What is GST?

In the Union Budget for 2009-2010, the Finance Minister announced that GST would be in effect from April 1, 2010 in India. However , at the end of January, Asim Dasgupta, Chairman of the Empowered Committee of State Finance Ministers made a statement that GST implementation in India would be deferred. It is essentially a tax only on value addition at each stage and a supplier at each stage is permitted to set-off through a tax credit mechanism Goods and Service Tax (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. The sellers or service providers collect the tax from their customer, who may or may not be the ultimate customer, and before depositing the same to the exchequer, they deduct the tax they have already paid. This is simply very similar to VAT which is at present applicable in most of the states and can be termed as National level VAT on Goods and Services with only one difference that in this system not only goods but also services are involved and the rate of tax on goods and services are generally the same. More than 140 countries have introduced GST. France was the first country which introduced a comprehensive goods and service tax regime in 1954. The different rate of GST is prevailing in different countries. In Australia, the GST is @ 10% , in Singapore the rate of tax is 7%.In India, it has been decided to adopt a two rate structure, a lower rate for necessary items and items of basic importance and a standard rate for goods in general, a special rate for precious metals and a list of exempted items.

Tax-Rate under the proposed GSTi India "World over, GST rates are typically between 16 per cent and 20 per cent. In India, it is likely to be the same," CBEC Chairman Sumit D Majumdar said. The tax-rate under the proposed GST would come down, but the number of assesses would increase by 5-6 times. Although rates would come down, tax collection would go up due to increased buoyancy. The government is working on a special IT platform for smooth implementation of the proposed Goods and Services Tax (GST). The IT special purpose vehicle (SPV) christened as GST N (Network) will be owned by three stakeholdersthe centre, the states and the technology partner NSDL, Finance minister Pranab Mukherjee has proposed a three-year timeline to fully implement the GST. In the first year, there will be a dual-rate GST. The Central GST is proposed at 6% for essential commodities and a 10% standard rate for other goods. States are expected to impose similar levies. As a result, the combined GST on goods will be between 12% and 20%. The tax on services will be levied at 8% by the Centre and a similar levy by the states. In the second year, only the standard rate will be reduced to 9%, the others remaining constant. In the third year, all the rates will be brought to a level of 16% for both Centre and states put together.

Delay in Implementation The introduction of GST regime has been pending for four years due to differences between the centre and some states over the structure of the new tax regime. Recently, the Government of India costituted a seven-member committee to frame a model GST legislation for governing the Central GST.The State Governments may use this model for framing their own legislations for the GST.it maay going to be implemented from Oct 1, 2012.

The new regime of GST will provide us a comparatively more transparent system through market mechanism. It will be a major blow for the underground economy. Taxation both direct and indirect plays an important role in promoting economic growth as well as equitable distribution. As we are facing the cascading system of indirect taxes in India and with the introduction of GST, all the cascading effects of Cenvat (custom on Goods) and service tax will be more comprehensively removed with a continuous chain set off from the producers point to the retailers point. Moreover, certain major Central and State taxes will also be subsumed in GST. We have also experienced the benefits from the Vat reform which include the growth in economics of States and business community . The structure of GST will be based on the destination principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to tax and exports will be relieved of the burden of the goods and service tax. International exports should be zero rated. On the other hand, International imports should be subject to both CGST and SGST at the time of importation irrespective of whether or not the imported goods are produced domestically.

Hence, it is necessary to make an integral part of proposed GST, the reform of the present system of taxation of immovable property, transaction and real estate services. It will certainly reduce the tax burden on consumers. The GST would entail remarkable changes for both Government and business/ economy and is set to become one of the Countrys biggest tax reforms forever.

Objective behind GST

a) The incidence of tax only falls on domestic consumption. b) The efficiency and equity of the system is optimized. c) There should be no export of taxes across taxing jurisdictions. d) The Indian market should be integrated into a single common market. e) It enhances the cause of co-operative federalism. Working of GST: The dealers registered under GST (Manufacturers, Wholesalers and Retailers and Service Providers) are required to charge GST at the specified rate of tax on goods and services that

they supply to customers. The GST payable is included in the price paid by the recipient of the goods and services. The supplier must deposit this amount of GST with the Government. If the recipient of goods or services is a registered dealer , he will normally be able to claim a credit for the amount of GST he has paid, provided he holds a proper tax invoice. This "input tax credit" is setoff against any GST (Out Put), which the dealer charges on goods and services, which he supplies, to his customers. The net effect is that dealers charge GST but do not keep it, and pay GST but get a credit for it. This means that they act essentially as collecting agents for the Government. The ultimate burden of the tax falls on the last and final consumer of the goods and services, as this person gets no credit for the GST paid by him to his sellers or service providers.

Benefits expected from GST are:

The successful implementation of the goods and service tax (GST) can give a trilliondollar boost to the economy, taking the total output to $2 trillion in a short span of time. As per Chairman of the 13th Finance Commission, the proposed GST would benefit the Indian economy by at least $15 billion (about Rs 73000 crore) per year. A fall in tax incidence on goods and services offered would enable producers to sell their products at a lower price, leading to increased demand. The gain from GST will propel the country from one-trillion dollar economy to two trillion-dollar economy in a short span of time. "Well designed GST will see an increase of 2 to 2.5 per cent in the GDP. "GST provide comprehensive and wider coverage of input credit setoff, you can use service tax credit for the payment of tax on sale of goods etc. Many indirect taxes in state and central level subsumed by GST, You need to pay a single GST instead of all. Uniformity of tax rates across the states By reducing the tax burden the competitiveness of Indian products in international market is expected to increase and there by development of the nation. Prices of goods are expected to reduce in the long run as the benefits of less tax burden would be passed on to the consumer.

How can the burden of tax, in general, fall under GST ? the present forms of CENVAT (Custom) and State VAT have remained incomplete in removing fully the cascading burden of taxes already paid at earlier stages. Besides, there are several other taxes, which both the Central Government and the State Government levy on production, manufacture and distributive trade, where no set-off is available in the form of input tax credit. These taxes add to the cost of goods and services through "tax on tax" which the final consumer has to bear. Since, with the introduction of GST, all the cascading effects of CENVAT and service tax would be removed with a continuous chain of set-off from the producer's point to the retailer's point, other major Central and State taxes would be included in GST and CST will also be phased out, the final net burden of tax on goods, under GST would, in general, fall. Since there would be a transparent and complete chain of set-offs, this

will help widening the coverage of tax base and improve tax compliance. This may lead to higher generation of revenues which may in turn lead to the possibility of lowering of average tax burden.

How GST Works

How does it work ? GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer's point and service provider's point upto the retailer's level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well. Table Stage of supply chain Purchase value of Input Value Value at addition which supply of goods and services made to next stage 30 20 10 130 150 160 Rate of GST GST on output Input Tax credit Net GST= GST on output Input tax credit

Manufacturer Whole seller Retailer

100 130 150

10% 10% 10%

13 15 16

10 13 15

13-10 = 3 15-13 = 2
16-15 = 1

Taxes to be counted under GST Both the EC and the Task Force on GST have got same view regarding taxes to be subsumed under CGST whereas they differ on SGST. The following central taxes should be included in the CGST: a) Central Excise Duty (including Additional Excise Duty) b) Service tax c) Additional Customs Duty (commonly referred as CVD) d) Surcharges and all cesses. The following state taxes should be included in the SGST. a) VAT / Sales tax (including CST) b) Entertainment tax (other than levied by local bodies) c) Entry tax no in lieu of Octroi d) Other Taxes and Duties (includes Luxury tax, Taxes on lottery, betting and gambling, and all cesses and surcharges by states). The Task Force has recommended for the inclusion of following other taxes levied by the states on goods and services: a) Stamp duty b) Taxes on vehicles c) Taxes on Goods and Passengers d) Taxes on duties on electricity. It has also suggested that all entry and Octroi duties levied by the third-tier government should be abolished.

CENVAT modvat credit means modified value added tax credit. it has been renamed as cenvat credit meaning central excise value added tax. it is not connected to customs duty as such. it is connected to central excise and service tax. cenvat credit as well as service tax is paid on the products manufactured and services provided. the tax paid on inputs, raw materials, capital goods and input services- utilized in manufacture of final products of a manufacturer and services provided are allowed to be deducted/ allowed as credit against the central excise/ service tax liability of a manufacturer/ service provided. the scheme was introduced for avoiding multi level taxation on same product or service, also mcalled cascading effect. As regards exports, central excise duty is nil. duty drawback is paid by govt. to exporters. Difference between CENVAT and VAT calculation is same For most common difference is , VAT is related to State and CENVAT is CENTRAL Let me give you the definition of both might be simpler foe you to figure the difference then, CENVAT - This is a replacement for the earlier MODVAT scheme and is meant for reducing the cascade effect of indirect taxes on finished products. The scheme is a more extensive one with most goods brought under its preview. MODVAT It stands for Modified Value Added Tax and is a way of giving some relief to the final manufacturers of goods on Excise Duties borne by their suppliers.

Difference Between VAT and Sales Tax

VAT vs Sales Tax

Value added tax (VAT) in theory avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favour over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain. In many developing countries such as India, sales tax/VAT are key revenue sources as high unemployment and low per capita income render other income sources inadequate. However, there is strong opposition to this by many sub-national governments as it leads to an overall reduction in the revenue they collect as well as a loss of some autonomy.

In theory sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. A general economic idea is that if sales taxes are high enough, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.). On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism. VAT too, today is subject to evasions like Carousel Fraud where taxes are imposed on goods exempt from them in order to avoid payment to the Government. The imposition of taxes like VAT is difficult in developing countries like India due to a low rate of per capita income and so Sales Tax is a more popular means of income for the country.

Summary: 1. VAT is levied on both the producer and consumer while a sales tax is levied on only the end consumer. 2. The burden of the VAT is, however, not felt by the consumer as much as the Sales Tax is. Since it is imposed during production itself it does not affect the buyer unlike the sales tax which increases the price of a commodity. 3. The effect of the VAT is felt equally by the consumers as well as the producers because the same amount of VAT levied on the product is also charged from the producers, despite their position or social standing. However, Sales Tax is borne solely by the consumers. 4. VAT involves tricky accounting while sales tax involves simpler accounting. 5. VAT is applied at the various stages of production while sales tax is applied on the total value of the purchase. 6. VAT efficiently avoids evasion of taxes while a sales tax is unable to deal with this.
7. Sales tax is applicable only to goods but VAT is added to everything including labour and services. 8. VAT is uniform; whereas sales tax differs from state to state.