Updated 80 slides training material on Goods and Service Tax of India is designed keeping the Value Added Tax and General Sales Tax in the background. General tax reforms in major direct and indirect taxes of India are discussed as introduction keeping overarching taxation guides in background. Impact of direct taxation is analyzed with some original concepts and examples. Some of the concepts and most of the examples and computations demonstrated in VAT and GST section are also original of the author.
Tax Policy Reforms with focus on VAT & GST in India - Jena
1. OVERARCHING TAXATION GUIDES
TAX REFORMS in INDIA
with focus on
VALUE ADDED TAX (VAT)
&
GOODS & SERVICE TAX (GST)
1
Chidananda Jena
Email: chidananda.jena@gmail.com
Skype/ YM: chidanandajena
2. Tax Policy is not only designed to collect
tax & finance development & public
goods & services, but also meant to bring
economic & social change, reduce
inequality, form capital of federal & local
governments, corporations, households &
individuals & instill in governments &
residents or otherwise a sense of shared
responsibility in each stated objective.
2
4. OVERARCHING TAXATION GUIDES
Tax GDP Ratio Worldwide
Indian Tax Distribution
International Tax Distribution
Effects of Direct Tax
Cascading Effect of Direct Tax on Earnings
Cascading Effect of Direct Tax on Consumer
Reduction of Wealth in Direct Tax
Direct Tax Rewards Spendthrifts
Welfare Dead Weight Loss-Harberger’s Triangle
Trend in Tax Reform
4
5. TAX REFORMS in INDIA
Direct Taxes
Customs
Central Excise
Service Tax
5
6. VAT
Principles of VAT
VAT Computation & Levy
Input Tax Credit (ITC) & No ITC
ITC on Purchase Tax
VAT over Sale Tax
Consignment Transaction for Principal of Other State
Interstate Sale
Comparison of Consignment & Interstate Sale in VAT
Zero VAT, ITC Carry Forward & Refund
VAT: Consumption States to Benefit
VAT: Achievements & Deficiencies
6
7. GST
Why GST
Taxes to Subsume in GST
How GST Different from VAT
Cascading Effect of Excise on VAT Vs GST
Cascading Effect of CENVAT
Different Models of GST
Models of Interstate Sale
IGST Vs Current VAT-CST
Challenges before Clearing House
Shifting of CGST Share from Producing to Consuming State
Tax Rates & Base in GST: GOI & States Stand
Challenges for Determining Place of Sale or Supply
7
8. CONSTITUTIONAL PROVISIONS
Constitutional Implications
Centre State Relations
Legislative, Administrative & Financial
Inter State Trade
GST Council & Dispute Settlement Authority
Taxing Export & Import
Taxing Petroleum & Edible Alcohol
Sixth Schedule
Seventh Schedule: Union & State List
8
9. PROGRESS UPDATES
Stand Off Between Centre & States on Compensation
in Lieu of CST Loss
GSTN SPV
GSTN Portal
Negative List of Services
9
12. TAX GDP RATIO WORLDWIDE
12
Tax GDP Ratio 2012 by Heritage Foundation
Canada 32.2
Mexico 29.7
USA 26.9
Australia 30.8
Japan 28.3
New Zealand 34.5
Denmark 49
France 44.6
Germany 40.6
Italy 42.6
Netherland 39.8
UK 39
OECD Un-weighted Average 34.8
Argentina 37.2
China 17
India 17.7
Russia 36.9
Source (wikipedia)
13. INDIAN TAX DISTRIBUTION
13
All India Tax Distribution 2012-13 ($/Rs conversion at 12-13 level apx)
figures are approximations
in Bn $
($1=$ 50) % of PAN India Tax
Corporate Tax 70.34 21.53%
Income Tax 38.26 11.71%
GoI Direct Taxes 108.61 33.24%
Customs 32.97 10.09%
Union Excise 34.40 10.53%
Service Tax 26.54 8.12%
GoI Indirect Taxes 93.91 28.75%
Total Govt of India Taxes 207.61 63.55%
State share transferred 58.81 18.00%
Balance tax with National Govt 148.42 45.43%
VAT of State 74.51 22.81%
State Own Tax Revenue (mostly Indirect) 124.18 38.01%
Total Tax at the disposal of State 182.99 56.01%
PAN India Total Indirect Tax 218.09 66.76%
PAN India Total Tax 326.69 100.00%
14. INTERNATIONAL TAX DISTRIBUTION
14
Comparison of OECD Countries in % of total Tax (Aproximately)
USA
Canad
a
Mexic
o UK
German
y France
Finlan
d
EU
(unweig
hted)
Austral
ia
Japan
(some taxes
missing)
OECD
(unwei
ghted)
Personal
Income Tax 35.3 34.6NA 28.7 23.9 17.5 31 25 38.5 17.5 24.9
Corporation Tax 8.1 10.4NA 7.8 3.5 5.7 7.7 8.1 16.7 13 9.3
Social Security
Contribution 26.4 17.5 18.7 18.5 40.5 40.2 26.7 29.8 5.6 18.5 27
Direct Tax from
earning 69.8 62.5 18.7 55 67.9 63.4 65.4 62.9 60.8 49 61.2
Property Tax 12.1 10 1.6 11.9 2.4 7.3 2.3 5.4 9.5 10.3 5.6
Goods &
Service Tax 18.2 26.1 52.5 32.7 29.4 25.5 32 30.4 29.7 20.3 32.1
Consumption
Tax (in GST) 8.4 15.1 19.4 19.8 17.9 16.8 19.4 18.9 13.7 9.5 18.9
Source: Tax Reform Trend in OECD Countries; Centre for Tax Policy & Administration, OECD
15. EFFECT of DIRECT TAX
15
People paying income tax again pay tax on spending-
Cascading
Profit earned by a Corporate/ Person from revenue
earned through sale of goods & service are ultimately
paid by consumer-payable income tax is built in the prices
of goods & services-Cascading
Tax on earning reduces people’s wealth more than
equivalent consumption tax
Direct Tax punishes savings
16. LOW INCOME GROUP MID INCOME GROUP
Earns $100
Exemption Limit=$100
Balance for Consumption=
$100
Pays VAT@10%= $9
Consumption= $91
Tax to Government on total
earning=$9=9%
Earns $200
Exemption Limit=$100
Income Tax @20%=$20
Balance for Consumption
=$180
Pays VAT@10%=16
Consumption=$164
Tax to Government on total
earning=$36=18%
16
CASCADING EFFECT of DIRECT TAX on EARNING
Note: Scenario is different for high income groups as the spending is much less than total
income, Tax Credit refund for low income group is practiced in developed economy, but no
relief for mid income group, i.e. majority of tax payers
17. CASCADING EFFECT of DIRECT TAX on CONSUMER
17
Corporation C sells cold drinks @ $1 per bottle
Consumer pays VAT/GST @ 10%=10 cents per bottle
Corpn C sells 1 Bn bottles & gross revenue is $10Bn
Corpn C collects from consumer & pays VAT/ GST of $1Bn
Operating Expenses etc. $1 Bn
Raw materials cost $ 5Bn
Depreciation, interest etc $ 2 Bn
Profit after depreciation & interest=$ 2 Bn
Income Tax due at this stage @ 20%= $40 Mn
Consumers utlimately pay this $ 40 Mn hidden in the cost of cold drinks
sold by Corpn C
VAT/ GST @ 10% on $ 40 Mn is $ 4 Mn
Consumers pay VAT of $ 1 Bn in which there is $4 Mn cascading effect of
direct tax + direct tax of $ 40 Mn= $ 1.4 Bn
18. Income Tax Consumption Tax
A earns $100
Pays Tax @ 20%=$20
Balance=$80
Consumption in Yr 1
$40
Investment 4m Yr 1-10
$40
Earnings $40
Tax@20% on earning=$8
Net=$72
No Income Tax
B earns $100
Consumption in Yr 1
$50 inclusive of tax
Tax@20%=$10
Actual Consumption=$40
Investment 4m Yr 1-10
$50
Earnings $50
Total =$100
18
REDUCTION of WEALTH in DIRECT TAX
19. INCOME TAX CONSUMPTION TAX
Consumption in Yr 10
$72
Total Effect
Total Earning $140
Tax=$28
Actual Consumption=$112
Tax effect=@20%
Consumption in Yr 10
$100 inclusive of Tax
Tax @20%=$20
Actual consumption=$80
Total Effect
Total Earning $ 150
Tax=$30
Actual consumption=$120
Tax Effect=@20%
19
REDUCTION of WEALTH in DIRECT TAX (Cont)
Note: Assuming rate of earning on
savings more than inflation, there is a
net loss to the public under income
tax regime
20. SPENDTHRIFT ECONOMICAL
A earns $100
Pays Tax @ 20%=$20
Balance=$80
Consumption in Yr 1
$80
B earns $100
Pays Tax @ 20%=$20
Balance=$80
Consumption in Yr 1
nil
Investment 4m Yr 1-10
$80
Earnings $80
Tax@20% on earnings=$16
Net=$144
20
DIRECT TAX REWARDS SPENDTHRIFT
Source: Progressive
Consumption Taxation; The
choice of Tax Design by Alan
Viard, American Enterprise
Institute, NYU, School of Law
21. SPENDTHRIFT ECONOMICAL
B’s Consumption in
comparison to no tax
scenario=$80/100=80%
Consumption in Yr 10
$144
Consumption in comparison
to no tax
scenario=$144/200= 72%
21
DIRECT TAX REWARDS SPENDTHRIFT (Cont)
Source: Progressive Consumption Taxation; The choice of Tax Design by Alan
Viard, American Enterprise Institute, NYU, School of Law
25. 25
No change in concept or computation in direct tax reform
Scope of revenue leakage is high-Transfer Pricing, income/ profit
transfer internationally, Tax Haven/ different tax rates
internationally, tax treaties etc.
Parity of CIT & PIT-Corporatization is high due to scope for
avoiding tax (Refer share of PIT & CIT in total tax) - Rent Seeking
tendency high
Cascading effect is enormous in Direct Tax
DIRECT TAX REFORM
26. NEW DIRECT TAX CODE
26
Simplified & rationalized
Reduced exemption & incentives, lowering rate & structure, ambiguities
eliminated to the extent possible
One Accounting Year, all taxes in one code Income (personal, corporate,
capital gain), dividend, fringe benefit & wealth
Reduction of provisions that can be abused
Tax neutral for public & government
Proviso & explanations eliminated as those were incomprehensible to non-
experts
Formulae & tables used for comprehension
Essential & principles in statute, details in rules & schedules
Tax Law is logically reproduced in form
Regulatory function removed
Tax rates in schedule, not in annual finance bill
27. 27
Exempt Exempt Tax EET (PPF, Insurance) Vs previous EEE
Parity of long term & short term capital gain-indexation benefit
Tax rate same at 25% for domestic & foreign firms, removal of
deduction, moving towards assets base deduction
Parity of domestic & foreign firms, Clarity in definition of resident &
non-resident
Loss carried forward till adjustment
Assets classification simplified- depreciation at same rate
NEW DIRECT TAX CODE (Cont)
28. 28
MAT moving from income to asset based
Companies will try to reduce wasteful assets & gestation
period
Wholly situated modified to partly situated- good for foreign
firms/ NRIs
Taxing media companies broadcasting from abroad, Indian
program through satellite to Indian audience, generating
revenue from advertisements of Indian Companies
Commission given lots of power in permanent establishment,
transfer pricing, associated enterprise, arms length price issue
NEW DIRECT TAX CODE (Cont)
29. CUSTOMS
29
Peak customs duty 10 %, committed to bring to 5%
Multiple tax rates persists for closely related items
Exemptions persist
Standard Commodity Classification followed
Transaction Value instead of deemed value
Fast Track Clearance Scheme limited-Delay persists
Should encourage self declaration as much as possible
Provision for Advance Ruling implemented, but lingering
MODVAT with negative list
30. CENTRAL EXCISE
30
Structure & rates of duty lowered: peak rate 16% & two
rates
CENVAT (Credit/ Set off) diluted
Cascading still persists
Populist exemptions persist
Physical restriction by tax administration reduced largely
with self declaration of tax payer
Adoption of standard commodity classification list
31. SERVICE TAX
31
Tax Base increase by leading to double tax by centre &
state
Interpretation of Services as Goods by states leading to
double taxation
ITC not interchangeable with tax paid for Goods to State
VAT or Central Excise
Revenue sharing between centre and states withdrawn,
Centre exclusively retains this revenue
33. PRINCIPLES of VAT
Uniform Tax Rate PAN India to eliminate Tax War
No Double Taxation & Cascading effect
ITC (Input Tax Credit)-differential to be paid to Govt.
Tax is not a part of sale price
Entire tax collected at different stages inside a state to be
refunded/ adjusted in case of Interstate Sale/ Export
Parity of Interstate Sale & Consignment Transfer
CST sale would have been tax free within few years
33
34. VAT COMPUTATION
VAT =(Output tax + Purchase tax) - Input tax
VAT- on the sale & purchase
A dealer collects tax on his sales, retains the
tax paid on purchases & pays the balance in
every tax period
TOT- Nominal rate on TTO of Sale
34
35. VAT LEVY on SALE & PURCHASE
Tax on sale turnover of taxable goods.
Purchase tax is on transactions, unlike purchase tax 3B
goods of Sales Tax Act.
Purchase tax is levied when taxable goods are purchased
under circumstances where no tax on sale is leviable.
When purchased from unregd. dealers.
Where the goods consumed or used otherwise than
through intra-state/ inter-state/ export
/SEZ/STP/EHTP/EOU sale.
35
36. INPUT TAX CREDIT (ITC)
ITC can be claimed only by Regd. VAT Dealers.
ITC on goods purchased within the state from Regd. VAT
Dealers .
ITC allowed on
Intra State Sale
Inter state sale/STP/SEZ/EOU/EHTP/Export out of the country.
Consignment/ Commission Transaction from one state to another
On stocks held on appointed day.
ITC Readjustment for goods returned.
Tax Invoice fundamental for claim of ITC.
36
37. ITC on CAPITAL GOODS
ITC to be allowed on capital goods spread over
2/3 years followed by refund
ITC on consumables except negative list goods.
37
38. NO INPUT TAX CREDIT- ITC
Against CST, VAT paid in another state
In respect of sales exempted from VAT
On material purchased from a regd. VAT Dealer, but given
away as gift
For TOT dealers
In respect of stock of goods remaining unsold at the time
of closure of business
On old capital goods/ vehicles for conveyance or
transport
38
39. NO INPUT TAX CREDIT-ITC (Cont)
To liable unregistered dealer
Purchase & Sale of Suspended Dealer
Raw materials when the finished product is
exempt.
Proportionately if part of finished goods is exempt
39
40. ITC for PURCHASE TAX
40
VAT manufacturer purchased taxable goods locally
from unregistered traders worth $ 500 in April
Purchase Tax (PT) paid in April tax return
@10%=$50
Manufacturer produces taxable goods worth of
$600 & tax free goods worth of $400 & sells in the
month of May from same goods purchased in April
ITC to be given on PT paid on purchase of goods =
(600X500)/(600+400)=$300
ITC@10%=$30 in the return of May against output
tax @10% on sale of taxable goods worth $600= $60
41. SALES TAX VAT
OMC (ore) sells $1000/
collects & Pays Tax@4% $40/
Shree Metallics (sponge
iron manufacturer)
purchases $1040/
margin $60/
sells $1100/
collects & Pays Tax@4%$44/
total $1144/
OMC sells $1000/
Collects & PaysVAT @4% $40/
Shree Metallics
purchases $1000/
margin $60/
sells at $1060/
Collects VAT@4% $42.4/
Pays Tax $ 2.4/
41
SALES TAX Vs. VAT
43. SALES TAX VAT
Trader purchases at
$1352/ including tax of
$184/
Companies keep margin
of $168/
No further Tax
Trader purchases at $ 1168/ &
total VAT $46.72/
total $ 1214.72/
All Companies keep margin of
$168/
Trader sells to consumer adding
margin of few dollars & adding tax of
few cents
43
SALES TAX Vs. VAT (Cont)
44. SALES TAX VAT
TIISCO, Odisha sells at
$1200/
Does not get ITC $ 40 tax on
input of $ 1000/
Collects no tax
Trader , Jharkhand sells
with 10% margin = $1320/
Jharkhand Sales Tax $ 52.8/
Odisha Sale Tax $ 40/
TIISCO sells at $1200/
Gets ITC in access of $ 40 on
input of $ 1000/=no ITC here
Collects no tax
Trader, Jharkhand sells with
10% margin = $ 1320 /
Jharkhand VAT(J) $ 52.8 /
Odisha VAT(O) $ 40 /
44
CONSIGNMENT TRANSACTION
by AGENT in ANOTHER STATE
Tax Benefit under VAT if tax rate is higher
than CST rate. Excess tax shall be given
ITC
46. STOCK TRANSFER CST
JMC, Jharkhand- Iron Ore
sell $1000/
VAT (J) @ 4% $ 40/
TIISCO- Jharkhand
purchase $ 1040/
no ITC for VAT of $ 40 /
margin@10%= $104/
sell Value $1144/
No CST
Jharkhand tax $40/
Benefit of $4 to TIISCO
JMC, Jharkhand- Iron Ore
sell $1000/
VAT(J) @ 4% $ 40/
TIISCO, Jharkhand
purchase $ 1000/
margin @10%= $ 100/
sell $1100/
CST (J) @4%=$44/
VAT(j)-$40/ refunded
Total Value=$1144/
Jharkhand Tax $ 44/
Loss of $4 to Jharkhand State
46
CONSIGNMENT TRANSFER
Vs INTERSTATE SALE in VAT
47. ZERO VAT
ITC for Zero rated sales.
Zero rating on
Goods exported out of the state
Goods exported out of the country
Goods sold to SEZ, STP, EHTP, EOU
47
48. ADJUSTMENT of ITC
ITC to be adjusted against outstanding tax, penalty under the VAT
Act or against tax due under CST Act
Excess of ITC after adjustment to be carried over as an input tax
credit to subsequent tax periods up to 2 years.
Refund of ITC will be given after 2 years / the dealer may opt for
further carry forward.
Refund of ITC on goods exported out of the country on application
in every tax period.
48
49. REFUND
Refund arising out of an order to be allowed,
without application, within a period of 60 days
Refund to be adjusted against arrears
Refund for export to be allowed on application
within 90 days after audit
Audit to be completed within 30 days
Refund can be granted provisionally against bank
guarantee
8% interest on refund after due date
49
50. CONSUMPTION TAX BENEFIT to POOR STATE
Net consuming state to benefit the reduction of CST &
refund of ITC in producing state
Consumers bear the State Sales Tax & CST of other states
in addition to the own state ST of Orissa for goods
brought in- VAT will reduce tax burden.
Integration of Industry will stop. Industries will migrate to
less developed state- raw material, Coal, Land & Labour is
cheap & plenty. Doubling & Cascading effect of tax is no
more a worry.
Ancillary Industries will grow-generation of huge
employment & new business avenues.
Main cause of industries in mineral rich states now-VAT
50
51. ACHIEVEMENT of VAT
51
Abolition of First Point (under pricing) or Last Point
(intractable) Sale Tax- Appropriate Revenue Collection at
appropriate level
Reduction of Cascading effect of Tax at manufacturing
stages as ITC on raw materials & Capital goods allowed
Reduction of Cascading effect for Refund of VAT for Inter-
state sale & Export
Reduction of CST leading to further reduction of cascading
Rationalization of Tax Structure & Uniform Floor Rate
amongst States
Consuming state collects VAT from Consumers
Self Assessment
52. DEFICIENCY in VAT
52
Tax War not fully contained
Still many rates & many taxes persist
Exemptions continue or crept in
Narrow Base
CST not abolished as Revenue Neutrality not achieved
Check Post System could not be abolished
No Coordination between Central Excise & States on cross
verification of transactions
Many Taxes on Goods & Services both by Centre & States
Conflict between state & centre whether service/goods
Cascading effect not eliminated fully
Commodity classification not standardized
54. WHY GST
54
Conflict between Union Govt (Central Excise) & State
VAT on taxing new products as Goods/ Services
Mobile Recharge Vouchers (Goods)/ Easy Recharge (Not Goods)
Software sold online/ Software sold in a DVD
Beverages Served in Luxury Hotels attract VAT & Service
Taxes in addition to Central Excise & State Excise
Assembling/Packaging - whether Manufacturing/
Service & thus taxable as Excise/ Services
States taxing selective services under Luxury Taxes, Hire
Purchases/Right to Use/Lease
Works Contract a Service/ Goods/ Manufacturing?
55. 55
To reduce cost of Administration
To reduce Cost of Compliance
Registration & routine works handled by State
Return for CGST/ SGST/ IGST will be simultaneous
Payment of all GSTs simultaneous
Reduce Tax burden on Public, Trade & Manufacturing
Coordination between all Indirect Taxing Authorities
Abolition of many taxes
Information sharing through robust GST Network
One Standard commodity classification by all states & Indian
Tax administrations
WHY GST (Cont)
56. WHY GST (Cont)
56
Next Stage in Tax Reform
Unified Market
Both Central Excise & State CT Dept wants to
increase tax base by including goods & services
Followed by more than 100 nations
Better mechanism to transfer ITC from one State
to another rather than refunding to Tax Payers in
selling state
57. UNION TAXES STATE TAXES
Central Excise Duty
Additional Excise Duty
The Excise Duty levied under
Medicinal & toiletries
preparation Act
Service Tax
Additional Custom Duty (CVD)
Special Additional Duty
Surcharge/ Education Cess
Note: One major taxes administered by
Central Govt. is left out, i.e
Customs/Import (for the time being)
VAT
Entertainment Taxes
Luxury Taxes
Entry Taxes
Tax on lottery
State Cess & Surcharge on
supply of goods & services
Note: CST (shall be abolished)
Most of the Taxes administered by Com Tax
Dept included
57
TAXES LIKELY to SUBSUME in GST
58. HOW GST DIFFERENT from VAT
58
Same concept of ITC as VAT
ITC for service & goods combined
ITC on Centre GST & state GST not interchangeable
National excise & state VAT shall integrate
No CST Law
No tax incentive/disincentive for different types on
interstate Transaction
Further reduction of cascading due to abolition of CST,
integration of central excise, service & state VAT
59. EXCISE@10%, VAT@10% CGST @10%, SGST@10%
Mnfr A sells $100+CENVAT $10,
Pays CENVAT to Centre = $10
Purchase cost for Trader B $110
With mark up @10%, Trdr B
sells at $ 121+VAT $12.10, Pays
VAT to state = $ 12.10
With mark up@ 10%, Trdr C
sells at $ 133.10+VAT $13.31,
Pays VAT =13.31-12.10= $ 1.21
Consumer Pays = $146.41
CENVAT=$10+VAT=$13.31=$ 23.31
MnfrA sells$100+CGST&SGST=$10
each; Pays tax to Centre & state
Purchase cost for Trader B $100
With mark up @10%, Trdr B sells
at $ 110+CGST&SGST=$11 each
Pays CGST & SGST = $ 1 each
With mark up@ 10%, Trdr C sells
at $ 121+CGST &SGST=$12.1 each
Pays CGST & SGST = $ 1.1 each
Consumer Pays = $ 145.2
Total CGST & SGST = $ 12.1 each
Consumer & Centre Gains & State
Looses in same tax rate of both
regime
59
CASCADING: EXCISE on VAT Vs GST
60. CENVAT @10% CGST @10%
Mnfr A sells $100+CENVAT $10
Trader B purchases $110
With mark up @10%, Trdr B
sells at $ 121 to Trdr C
With mark up@ 10%, Trdr C
sells at $ 133.10 to Mnfr D
With mark up @ 100%,Mnfr D
sell at $266.20+CENVAT $26.62
Cost to Consumer $ 292.82
CENVAT = $10+$26.62 =$36.62
No ITC for break in Mnfcr Chain
Mnfr A sells $ 100+CGST $ 10
With mark up @10%, Trdr B sells $
110+CGST $ 11 to Trdr C
With mark up@ 10%, Trdr C sells
$121+CGST $12.10 to Mnfr D
With mark up @ 100%, Mnfr D
sells $242+CGST $24.20
Cost to Consumer $ 266.20
Total CGST $24.20
60
CENVAT-CASCADING
CENVAT leads to cascading in cases where chain of traders involved in purchases from
manufacturing unit & sells to manufacturing Unit-Break Manufacturing ITC Chain
Saving by consumer= $26.62 (Tax
$12.42+ Effect of Mark up on tax
included in cost $14.20)
61. MODEL 1: GST on DEVOLUTION
61
State GST:
State levy & collect GST
Centre withdraws from tax on Trade & Service
Centre have excise tax with state & centre sharing model
Central GST:
Centre levy & collect Tax
State VAT merged with CENVAT & Service Tax
Centre share more tax with respective States
Dual GST
State & Centre both collect Tax @ same Rate
Commodity Base Synchronised
62. UNION STATE
Gross Turnover of
Services upto $ 1.5 Crore
GTO above $ 1.5 Crore
for Goods & Services
Note: Cannot predict if GTO
will decline below threshold
Gross Turnover of Goods
upto $ 1.5 Crore
GTO above $ 1.5 Crore
for Goods & Services
Note: Cannot predict if GTO
will exceed the threshold
62
MODEL 2
GST on the BASIS of THRESHOLD
63. MODELS in INTERSTATE SALE
63
VAT-CST Model: Zero Rated; ITC Adjusted/Carried Forward &
Refunded/ Transferred for Seller; Purchaser pays full VAT in
consuming state
Reverse Charge Mechanism: Seller pay SGST to Exporting State;
Purchaser pays again SGST in Consuming State; Purchaser gets
certificate from Consuming State & gives to Seller; Seller claims
refund-Taxing Tax Payers
Clearing House Mechanism: Seller pay SGST in exporting state,
provide details to clearing house; clearing house will collect SGST
from exporting state to Consuming State; Issue Certificate to
Seller & Purchaser; Seller can claim refund & Purchaser can claim
ITC- Challenging
IGST Model: Seller pay differential tax to Centre; Exporting State
transfer credit used in IGST to Centre; Purchaser claim ITC;
Centre transfer ITC claimed by Purchaser to Consuming State;
Clearing House-More Challenging
64. VAT @10% + CST @2% SGST/IGST @10%
Trdr A (State 1) purchases $
100+VAT $ 10
With Mark Up@10%, Trdr A makes
interstate sale to Trdr B (State 2) at $
110 + CST $ 2.20=$ 112.20
Trdr A claims refund from State1 =$
10-$2.20 =$ 7.80
With marks up @10%, Trdr B sells $
123.42+VAT $ 12.34
Consumer pays $ 135.76
State 2 CTD gets VAT 12.34
State 1 gets CST of $2.20
Total Tax=14.54
Trdr A (State 1) purchases $ 100 +
SGST $ 10
With Mark Up@10%. Trdr A makes
interstate sells to Trdr B (State2) $ 110
+ IGST $ 11
With marks up @10%, Trdr B sells
$121 + SGST $ 12.10
Consumer pays = $ 133.10
Trdr B gives State 2 SGST=$ 12.10 -
$11=$ 1.10
Trdr A gives Centre IGST= $11-$10=$ 1
Clearing House collects $ 10 from
State 1+ $ 1 from Centre IGST & pay $
11 to State 2
64
IGST Vs VAT-CST MODEL
65. CHALLENGES for CLEARING HOUSE
65
State 1 accepting an interstate sell by Trader A to trader B
in State 2.
Verifying ITC on purchases of Trader A by State 1 before
transferring ITC to Clearing House is a challenge
Correlating invoice to invoice of purchase to sale not
possible
Presently refund is not easily given & hence ITC is carried
forward for a long time
Trader B availing ITC while State 2 would not receive the
ITC transfer will be a huge strain on consuming state
Without clarity, verification mechanism, Enforcement
mandate of clearing house, State 1 will gain at the cost of
State 2
66. CENVAT @10% CGST @10%
Mnfr A (State1)sells at
$100+CENVAT $10
Trader B (State2) purchases
$ 110
With mark up @10%, Trdr
B sells at $121
Total CENVAT $ 10
If Centre & State Sharing is
50:50, State 1 gets $ 5
Mnfr A (State1)sells at
$100+CGST $10 to Trdr B (State2)
With marks up @10%,Trdr B sells
at $110+CGST $11
Total CGST $ 11
CGST chain is not broken, CGST
credit will be reflected in Central
Excise Commissionerate of state2
If Centre & State Sharing is 50:50,
State2 gets $ 5.50
66
SHARE of CGST to CONSUMING STATE
Consuming State does not get share of CENVAT Centre: State Tax Sharing Arrangement as ITC on CENVAT
stops at manufacturing-if manufacturing happens in one state & consumption in another
67. RATE & BASE in DUAL GST-STATE STAND
67
Standard Rate= 8/ 9% CGST+8/ 9% SGST
Essentials life support= 4% CGST+4% SGST
Gold Silver Bullion Diamond=1% CGST+1%
SGST
Common Exempt List with limited regional
exceptions
SIN (Alcohol + Tobacco) Products + Petroleum
Products out of GST = Taxed as present
68. RATE & BASE in DUAL GST- GOI STAND
68
Petroleum Products out of GST = Taxed as present
Special Central Excise on Tobacco even as it will be in GST
For rest start with different Rate: Graduate to one Rate
1st Year
Standard Rate= 10% CGST+ 10% SGST
Services = 8% CGST+8% SGST
Essentials life support= 6% CGST+6% SGST
2nd Year
Standard Rate= 9% CGST+ 9% SGST
Services = 8% CGST+8% SGST
Essentials life support= 6% CGST+6% SGST
3rd Year
One Rate = 8% CGST+8% SGST
69. CHALLENGES in PLACE of CONSUMPTION
69
Place of sale of Goods & supply of Service /
Consumption – conflict among states
Online Sale of Commodities by one dealer located in
Delhi to States all over India
Consultancy Services provided by one Corporate in all
states against a work order received centrally from
another agencies in Delhi
Mobile Phone Services provided to a corporate house
centralized at Delhi, but services utilized in different
states
71. CENTRAL GOVERNMENT STATE GOVERNMENT
Does not have power to Tax
goods during Trading
Does not have power to tax
Interstate trade (in the
scenario of taxing (IGST)
Does not have power to
Tax Services
Does not have power to
tax import
71
CONSTITUTIONAL IMPLICATION
Note: need for amendment of constitution: 115th Amendment
Way Out: Centre levy tax & fix rate on services, states collect & appropriate;
consensus required on modalities, rate & services devolved to states-No
more discussed
72. CONSTITUTION AMENDMENT
72
Art 246 to Art 279:Amendment of relation of Centre &
State
Legislative, Administrative & Finance
269A: Inter State Trade
279A: GST Council
Centre to have Veto & 2/3rd majority of States/ Consensus/
Act of Parliament & Recommendatory; Like EC but as a
Constitutional Body
279B: Dispute Settlement Authority
States’ apprehend this will dilute federalism
73. CONSTITUTION AMENDMENT (Cont)
73
Art 286:Restricting States to tax Export & Import
Art 366 12A :Definition of Goods & Services Tax
excludes Petroleum & Human Consumption Alcohol
Sixth Schedule: Dist Council of Autonomous Dist gets
power to tax Entertainment & Amusement
74. 74
Seventh Schedule: Union & State List
Union List No 84: Union Excise duty list included Petroleum
products (Earlier tobacco), excluded alcohol & narcotic drugs
Union List No 92:Service omitted
State List 52: Entry Tax power taken away from State & given to
local bodies
State List 54:Taxes on Sale or Purchase of Goods replaced by Taxes
on Sale; excludes Petroleum & Human Consumption Alcohol
State List 62: Local Bodies/Regional/Dist Council to tax
Entertainment & Amusement
CONSTITUTION AMENDMENT (Cont)
76. STAND OFF
76
Draft Bill in its current form
Issue of integrated GST for inter-state movement of
goods & VAT on imports
Revenue neutral rate on GST - one that is not too high
for the traders & not too low for states
Mechanism so that tax payers have to coordinate only
with one agency - centre or state
Arrear compensation not given since 2010-11 (Rs. 6,394
crore budgeted in 2013-14 for 2010-11)
77. GSTN-SPV
77
AOA, MoA, Shareholders Agreement
Equity Sharing (51 Pvt+24.5 Centre+24.5 States, Uts &
EC)
Board of Directors
6 from Govt+Govt nominated Chairman
CEO from Private Sector ( EC has recommended change)+7
from Pvt
Instantaneous Information & timely settlement of
States Shares
GSTN IT Infrastructure owner EC
78. GSTN PORTAL
78
Single window for e-filing of CGST, IGST & SGST in the
shared portal
E-Services shall be done through this portal-
disseminated at back end to respective states & Excise
Dept.
Full Service Model: Some States can utilize
Limited Service Model: Regn, Return, Payment
Application Programming Interface (API): Adhere to
common RRP formats, can have additional fields in
their own system
Provide local language support
79. NEGATIVE LIST on SERVICES
79
Included
Transport
Advertizement
Entertainment
Sale of Goods
Not Included
Personal Services
Land & Building
Cable Operator & DTH Services
Note: Financial Services are not part of GST