INTERNATIONAL SCHOOL OF BUSINESS & MEDIA

BUSINESS ENVIRONMENT

PROJECT REPORT ON

Analyze the structure & issues of GST tax model and its impact in liquor
industry

UNDER THE GUIDANCE OF

Prof.Madan Survase

Submitted By-

Basab Bhattacharya
Aditya Pal
Aman Kaushal
 Chapter No. 1
INTRODUCTION:

1.1 What is GST?

Goods and Services Tax (GST) is a proposed system of indirect taxation in India merging
most of the existing taxes into single system of taxation. It was introduced by The Constitution
(One Hundred and First Amendment) Act 2016. The chairman of GST bill is union finance
minister which is currently Arun Jaitley.

GST 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.

1.2 Objectives of the study:

1) To analyze the structure and issue of GST Tax model of India.

2) To analyze the impact of GST on Liquor Industry.

1.3 Research methodology:

The descriptive and exploratory research designing will be used for this research. The research
is based on secondary data. The secondary data is collected through internet, journals etc. The
descriptive and inferential statistics will be used to analyze the data with the help of statistical
software such as Excel.
 Chapter no. 2
Understanding GST:

2.1 Understanding GST

In keeping with the federal structure of India, it is proposed that GST will be levied
concurrently by the Centre (CGST) and the states (SGST). It is expected that the base and other
essential design features would be common between CGST and SGST across SGSTs
for individual states. Both CGST and SGST would be levied on the basis of the destination
principle. Thus, exports would be zero-rated, and imports would attract tax in the same manner
as domestic goods and services. Inter-state supplies within India would attract an Integrated
GST (aggregate of CGST and the SGST of the destination State).

In addition to the IGST,

in respect of supply of
goods, an additional tax
of up to 1% has been
proposed to be levied by
the Centre. Revenue from
this tax is to be assigned
to origin states. This tax
is proposed to be levied
for the first two years or a longer period, as recommended by the GST Council.

The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by
The President of India post its passage in the Parliament (Rajya Sabha on 3 August 2016 and
Lok Sabha on 8 August 2016) and ratification by more than 50 percent of state legislatures.
The Government of India is committed to replace all the indirect taxes levied on goods and
services by the Centre and States and implement GST by April 2017.

With GST, it is anticipated that the tax base will be comprehensive, as virtually all goods and
services will be taxable, with minimum exemptions.

GST will be a game changing reform for the Indian economy by creating a common Indian
market and reducing the cascading effect of tax on the cost of goods and services. It will impact
the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization
and reporting, leading to a complete overhaul of the current indirect tax system.

GST will have a far-reaching impact on almost all the aspects of the business operations in the
country, for instance, pricing of products and services, supply chain optimization, IT,
accounting, and tax compliance systems.

A GST Council consisting of representatives from the Centre as well as State will be
formed within 60 days of the enactment of the Bill. The Council will
make recommendations to the Union and the States on model Goods & Service tax
laws, rates including floor rates with bands of goods & service tax,, Place of Supply
rules and any other matter relating to GST as the Council may decide.

Reports of Joint Committee constituted by Empowered Committee of the State Finance

Ministers on business processes of payment, registration refund and return under GST
have been released and put in the public domain for suggestions.

The draft model GST Law was released and put in public domain in June 2016.

GST Network, an IT backbone of GST, which will facilitate online registration, tax
payment and return filing, will be launched.

States will frame their respective GST Legislations to enable them to implement GST.
It will be in line with the Central GST Legislation.
2.2 Salient Features of the proposed Indian GST System

The power to make laws in respect of supplies in the course of inter-state trade or
commerce will be vested only in the Union Government. States will have the right to
levy GST on intra-state transactions, including on services.

The Centre will levy IGST on inter-state supply of goods and services. Import of goods
will be subject to basic customs duty and IGST.

GST is defined as any tax on supply of goods and services other than on alcohol
for human consumption

Central taxes such as Central Excise duty, Additional Excise duty, Service tax,
Additional Custom duty and Special Additional duty as well as state-level taxes such
as VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax,
Luxury tax and Octroi will subsume in GST.

Petroleum and petroleum products, i.e., crude, high speed diesel, motor spirit, aviation
turbine fuel and natural gas, shall be subject to GST - date to be notified by the GST
Council.

Provision will be made for removing imposition of entry tax / Octroi across India.

Entertainment tax, imposed by states on movie, theatre, etc., will be subsumed in GST,
but taxes on entertainment at panchayat, municipality or district level will continue.

GST may be levied on the sale of newspapers and advertisements. This would
mean substantial incremental revenues for the Government.

Stamp duties, typically imposed on legal agreements by states, will continue to be

levied.

Administration of GST will be the responsibility of the GST Council, which will be the
apex policy making body for GST. Members of GST Council comprise Central and
State ministers in charge of the finance portfolio.

2.3 Benefits of the GST

GST has been envisaged as an efficient tax system, neutral in its application and distributionally
attractive. The advantages of GST are:
 Wider tax base, necessary for lowering tax rates and eliminating classification disputes

Elimination of multiplicity of taxes and their cascading effects

Rationalization of tax structure and simplification of compliance procedures

Harmonization of center and state tax administrations, which would reduce duplication
and compliance costs

Automation of compliance procedures to reduce errors and increase efficiency

Destination principle

The GST structure would follow the destination principle. Accordingly, imports would be
subject to GST, while exports would be zero-rated. In the case of inter-state transactions within
India, State tax would apply in the state of destination as opposed to that of origin.

Taxes to be subsumed

GST would replace most indirect taxes currently in place such as:

Central Taxes State Taxes

Central Excise Duty [including Value-added tax

additional excise duties, excise duty Octroi and Entry tax
under the Medicinal and Toilet Purchase tax
Preparations (Excise Duties) Act, Luxury tax
1955] Taxes on lottery, betting and
Service tax gambling
Additional Customs Duty (CVD) State cesses and surcharges
Special Additional Duty of Entertainment tax (other than the
Customs (SAD) tax levied by the local bodies)
Central Sales Tax ( levied by the Central Sales tax ( levied by the
Centre and collected by the States) Centre and collected by states)
Central surcharges and cesses (
relating to supply of goods and
services)

Table 2.3.1
2.4 Problems with the System that has not been solved
The credit of Input VAT is available against Output VAT. The credit of input
excise/service tax is available against output excise/service tax. However, the credit
of VAT is not available against excise and vice versa.
VAT is computed on a value which includes excise duty. This shows that there is
still a tax on tax!
GST will solve this problem. Let us see how.

2.5 PRESENT SYSTEM OF INDIRECT TAXES

Various indirect taxes that are presently being levied by the Central & State Governments.

Table 2.5.1

(*CVD Countervailing Duty; SAD Special Additional Duty)

The GST shall subsume all the above taxes, except the Basic Customs Duty that will
continue to be charged even after the introduction of GST.
India shall adopt a Dual GST model, meaning that the GST would be
administered both by the Central and the State Governments.
2.6 DUAL GST MODEL

We begin by stating the dual GST model and the taxes levied on each kind of transaction. See
these abbreviations before we understand them-

1. SGST State GST, collected by the State Govt.

2. CGST Central GST, collected by the Central Govt.
3. IGST Integrated GST, collected by the Central Govt.
Now look at the chart that follows:

Table 2.6.1

These are the taxes that shall be levied under the new system of GST.

2.7 HOW GST OPERATES?

Case 1: Sale in one state, resale in the same state

In the example illustrated below, goods are moving from Mumbai to Pune. Since it is a sale
within a state, CGST and SGST will be levied. The collection goes to the Central Government
and the State Government as pointed out in the diagram. Then the goods are resold from Pune
to Nagpur. This is again a sale within a state, so CGST and SGST will be levied. Sale price is
increased so tax liability will also increase. In the case of resale, the credit of input CGST and
input SGST (Rs. 8) is claimed as shown; and the remaining taxes go to the respective
governments.
Figure 2.7.1 Source: https://www.quora.com/What-is-the-difference-between-the-current-taxation-
and-the-new-goods-and-services-tax-GST-in-India-What-is-the-impact

Case 2: Sale in one state, resale in another state

In this case, goods are moving from Indore to Bhopal. Since it is a sale within a state, CGST
and SGST will be levied. The collection goes to the Central Government and the State
Government as pointed out in the diagram. Later the goods are resold from Bhopal to Lucknow
(outside the state). Therefore, IGST will be levied. Whole IGST goes to the central government.

Against IGST, both the input taxes are taken as credit. But we see that SGST never went to the
central government, still the credit is claimed. This is the crux of GST. Since this amounts to
a loss to the Central Government, the state government compensates the central government
by transferring the credit to the central government.
Figure 2.7.2 Source: https://www.quora.com/What-is-the-difference-between-the-current-taxation-
and-the-new-goods-and-services-tax-GST-in-India-What-is-the-impact

2.8 Sale outside the state, resale in that state

In this case, goods are moving from Delhi to Jaipur. Since it is an interstate sale, IGST will be
levied. The collection goes to the Central Government. Later the goods are resold from Jaipur
to Jodhpur (within the state). Therefore, CGST and SGST will be levied.

Against CGST and SGST, 50% of the IGST, that is Rs. 8 is taken as a credit. But we see that
IGST never went to the state government, still the credit is claimed against SGST. Since this
amounts to a loss to the State Government, the Central government compensates the State
government by transferring the credit to the State government.
Figure 2.8.1 Source: https://www.quora.com/What-is-the-difference-between-the-current-taxation-
and-the-new-goods-and-services-tax-GST-in-India-What-is-the-impact

2.9 ADVANTAGES OF GST

Apart from full allowance of credit, there are several other advantages of introducing a GST in
India:

Possible reduction in prices: Due to full and seamless credit, manufacturers or

traders do not have to include taxes as a part of their cost of production, which is a
very big reason to say that we can see a reduction in prices. However, if the
government seeks to introduce GST with a higher rate, this might be lost.
Increase in Government Revenues: This might seem to be a little vague. However,
even at the time of introduction of VAT, the public revenues actually went up instead
of falling because many people resorted to paying taxes rather than evading the same.
However, the government may wish to introduce GST at a Revenue Neutral Rate, in
which case the revenues might not see a significant increase in the short run.
Less compliance and procedural cost: Instead of maintaining big records, returns
and reporting under various different statutes, all assessees will find comfortable
under GST as the compliance cost will be reduced. It should be noted that the
assesses are, nevertheless, required to keep record of CGST, SGST and IGST
separately
Advantages and Disadvantages in a nutshell
At present, Goods and Services are taxed separately and also by different authorities at
Centre, State and Municipal level. Hence the same goods are taxed differently when
produced in different states and even different districts.
GST is an attempt to unify all taxation of goods and services to provide a seamless tax
system for the entire country.

Advantages
1. It removes multiple taxation
2. It creates India as a single market
3. It taxes goods and services at the same rates so many disputes are eliminated on tax
matter.
4. It reduces taxes on manufactures, hence it increases their business and make them
more competitive at national and international level.
5. A seamless flow of Credit is available throughout the country. Hence evasion is
minimized.

Disadvantages
1. The Tax on services would go up substantially from 14% to 20%
2. Tax on retails would be almost double.
3. Imported goods would be taxed at higher rate by around 6%
4. There will be dual control on every business by Central and State Government. So
compliance cost will go up.
5. All credit will be available on from online connectivity with GST Network. Hence,
small businesses may find it difficult to use the system

There is Fierce Opposition too.

1. Congress is doing what BJP did when Congress wanted to pass the Bill. So it is
political.
2. States may lose autonomy to change their tax rates.
3. There will still be tax in the name of Additional Tax @ 1% for Inter-state movement
of goods which is against the spirit of GST.
 4. Manufacturing states would lose big revenue

Challenges after GST is passed

1. Service sector may oppose because they have to register in every state with central
and state government. So every business at all India level will have around 60
registrations while they are having just one today. Moreover their rates will also go up.
2. Retail business may oppose because their taxes will go up and they will also have to
deal with Central Government now in addition to States.
3. GSTN may not work optimally for quite some time.
4. Dual control can increase harassment to businesses.

2.10 FOOD FOR THOUGHT

The GST is a very good type of tax. However, for the successful implementation of the same,
we must be cautious about a few aspects. Following are some of the factors that must be kept
in mind about GST:

Firstly, it is really required that all the states implement the GST together and that
too at the same rates. Otherwise, it will be really cumbersome for businesses to
comply with the provisions of the law. Further, GST will be very advantageous if the
rates are same, because in that case taxes will not be a factor in investment location
decisions, and people will be able to focus on profitability.
For smooth functioning, it is important that the GST clearly sets out the taxable
event. Presently, the CENVAT credit rules, the Point of Taxation Rules are
amended/ introduced for this purpose only. However, the rules should be more
refined and free from ambiguity.
The GST is a destination based tax, not the origin one. In such circumstances, it
should be clearly identifiable as to where the goods are going. This shall be difficult
in case of services, because it is not easy to identify where a service is provided, thus
this should be properly dealt with.
More awareness about GST and its advantages have to be made, and professionals
like us really have to take the onus to assume this responsibility.
2.11 FURTHER UNDERSTANDING

Here is a compilation of some of my other answers that are worth reading in context of GST.
If you need to understand GST perfectly, these answers shall be relevant for you:

How is GST beneficial for the country? How would it help to improve the country's
economy?
How can GST be beneficial if the tax on the good goes to the state where the product
is consumed?
What're the major differences between the GST bill introduced by the UPA and the
current one?
What does the inclusion of 18% cap on GST rate in the bill signify?
If GST works best when the tax structure is uniform across different states, why
should the states have any say in the GST council (of India)?
How the GST will impact Petroleum traders across states in India?
 Chapter no. 3
Liquor Industry

3.1 Liquor Industry in India:

Alcohols are the intoxicating beverage consisting of spirits, wine and beer. It is defined by
the alcohol content and the major raw material used in it. For instance, spirits are mainly made
by fermenting grains and sugar, whereas wine is made by fermenting fruits/berries.
Indian alcohol market has been flourishing since 2001 and registered growth between 7-12%
till 2011 when the growth finally declined due to heavy import taxes, state government taxes,
excise duty and political instability in election season. The year 2013 was a great fall in Indian
alcohol market when the spirits volume actually declined by 2-3% in India. Alcohol industry
is a part of huge US$ 12 billion beverage industry of India excluding milk and milk products.
Indian alcohol market is dominated by whiskey which falls under spirit category. However,
the wine market is expected to show highest growth in the forecast period. The Indian alcohol
market is broadly segmented as spirits, beer and wine. Spirits are further sub-segmented into
whiskey, rum/brandy, vodka, gin and others. The market is projected to register a flat growth
in the forecast period.
Consumers are largely inclined towards quality alcohol due to increasing disposable income
and better standard of living. Other drivers include greater inclination towards social drinking
as well as women indulging into alcohol consumption. As India has huge youth population,
the demand of alcohol would remain high in the coming years. The market saw a boom in
Vodka sales in past decade as Vodka was positioned as the alcohol for women. Youth largely
prefer beer and the salaried youth are inclined toward whiskey and rum. In beer segment,
more than 85% of the market is dominated by strong beer rather than mild.
There exists quite a few restraints in the market such as high taxes, stringent government
regulations on manufacturing and selling liquor, and ban on advertisements among others.
Alcohol consumption is also subjected to the overall economys growth in terms of gross net
income per capita and household expenditure. Thus, development in the economy would give
a thrust to the alcohol market further but in a less pronounced manner.
One of the most notable trend is the demand of premium liquor among the consumers. The
growth of premium segment would surpass the overall growth of alcohol market due to
greater exposure towards foreign brands. India has seen a burst of high net worth individuals
in past two decades and the list is ever increasing, which would fuel the growth of market in
premium segment. In addition to travel retail theatres and duty free retailing would further
boost the growth of premium alcohol in the market. Companies are launching exclusive new
brands and products at premium prices to increase their margins and capture the upper class
consumers. In September 2014, SABMiller, which also happen to be the second largest player
in beer segment (after Kingfisher) launched its premium brand Miller Ace in India to
compete with brands such as Carlsberg and Anheuser-Busch InBev.
Many international brands such as Diageo plc, Pernod Ricard, and The Carlsberg Group
already forayed into the market with their million-dollar brands. The market is also moving
towards consolidation with large number of acquisitions and joint ventures. One of the biggest
mergers in recent past is that of London based Diageo plc and Indian firm United Spirits
Limited, (USL). Diageo acquired 54.78 % share in USL by shelling whopping US$ 3 billion
by mid-2014. USL is the dominant player in Indian alcohol market commanding majority of
market share.
Some of the major players in Indian Alcohol Market are United Spirits Limited, Radico
Khaitan, Jagatjit Industries, Globus Spirits, Allied Blenders and Distillers Pvt. Ltd., Sula
Vineyards, SABMiller India Ltd. and John Distilleries Pvt Ltd among others.
The research report presents a comprehensive assessment of market and contains thoughtful
insights, facts, historical data, and statistically supported and industry validated market data
and projections with suitable set of assumptions and methodology. Research report provides
analysis and information by categories such as market segments, geographies, types,
technology and applications.
 Chapter no. 4
Impact of GST in Liquor Industry

Allaying the fears of revenue loss by governments, the industry presentation argues that
actually application of GST to alcohol would lead to significant increase in government
revenues because GST would apply in addition to all existing taxes, and not as a replacement
for them. According to the presentation, additional revenues to the tune of Rs 1000 crores per
point of the GST rate would be generated if GST is applied to alcohol. Besides, it would lead
to significant revenue growth from existing taxes because of reduced leakages and greater
transparency in tax enforcement and better control on illicit production and sales. According
to the presentation, the seamless coordination between the Centre and the States under GST
would provide an audit trail and plug revenue leakages. It would facilitate automated matching
of inputs and outputs by GSTN and better monitoring and reporting of inter-State shipments
which are the prime source of leakages. Any collusion for concealing inter-State shipments and
avoiding tax payment will become extremely difficult under collective administration of GST
by the Central and State tax departments.

4.1 NO CURBS ON STATES POWERS

Bringing alcohol in GST will not curb the States current powers as constitutional provisions
give the States exclusive jurisdiction/control over potable alcohol and these powers remain
unchanged. In this regard, there are following constitutional provisions:

Entry 8 of the State List in the Seventh Schedule to the Constitution gives exclusive powers to
the States to legislate in respect of: Intoxicating liquors, that is, to say, the production,
manufacture, possession, transport, purchase and sale of intoxicating liquors.

Entry 51 of the State List in the Seventh Schedule to the Constitution gives exclusive power to
the States to legislate in respect of: Duties of excise on the following goods manufactured or
produced in the State and countervailing duties at the same or lower rates on similar goods
manufactured or produced elsewhere in India alcoholic liquors for human consumption;

Additionally, the Constitution (122nd Amendment) Bill retains Entry 54 with respect to
alcohol, giving exclusive powers to the States to levy tax on sale of alcohol.

4.2 ADVERSE IMPACT ON THE INDUSTRY

Assessing the impact of GST exclusion on the alco-beverage industry, the presentation
explains that blockage of input tax credits will lead to increased production costs,
inefficiencies in production and distribution supply chains; encourage bias in favour of
vertical and horizontal integration and greater concentration in the industry. This will
ultimately lead to less FDI and resulting loss of employment and adversely impacting the
countrys economic growth.

4.3 IMPACT ON CONSUMERS

The presentation says the alcohol exclusion from GST will have an adverse impact on
consumers because ineffective controls and collusion lead to illegal production/cartelization,
encourage counterfeiting, deception of the consumer and hazard to health in the absence of
quality and safety standards. Such activities (will) be curtailed through robust mechanisms,
if alcohol is brought within the ambit of the dual GST, the presentation maintains.

4.4 GREY MARKETS AND BLACK MONEY

The presentation also highlights the ugly truth that the grey market of alcohol in India is 50%
of the total consumed volume, aggregating 350 million cases. It cites a FICCI report on
Illicit Markets A Threat to our National Interests according to which there was 115%
increase in the grey market sales in the alcohol sector alone from Rs 5,626 crores in FY12 to
Rs 14,140 crores in FY14. The grey market has a direct bearing on the public health,
generates black money, abets tax frauds and causes revenue loss to governments.

4.5 Impact of non-inclusion of alcohol in the GST net

Assessing the impact of GST exclusion on the alcohol beverage industry, it will lead to both,
positive and negative impact.

4.5.1 Positive Impact

Better and efficient logistics / distribution channels

State taxes other than excise / VAT to be subsumed in GST .To that extent , ITC may
be allowed
Relief from dual administrative control
4.5.2 Adverse Impact

It will accentuate increased cascading effect of taxes on liquor due to no input tax credit
available between GST and state excise / VAT
There will be even no input credit available between any two or more state taxes and
on various goods and services consumed during exploration and production
Further , cost of production and prices would likely to go up which would ultimately
impact sales
There will be inefficiencies in production and distribution supply chains
No encouragement to FDI
GST to be paid on various services without allowance of input tax credit on those
services
GST will be payable on various regulatory fees (eg. License fees to State Government)
Share of contribution to economic growth will come down in future under the GST
regime
State may levy cess or sin tax on luxury / sin items such as tobacco, liquor, aerated
drinks etc.
Existing business models may have to be revisited self manufacturing, contract
manufacturing, IPR , franchise etc.
There is no concept of centralized registration in GST regime
Vendor / supplier management for compliances
Compliances for various input and output services still to be done
Where the input goods and services for the petroleum and liquor industries are covered
under GST and the outputs are not, there could arise complex issues surrounding double
taxation, ineligibility for input tax credits, supply chain regulations, and so on.
There will be adverse impact on major consumers like hotels, restaurants,
pharmaceuticals, perfumes manufacturing sector etc. in the form of increased cost.

Thus, exclusion of alcohol from GST regime may defeat the basic purpose of GST leading to
cascading effect and double taxation
 Conclusion

"High growth and numbers for liquor companies will be visible in the coming years as this
sector in India is getting more organised and demand for branded stuff is growing. Ban on
liquor in most states are expected to be phased out slowly as it happened in Andhra Pradesh
in the late 1990s as such policies are mere transitory. Ban on liquor gives rise to Mafia and it
will be discouraged," Sekhar said. In June a Goldman Sachs report too pointed out there was
ample potential for liquor companies in India in comparison to China.

"While alcoholic beverages represent 25% of the food and beverage market in China and the
US, in India, spirits alone is 34%, making it the largest category and a US$31bn market,"
Goldman Sachs said. "It is equivalent to 75% size for all packaged food. Still, we believe
there remains ample potential for growth as only 15% of Indians drink. Taboos around
alcohol also appear to be lifting, driven by Millennials: age of first drinking was around 17 in
recent years, down from 28 in the 1980s, according to WHO. The Indians who drink appear
to be high-frequency consumers: 36% of drinkers drink more than 3-4 times per week. We
expect incremental industry volume growth to be driven mainly by new consumers."

Year to date only four out of the 21 listed spirits makers in India have given positive returns
while the share price of the rest have seen a sharp fall. On Thursday, the share price of
companies including United Spirits, Pioneer Distilleries BSE-1.04 % and Tilaknagar
Industries among others crashed between 1-4% on the GST news.

Liquor companies were being kept out of GST as the sector is the second largest contributor
to state government exchequers, giving more than 90,000 crore in taxes every year. The net
tax rates for liquor companies range from 70-150% in most states as no set-offs are available
for them. A June report by Motilal Oswal Financial Services pointed out that state
governments are gradually coming around to the view that taxing spirits highly is self-
defeating for them. Sentiment towards liquor companies turned negative after elections in the
state of Bihar and Kerala were won on the plank of alcohol ban giving rise to speculation that
more states would follow suit.