Understanding GST

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GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer’s point and service provider’s point upto the retailer’s level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well.

Table

Stage of supply chain Purchase value of

Input

Value

addition

Value at which

Supply of goods and services made to next stage

Rate

of

GST

GST

on

output

Input

Tax

credit

Net GST=

GST on output

– Input tax credit

Manufacturer 100 30 130 10% 13 10 13–10 = 3
Whole seller 130 20 150 10% 15 13 15–13 = 2
Retailer 150 10 160 10% 16 15 16–15 = 1

The introduction of GST would mark a clear departure from the scheme of distribution of fiscal powers envisaged in the Constitution. The proposed dual GST envisages taxation of the same taxable event, i.e., supply of goods and services, simultaneously by both the Centre and the States. Therefore, both Centre and States will be empowered to levy GST across the value chain from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no ‘tax on tax’ in the country.

Important aspects of GST:

A brief analysis of some important aspects of the GST Acts and their impacts are as follows:

S.No. Particular Impact
1 Supply All transaction of business comes under the Indirect tax net
2 Levy Single indirect tax levy across all transactions, allowing free movement of goods and services across country
3 Tax Rate Single Tax rates makes the country one common market
4 Input tax credit Credit base widened allowing customer to enjoy Input tax credit on all goods and services used for provision of output services
5 Dual Administration Empowers parallel power to both Central and State government officers on a single assessee
6 State wise registration This may complicate the provision of service provision, its tax payment and also restricts the availability of Credit amongst different branches as available today.  Also inter state supplies including movement of own assets of Company shall be exigible to levy of GST.
7 Multiple Taxes – CGST and SGST or IGST (Place of Supply) The distinction has complicated the transaction for an assessee.  It is pertinent to note that in case of any error, the assessee would be required to pay the other tax and take refund of the tax wrongly paid, leading to unnecessary burden of compliance and cash flow.
8 Removal of credit reversal requirement in case of branch transfer Removal of condition to reverse credit is no more required in case of branch transfer leading to positive cash flow and profits
9 Tax on  supply to agents This shall lead to blockage of Company’s funds for supply for its own use and when such supply value is not recoverable.
10 Tax on Advance for goods Such tax shall increase the working capital requirement as Input tax credit is not available unless the goods are received.
11 E way Bills Unless, the entire system is mechanised, the system of carrying way bill shall continue the road blocks as check posts, enforcements teams etc and shall hinder free flow of goods across country
12 HSN based Classification HSN based classification shall pose a major challenge in understanding of different products espcially the ones in which company is not a supplier. Though the reporting norms may be relaxed, the determination of rate of an item require classification.  The problem is aggregated by the fact that the classification of products under reverse charge is also required.

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