You are on page 1of 4

7/7/2017 Salient Features of upcoming Goods and Service Tax (GST) in India - Udyog Software

QuicKonnect

Products Taxes Covered Services Demo Center Tax Knowledge Careers About Us Contact Us

Salient Features of upcoming Udyog Software Taxes Covered Goods and Service
Salient Features

Goods and Service Tax (GST) in


India

Goods and Services Tax: Salient features


The present essay looks at the salient features of the proposed GST and how it is di erent from the current system of taxation of goods and
services. The information herein is drawn from the o cial paper on GST on the website of the Central Board of Excise & Customs, which has played
a vital role in the formulation of the GST model. The paper can be accessed at http://cbec.gov.in/deptt_o cr/status-gst-15052015.pdf.

I shall proceed as follows:

The journey to GST


What is GST: how is it di erent?
GST by states and centre on the same taxable value;
Input tax credit of GST in inter-state transactions;
Di erential treatment for alcohol, tobacco, petroleum products;
Additional levy by states on interstate supply of goods;
Operational mechanism
Uniform rate across states?

The journey to GST

(i) Amendment of Constitution


The 100th Constitution Amendment Bill, which aims to change the taxing powers of the states and union to enable GST, has been passed by the Lok
Sabha and is now with a Parliamentary committee for scrutiny. It is a long journey for an amendment of this nature to actually be made, as laid
down in Article 368 of the Constitution1. After passing by both houses of Parliament, the Bill has to be rati ed by at least half the states before it
becomes law. This is required because the lists in the Seventh Schedule are being amended, which changes the balance of power in the federation
of states. (The federal structure of the Indian nation is declared in the very rst Article of the Constitution, which opens with Article 1 saying, India,
that is Bharat, shall be a Union of States.)

(ii) GST law to be enacted by centre and each state


As will be seen below, an important feature of GST will be that tax paid on inter-state transactions will be available as input tax credit. For this
purpose the taxing statutes of each state would have to incorporate this provision, as it will not work without complete synchronisation. Therefore
the next step after the Constitutional amendment will be that the GST Council (explained below) will provide draft enactments to the states and
centre and these will have to be passed by each of the states and by Parliament respectively.

What is GST: how the levy will be di erent?


GST is Goods and Services Tax:

a dual tax to be levied on the same taxable event by both the states and the union government2.
The taxable event will be supply of goods or services3.
The states will levy the tax on such supplies of goods / services made within the state, while the union will levy the tax on inter-state supplies,
but the state will collect it as in the present case of CST.
Thus on each supply of goods / services, there will be a state tax as well as a central tax. These will be called state GST and central GST
respectively.
There will be a single document for tax purposes, and a single return led with a central registry, from which the information will be split
between the centre and the relevant states.

http://www.udyogsoftware.com/taxes-covered/gst/salient-features-of-upcoming-goods-and-service-tax-gst-in-india/ 1/4
7/7/2017 Salient Features of upcoming Goods and Service Tax (GST) in India - Udyog Software

The di erences in the levy from the current scenario will be as follows.

At present:
(i) Currently the centre alone can tax services. When service tax was introduced in 1994, this was an item not mentioned anywhere in Lists 1, 2 or 3
of the Seventh Schedule and was therefore covered under the residual entry number 97 in List I (union list). An item 92C has subsequently been
inserted in List I, but not been operationalized.

(ii) Currently, di erent stages in the progression of goods in the supply chain are levied to di erent taxes, and there is no input tax relief for most of
these, so that the price of goods gets correspondingly in ated. The taxes on goods include excise duty, VAT / CST, purchase tax (if applicable), entry
tax (in various forms and names), and state cesses and surcharges. While a manufacturers invoice does re ect both excise duty and VAT / CST even
now, this is only because both are indirect taxes and are collected from the customer. However they are sequentially collected, excise duty on
manufacture and then VAT / CST on sale, and are charged on di erent values (as elaborated elsewhere in this paper). It can also be seen that VAT /
CST is not charged on transfer of goods that is not a sale, like stock transfer; and excise duty is not charged on sale transactions but is charged only
on manufacture.

(iii) Because manufacture, sale and service are at present taxed di erently, there is much ambiguity and litigation over legal concepts of what
constitutes

Manufacture
Sale
Service [as distinct from deemed sale under Article 366(29A) of the Constitution4]

In future (during GST regime):


(i) In GST it is proposed to delete entry 92C (tax on services) from List I so that the states as well as the centre can tax services. Also, both centre
and states are to be explicitly empowered to levy goods and services tax, which is de ned as a tax on the supply of goods or services or both. Thus
the Constitution, upon amendment, will support levy of tax on services as well as goods by the states as well as the centre.

(ii) GST will replace a multiplicity of taxes on goods, like excise duty on indigenous manufacture and on imports, VAT, CST, purchase tax, entry tax,
and various cesses and surcharges. It will also replace entertainment tax (other than by local bodies), luxury tax, taxes on advertisements and taxes
on lottery, racing and gambling. Furthermore, GST will be available as input tax credit.

(iii) The single tax on supply will render redundant the decades-old debates on what constitutes manufacture, what constitutes sale, and how to tax
composite transactions of service and sale. A greater degree of clarity regarding taxability, and a corresponding reduction in uncertainty will result.

GST: chargeable by states and centre on the same taxable value


The levy of GST will be simultaneously made on the same transaction by the states and centre. Consequently, the taxable value will be the same for
the purpose of both state & central GST. This is di erent from the present scenario in the following ways:

At present:
Even today, a manufacturers commercial invoice re ects both central excise duty and state VAT on the same goods. This is because both are
indirect taxes and are collected from the customer. Conceptually, however, at present the centre taxes manufacture, and thereafter the state taxes
sale of the goods. The result is that the central excise duty is imposed rst on the goods, and the state tax comes after that, on a value that is price
plus central excise duty. If the goods are priced at Rs 100, and excise duty is 10% and VAT is 14%, the present scenario is that the invoice will read
as follows:

Goods Rs. 100.00

C. Excise duty @ 10% Rs. 10.00

Sub-total Rs. 110.00

VAT @ 14% Rs. 15.40

In future (during GST regime):


When the same transaction of supply is being taxed by both centre and states, the taxes are levied simultaneously on the same value. The rate of
GST in the above transaction will be 24%, split as 10% central GST and 14% state GST. The transaction will then be taxed as follows:

Goods Rs. 100.00

C.GST @ 10% Rs. 10.00

S.GST @ 14% Rs. 14.00

http://www.udyogsoftware.com/taxes-covered/gst/salient-features-of-upcoming-goods-and-service-tax-gst-in-india/ 2/4
7/7/2017 Salient Features of upcoming Goods and Service Tax (GST) in India - Udyog Software

Thus there will be a reduction in the amount of VAT (to be known as SGST) payable if the rate remains the same. (The same result could have been
achieved by changing the method of valuation in VAT / CST law, but there was no incentive for the states to do this or agree to it, as it involves
reduction in their revenue.)

GST will provide input tax relief in inter-state transactions

The major gain from GST will be extension of input tax relief to inter-state sale of goods.

At present:
At present, there is a pan-India input tax relief mechanism for only the central taxes on goods and services, in the form of Cenvat credit. As for the
state taxes, each state charges VAT on sale of goods within the state and provides input VAT credits for taxes paid within the state. Inter-state sales
are subject to CST, levied by the centre but collected by the states. No credits are available for such inter-state transactions. The obvious reason for
the absence of tax credits in inter-state sales is loss of revenue that would ensue by allowing tax paid to another state to be reduced from tax
payable.

In future (during GST regime):


The breakthrough achieved by the GST model is the central clearing house to mediate inter-state credits, with central compensation built into the
system. CST will be replaced by integrated GST (IGST), which the originating state will charge on the sale. IGST can be taken as a credit in the
destination state. Its use will be to pay IGST, CGST or SGST, in that order of preference. The transaction will be electronically routed through the
central clearing house, which will also track the use of IGST to pay SGST and will compensate the state to that extent. In other words, the loss
caused to the destination state by tax paid in another state being adjusted against tax payable to the destination state will be made up by the
centre. The rationale for this is to encourage growth of the market, which in turn is expected to spur production and increase revenue. This system
of input tax credit in inter-state sales is a major salutary feature of the proposed GST model.

Di erential treatment for alcohol, tobacco and petroleum products

(i) Alcoholic liquor for human consumption has been excluded from the purview of GST. The de nition of goods and services tax in the proposed
clause (12A) to be inserted in Article 366 of the Constitution is tax on the supply of goods or services or both (except tax on the supply of alcoholic
liquor for human consumption). The manufacture and sale of the product will continue to be taxed by states.

(ii) Tobacco and tobacco products will be subject to central excise duty in addition to GST. While not excluded from GST, it is retained in entry 84 of
List I (union list) also.

(iii) Petroleum products are excluded from GST for the present, and will continue to be taxed in the present mode central excise duty on
manufacture and VAT / CST on sale. However, the proposed Constitutional amendment requires the GST Council to x the date by which these
products will be brought into the purview of GST. This is in clause (5) of the proposed Article 279A.

Additional 1% for originating state on interstate supply of goods non-VATable In addition to GST, an amount of 1% on inter-state supply of goods
will be charged by the centre and assigned to the originating state, as per section 18 of the Constitution amendment bill. What is the originating
state will be determined in terms of the rules for place of supply, which will be framed by Parliament in terms of the same section. This tax of 1% on
inter-state supply of goods will not be available as input tax credit. The tax will be levied for an initial period of two years and may be extended on
the recommendation of the GST Council (see below).

Operational mechanism
At the level of centre-state coordination on policy and implementation, the proposed Article 279A in the Constitutional amendment provides for the
creation of a GST Council consisting of the union and state Finance Ministers and other designated functionaries, who will take decisions by
majority vote in the manner provided. The role of the Council will be to make recommendations to the centre and the states on, inter alia,
exemptions including threshold exemption, rates of tax, date of tax to be levied on petroleum products, special provisions for speci ed states.

However, the manner of operation of the levy on the ground is far from clear. Perhaps the GST Council will decide issues like, who will have
jurisdiction to audit the assesse, what will be the enforcement mechanism for cases of evasion, what will be the mechanism to prevent input tax
fraud, and so on.

Uniform rates of GST across states?


Part of the vision of the government in bringing GST is that it will transform India into one integrated market and greatly enhance the ease of doing
business. To this end, uniform rates of GST across states are considered desirable, as a measure of simpli cation. However the states are
understandably reluctant to surrender their discretion to tax; as a compromise it is understood that the GST Council will give them a range within
which they can raise or lower the rates.

There is a school of thought that is opposed to uniform rates on the ground that such a provision will be eventually detrimental to business. The
states use rates of tax and exemptions from tax as an incentive to attract business. In this sense there is competition among the states, and
business bene ts. In case of uniformity, the tax rates are a fait accompli that will have to be faced by the potential investor without alternative
recourse.

Content provided by:


http://www.udyogsoftware.com/taxes-covered/gst/salient-features-of-upcoming-goods-and-service-tax-gst-in-india/ 3/4
7/7/2017 Salient Features of upcoming Goods and Service Tax (GST) in India - Udyog Software

Content provided by:


Radha Arun
Consultants to Udyog Software (India) Ltd.
Email: radha.arjuni@gmail.com

Please connect with us at:

Web: www.udyogsoftware.com
Email: teammarketing@udyogsoftware.com

1 Article 368 of the Constitution can be perused at http://indiankanoon.org/doc/594125/.

2 In terms of the proposed Article 246A of the Constitution, Parliament as well as the legislatures of every state shall have power to make laws with
respect to goods and services tax imposed by the Union or by such state.

3 In terms of the proposed clause (12A) to be inserted in Article 366 of the Constitution, goods and services tax means tax on the supply of goods or
services or both (except tax on the supply of alcoholic liquor for human consumption).

4 Article 366(29A) of the Constitution was inserted in the pre-service tax period, to deem certain transactions as sale. The transactions included
works contract, catering, hire purchase, aspects of which are now subject to service tax.

Products Taxes Covered Services About Us


vuGST 13.0 Business Automation and GST Goods and Services Tax (GST) Demo Center Leadership Team
Compliance Indirect Taxes Recognitions &
Tax Knowledge
UGST Billing Localised GST Invoicing Service Tax | Excise Trading | Achievements
Newsletters
EXIM Export Import Documentation & EDI Excise Manufacturing | VAT | GTA | Partners
White Papers
Tracet Fixed Asset Management Works Contract
Careers
Articles
Direct Taxes
Open Positions
TDS Case Studies
Events Contact Us
Special Taxes
EXIM | Special Economic Zone | Union and State Budgets
Export Oriented Unit Union Budget 2017-18 |

Payroll Taxes Union Budget 2016-17 |


Delhi NCT Budget 2016 -2017 |

Maharashtra State Budget 2016-17 |


Union Budget 2015-16

2013 Udyog Software. All Rights Reserved. Privacy Statement | Terms of Use

http://www.udyogsoftware.com/taxes-covered/gst/salient-features-of-upcoming-goods-and-service-tax-gst-in-india/ 4/4

You might also like