Goods and Services Tax: India

Indirect Tax CIA I

Aanchal Agrawal, 1311680, 6 BBA (H) A

Table of Contents
OVERVIEW

TYPE OF GST
BENEFITS OF GST
DRAWBACKS OF GST
IMPLEMENTATION PLAN

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IMPLICATION ON INDIRECT TAX

IMPLICATION ON MANUFACTURERS

ADVANTAGES
REDUCED COST OF PRODUCTION
HASSLE-FREE SUPPLY OF GOODS
SUPPLY CHAIN RESTRUCTURING
DISADVANTAGES
INCREASED COMPLIANCE REQUIREMENT
AREA-BASED EXEMPTIONS
GST RATE

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SCOPE

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CONCLUSION

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REFERENCE

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Goods and Services Tax: India

Overview
Goods and Services Tax is a comprehensive tax levy on manufacture, sale and
consumption of goods and services at a national level. Through a tax credit mechanism,
this tax is collected on value-added goods and services at each stage of sale or purchase
in the supply chain. The system allows the set-off of GST paid on the procurement of
goods and services against the GST which is payable on the supply of goods or services.
However, the end consumer bears this tax, as he is the last person in the supply chain.

Type of GST
India is planning to implement a dual GST system. Under dual GST, a Central Goods and
Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the
taxable value of a transaction. All goods and services, barring a few exceptions, will be
brought into the GST base. Thus, there will be no distinction between goods and services.

Benefits of GST
The benefits of GST can be identified as follows; the taxation burden will be divided
equitably between manufacturing and services, through a lower tax rate by increasing the
tax base and minimizing exemptions. It will build a transparent and corruption-free tax
administration. GST will be levied only at the destination point, and not at various points.
Currently, a manufacturer needs to pay tax when a finished product moves out from a
factory, and it is again taxed at the retail outlet when sold. This will benefit individuals,
as prices are likely to come down. Lower prices will lead to more consumption, thereby
helping companies.
The benefit to the Centre and State would be a gain of $15 billion a year by implementing
the Goods and Services Tax as it would promote exports, raise employment and boost
growth. It will divide the tax burden equitably between manufacturing and services.
Experts say that GST is likely to improve tax collections and boost Indias economic
Goods and Services Tax: India 3

development by breaking tax barriers between States and integrating India through a
uniform tax rate.

Drawbacks of GST
The governments of Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the
information technology systems and the administrative infrastructure will not be ready by
April 2016 to implement GST. States have sought assurances that their existing revenues
will be protected. The central government has offered to compensate States in case of a
loss in revenues. Some States fear that if the uniform tax rate is lower than their existing
rates, it will hit their tax kitty. The government believes that dual GST will lead to better
revenue collection for States. However, backward and less-developed States could see a
fall in tax collections. GST could see better revenue collection for some States as the
consumption of goods and services will rise.
The GST journey so far,

Goods and Services Tax: India

Implementation Plan
Government is committed to introduce GST by 2016 and the companies need to be GST
compliant to be able to test system changes in time. After the Select Committee
submitted its report to the Rajya Sabha in the monsoon session, the Government awaits
passage of the Bill in the Rajya Sabha in the winter session The passage in Rajya Sabha
will require two-third majority.The Bill thereafter will be needed to be ratified by
minimum of 15 States in their respective assemblies before the President can give its
assent for its enactment.
Almost 140 countries have already implemented the GST. Most of the countries have a
unified GST system. Brazil and Canada follow a dual system where GST is levied by
both the Union and the State governments.

Goods and Services Tax: India 5

Implication on Indirect Tax

GST will not be an additional tax. CGST will include central excise duty (Cenvat),
service tax, and additional duties of customs at the central level; and value-added tax,
central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state
surcharges related to supply of goods and services and purchase tax at the State level.

The combined GST rate is being discussed by government. The rate is expected around
14-16 per cent. After the total GST rate is arrived at, the States and the Centre will decide
on the CGST and SGST rates. Currently, services are taxed at 10 per cent and the
combined charge indirect taxes on most goods is around 20 per cent. The prices are
expected to fall in the long term as dealers might pass on the benefits of the reduced tax
to consumers.

Goods and Services Tax: India

The taxes that would be subsumed can be identified as follows; it would replace most of
the indirect taxes levied on various goods and services.
Central Taxes

Central Excise Duty [including additional excise duties, excise duty under the
Medicinal and Toilet Preparations (Excise Duties) Act, 1955]

Service tax

Additional Customs Duty (CVD)

Special Additional Duty of Customs (SAD)

Central Sales Tax (levied by the Centre and collected by the States)

Central surcharges and cesses (relating to supply of goods and services)

State Taxes

Value Added Tax

Octroi and Entry Tax

Purchase Tax

Luxury Tax

Taxes on lottery, betting & gambling

State cesses and surcharges

Entertainment tax (other than the tax levied by the local bodies)

Central Sales Tax (levied by the Centre and collected by the States)
Goods and Services Tax: India 7

Implication on Manufacturers
The Indian government recognizes the significance of the manufacturing sector in the
countrys economic development and is taking prudent steps to increase investments in
the sector.
The government also realizes that becoming a manufacturing hub will need several
strategic reforms to simplify manufacturing in India. One of the proposed reforms, in line
with Make in India, is the implementation of the Goods and Services Tax (GST). The
new GST regime will trigger a transformational shift from a complex multi-layered
indirect taxation system to a unified indirect taxation system. GST will also propagate a
positive change by ensuring cascading of taxes is reduced, thus leading to manufacturing
synergy in India.
The new GST regime will be a modern tax reform, which will usher in growth and
opportunities for businesses in India. It will have a far-reaching impact on business
avenues, compelling organizations to realign bottlenecks such as production cost,
production time, supply chain, compliance, logistics, etc. with the changing indirect tax
structure. Furthermore, all major business dynamics will have to be thoroughly analyzed
to assess the impact of GST on business.

Advantages
Reduced Cost of Production
The new GST regime will be greatly beneficial as a reduction in tax cascading may lead
to a lower cost of production. Also, one of the major defects of the current indirect tax
regime the non-availability of tax credit of central/union taxes over state taxes and vice
versa could be eliminated by allowing unrestrictive tax credit under GST.
Hassle-free Supply Of Goods
State-border checkpoints, which are tasked with material scrutiny and location-based tax
compliance, negatively impact the overall production and logistics time and account for
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Goods and Services Tax: India

roughly 60% of a trucks transit time. These unproductive transit hours coupled with
regulatory impediments reduce the efficiency of Indian manufacturers compared to their
international counterparts. The new GST regime will unify the Indian market and assist
the smooth flow of goods within the country. Although border checkpoints may not be
done away with immediately, reduced compliance scrutiny at these checkpoints will
reduce transport hassles.
Supply Chain Restructuring
Three specific aspects of GST an additional 1% tax on supply of goods, the supply of
goods and services to oneself, and input tax credit on inter-state sale may propel the
need for supply chain restructuring. The additional 1% tax, envisaged as a replacement
for Central Sales Tax, may not be available for credit, which will add to the cost burden
in the price of products. Clarity regarding supply is expected from the GST Act, which
is yet to be proposed by the GST Council. If such a shift materialises, it will warrant a
redrawing of warehouse strategy to optimise organisational profits. Availability of input
tax credit on inter-state sale of goods and services may lead to warehouse re-engineering
which can remove an extra level of warehousing in the supply chain, thereby leading to
greater cost benefits.

Disadvantages
Increased Compliance Requirement
Taking a cue from the OECDs guidelines for place of supply, which were released
earlier this year, GST may lead to increased compliance requirements.
Area-based Exemptions
As GST would lead to the entire country being considered a common and unified market,
the current area-based exemptions would become irrelevant. As we do not have a
finalised GST Act in hand, whether or not these area-based exemptions would be
available is a matter of concern. If these exemptions are discontinued, those who enrolled
due to this incentive would be at a loss.

Goods and Services Tax: India 9

GST Rate
The GST regime may be perceived as a good indirect taxation system only if the tax rates
proposed by the government do not exceed the revenue-neutral rate (RNR) expectation of
the industry. If the GST rate is higher than expected (2022%), it will negate every
positive aspect of the new regime.

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Scope

The scope of GST in different industries can be identified as follows
Food Industry: The application of GST to food items will have a significant impact on
those who are living under subsistence level. But at the same time, a complete exemption
for food items would drastically shrink the tax base. Food includes grains and cereals,
meat, fish and poultry, milk and dairy products, fruits and vegetables, candy and
confectionary, snacks, prepared meals for home consumption, restaurant meals and
beverages. Even if the food is within the scope of GST, such sales would largely remain
exempt due to small business registration threshold. Given the exemption of food from
CENVAT and 4% VAT on food item, the GST under a single rate would lead to a
doubling of tax burden on food.
Housing and Construction Industry : In India, construction and Housing sector need to be
included in the GST tax base because construction sector is a significant contributor to
the national economy.
FMCG Sector : Despite of the economic slowdown, Indias Fast Moving Consumer
Goods (FMCG) has grown consistently during the past three, four years. Implementation
of proposed GST and opening of Foreign Direct Investment (F.D.I.) are expected to fuel
the growth and raise industrys size.
Rail Sector : There have been suggestions for including the rail sector under the GST
umbrella to bring about significant tax gains and widen the tax net so as to keep overall
GST rate low. This will have the added benefit of ensuring that all interstate
transportation of goods can be tracked through the proposed Information technology (IT)
network.
Financial Services : In most of the countries GST is not charged on the financial services.
Example, In New Zealand most of the services covered except financial services as GST.
Goods and Services Tax: India 1
1

Under the service tax, India has followed the approach of bringing virtually all financial
services within the ambit of tax where consideration for them is in the form of an explicit
fee. GST also include financial services on the above grounds only.
Information Technology enabled services : To be in sync with the best International
practices, domestic supply of software should also attract G.S.T. on the basis of mode of
transaction. Hence if the software is transferred through electronic form, it should be
considered as Intellectual Property and regarded as a service. And if the software is
transmitted on media or any other tangible property, then it should be treated as goods
and subject to G.S.T. Implementation of GST will also help in uniform, simplified and
single point Taxation and thereby reduced prices.
Impact on Small Enterprises : There will be three categories of Small Enterprises in the
GST regime. (a) Those below threshold need not register for the GST (b) Those between
the threshold and composition turnovers will have the option to pay a turnover based tax
or opt to join the GST regime, (c) Those above threshold limit will need to be within
framework of GST. Possible downward changes in the threshold in some States
consequent to the introduction of GST may result in obligation being created for some
dealers. In this case considerable assistance is desired. In respect of Central GST, the
position is slightly more complex.

12 Goods and Services Tax: India

Conclusion
All the shortcomings of the present taxation regime lead us to develop a new system of
Taxation for the ease of doing business and for the seamless flow of credit across the
whole supply chain. If we have been following some system that is now obsolete for
years, it does not means that we need to continue with it in the fore coming years as well
There is a criticism today that the proposed model of GST is fractured due to the
compromises. But the compromised model in any case would be better than no model at
all. Also the bitter truth is that a compromise often becomes necessary in Federal
democracies.
The dual model will be like a joint venture between center and the 29+ states. In order to
make this joint venture successful, one has to take all the states on the board with the
compromise this entails. Some states might lose revenue after introduction of GST but
you cannot hold entire country hostage because of one or two such states. One should
keep in mind that an ideally perfect GST has never been practiced in any federal
democracy.

Goods and Services Tax: India 1

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(n.d.).

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