GST explained for non tax professionals

Get Clarity! (Goods and ServiceTax)
Explained
ForThe Rest of Us
GST

What is GST?
Money is used to trade goods and services.
Governments take away part of these flows as taxes.
Taxes on net money flow are called Direct Taxes. E.g. Income Tax.
Taxes on gross (total) money flows are called Indirect Taxes.
E.g. Service, Excise and Sales Tax.
The Goods and ServiceTax will replace many IndirectTaxes.
TRADE IN
GOODS &
SERVICES
TAXED BY

What is GST?
Excise duty
ServiceTax
CounterVeiling Duty on customs
(CVD)
Special Additional Duty of Customs
(SAD)
Central Surcharges and Cesses.
Tamil NaduVAT
MaharashtraVAT
KarnatakaVAT
UPVat, etc.
Central SalesTax
Luxury Tax
Entry Tax
Other State Surcharges
and Cesses, Octroi.
THESE TAXES... ...WILL BE REPLACED BY
CGST
IGST
SGST
For complete list of taxes replaced see: Frequently Asked Questions (FAQ) on GST – CBEC https://goo.gl/atbQF1

What is GST?
ALSO, MULTIPLETAXATION AGENCIES... ...WILL BE REPLACED BY
A SINGLE AGENCY
(GSTN)
!!!

Understanding Input Tax Credit
To understand GST, we have to understand InputTax Credit.
Let’s take a look at that now, with the help of:
“A”
A DEALER IN
COTTON THREAD
BUYSTHREAD FROM A
AND MAKES IT INTO CLOTH
WHICH HETHEN SELLS
“B”

A sells cotton thread to B for Rs. 100. B weaves cloth from the thread and
sells it for Rs. 150. Assume there is only Sales Tax @ 10% applicable on all
transactions.
The tax payable on the output is reduced by the taxes already included in the input prices.
If input tax credit is available for a tax, it is called VAT’able.
PRICE OF A’S
THREAD
TAX @ 10% COST FOR B SELLING
PRICE FOR B’S
CLOTH
FINAL PRICE
FOR B’S
CUSTOMER
TAX @ 10%
100 10 100 + 10=
110
150 15 150 + 15 =
165
PRICE OF A’S
THREAD
TAX @ 10% COST FOR B SELLING
PRICE FOR B’S
CLOTH
FINAL PRICE
FOR B’S
CUSTOMER
TAX @ 10%
100 10 100 + 10=
110
150 15 10
(Simplified example to explain concept.)
With credit for tax already paid:
Without credit for tax already paid:
CREDIT FOR
TAX PAID
150 + 15
-10 = 155
PRICE OF A’S
THREAD

Input tax credit or aVAT able tax decreases tax evasion,
because the tax amount at each stage is reduced.
A tax payer can take benefit of reduced tax
only if his supplier has paid tax.
So, in our example above, if B pays tax, he will
force his supplier A to give proof of tax paid.
GOVT
A B
proof of tax paid, please!
here is my receipt.
thanks. now my tax will be
less your paid tax.
Excise and Sales Tax (VAT) wereVAT’able.
However, there were challenges.

Challenges of Pre-GST System
• Cascading of taxes with taxes charged on input
costs including taxes - tax on tax
• Different taxes applicable at different stages
of the production/sales of goods – excise tax on
production while sales tax on sales.
• Businesses needed to interact with multiple tax
departments of the state and central government.
• Many taxes were notVATable

Challenges of Pre-GST System
• Central and different State Governments decided
taxes and tax holidays independently.
• Due to this the tax structure for goods became very
complicated.
• Goods manufacturers created supply depots and
warehouses in various locations to manage their
tax liabilities e.g. a large soap maker would supply
dealers from depots in each state, instead of supplying
directly to avoid inter-state sales tax.
• This led to an unnecessarily complicated supply chain.
That is, complications in transport and compliance
systems.

How GST improves the current system: Intra State Sale
Example:
Hawa Hawai Fans is based in Mumbai (Maharashtra).
It buys motors from Dhrum Motors based in Nashik
(Maharashtra) for Rs. 500 each.
It also buys all other fan components from
Pawar Industries in Pune for Rs. 300.
Hawa Hawai has aValue Addition of Rs. 200.
TheValue Addition includes all charges like assembly,
packing and selling expenses and also the company’s profits.
Without any taxes, the price of Hawa Hawai fans would be
500 + 300 + 200 = Rs. 1,000/-
NASHIK
PUNE
MUMBAI MAHARASHTHRA

PRICE EXCISE DUTY
@10%*
EX FACTORY
PRICE
PURCHASE
PRICE OF HH
VAT @ 10%
Motor 500 50 550 55 605
Body 300 30 330 33 363
Total 80 88 968
*Actual Excise Duty andVAT rates are different. 10% taken for ease of computation.
Goes to Central Govt. Goes to Maharashthra Govt.
Value addition is 200
Final price to consumer = 500+300+200+80+88+36.8+32.5=1237.3
ED@10% CREDIT TAX PAID VAT @ 10%EX FACTORY
1168 116.8 80 36.8 1204.8 120.5
CREDIT TAX PAID
88 32.5
Pre GST

Taxes are charged on different events
- Excise on production andVAT on sale.PRODUCTION
SALE
PRICE
Different departments deal with different taxes, further
increasing complexity.
This increased complexity is a problem for honest businesses but an
opportunity for dishonest businesses.A dishonest business can give very
different information to different departments and these cannot catch the
wrong doing because they do not exchange information.
There is tax on tax
VAT is charged on price including Excise.
In a multistage productionVAT and Excise in later stage would both be
charged on cost includingVAT and Excise already paid.
VAT
EXCISE
VAT
EXCISE
Challenges

PRICE CGST
@10%*
SGST
@10%
PURCHASE
PRICE OF HH
Motor 500 50 600
Body 300 30 360
Total 80 960
50
30
80
Post GST
Final price to consumer = 500+300+300+80+80+40=1200
CGST CGST
CREDIT
SGST
1000 100 80 80
*Actual CGST and SGST would be different. 10% taken for ease of computation.
COST
WITHOUT
TAX
SGST
CREDIT
TAX
PAID
20+20=40
100

VALUE
ADDED
ONLY
TAX
SUPPLY OF
GOODS
ONLY
CGST
SGST
SAME EX-
FACTORY
PRICE
CGST
SGST
GST is a true tax
onValue Added.
The tax is applied
onValue added only.
For both CGST and
SGST the taxable
event is the same
– supply of goods.
CGST and SGST is on
the same ex factory
price.
Additionally, a new entity is being created for GST administration –
GSTN, which we shall now look at.
Benefits of GST

What is GSTN?
Goods and Service Tax Network (GSTN) is a private sector
company whose owners are the Central Government, the State
Governments and Financial Institutions.
GSTN will administer the GST.
GSTN Characteristics
• Single agency to administer GST that will replace
multiple Central and State Government
departments.
• The tax administration will shift online with
facility to reconcile with bank accounts.

What is GSTN?
GSTN Benefits
• Businesses will deal with only one entity for
most of their indirect taxes.
• GSTN will get a complete picture of all
business making tax evasion very difficult.

NASHIK
MUMBAI
MAHARASHTHRA
GUJARAT
VADODHARA
Hawa Hawai fans changes its
supplier from Pawar Industries
in Pune to Shah Metal works
based in Baroda (Gujarat).
This sale is now an interstate sale.
How GST improves the current system: Interstate Sale

**VAT Credit not available against CST.
PRICE EXCISE DUTY
@10%*
EX FACTORY
PRICE
VAT @ 10%*CENTRAL
SALESTAX
@2%**
Motor 500 50 550 55
Body 300 30 330 6.6
Total 80 55
Goes to Central Govt. Goes to Gujarat Govt.
PURCHASE
PRICE OF HH
605
336.6
941.6
Goes to Maharashtra Govt.
ED@10% CREDIT TAX PAID VAT @ 10%EX FACTORY
1141.6 114.2 80 34.2 1175.8 117.6
CREDIT TAX PAID
55 62.6
Final price to consumer = 500+300+200+80+6.6 + 55+34.2+62.6 =1238.4. As can
be seen,VAT credit was not available for CST leading to higher price.This was
because CST andVAT were administered and collected by different states.
Pre GST

PRICE CGST
@10%*
IGST
@20*
SGST
@10*
Motor 500 50
Body 300 60
50
Total 50
Goes to Central Govt.
PURCHASE
PRICE OF HH
600
360
960
Goes to Maharashtra Govt.
50
Final price to consumer = 500+300+200+50+50+60+40=1200
The cost of HH would be the same wherever it buys its components from!
CGST CGST
CREDIT
SGST
1000 100 50
IGST
CREDIT
50 100
Post GST
COST
WITHOUT
TAX
IGST
CREDIT
BALANCE
10
SGST
CREDIT
50
TAX
PAID
100-10-50=40

How GST improves the current system
Many states imposed cess on
particular products which were not
VAT able.These cess will go now.
For example, Punjab imposes a 3%
Infrastructure cess and a 2% rural
development cess on foodgrains.With
GST these taxes will be gone and food
processing industries can buy grains from
either Punjab or any other state.
Other taxes
Source: https://goo.gl/Z6ZoZK
Sugar Cess
Punjab Wheat Cess
Octroi
THESE TAXES... ...WILL BE REPLACED BY
CGST
IGST
SGST

In GST regime, IGST will replace CST and
credit will be available for IGST paid against
IGST, CGST and SGST.
Do note: CGST credit is available only against IGST
and CGST and SGST credit is available against SGST
and IGST.
Importantly, credit will not be available for SGST
paid in another state. However, most of the time,
credit for SGST paid will be available against IGST.
IGST rate = SGST rate + CGST rate

How does GST work?
• Pre-GST, the central government and state governments were
empowered to tax the production and sale of goods respectively.
Service tax was levied by the central government.
• Post the 101st Constitution Amendment, all governments in India
have given up their powers to tax goods and services to a
collective body of all governments called the Goods and Services Tax
Council (GST Council). This is the concept of ‘pooled
sovereignty’.
• This GST Council will recommend the taxation structure on all
goods and services to the legislature of the centre and states, which
shall pass laws to give effect to these recommendations.
• The GST Council will make all decisions by three-fourth
majority. The center will have one-third of the votes, while each
state will have a weighted share of the remaining two-thirds.

GST impact
• As location specific tax holidays and different
state taxes in each state are not possible under
GST, businesses will design their supply
chains exclusively for logistical and
operational efficiency.
• States cannot attract industries by giving
tax holidays. LOCATIONAL FACTORS
LOCALTAX & CESS
TAX HOLIDAYS
INFRASTRUCTURE
MARKET PROXIMITY
EMPLOYEE AVAILABILITY

GST impact
PRE GST: FACTORY (GURUGRAM) > DEPOT (BHIVANDI) > DEALER (MUMBAI)
POST GST: FACTORY (GURUGRAM) > DEALER (MUMBAI)
• A manufacturing company would set up large depots near big cities in different
states so that it could ‘transfer stock’ to that state before selling it to a dealer in
the city.This was done so that it would not need to pay CST. Now these
depots are not needed.

GST will change governments’ revenue profile
• GST will change the revenue profile of each government –
some sources of revenue will decline, while others
will increase.
• The exact nature is the change cannot be
determined as GST will cause many tax-payers and non-
payers to change their present tax behavior.
• However, the attempt is to minimize the impact on
revenues by adopting the ‘revenue neutral’ philosophy
while fixing the GST rates.
• The centre has agreed to compensate any revenue
shortfall (in those tax revenues that are subsumed in
GST, including municipal revenues) that states may face as
a result of GST in the first 5 years.
GOVT WILL MAKE GOOD STATE LOSSES
DUETO GST FOR 5YEAR PERIOD
GOVT
STATES

GST Impact
Ease of doing business
Positive: Businesses will need to deal
with only one authority instead of
multiple.
Negative: They will need to register in
each state they are selling in.This will be
specially cumbersome for service
providers.
SINGLE AUTHORITY
STATE REGISTRATION

Goods not in ambit of GST
PETROLEUM
PRODUCTS*
ELECTRICITY ALCOHOL REAL ESTATE
- STAMP DUTY
*It now has 0% GST and thus, effectively is out of GST. Decision to be taken in two years.

Rationale behind non-inclusions
Petroleum products – Tax on petroleum products is one of
largest source of tax revenue for central and state governments.
Both central and state governments were uncertain about the
impact of GST on revenues and hence decided to defer inclusion of
petroleum products.
Electricity – though the revenues from this are small, it is taxed
under a dedicated constitutional provision which would need to be
amended separately to bring it under the GST purview
Alcohol and other psychotropic substances –State excise andVAT
on alcohol forms a very large part of revenues of many states. So,
they were not willing to give up their independence to tax it.
Real Estate Stamp duty– A lot of reasons applicable to alcohol
apply to real estate. However, the influence of vested interests
rooting for its exclusion from GST cannot be ruled out.

Non inclusion of stamp duty
Land and property is a significant method for money laundering*.
Replacing Stamp Duty with GST would have helped in the fight against Black Money.
* See AskHow India capsule, How can we reduce black money in India at https://goo.gl/wbYxhv

Will goods become cheaper or costlier?
Whether goods and services will become cheaper depend on
the classification of the final good as well as
intermediate components in the above slabs as well as
the additional cess imposed on the final good.
For example, see GST impact here https://goo.gl/LqUuWA
GST has five rates :
0% 5% 12% 18% 28%

Will total tax collection increase post GST?
We expect an increase in tax collection post GST
in the medium term, because
• GSTN will shift the whole process on-line, significantly
increasing the tax compliance. Because (amongst other
reasons):
• Reduction of fraudulent claims of taxes already
paid.
• Reconciliation of input taxes with bank flows.
• Information sharing between different tax entities was
tough. So, a tax evader could give different information
to Excise andVAT departments.This is impossible now.
• The power of Input Tax Credit to increase compliance.
GST
TAX COLLECTIONS

GST: Pluses and Minuses
• Will decrease tax evasion over the long run.
• India will finally become a single market because of single
rate, credit for CST and removal of multiple taxes. This
will increase manufacturing productivity.
• Easier compliance for manufacturing businesses.
• GST is complex.There is bound to be teething trouble
including litigation.
• Non-inclusion of Real Estate Stamp Duty.
• The administrative load on services will increase.

ThankYou!
Thank you for watching this presentation on the ins and outs of
GST.We hope it was helpful in understanding this complex but
very important topic.
For many more topical InfoCapsules and Shorts, do visit us at
http://www.askhowindia.org/. See you there!

GST explained for non tax professionals

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