GST Introduction

GST part I

An introduction of the Value Added Tax (VAT) at the Central and the State level was considered to be a major step – an important breakthrough – in the sphere of indirect tax reforms in India. If the VAT is a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level, then the Goods and Services Tax (GST) has a proven international record of bringing in significant improvement towards comprehensive indirect tax reforms in the country.
GST is a tax on supply of goods or services or both with a comprehensive and continuous chain of the set of benefit from manufacturer’s/ service provider’s point to the retailer’s point.
As per clause (12A) of article 366,“goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. 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.
An introduction of GST would also make Indian products competitive in the domestic and international markets. Studies show that this would instantly spur economic growth. Last but not the least, this tax, because of its transparent character, would be easier to administer.

To understand the tax credit at each stage of a transaction taking place on account of supply of goods as well as services, for example:
Manufacturer adds a value of INR 30 on his purchases worth INR 100 of goods and services used in the manufacturing and GST rate @ 10%;
Gross tax  value would be INR 13 and manufacturer will then pay INR 3 after setting of the credit of INR 10;
Manufacturer sells the goods to the wholesaler and he further sells the goods to the retailer after adding value of INR 20, Gross tax value would be INR 15 and wholesaler will then pay INR 2 after setting of the credit of INR 13;
Similarly, when a retailer sells the same goods after adding value of INR 10, then he will pay INR 1, after availing credit of INR 15 paid to wholesaler from his gross GST of INR 16
Thus, the manufacturer, wholesaler, 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 the final service provider as well.

Applicability of levy

The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

Supply within State:

In the case of supply of the goods or services is consumed within State, then The Central GST and the State GST both would be levied on the same price or value, unlike State VAT which is levied on the value of the goods inclusive of CENVAT. While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, SGST would be chargeable only when the supplier and the recipient are both located within the State. The tax rate would be recommended by GST council. This can be explained with the help of the following example:

Base value of supply of goods or service or both	INR 1,000
Add : CGST @ 10%	INR 100
Add : SGST @ 10%	INR 100
Total price charged for local supply of goods or services or both from the customer	INR 1,200

The CGST and SGST charged from customer on supply of goods or services would be deposited by seller with the Government.

Supply from one State to another :

In case of supply of the goods or services in consumed outside the State, then I GST would be levied at the specified rate as the GST council may recommended. This could be understand with the help of following example:

Base value of supply of goods or service or both	INR 1,000
Add : IGST @ 20%	INR 200
Total price charged for interstate supply of goods or services or both from the customer	INR 1,200

IGST charged from customer for supply of goods or services would require to be deposited by the seller with the Government.

Export :

In case the goods or services are exported out of India then as per the place of supply rules which provide that the same would be regarded as ‘export’, and simultaneously it would attract a zero rate on the particular transaction. In other word, the supplier would be allowed to export the goods or services without charging any tax. This can be understand with the help of following example:

 

Base value of supply of goods or service or both	INR 1,000
Add : GST @ 0%	INR NIL
Total price charged for export of goods or services or both from the customer	INR 1,000

 

Import :

Import of goods or services or both will be treated as interstate supplies and therefore, would be subject to IGST in same manner as applicable to other interstate supplies. In addition to IGST, custom duty would also be applicable as per prevailing rates. Input credit will be available of the GST paid on the import of goods and service.

Author: This article is contributed by CA. Gaurav Katiyar, who is fellow member of the Institute of Chartered Accountants of India and has a vast professional experience of over 17 years. He is also founder of GST knowledge sharing portal www.gstguru.com