Tuesday, November 25, 2008

GOODS AND SERVICE TAX: - AN INTRODUCTRY STUDY

The Finance Minister Mr. P Chidambaram while presenting the Union Budget -2006 has given the indication that we will be in GST regime in 2010 and after successful introduction of VAT in almost all the states barring one or two and continuous increase in number of services under the service tax net, nobody should have any doubt on his declaration and seriousness about GST. Let us see what the FM has said in his Budget speech: -
 

155. It is my sense that there is a large consensus that the country should move towards a National Level Goods and Service Tax (GST) that should be shared between the centre and the states. I propose that we set April 1, 2010 as the date of introducing GST. World over, Goods and Services attract the same rate of Tax. This is the foundation of GST. People must get used to the idea of a GST. We must progressively converge the service tax rate and Cenvat rate. I propose to take one step this year and increase the service tax rate from 10 percent to 12 percent. Let me hasten to add that since service tax paid can be credited against service tax payable or excise duty payable, the net impact will be very small.

 
1.WHAT IS GST?
 
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 sell 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. 
 
On most of the goods and services the rate of tax remains the same but as per the necessity of the nation some goods or services can be declared as "exempted" or "Zero rated". The whole system is developed in such a way that it avoids the cascading effect and the final consumer bears the burden of all the tax. Generally, in such a system Exports are zero rated and all the taxes paid while purchasing and manufacturing the goods including the taxes paid on raw material and services are returned to the exporter to make the exports competitive. 
 
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 the country 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 the services are also involved and the rate of tax on goods and services are generally the same.
 
2.HOW GST WILL WORK
 
 
Generally, The Dealer registered under GST (Manufacturers, Wholesalers and retailers and service providers) charge GST on the price of Goods and services from their customers and claim credits for the GST included in the price of their own   purchases of Goods and services used by them. While GST is paid at each step in the supply chain of goods and services, the paying dealer don't actually bear the burden of the tax because GST is an indirect Tax and ultimate burden of the GST have to be taken by the last customer.
 
This is because they include GST in the price of the goods and services they sell and can claim credits for the most GST included in the price of goods and services they buy. The cost of GST is borne by the final consumer, who can't claim GST credits, i.e. input credit of the tax paid. 
 
The GST can be divided into following Sections to understand it better: -
 

1.CHARGING THE TAX: -
The Dealer registered under GST (Manufacturers, Wholesalers and retailers and service providers) is 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 to the Government.
2. GETTING CREDIT OF GST: -
If the recipient of goods or services is a registered dealer (Manufacturers, Wholesalers and retailers and service providers), it will normally be able to claim a credit for the amount of GST it has paid, provided it holds a proper tax invoice. This "input tax credit" is setoff against any GST (Out Put), which the business itself charges on goods and services, which it supplies, to its customers.
3.ULTIMATE BURDEN OF TAX ON LAST CUSTOMER: -
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.
4.REGISTRATION: -
Dealers will have to register for GST. These dealers will include the suppliers, Manufacturers, service providers, wholesalers and retailers. If a Dealer is not registered, it normally cannot charge GST and cannot claim credit for the GST he pays and further can not issue a Tax invoice.
5. TAX PERIOD: -
The tax period will have to be decided by the respective law and normally it is monthly and/or quarterly. On a particular tax period, which is applicable to the dealer concerned, the dealer have to deposit the tax if his out put credit is more than the input credit after considering the opening balance, if any, of the input credit.
6. REFUNDS: -
If for a tax period the input credit of a dealer is more than the out put credit then he is eligible for refund subject to the provisions of law applicable in this respect. The excess may be carried forward to next period or may be refunded immediately depending upon the provision of law.
7. EXEMPTED GOODS AND SERVICES: -
Certain goods and services may be declared as exempted goods and services and in that case the input credit can not be claimed on the GST paid for purchasing the raw material in this respect or GST paid on services used for providing such goods and services.
8.ZERO RATED GOODS AND SERVICES: -
Generally export of goods and services are zero-rated and in that case the GST paid by the exporters of these goods and services is refunded. This is the basic difference between Zero rated goods and services and exempted goods and services.
9.TAX INVOICE: -
Tax invoice is the basic and important document in the GST and a dealer registered under GST can issue a Tax invoice and on the basis of this invoice the credit (Input) can be claimed. Normally a Tax invoice must bear the name of supplying dealer, his Tax identification Nos., address and Tax invoice Nos. coupled with the name and address of the purchasing dealer, his tax identification Nos., address and description of goods sold or service provided.

 
 
The working of GST with respect to Manufacturer, dealer and consumer can be seen in the illustrations given below: -
 
 
(a). Manufacturer
 
The manufacturers will get the input credit of all the taxes paid by them on the raw material and also on the services. Let us assume the Rate of GST at 16% and a plastic manufacturing company has consumed the following Goods and Services while producing the goods, which they are able to sale at Rs. 100 Lakhs plus Tax: -
 
DESCRIPTION
AMOUNT
RATE OF TAX
TAX PAID
Raw material
Rs. 50 Lakhs
16%
Rs. 8.00 Lakhs
Stores and spares
Rs. 10 Lakhs
16%
Rs. 1.60 Lakhs
Services
Rs. 15 Lakhs
16%
Rs. 2.40 Lakhs
Total Input Tax
 
 
Rs. 12 Lakhs
 
Now the "Out put Tax" i.e. the tax charged from the purchaser is as under: -
 
DESCRIPTION
AMOUNT
RATE OF TAX
TAX COLLECTED
Sale
Rs. 100 Lakhs
16%
Rs.16.00 Lakhs
 
 
TOTAL OUT PUT CREDIT
Rs. 16.00 Lakhs
 
 
The net tax payable by Manufacturer is as under: -
 
DESCRIPTION
AMOUNT
Total output tax.
Rs. 16.00 Lakhs
Total input tax.
Rs. 12.00 Lakhs
Net GST Payable
Rs. 4.00 Lakhs
 
If the Goods are sold to a Trader by this manufacturer and the trader also used some of the service amounting to Rs.5 Lakhs also on which he has paid service Tax amounting to Rs. 0.80 Lakhs. Now his input tax is as under: -
 

DESCRIPTION
AMOUNT
RATE OF TAX
TAX PAID
Goods 
Rs.100 Lakhs
16%
Rs. 16.00 Lakhs
Services
Rs. 5 Lakhs
16%
Rs. 0.80 Lakhs
 
 
Total Input Tax
Rs. 16.80 Lakhs

 
 
Now the dealer sold the goods to the Consumers by adding his profit of Rs. 10 Lakhs and in that case his output tax will be as under: -
 

DESCRIPTION
AMOUNT
 Goods Sold
Rs. 115.00 Lakhs
Add: - Tax @ 16%
Rs. 18.40 Lakhs
Total
Rs.133.40 Lakhs

 
The net tax payable by the dealer is under: -
 

DESCRIPTION
AMOUNT
Total output tax.
Rs. 18.40 Lakhs
Total input tax.
Rs. 16.80 Lakhs
Net GST Payable
Rs. 1.60 Lakhs

 
Now through this system we have presumed that the goods of Rs. 115 Lakhs are sold to the customers then the Government in that case has got the tax in the following form: -
 

DESCRIPTION
AMOUNT
From the sellers of Raw material
Rs.8 Lakhs
From the suppliers of stores and spares
Rs. 1.60 Lakhs
From the service providers of the services consumed by the manufacturers.
Rs. 2.40 Lakhs
From the Manufacturer
Rs. 4.00 Lakhs
From the service providers of the services consumed by the dealer.
Rs. 0.80 Lakhs
From the Dealer
Rs. 1.60 Lakhs
Total GST received
Rs.18.40 Lakhs

 
See this is exactly equal to the amount that has to be born and ultimately paid by the last customer on Rs.115 Crores @ 16% i.e. Rs. 18.40 Lakhs.
 
Apparently the system is very much similar to the present system of VAT but the implementation of this system will certainly have some unique problems compared to VAT which are being discussed and explained in next paragraph.
 
In a very simple manner the overall system of GST can be seen as under with the help of this table: -
 
(Rs.in Lakhs)
 

DESCRIPTION
OUTPUT CREIDT
INPUT CREDIT
NET TAX
RAW MATERIAL SUPPLIER
8
                                                    NIL
8
STORES SUPPL.TO MFG.
1.6
 NIL
1.6
SERVICE PROVIDER TO MFG.
2.4
 NIL
2.4
SERVICE PROVIDER TO TRADER
0.8
 NIL
0.8
MANUFACTURER
16
12
4
TRADER
18.4
16.8
1.6
TOTAL
47.2
28.8
18.4

 
 
The Net GST payable by the Manufacturer and Trader can be seen as under with the help of this Graph: -
 
 
 
Fig: -1 Showing the output credit, input credit and Net tax payable by the Manufacture and the Dealer.
 
The Net component of Tax to the consumer can be seen as under: -
 
 
 
Fig.2: - Showing how the tax born by the ultimate consumer is deposited by various dealers at different stages.
 
3.SYSTEMS OF GST
 
Internationally, there are three systems in vogue and these three are: -
 
(a). INVOICE SYSTEM
(b). PAYMENT SYTEM
(c). HYBRID SYSTEM
 
(a). INVOICE SYSTEM
 
In the invoice system, the GST (Input) is claimed on the basis of invoice and it is claimed when the invoice is received, it is immaterial whether payment is made or not. Further the GST (Output) is account for when invoice is raised. Here also the time of receipt of payment is immaterial.
 
One may treat it as mercantile system of accounting. In India the present system of sales tax on goods is an invoice system of VAT and here it is immaterial whether the taxpayer is following the cash basis of accounting or mercantile basis of accounting.
 
Advantage of Invoice system
 
The advantage of invoice system is that the input credit can be claimed without making the payment.
 
 
The disadvantage of the invoice system is that the GST has to be paid without receiving the payment.
 
(b). PAYMENT SYSTEM
 
In the payment system of GST, the GST (Input) is claimed when the payment for purchases is made and the GST (Output) is accounted for when the payment is made. In this system, it is immaterial whether the assessee is maintaining the accounts on cash basis or not.
 
Advantage of Payment system
 
The advantage of cash invoice system is that the Tax (output) need not to be deposited until the payment for the Goods and/or services received.
Disadvantage of payment system
 
The disadvantage of the payment system is that the GST (input) cannot be claimed without making the payment.
 
The Taxes on services in India are based on this payment system since service tax is payable on receipt basis and further Cenvat credit is only allowable when payment of the service is made. 
 
In some countries, this system is also adopted for small traders to keep them away from the complexities of the Invoice system, which is purely a mercantile system.
 
(c). HYBRID SYSTEM
 
In hybrid system the GST (Input) is claimed on the basis of invoice and GST (Output) is account for on the basis of payment, if allowed by the lawIn some countries the dealers have to put their option for this system or for a reversal of this system before adopting the same.
 
Both these three systems can be summarised as under: -
 
 

DESCRIPTION
INPUT CREDIT
OUTPUT CREDIT
Invoice system
On receipt of invoice
On issue of Invoice
Payment system
On making the payment
On receiving the payment
Hybrid system
At the option of dealer to be declared in advance.
At the option of dealer to be declared in advance.

 
It always depends on the law of the country, which decides the system of GST to be followed by the Dealers.
 
4.GST AND PRESENT SYSTEM OF VAT
 
 
In principle there is no difference between present tax structure under VAT and GST as far as the tax on Goods is concerned because GST is also a form of VAT on Goods and services. Here at present both the Sales tax, with an exception of CST, is a VAT system and in case of service Tax the system also has the Cenvat credit system hence both Sales Tax and Service tax are under VAT system in our country. At present the Goods and services are taxed separately but in GST the difference will be vanished.
 
The overall system of GST is very much similar to the VAT as it is implemented in most of the country in recent years and VAT can be considered as first step towards GST. Let us see the VAT implementation schedule of various states: -
 

STATES
DATE OF IMPOSITION OF VAT
NUMBER OF STATES
1.Haryana
1-4-2003
1
2. Andhra Pradesh, West Bengal, Kerala, Karnataka, Orissa, NCT Delhi, Tripura, Bihar, Arunachal Pradesh, Sikkim, Punjab, Goa, Mizoram, Nagaland, Jammu and Kashmir, Manipur, Maharashtra, Himachal Pradesh, Assam and Meghalaya.  
1-4-2005
20
3.Uttaranchal
1-10-2005
1
4. Rajasthan, Gujarat, MP and Chhatisgarh, Jharkhand.
1-4-2006
5
5.Uttar Pradesh and Tamil Nadu
Still not decided
2

 
All the states have their own VAT Laws comprising VAT acts and VAT rules and these acts and rules are formulated on the basis of "White paper on VAT" issued by the empowered committee of states' Finance Ministers on VAT headed by Dr. Asim Das Gupta, the Finance Minister of West Bengal.
 
Due to the fact that the taxpayers are already using the Vatable sales Tax and service tax system hence there may be a possibility that GST will be a matter of settlement between the centre and the states and like VAT, the possibility of any resistance from the Tax payers is somewhat less.
 
5.SERVICE TAX
 
The goods in our country are taxable since long time but the same thing cannot be said for services. Till 1994 there was no tax on services and this tax was introduced by Present Prime minister of India Dr. Man Mohan Singh, who was holding the Finance Portfolio at that time and the logic behind it was "When goods are taxable why not service?" It is also a central taxand along with central excise it is governed on the system of VAT and the service tax suffered and paid can be claimed as Cenvat credit against central excise and service tax or vica versa.
 
There is no separate service tax Act and Service Tax Department in India and taxes on servicesin our country is governed by some of the provisions of Finance Act- 1994 and Service Tax Rules – 1994 and the concerned department is Central Exicise department.
 
In out country the whole service sector is not taken under the net of service tax and for this purpose a selective approach is taken. In 1994 only three services were taken into the net of service Tax and year-to-year this number is continuously increasing. The number of services taken into the net of service tax is touching almost 100 till 2006.
 
 
 
6.RATE OF SERIVCE TAX
 
The rate of service tax at various stages of time is as under: -
 

PERIOD
RATE OF TAX
1-7-1994 to 13-05-2003
5%
14-05-2003 to 09-09-2004
8%
10-09-2004 to 17-04-2006
10.2% (including 2% Education cess)
From 18-04-2006- 12.24%
12.24%(including 2% Education cess)

 
When GST will be introduced, the Service Tax provisions as contained in Finance Act – 1994 and service tax Rules-1994 will be replaced by the provision of a Central Goods and Service Tax Act and Rules.
  
7.GST AND INCOME TAX
 
Though GST is basically an indirect tax but since the last burden of this tax is borne by the ultimate consumer hence for a consumer it is a tax on him. If a person pays income tax of Rs. 10000.00 on his income and Rs. 2500.00 on services and goods consumed by him the total burden of tax on him is Rs. 12500.00 isborn by him during the year.
 
Now in some countries the GST has been made deductible from the income tax of the ultimate consumer but on experimental basis and only in the case of small income group assesses only. If this may be the scheme then the person mentioned above will get the credit of Rs.2500.00 and have to pay income tax of Rs.7500.00 only to make his total tax in tune of Rs.10000.00.
 
In our country this is a very remote possibility but theoretically this may be a good point of study.
 
8.IT IS ESSENTIALLY A CENTRALISED SYSTEM
 
The GST will work only as centralized taxation system with collection of all the Tax to the central Government and then shared by the states and this will be a very big and foremost problem when GST will be introduced in India because the country has the federal system of economy in which the states have also power to collect tax and that is the main base of their economic autonomy.
 
 
How this system will work in a centralized system can only be understood from announcement of Finance Minister, let us once again see the relevant portion of the speech: -
 

It is my sense that there is a large consensus that the country should move towards a National Level Goods and service Tax (GST) that should be shared between the centre and the states.

 
This particular peculiarity of the GST has made it totally different from the VAT and this can only be a national level tax and can be successfully managed by the central power and the total collection of the same can be shared by the states.   
 
VAT has also been introduced in our country without abolishing the CST (Central Sales Tax) and even lowering the CST rates have been postponed several times and the basic reason is that some of the states collecting major share of CST are not ready to compromise with their economic autonomy. VAT, principally is also a central tax but in our country it has been introduced with some compromises and states have agreed on it, though with some initial hesitation, because their economic autonomy was not touched. There is psychological difference between the collection of Tax by the states themselves and sharing the centrally collected tax.

2 comments:

abhinaya said...

good coverstory

Anonymous said...

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