes it mandatory if the
tax, penalty or interest etc. payable exceeds Rs 10,000.

Mode of Operation

While GST is a fully online technologically advanced tax regime, it was not the case under
VAT. Many of the functions were not automated under the VAT which was compelling the
taxpayers to do a lot of paperwork.

Table showing difference between VAT and GST

Point of Difference VAT

Applicability Goods

Taxable event Sale of goods

Tax b/w state and central govt. The whole share of tax collected goes to the state which collects it

Calculation of input credit Net tax liability = VAT on output – VAT on input

Input tax credit Cannot be claimed for services

Tax on services Not applicable

Return filing 20th of succeeding month

Registration Mandatory if turnover exceeds Rs 5 lakh (varies from state to state)

Mode of payment of tax Offline

Tax distribution between state


Under VAT the revenue was collected by the seller state
and centre

Flow of credit Excise duty paid was not available to be claimed as credit

Difference between VAT and GST in India with Example


Consider a consultant providing services to his clients.

Under VAT regime

The consultant charged 15% service tax on services of Rs 70,000. So, his output tax was Rs
70,000 x 15% = Rs 10,500.
Then, if he purchased office supplies for Rs. 25,000 paying 5% as VAT : Rs 25,000 x 5% =
Rs 1,250.
He had to pay Rs 10,500 output service tax without getting any deduction of Rs 1,250 VAT
already paid on stationery.
His total tax outflow is Rs 11,750.
Under GST regime

GST on service of Rs 70,000 @18% = Rs 12,600


Subtract GST on office supplies (Rs 25,000*5%) = Rs 1,250
Net GST to pay = Rs 11,350

Now consider a machine manufacturer and the implications of VAT and GST for him.

Pre-GST implementation scenario

Before the implementation of GST, if a machine manufacturer had to sell a machine, he had
to pay Excise duty and VAT on it. So if the price of machine sold was Rs 5,000 then the
Excise duty @ 12.5% was Rs 625 which would bring the value to Rs 5,625. VAT of Rs 816
i.e. @ 14.5% would be charged on this value. So, the customer has to pay Rs 6,441.

Now let’s see how the same manufacturer sells his product in the GST regime.

Post-GST implementation scenario

In the GST regime, only GST is charged on the price of machinery. So, the seller charges
CGST @ 9% and SGST @ 9% on the value of machinery which is Rs 5,000. So, the buyer in
this case pays Rs 5,000 + Rs 450 (CGST) + Rs 450 (SGST) i.e., Rs 5,900 to buy the machine.

As you can assess from both the scenarios, the cascading effect of tax has vanished and the
total tax payable is less under GST regime.
Hence, we can deduce from these points that there are a number of differences between GST
and VAT. GST is a probable solution for the different issues taxpayers faced under the VAT
regime.

At earlyGST we have tax experts who will not only help you be GST compliant but also
prepare and file your GST returns.

What is VAT?

VAT- the Value Added Tax, was applicable for goods sold, and not services. Service tax took
care of the services rendered. The previous taxation system included several indirect taxes
along the supply chain, resulting into high tax rates paid from the pocket of the ultimate
consumer.

What is GST?

However, GST is applicable for both goods and services, together with uniform pricing. GST
is one tax that is levied on manufacturing, selling, and consumption of goods and services. It
is a destination-based tax, distributed among the Central Government and the State
Governments under the components Central GST (CGST) and State GST (SGST).

How is GST different from VAT?

In the words of many eminent economists, VAT and GST are just two names for one tax, but
on evaluating minutely, you observe the contrast. First and foremost, it’s important to
understand how valuation of goods is considered under their respective perspective.

VAT is calculated on the market price of the goods. Further, excise duty and VAT add up to it.
For Example: Suppose a manufacturer sells machinery worth Rs. 3000 to a distributor. The
invoice would reflect:

Price of goods = 3000/-

Excise duty @ 12.5% = 375/-

Subtotal = 3375/-

VAT @ 14.5% on subtotal= 490/-

The total payable amount by the customer = 3865/-

Whereas, GST will be only charged on the selling price and the subsequent parts of SGST
and CGST would add to the value of goods as per their percentage. The invoice under GST
scenario would reflect:

Price of goods = 3000/-

CGST @ 9% = 270/-

SGST @ 9% = 270/-
The total payable amount by the customer = 3540/-

The total difference of the two taxes = 3865-3540= 325/-

Thus, GST has eliminated the additional, indirect and redundant taxes and has reduced the
burden on the common taxpayer. However, there is more in terms to draw comparison
between VAT and GST. Let’s have a look at major points of difference amongst the two.

8 Key Point of Differences between VAT and GST

1. Taxable event

VAT- On Sale of goods.

GST- On every supply of goods or service.

2. Tax between state and center

VAT- Only State govt. gets the whole share for welfare of state's public.

GST- GST is collected under SGST and CGST for every sale from same state. The
corresponding center and state amount then gets bifurcated.

3. Input Credit
VAT- Dealer has right to deposit his net VAT liability by deducting input VAT on goods
purchased and from output VAT on goods sold.

GST- As GST is applicable on goods as well as services provided, the GST portal system
calculates the Input credit which is used for payment during the next GST liability.

4. Input tax credit on services of goods

VAT- Not applicable, as VAT is only for goods, not services.

GST- The paid GST on services adds up to total input GST comparable to total output GST,
which may be on goods sold. Finally the tax payer gets the input credit on tax for the services
availed by the products you purchased.

5. Taxation on services

VAT- VAT is not applicable on provided or sold services. Service tax is charged additionally
@ 14.5%.

GST- GST rates for services depend on nature of service. It may be 12% and 18% and 28%
depending on the sector. Most services come under 15% GST.

6. Return Filing
VAT- Must file return by 20th of succeeding month.

GST- Must file return for sales by 10th, purchase by 15th and payment by 20th of succeeding
month.

7. Compulsion for VAT No. & GST No.

VAT- If turnover is or beyond RS. 10 Lakh.

GST- If turnover is or beyond Rs.20 Lakh.

8. Online Payment

VAT- Online payment is not compulsory.


CHAPTER 4

RESESARCH OBJECTIVE

 To enquire the impact of GST after its implementation.

 To find out difference between present indirect taxes and GST.

 To identify benefits and challenges of GST after implementation.

 To understand the key issues involved in the successful implementation of VAT

and GST.

 To study the impact of Sales tax, VAT and GST on the profitability

of manufacturing industry.

 To identify the drivers for the smooth implementation of tax from VAT to GST.

 To Study the Impact of Sales tax, VAT and GST on the price of the product.

 To Study the impact of Sales tax, VAT and GST on Government Revenue

RESARCH METHODOLOGY

The study focuses on extensive study of secondary data collected from various books,
journals, government reports, publications from various websites which focused on various
aspects of goods and service tax.

SIGNIFICANCE OF STUDY

This research paper can actually benefit all of them who want to know about GST its impact
and its benefits.

LIMITATIONS

1. Data was collected through secondary sources hence may not be fully accurate.

2. As the study was to be completed in a short time, the time factor acted as a significant
limit on the scope and extensiveness of the study.
FUTURE STUDY SCOPE

A research report on comparison of GDP before and after applying GST.

IMPACT ON HOTELS AND RESTAURANTS

The GST, once implemented, is expected to rationalize indirect tax structure and usher in
seamless tax credit. However, the impact for the hotel sector is more likely to be neutral
depending on the final GST rate. Since hotels/restaurants are mainly subject to service tax,
VAT (state subject), luxury tax (state subject), the impact of GST would depend on the tax
levied by various states.

PRESENT TAX AFTER GST IMPACT

HOTELS Service tax – 8.7 % 1. If GST will POSITIVE


be around 10-
Luxury tax – 8-12%
15%
2. If GST will
TOTAL- 16% -20% NEUTRAL
be around 15-
20%
3. If GST will
NEGATIVE
be more than
20%
RESTURANTS Service tax – 5.6 % 4. If GST will POSITIVE
be around 10-
VAT –12-14.5%
15%
5. If GST will
TOTAL- 17% -20% NEUTRAL
be around 15-
20%
6. If GST will
NEGATIVE
be more than
20%
DATA ANALYSIS AND INTERPRETATION

1. Through implementation of an integrated “goods and services tax” (GST)


be an improvement over the current taxation system in India

Required
Name

Professional status *
Auditors 20
Financial mangerst s 30
Industrialist 15
Business directors 15
Statutory authorities 20

2. The system’s multiple tax-on-tax effects cascade through the production-


disturb
1- The tax system is all about balance between minimizing compliance costs and maximizing revenue.

Strongly Agree 25
Agree 20
Neither Agree nor disagree 20
Disagree 15
Strongly Disagree 20

Chain with harmful economic consequences.

Strongly Agree 20
Agree 15
Neither Agree nor disagree 35
Disagree 20
StronglyDisagree 20

3. Current taxation system for goods and service in our state made in the
tax design and administration the systems at both central and state levels
remain complex.
Strongly Agree 15
Agree 20
Neither Agree nor disagree 30
Disagree 25
StronglyDisagree 20

4. Uniformity of rates especially in the neighboring states helpful traders and service providers have
to be benefited.

Strongly Agree 20
Agree 20
Neither Agree nor disagree 25
Disagree 20
StronglyDisagree 15

5. To do business in India usually finds it difficult to comprehend


the complex tax laws and operational modalities

Strongly Agree 15
Agree 15
Neither Agree nor disagree 30
Disagree 20
StronglyDisagree 20

6. The Government should rationalize and simplify the tax structure, and provide an efficient and
assesses friendly tax administration with zero red tape.

Strongly Agree 15
Agree 20
Neither Agree nor disagree 25
Disagree 25
Strongly Disagree 15

Excise Duty
7. Taxes applicable currently: on Excise duty (manufacturing duty for goods manufactured in India or
counter veiling duty for imported goods) varying from zero to 14% depending on the product is
complications for tax compliance.

Strongly Agree 15
Agree 20
Neither Agree nor disagree 30
Disagree 20
Strongly Disagree 15

8. currently there are indirect taxes such as excise duty and countervailing duty, special additional
duty on customs this causes effective tax rate to be high and the differences across states.

Strongly Agree 15
Agree 20
Neither Agree nor disagree 25
Disagree 20
StronglyDisagree 20
IMPACT ON PHARMACY

CURRENT TAX STRUCTURE IN PHARMACY

Currently, the pharmaceutical sector in India faces a multistage taxation system. Different
taxes—such as import customs duty, central excise duty on manufacture, CST/VAT on sale,
and service tax on provision of services—adds burden to operating margins of pharma
industry. Further, the loss of tax credit on services (currently credit claims are available for
raw materials) such as logistics impart insufficiencies to the complete pharma supply chain.
Further, multistage taxation increases compliance cost for the pharmaceuticals as the
company is liable to file multiple returns on monthly basis to different authorities.

AFTER GST

GST implementation will lead to re-distribution of taxes across different business functions,
thereby, leading to low taxation cost for drug makers. The most direct impact is likely to
come from elimination of CST. This will lead to reduction in transaction cost.

CHALLENGE

Currently, the pharma sector enjoys tax holidays in a few regions provisioned by the
government on the backdrop of regional development. The access and logistic cost to these
regions is high, but is overridden by the tax benefits. However, with GST, these tax benefits
will also be eliminated. It will be up to the government on how it plans to lure manufacturers
to stay in these regions and ensure their development.

Concluding, we assume that the foremost benefits to pharma from GST will come from
unified taxation (leading to low processing cost) and optimized logistic process. However,
given the pricing controls by government on drug prices, the key question to be answered is
— who will avail this benefit, the patient, the government or the pharma?

HYPOTHESIS TESTING – there are many challenges in pharmacy industries but then to it
is assume that after GST it will have a POSITIVE impact on pharmacy industry hence, our
hypothesis is been proved wrong.

IMPACT ON AIRLINES

Flying to become expensive, as service tax will be replaced by GST. Service tax on fares
currently ranges between 6% and 9% (depending on the class of travel). With GST, the rate
will surpass 15%, if not 18%, effectively doubling the tax rate. The other impact may be on
aviation turbine fuel. Currently, airlines can claim what is called a cenvat credit on the central
excise duty for fuel. They will lose that in the GST regime as petroleum products, including
ATF, are outside the purview of GST. This will have a NEGATIVE Impact on airline
industry and thus the prices of air ticket will go up.

ADVANTAGES OF GST BILL

Introduction of a GST is very much essential in the emerging environment of the Indian
economy.

 There is no doubt that in production and distribution of goods, services are


increasingly used or consumed and vice versa. Separate taxes for goods and services,
which is the present taxation system, requires division of transaction values into value
of goods and services for taxation, leading to greater complications, administration,
including compliances costs. In the GST system, when all the taxes are integrated, it
would make possible the taxation burden to be split equitably between manufacturing
and services.
 GST will be levied only at the final destination of consumption based on VAT
principle and not at various points (from manufacturing to retail outlets). This will
help in removing economic distortions and bring about development of a common
national market.
 It will also help to build a transparent and corruption-free tax administration.
Presently, a tax is levied on when a finished product moves out from a factory, which
is paid by the manufacturer, and it is again levied at the retail outlet when sold.
CONCLUSION

Tax policies play an important role on the economy through their impact on both
efficiency and equity. A good tax system should keep in view issues of income
distribution and, at the same time, also endeavour to generate tax revenues to support
government expenditure on public services and infrastructure development. Cascading tax
revenues have differential impacts on firms in the economy with relatively high burden on
those not getting full offsets. This results in loss of income and welfare of the affected
economy. The ongoing tax reforms on moving to a goods and services tax (GST) would
impact the national economy, International trade, firms and the consumers There has been
a good deal of criticism as well as appraisal of the proposed Goods and Services Tax
regime. It is considered to be a major improvement over the pre-existing central excise
duty at the national level and the sales tax system at the state level, the new tax will be a
further significant breakthrough and the next logical step towards a comprehensive
indirect tax reform in the country. GST is not simply VAT plus service tax, but a major
improvement over the previous system of VAT and disjointed services tax – a justified
step forward. India is a federal republic, and the GST will thus be implemented
concurrently by the central and state governments as the Central GST and the State GST
respectively and it appears that there will be different rates of taxes. However a single rate
of GST would help maintain simplicity and transparency by treating all the services
equal. And though there are some negative as well as positive impact on various service
sectors but with the proper planning and implementation it can be a great boost to our
country.
REFERENCES

http://www.careratings.com/upload/NewsFiles/SplAnalysis/Impact%20of%20proposed
%20GST%20on%20select%20industries.pdf

https://www.academia.edu/6661188/GOODS_AND_SERVICE_TAX_ITS_IMPACT_ON_IN
DIAN_ECONOMY

http://icmai.in/icmai/Taxation/upload/GST-In-India-vol1.pdf

http://www.ey.com/IN/en/Services/EY-goods-and-services-tax-gst