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Goods and Service Tax: The Way Ahead

Goods and Service Tax: The Way Ahead. Why is GST. A good and service tax (GST) or value added tax (VAT) is a tax on domestic consumption. It is multi-stage tax for which the tax burden is intended to fall on the final consumer.

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Goods and Service Tax: The Way Ahead

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  1. Goods and Service Tax: The Way Ahead

  2. Why is GST • A good and service tax (GST) or value added tax (VAT) is a tax on domestic consumption. It is multi-stage tax for which the tax burden is intended to fall on the final consumer. • Under GST, registered dealer is to charged GST on its output and pay GST on inputs. Difference of OUTPUT GST and input GST he has to pay to the tax authorities. • To avoid cascading effect tax is paid on only on the vale addition at each stage.

  3. Why there is need to GST • The design of the CENVAT and state VATs was dictated by the constraints imposed by the Constitution, which allows neither the Centre nor the States to levy taxes on a comprehensive base of all goods and services and at all points in their supply chain. • The Centre is constrained from levying the tax on goods beyond the point of manufacturing, and the States in extending the tax to services.

  4. Why there is need to GST • This division of tax powers makes both the CENVAT and the state VATs partial in nature and contributes to their inefficiency and complexity. • The CENVAT is levied on goods manufactured or produced in India. This gives rise to definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied.

  5. Why there is need to GST • The taxable value at the point of manufacturing relative to the value added beyond this point. • Taxation of composite contract – divisible/ indivisible contract • The advancements in information technology and digitization have blurred the distinction between goods and services. In India even intangible are treated as goods whereas generally it is part of service contract.

  6. Why there is need to GST • Tax cascading effect – • Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government • Real estate transactions are outside the scope of both VAT and CENVAT • The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs

  7. Constitutional Provisions on Centre-State Fiscal Balance • Direct Tax – Income Tax levied by the Centre • Tax on manufacturing levied by Centre (Central Excise) • Tax on sales levied by the State (Sales Tax or State VAT) • Tax on inter-State sale & Declared Goods Central Sales Tax - Central law – but collected & retained by the State • Tax on services levied by the Centre (Service Tax) • Tax on Exports & Imports levied by the Centre (Customs Duty & Export Duty)

  8. Volume of Tax Collected 2007-08 Centre Income Tax – Rs 3,14,000 cr Customs Duty – Rs 1,04,000 cr Central Excise – Rs 63,864 cr (excl.petroleum) Service Tax – Rs 51,133 cr CVD - Rs 53,293 cr Sub-total - Rs 168,290 cr States Sales Tax/VAT – Rs 108,340 cr (excl. non-VAT) CST (X4/3) – Rs 30,585 cr Others - Rs 7,627 cr Sub-total - Rs 146,552 cr

  9. Tax Cascading

  10. Value Added TaxTax payable only on the value addition at each stage

  11. Central VAT & State VAT • Easy to give input tax credit (ITC) within same jurisdiction. CENVAT is in operation for 10-15 years now. • Centre can give ITC for Central Excise and even for Service Tax; but cannot do so when there is a sale of good, which is in the State’s domain. • State can give ITC for Sales Tax within the State, but cannot do so against Central Excise paid to Centre and Sales Tax paid to other States. • Even if some mechanism for giving ITC between Centre & States is evolved, there has to be uniformity of rates. • If rates are made uniform across all States, there will be a number of States which will lose revenue. They have to be compensated.

  12. Goods & Services Tax (GST) The EC has been discussing GST for about 2 years now. There is a broad consensus between Centre & States on the policy areas relating to GST to be introduced by 1.4.2010. This will be a dual GST – • Under this model both goods and services would be subject to concurrent taxation by the Centre and the States. This model is closer to the model recommended by the Kelkar Committee in 2002. • inter-state services for which the place of destination would be difficult to determine. The State tax on these services may be collected by the Centre, and then apportioned among the States in some manner.

  13. Goods & Services Tax (GST) (1) This will be a dual GST – there will be Central GST portion (CGST) and a State GST portion (SGST) eg. if GST is 17%, CGST can be 9% & SGST 8% and so on. There could also be multiple rates. (2) GST will subsume Central Excise, State VAT and Service Tax. It will also subsume all cesses & surcharges (by Centre & the States), Entry Tax not in lieu of Octroi, Entertainment tax levied & collected by the State Government, etc. It will not subsume levies by local self-Governments (Panchayats & Urban Local Bodies), petroleum, etc. For liquor, tobacco, etc States could impose an additional tax, over and above the GST. Final view yet to be taken by the EC.

  14. GST – Basic Features

  15. GST – Basic Features – Contd… (4) Centre will give Input Tax Credit (ITC) only for CGST and the State only for SGST. Cross utilisation of ITC between CGST & SGST shall not be allowed. (5) Centre will legislate, levy & administer the CGST portion on its own and the States the SGST portion on their own. (6) To avoid deviations by the States, there shall be a mechanism (eg. EC), wherein the rates and other relevant parameters will be decided upon by the Centre & the States. The rates can thereafter not be changed by the Centre or any of the States, without approval of the same mechanism. A Constitutional mechanism will be introduced.

  16. GST – Basic Features – Contd… (7) Destination principle for inter State sales of goods. For services, the rules are yet to be formulated; sub-Working Group has been constituted. (8) Administration of CGST will be Centre’s responsibility; Administration of SGST will be the responsibility of each State – Concurrent jurisdiction for entire value chain and all taxpayers will cause difficulties. A solution will have to be found for this.

  17. Dual GST – Other features/ suggestions: • There would a single registration or taxpayer identification number, based on the Permanent Account Number (PAN) for direct taxation. Three additional digits would be added to the current PAN to identify registration for the Centre and State GSTs.

  18. Dual GST – Other features: • Procedures for collection of Central and State GSTs would be uniform. There would be one common tax return for both taxes, with one copy given to the Central authority and the other to the relevant State authority.

  19. Dual GST – Other features: • To minimize the need for additional administrative resources at the Centre, States would also assume the responsibility for administering the Central GST for dealers with gross turnover below the current registration threshold of Rs 1.5 crores under the central Excise (CENVAT). They would collect the Central GST from such dealers on behalf of the Centre and transfer the funds to the Centre.

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