All about GST, Understand GST with Example of Current Tax & GST

All about GST: The Government is all set to rollout the landmark Goods and Service Tax (GST) from July 1, 2017. In the last couple of months, an exceptional progress happened on India GST subject. The Government released the GST bills – IGST, CGST, UTGST, Composition bill and approved the same, GST rules – GST Registration, GST Invoice, GST Refund, GST Payment, GST Return got revised and Input Tax credit, Valuation Composition, Transition are newly drafted.

Now the state assemblies are in the process of releasing their respective SGST bills. Till date states – Telangana, Bihar, Rajasthan, Jharkhand, Chhattisgarh, Uttarakhand, Madhya Pradesh and Haryana have released SGST bill and the remaining States/UTs are likely to pass the SGST Bill in their respective assemblies before the end of May. Beside Centre and States have already begun the enrollment process for migrating existing taxpayers to the proposed tax regime through GST common portal.

All about GST

Goods and Service Tax (GST) is a comprehensive and single indirect tax replacing most of the existing taxes levied by the Central and State Government of India. Central levies – Central Excise duty, Additional Duties of Excise, CVD, SAD, Service Tax and State levies – VAT/CST, Luxury Tax, Entertainment Tax, Entry Tax etc will merge into one single tax i.e. GST. However, GST will not subsume taxes like Basic Customs Duty (BCD), Toll tax, Stamp Duty, Electricity Duty and all the other levies by local bodies. GST is based on the destination principle which means that taxes would get accrued in the taxing authority where the consumption of goods or services will actually taking place. However current Indirect tax regime is based on the origin principle which means that state authority where the production/origin of goods would collect taxes.

GST is a historic tax reform in India and will bring numerous benefits:

  • India will become a common market with common tax rates and procedures,
  • Elimination of multiplicity of taxes and their cascading effects,
  • It will give a boost to the economy and ‘Make in India’ initiative of the Government,
  • It will help in building a transparent and corruption free administration,
  • Seamless flow of Input Tax Credit (ITC) will be allowed,
  • Lesser Compliance procedures and costs,
  • Quick processing of refunds on account of exports,

Beneficial for corporations as it will reduce the burden on the companies by reducing their production cost.

Below table depicts a comparative view of intrastate sale of goods transaction under both regimes:

Particulars Current Regime GST Regime
Production cost to manufacturer 10000 10000
Add: Profit @10% 1000 1000
Add: Excise Duty @12% 1320  
Total cost 12320 11000
Add: VAT @12.5% 1540  
Add: [email protected]%   660
Add: [email protected]%   660
Invoice Value (Wholesaler cost) 13860 12320
Add: Profit by wholesaler @10% 1386 1232
Total Value 15246 13552
Add: [email protected]% 1906  
Add: [email protected]%   813
Add: [email protected]%   813
Invoice value (Retailer cost) 17152 15178
Add: Profit by retailer @10% 1715 1518
Total Value 18867 16696
Add: [email protected]% 2358  
Add: [email protected]%   1001
Add: [email protected]%   1001
Invoice value (to end consumer) 21225 18698

It can be seen that under GST regime goods cost is reducing from INR 17152 to 15178 for a retailer as compared to the current regime. There will also be a reduction in input tax credit for the wholesaler/retailer under the GST law.

A dual GST system is planned to be implemented by virtue of the reason that India is a federal country where both the Centre and States have been assigned the powers to levy and collect taxes. There are four components of GST i.e. CGST, SGST, UTGST and IGST. CGST is a levy on the supply of all goods and/or services by the Central Government. SGST is a levy on the supply of all goods and/or services by the respective State Government.

IGST is a levy on all interstate supplies of goods and/or services by the Central Government which will be collected by the union at the first stage and later on to be transferred to the destination state. UTGST is a levy on all intra UT supplies of goods and/or services. There are 7 UTs in India out of which two UT i.e. Delhi and Pondicherry will adopt SGST act and other 5 will adopt UTGST Act. Here is the gist of tax scenarios and its tax treatment under GST:

Transaction Type GST Treatment
Intra-State supply (e.g. MH to MH) CGST+SGST
Inter-State supply (e.g. MH to DL) IGST
Export of goods and/or services (e.g. MH to the US) IGST
Import of goods and/or services (e.g. US to MH) Goods: BCD+IGST, Services: IGST
Intra-Union Territory supply (e.g. CH to CH) UTGST+CGST
Inter-Union Territory supply (e.g. CH to DL) IGST

In GST, the supply of all goods and services would be chargeable to GST except supply of alcoholic liquor for human consumption. Therefore, it would continuously be taxed by the states. Similarly, five petroleum products viz. petroleum crude, motor spirit, high-speed diesel, natural gas and aviation turbine fuel have been temporarily kept out of GST and the date shall be notified for applicability of the same. It is to be noted that product taxability rules have not been released yet which are likely to come after next GST council meeting proposed on 18th and 19th May. However, GST council has already decided that it would be a 4 tier structure having 5%, 12%, 18%, 28 % rates. Hence, 5% is a reduced rate to be levied on essential items, 12%, and 18% are the two standard rates and 28% is the highest rate for luxury and sin goods such as big cars, aerated drinks, coal, and tobacco. There would also be a Compensation Cess on top of the highest tax rate to compensate states for loss of revenue they might have due to GST.

To summarize, GST is supposed to change the way India does business.GST will impact the compliance, credit utilization and reporting, IT systems, master data, transaction data, reporting data, tax rules and business processes leading to a complete overhaul of the current indirect tax system. Therefore as India moves ahead to rollout GST from July 1, 2017, Industry is required to rush on the preparedness and to finalize their systems, technology etc

Submitted by – Sakshi

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