Goods

1
Goods Services Tax

• An Introduction

Prepared by - Swapnil Shah, Kirtane
Pandit,Chartered Accountants
2
Points to Ponder

• What is Goods Services Tax?
• GST Global Scenario
• Background in India
• Constitution of the Joint Working Group (JWG)
• Basic Structure of GST
• Recommendations of JWG
• Dual structure of GST
• Likely Features Of GST
• Justification of GST
• Hurdles in Implementation
• Administrative machinery
• Way Forward

3
What is Goods Services Tax?

• GST is a broad based and a single comprehensive
  tax levied on goods and services consumed in an
  economy.
• GST paid on the procurement of goods and services
  can be set off against that payable on the supply
  of goods or services. But being the last person
  in the supply chain, the end consumer has to bear
  this tax and so, in many respects, GST is like a
  last-point retail tax.

4
GST Global Scenario

• More than 140 countries have already introduced
  GST/National VAT.
• France was the first country to introduce GST
  system in 1954.
• Most countries have a single GST rate.
• Typically it is a single rate system but
  two/three rate systems are also prevalent
  depending upon the requirement of the
  implementing nation.
• Standard GST rate in most countries ranges
  between 15-20
• All sectors are taxed with very few exceptions/
  exemptions
• Full tax credits on inputs 100 set off
• Canada and Brazil alone have a dual VAT.

5
Background in India

• The effort to introduce the new tax regime was
  reflected, for the first time, in 2006-2007 Union
  Budget Speech.
• The then Finance Minister Mr. P. Chidambaram
  remarked that there is a large consensus that the
  country must move towards a national level GST
  that must be shared between the centre and the
  states.
• He proposed 1 April, 2010 as the date for
  introducing GST. After successful introduction of
  Value Added Tax (VAT) in almost all the states
  and continuous increase in number of services
  under the service tax net.

6
Continued

• Finance Minister Pranab Mukherjee while
  presenting the Budget on July 6, 2009, said that
  GST would come into effect from April 2010.

7
Constitution of the Joint Working Group(JWG)

• Empowered Committee of State Finance Ministers
  has been working with the Central Government to
  prepare a roadmap for introducing a national
  level GST with effect from 1 April 2010.
• In May 2007, Empowered Committee (EC) of State
  Finance Ministers in consultation with the
  Central Government, constituted a Joint Working
  Group (JWG), to recommend the GST model.
• The JWG had been entrusted with the task of
  studying global GST models and identify alternate
  models for introduction in India.
• Within 7 months of its constitution that is in
  November 2007, JWG presented its report on the
  GST to the EC. The EC has accepted the report on
  GST submitted by the JWG.

8
Continued

• Based on a study of the alternate models
  vis-à-vis Indias federal structure, the JWG had
  suggested the best model for introduction of GST
  in India.
• Dual GST recommended by Joint Working Group of
  the EC.
• EC has accepted the recommendations and submitted
  its report to the Government.

9
Basic Structure of GST

• Central GST and State GST to operate in a
  parallel fashion.
• Both Central and State GST to be further
  bifurcated into Goods Tax and Services Tax.
• The proposed rate of GST in India is 16.

10
Taxes proposed to be subsumed by GST

• Value Added Tax
• Service Tax
• Central Excise
• Entertainment Tax
• Luxury Tax
• Octroi
• Lottery Tax

11
Recommendations of JWG

• The committee has suggested that GST, when it
  rolls out on 1 April 2010, have two components
  Central tax and a single uniform state tax across
  the country.
• The JWG report had suggested that states must tax
  intra-state services while inter-state services
  must remain with the Centre.
• Petroleum products, including crude, high-speed
  diesel and petrol, may remain outside the ambit
  of GST.
• Central cess like education and oil cess may be
  kept outside the dual GST structure to be
  introduced from April 2010.
• Diesel and petrol, may remain outside the ambit
  of GST.

12
Recommendations

• Besides central cess, the EC of State Finance
  Ministers has also recommended to keep purchase
  tax and octroi, which are collected at state and
  local levels, outside the GST framework.
• The report has also recommended keeping stamp
  duty, which is a good source of revenue for
  states, out of the purview of the GST. Stamp duty
  is levied on transfer of assets like houses and
  land.

13
How will the dual structure work?

• Central GST and State GST would be levied on
  different services.
• State GST would be levied on services of local
  nature.
• Single periodical return would be filed under the
  dual structure.
• Export of goods and services would be zero rated,
  meaning exporters of goods and services need not
  pay GST on their exports.GST paid by them on the
  procurement of goods and services will be
  refunded.

14
Continued.

• Any economic activity which is not supply of
  goods is supply of services.
• All services to be taxed with few exceptions.
• Central GST on services relatively easy to
  collect.
• State GST on services will be far more complex
  particularly on cross border services.
• Cross border Services
• Taxed at the place of consumption of services

15
Continued

• GST paid on imports (goods as well as services)
  would be available as credit.
• Input tax Credits ( ITC)
• full credits under the Central and the State GST
  that will operate in parallel
• cross utilization of credits between Central GST
  and State GST not permitted
• refund of unutilized accumulated ITC.
• Inter-State transactions
• goods to be taxed in the destination/importing
  State
• services to be taxed in the State of consumption
• zero rating in the originating State

16
Continued

• Difficult to determine the actual place of
  effective use/enjoyment of services.
• Rules for place of supply of services to be
  framed.
• Currently no uniform practice exists.
• Administrative convenience convenience of the
  trade industry to be factored to determine the
  place of collection of service tax.

17
Likely Features of GST

• Credit of tax paid on purchases would be allowed
  across the supply chain
• Credit of State GST may not be allowed against
  Central GST or vice versa.
• State GST paid in one State would be creditable
  against State GST liability of another State.
• Requirement of C forms and F forms would be
  abolished.
• Certain specified goods may be subject to a lower
  State GST rate or be exempted.

18
Continued

• Manufacturers, traders and service providers
  having turnover more than the threshold limit to
  register under Central and State GST.
• A single Tax Identification Number (TIN) would be
  allotted for both Central and State GST.
• Both Central as well as State GST would be levied
  at every point of sale.

19
Why GST ???

• A simple tax structure with only one or two rates
  of taxes.
• Uniform single tax across the supply chain.
• Reduced transaction cost in the hands of the tax
  payers.
• Increased tax collections due to wider tax base
  and better compliance.
• Improvement in international cost competitiveness
  of indigenous goods and services.

20
Continued

• Enhancement in efficiency in manufacture and
  distribution due to economies of scale.
• GST encourages an unbiased tax structure that is
  neutral to business processes, business models,
  organization structure, product substitutes and
  geographical locations.
• The prices of commodities are expected to come
  down in the long run as dealers pass on the
  benefits of reduced tax incidence to consumers by
  slashing the prices of goods.

21
Continued

• replacing the cascading effect tax on tax
  created by existing indirect taxes.

22
Hurdles in Implementation

• Implementation of GST calls for effecting
  widespread amendments in the Constitution and the
  various constitutional entries relating to
  taxation.
• Such amendments may virtually transform the
  Indian federation into an economic Union much
  along the lines of the European Union.
• It is important to note that states will have to
  be given constitutional powers to tax services.
  At present, states do not enjoy the power to tax
  services.
• The various levies of the Union and the states
  are also to be harmonized. In the current
  scenario it is difficult to visualise
  constitutional amendments of such far reaching
  implications.

23
Continued

• Drafting of the Goods Services Tax Act (
  expected by October,2009).
• Ideally GST model should have been finalised at
  least 12 months prior to implementation.
• Services have to be appropriately integrated in
  the tax network.
• Fate of various area based exemptions/concessions
  provided by Central as well as State to be
  decided
• Treatment of inter-state branch transfers under
  the GST scenario to be identified.

24
Continued

• Transition from present indirect taxes towards
  the Dual GST structure.
• Whether unadjusted tax credits would be refunded
  by the State as applicable under the present VAT
  system.
• Treatment of closing stock of finished goods,
  inputs, input services and capital goods with
  respect to tax credits on the date of
  implementation.
• Protecting and balancing the present and future
  revenues of the Centre and the States.
• The Centre is expected to put in place a
  mechanism to compensate states for any revenue
  loss due to GST.

25
Continued

• consultation with all stakeholders including
  trade and industry associations before
  finalisation, administrative preparedness to
  implement the new tax regime and resolution of
  all other issues under discussion.

26
Administrative Machinery

• Standardization of systems and procedures
• Uniform dispute settlement machinery
• Training
• Re-organization of administrative machinery for
  GST implementation is the key
• Building information technology backbone the
  single most important initiative for GST
  implementation

27
Ensuring uniform implementation

• Uniform Implementation of GST should be ensured
  across all states(unlike staggered implementation
  of VAT).
• Many issues might crop up in case of
  transactions between states who comply with GST
  states who are not complying with GST.

28
Way forward.

• The dual structure should be simple to understand
  and implement.
• Creating consumer and supplier awareness before
  introduction of the dual structure.
• The cost of compliance should be minimum i.e.
  reporting and compliance procedures should be
  identical across all the States.
• The format of periodical returns should be
  identical across all the States.

29
Way forward.

• Dispute settlement machinery should be uniform
  under the State GST
• Lower level tax authorities should have adequate
  understanding of the fundamentally different law
  
• States should have powers to increase/decrease
  the rate of State GST on certain specified goods
  within a permissible limit
• Introduce electronic State GST and Central GST
  refunds.

30
Lets hope GST is

• Great Simplified Tax !!!
• Thank you.