WHAT IS GST?

y 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 sale 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. y France was the first country to introduce this system in 1954. Today, it has spread to over 140 countries. y Through a tax credit mechanism, GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. y GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax. y Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both federal and state or provincial governments. y In India, a dual GST is being proposed wherein 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.

 HISTORY OF GST
y France was the first country which introduced a comprehensive goods and service tax Regime in 1954. The Goods and Service Tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level. The GST rate in various countries ranges from 5 per cent in Taiwan to 25 per cent in Denmark. y In the late 1980s, the federal government of Canada replaced its MST (Manufacturers Sale Tax) with a new value-added sales tax called the Goods and Services Tax (GST). The basic motive behind this reform was to introduce a new nationally harmonized sales tax which would replace individual provincial sales taxes (PST), and both the levels of government would share the revenues generated there from. y Subsequent negotiations to harmonize the provincial and national sales taxes proved unsuccessful for the Canadian Government. Various provinces challenged the introduction of national sales tax on the ground that the federal government was exceeding its constitutional powers by operating in a taxation field historically reserved for the provinces. But as a result of constructive efforts by the Canadian Government National Sales Tax was implemented in 1989-90. y In Australia, it was introduced by the Howard Government on 1 July 2000, replacing the previous Federal wholesale sales tax system and designed to phase out a number of various State and Territory Government taxes, duties and levies such as banking taxes and stamp duty. This proved a milestone in the taxonomy of Australia. y Today, it has spread to about 150 countries.

 EXISTING INDIRECT TAX SYSTEM IN INDIA

It is required to have a brief view of the existing indirect taxes regime, before proceeding to understanding GST. The excise duty, import duties of customs, VAT/CST and service tax are the main levies at present. a) Excise duty: Central Excise Duty is levied by the Central Government under the Central Excise Act, 1944. The levy is on all goods manufactured and produced in India, which are specified in the schedule to the Central Excise Tariff Act subject to certain exemptions. The effective rate may vary from product to product though most goods are subject to excise duty at 10% (without education cess). b) Import Duties: Customs duties are levied by the Central Government under the Customs Act, 1962. The levy gets attracted on all specified goods imported into and exported from India, which are specified in the schedule to the Customs Tariff Act. The customs duties are levied on assessable value and the total customs duty ordinarily would amount to an average of 24.42% (subject to CENVAT credits) on the value of goods imported. c) Value Added Tax (VAT): Value Added Tax (VAT) is levied by the State Governments on transfer of property in goods from one person to another, when such transfer is for cash, deferred payment or other valuable consideration. VAT is also payable on certain transactions that are deemed to be sale such as transfer of right to use goods, hire purchase and sale by installments, works contract and sale of food and drink as a part of rendering of any service. d) CST: The rate of CST is 2% against the declaration in Form C and in case the said declaration is not provided by the buyer, they are

subject to tax at the rate specified in the local VAT law. Form C is allowed to be issued by the buyer when he purchases the goods for use in manufacture or for resale or for use in telecommunication network or in mining or in generation or distribution of power. e) Service Tax: Service tax is levied on specified services, referred to as taxable services, when rendered by a service provider. Service tax is presently taxed at 10% (without education cess). Ordinarily, service tax is payable by the service provider, except in specified cases.

 SYSTEMS OF GST
There are 3 Recognized Systems of GST worldwide:y Invoice System: - In this system the GST (Input) can be claimed on the basis of acknowledgement of invoice, put aside the matter whether payment is cleared or not. The GST (Output) is accounted for when invoice is raised. Here the time of receipt of payment keeps no value. y Payment System: - In this system the GST (Input) can be claimed at the time of making the payment for purchases and the GST (Output) is accounted for when the payment is cleared. In payment system, it has no value whether the assessee is preserving the accounts on cash basis or not. y Hybrid System: - In this system GST (Input) can be claimed at the time of receiving invoice and GST (Output) is accountable on the ground of payment, if allowed by the law. In some countries the dealers have to put their option for this system or for a reversal of this system before adopting the same.

# It always depends on the law of the country, which decides the system of GST to be followed by the dealers. Presently, in India the system of sales tax on goods is an invoice system of VAT, whereas the system of Service Tax is a Payment system. Thus, this issue is yet to be unveiled whether the Payment system or Invoice system will be adopted under GST. Moreover it may be stated that Government may issue a Hybrid system wherein the choice of system is left on the dealer himself.

 PROPOSED STRUCTURE OF GST IN INDIA

Consistent with the federal structure of the country, the GST will have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable. The Central GST and the State GST would be applicable to all transactions of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. Since the Central GST and State GST are to be treated separately, in general, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST.

Cross utilization of ITC between the Central GST and the State GST would, in general, not be allowed.

 To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST. The administration of the Central GST would be with the Centre and for State GST with the States. The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities. Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department. Keeping in mind the need of tax payers convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.

SEGMENTS OF GST

Chargeability:-The dealers including (Manufacturers, Wholesalers and Retailers and Service Providers) registered under GST need to charge GST on goods and services delivered to customers at the specified rate of tax. The GST payable is comprised in the price borne by the purchaser of the goods and the service buyer. The supplier including Seller and service provider should deposit this GST amount to the Government. Input Tax Credit (ITC):-If the recipient of goods or services belongs to a registered dealer (Manufacturers, Wholesalers and Retailers and

Service Providers) and has got an appropriate tax invoice then he can claim a credit for the payment of GST amount. This input tax credit is set off against any GST (Out Put), charged on goods and services by the dealer to his customers Registration: - Dealers including the suppliers, manufacturers, service providers, wholesalers and retailers must be register for GST falling which he normally unable to charge GST and claim credit for the GST he pays. Besides he cannot also issue a tax invoice. Tax Period: - The tax period should be calculated by the respective law and normally for monthly and/or quarterly. The concerned dealer has to deposit the tax on a particular tax period applicable to him if his output credit is more than the input credit after considering the opening balance, if any, of the input credit. Refund:-The dealer is entitled to get refund subject to the provisions of law applicable in this respect if the input credit of a dealer is more than the output credit for a tax period. Depending on the provision of law the excess amount need to be brought forward to next period or should be refunded with immediate effect. Exempted Goods & Services:-Some particular goods and services may be marked as exempted goods and services and the input credit should not be claimed on the GST paid for purchasing the raw material in this regard or GST paid on services used for providing such goods and services. Zero Rated Goods & Services:-Normally, export of goods and services treated as zero-rated and the GST paid by the exporters of these goods and services is refunded in this regard. This is the fundamental distinction between Zero rated and exempted goods and services Tax Invoice:-Tax invoice is the most vital & basic document in the GST. A dealer registered under GST can issue a tax invoice and with that invoice the credit (Input) can be claimed. Usually a tax invoice should includes 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.

GST RATE STRUCTURE

The Empowered Committee has decided to adopt a two-rate structure a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. The States are of the view that for CGST relating to goods, the Government of India may also have a two-rate structure, with conformity in the levels of rate under the SGST. For taxation of services, there may be a single rate for both CGST and SGST. Zero Rating of Exports: Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed. GST on Imports: The GST will be levied on imports with necessary Constitutional Amendments. Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services. Special Industrial Area Scheme: After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives should be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a continuous chain of setoffs is not disturbed. Regarding Special Industrial Area Schemes, it is

clarified that such exemptions, remissions etc. would continue up to legitimate expiry time both for the Centre and the States. Any new exemption, remission etc. or continuation of earlier exemption, remission etc. would not be allowed. In such cases, the Central and the State Governments could provide reimbursement after collecting GST. IT Infrastructure: After acceptance of IGST Model for Inter-State transactions, the major responsibilities of IT infrastructural requirement will be shared by the Central Government through the use of its own IT infrastructure facility. The issues of tying up the State Infrastructure facilities with the Central facilities as well as further improvement of the States own IT infrastructure, including TINXSYS, is now to be addressed expeditiously and in a time bound manner. Constitutional Amendments, Legislations and Rules for administration of CGST and SGST: It is essential to have Constitutional Amendments for empowering the States for levy of service tax, GST on imports and consequential issues as well as corresponding Central and State legislations with associated rules and procedures. With these specific tasks in view, a Joint Working Group has been constituted (September 30, 2009) comprising of the officials of the Central and State Governments to prepare, in a time bound manner a draft legislation for Constitutional Amendment, draft legislation for CGST, a suitable Model Legislation for SGST and rules and procedures for CGST and SGST.

 COMPARISON BETWEEN PRESENT AND PROPOSED TAX STRUCTURE