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Goods and Services Tax: India Indirect Tax CIA I Aanchal Agrawal, 1311680, 6 BBA (H) A

GST India- Aanchal Agrawal 1311680.pdf

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Page 1: GST India- Aanchal Agrawal 1311680.pdf

Goods and Services Tax: India Indirect Tax CIA I Aanchal Agrawal, 1311680, 6 BBA (H) A

Page 2: GST India- Aanchal Agrawal 1311680.pdf

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TableofContents

OVERVIEW 3TYPEOFGST 3BENEFITSOFGST 3DRAWBACKSOFGST 4IMPLEMENTATIONPLAN 5

IMPLICATIONONINDIRECTTAX 6

IMPLICATIONONMANUFACTURERS 8ADVANTAGES 8REDUCEDCOSTOFPRODUCTION 8HASSLE-FREESUPPLYOFGOODS 8SUPPLYCHAINRESTRUCTURING 9DISADVANTAGES 9INCREASEDCOMPLIANCEREQUIREMENT 9AREA-BASEDEXEMPTIONS 9GSTRATE 10

SCOPE 11

CONCLUSION 13

REFERENCE 14

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GoodsandServicesTax:India 3

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.

TypeofGST

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.

BenefitsofGST

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 India’s economic

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

uniform tax rate.

DrawbacksofGST

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,

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GoodsandServicesTax:India 5

ImplementationPlan

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.

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ImplicationonIndirectTax

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.

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GoodsandServicesTax:India 7

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)

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ImplicationonManufacturers The Indian government recognizes the significance of the manufacturing sector in the

country’s 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

ReducedCostofProduction 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-freeSupplyOfGoods 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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GoodsandServicesTax:India 9

roughly 60% of a truck’s 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.

SupplyChainRestructuring 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

IncreasedComplianceRequirement Taking a cue from the OECD’s guidelines for place of supply, which were released

earlier this year, GST may lead to increased compliance requirements.

Area-basedExemptions 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.

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GSTRate 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 (20–22%), 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, India’s 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 industry’s 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 inter–state

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.

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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.

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GoodsandServicesTax:India 13

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.

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GST-ICAI.pdf

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