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Simplifying Goods and Services Tax

Simplifying Goods and Services Tax

By Dr. Lalit Kumar Setia 
Simplifying Goods and Services Tax

The economic progress of India is entirely dependent upon Goods and Services Tax as it has replaced many taxes and being charge as single tax on goods and services. The 'Leaves of Progress' website is providing the simplification of its concept so that readers be benefited with easiest way to understand the Goods and Services Tax (GST). 

Why Constitution is amended to impose GST Act?

Earlier the state government had no power to levy tax on services and the GST imposition required the state government to impose tax on services. In 2016, the constitution is amended to empower both central and state governments to levy tax on supply of both goods and services.

GST Network Company to ensure IT infrastructure:

In order to ensure good IT infrastructure, Goods and Services Goods and Services Tax Network (GSTN), a non-Government private limited company was incorporated in 2013 in which Government of India held 24.5% equity and 24.5% by States, balance 51% equity of Non-Government Financial Institutions. The GSTN with support of Infosys providing one stop filing of all taxes to tax payers, and ensuring the IT infrastructure and services to Governments, tax payers, and other stakeholders. The GST portal also has provision for helpdesk support. The cost of GSTN project is Rs. 1,380 Crores and the project not covered ‘audit and enforcement’ functions of tax department. The GSTN has also developed mobile apps for generating invoices and processing of GST returns.
The laws related to GST are passed in Parliament (for CGST and IGST) and State Assemblies (for SGST) as per the provisions of constitution. The GST Council is empowered to decide the rate of GST on various types of goods and services. Before the enforcement of GST, the taxability was at the time of manufacturing / production (as Excise Duty), sale (as Value Added Tax), import or export (as Custom Duty), Rendering Service (as Service Tax) and after enforcement of GST, the taxability is on ‘Supply including Import or Export and Rendering of Service’. Under GST, the point of payment for taxes is only at the ‘Time of Supply of Goods or Clearance from Custom’.

Imposition of Goods and Services Tax (GST):

It is well known that the government earns most of its revenues from taxes and Goods and Services Tax (GST) is an indirect tax introduced with replacing many previously existed taxes. It was introduced from 1st July, 2017 as a multi-stage, destination-based tax. The Government of India with the enactment of GST Act, empowered both Centre and States to levy the taxes on both goods and services keeping in view ‘One Nation – One Tax’. Here tax is levied on ‘supply by one taxable party to another taxable party’ and the credit of paid GST flow only in case of B to B transfer. The earlier use of Form C, F, E-1/ E-II, Waybills etc. are also transformed with the new provisions of GST.
The manufacturers buy raw material with paying Goods and Service Tax on the cost of raw material, after manufacturing, they sell finished goods by charging Goods and Service Tax to the whole-sellers and the whole-sellers sell the goods to retailers by charging Goods and Service Tax from retailers and finally, the retailers sell the goods to consumers by charging Goods and Service Tax from consumers. In this way, the Goods and Service Tax is imposed at every point of distribution channel.
Goods and Services Tax

What does Destination-based tax mean?

The Goods and Service Tax is a destination based tax which means it doesn’t matter where the raw material is sold or goods are manufactured; the entire Goods and Service Tax will go to the State where the finally goods are sold to the final consumer. For example, sugarcane is imported from Uttar-Pradesh and Sugar is manufactured in Delhi and then consumed in Rajasthan; then the Goods and Service Tax revenue for the sale of sugar will go to the basket of Rajasthan Government.
The main objective for imposing GST in place of other indirect taxes, is to reduce the cost of compliance of indirect taxes by imposing single tax from the manufacturer to the consumer depending upon the nature of goods and services under consideration. With imposing GST with the help of its filing system through software and use of information technology, the maintenance of multiple records at multiple levels is controlled. It has also reduced and eliminated double taxation particularly in case of work contracts.
What items are excluded from GST?
The GST Council is empowered to finalize the GST rates, exempted goods and services, the threshold limit for turnover exempted from GST etc. The chairperson of the GST council is ‘Union Finance Minister’ and members include State Finance Ministers of all States. GST has been imposed on all goods and services except Alcoholic Liquor, Electricity, and Petroleum Products (Crude Oil, Diesel, Petroleum, Natural Gas, and ATF). The goods which covered under GST, are the goods of ‘every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply’ (RMGL Section 2(49)). The services which covered under GST, are anything other than Goods (Article 366 (2A)).

Components of Goods and Services Tax:

The central government collects Central Goods and Service Tax (CGST) and Interstate Goods and Service Tax (IGST) on intra-state and inter-state sale of goods and services while state government collects State Goods and Service Tax (SGST) on intra-state sale of goods and services. The IGST collected by the central government is shared based on the destination of the goods sold. For example, in case a whole-seller of Punjab sold sugar to whole-seller of Rajasthan; then Goods and Service Tax on Sugar will be collected by the central government as IGST (suppose it is 18%, then 18% will be charged as IGST by central government). In the same case, if the whole-seller of Punjab sold sugar to another whole-seller or retailer of Punjab then CGST and SGST will be charged equally (suppose it is 18%, then 9% CGST and 9% SGST will be charged by central and state government).

Goods and Services Tax avoids tax on tax i.e. cascading effect of taxes:

Before Goods and Services Tax, there was Value Added Tax in existence on the goods. The value added tax was imposed on each stage of distribution channel on the value added by the involved party. However, the rate of Value Added Tax was not so much, it was 10% on most of the goods and the rate of Goods and Services Tax is more i.e. up to 18% on most of the goods.

Let’s take an example:

A farmer sells sugarcane @ 20 per kg to a sugar mill, the sugar mill manufactures sugar and sells it to the whole seller @ 30 per kg and the whole seller sells it to the retailer @ 40 per kg and the retailer after packaging, sells it to the consumer @ 50 per kg.

In previous case of Value Added Tax:

0 Value Added Tax on Rs. 20 = Rs. 0 means the farmer will charge Rs. 20 to the sugar mill, then sugar mill impose 10% Value Added Tax on 30 = Rs. 3 means it will charge whole-seller Rs. 33 and the whole seller will impose 10% Value Added Tax on 40 = Rs. 4 means it will charge retailer Rs. 44 and the retailer will impose 10% Value Added Tax on Rs. 50 = Rs. 5 means it will charge the consumer @Rs. 55 per kg.
Channel Stage
Input
Tax
Price
Farmer (Value Added 20)
20
0
20
Sugar Mill (Value added 10)
30
3
33
Whole Seller
(Value Added 7)
40
4
44
Retailer (Value Added 6)
50
5
55
Total
20+10+7+6
43
12
55
In this case of Value Added Tax, the margin in the hands of farmer, sugar mill, whole-seller, and retailer was Rs. 20, 10, 7, 6 respectively.

In present case of Goods and Services Tax:

Suppose there is 18% Goods and Services Tax (GST) on packed sugar. In Goods and Services Tax, the person who pays the tax on acquiring the input, can claim to settle the same at the time of paying the tax on output which will be input for the next person, and so on.
Let us understand it in this way: The farmer will not pay Goods and Services Tax (GST) on sugarcane as it is exempt and will receive Rs. 20 per kg from the sugar mill. The sugar mill will manufacture sugar and will sell to the whole seller @ Rs. 30 per kg and will charge 18% GST on Rs. 30 i.e. Rs. 5.4 and the sugar will cost Rs. 35.4 in the hands of whole-seller. But as the whole-seller will add only Rs. 7, the input cost will be 30 + 7 = 37 and he will charge tax on 37 @18% i.e. Rs. 6.6 and will sell it to the retailer @ 43.6 per kg. and the retailer will add only Rs. 6, the input cost will be 37 + 6 = 43 and will charge 18% GST on Rs. 43 i.e. Rs. 7.74 and the sugar will cost Rs. 50.7 per kg to the consumer. With same value addition, the cost of sugar in the hands of consumer is Rs. 50.7 with 18% GST while it was Rs. 55 in previous case of Value Added Tax.

Channel Stage
Input
Tax
Actual Tax to Govt.
Price
Farmer (Value Added 20)
20
0
0
20
Sugar Mill (Value added 10)
30
5.4
5.4
35.4
Whole Seller
(Value Added 7)
37
6.6
1.2
43.6
Retailer (Value Added 6)
43
7.74
1.14
50.74
Total
43
7.74
50.74
After the sale is completed, the Goods and Services Tax paid on input will be settled by claim at the time of filing GST return. In this case of Goods and Services Tax, the margin in the hands of farmer, sugar mill, whole-seller, and retailer will be Rs. 20, (35.4 – 5.4 - 20), (43.6 – 6.6 + 5.4 – 35.4), (50.74 – 7.74 + 6.6 – 43.6)  i.e. Rs. 20, 10, 7, 6 respectively.
Registration in Goods and Services Tax

Who bears the Goods and Services Tax?

Instead of 18% Goods and Service Tax, the sugar costs Rs. 50.74 in the hands of consumer which was Rs. 55 in case of Value Added Tax in the hands of consumer. It means the consumer is benefited due to avoidance of cascading effect of the tax i.e. tax on tax. The ultimate loss was to Government i.e. collecting tax of Rs. 7.74 instead of Rs. 12. There was no suffering to farmer, sugar mill, whole-seller, and retailer as their margins are same as at the time of Value Added Tax. Why Government bears the loss? The Goods and Service Tax is burdened on consumer. The Government agreed to bear the loss, because the introduction of Goods and Service Tax reduced the paper work, deployment of man-power for collection of taxes, and reducing the framework of many previously imposed taxes.  

Why taxes levied on Goods and Services?

The Central Government collects revenues from Service Tax, Excise Duty, Custom Duty while the States collect revenues through imposition of Entry Tax, Luxury Tax, Entertainment Tax, Stamp Duty etc. However, with imposition of Goods and Services Tax (GST), most of the collections are covered under different range of GST Taxes. The term ‘service’ is very wide and it covers all type of activities carried out by individuals and companies for earning consideration with commitment to deliver a specific service. The term ‘Goods’ cover all types of movable assets other than money; and taxes on transfer of goods for monetary gains; covered in taxation.
After enforcement of Goods and Services Tax (GST) on 1st July 2017; the nomenclature of VAT, Octroi and Entry Tax, Purchase Tax, Excise Duty, Service Tax, Custom Duty, Entertainment Tax, Luxury Tax; to ‘Goods and Services Tax (i.e. Central GST, State GST, and Inter-State GST).
The Contract Act 1972, defines the term ‘Consideration’ as “When at the desire of the promisor, the promisee or any other person has done or abstain from doing, or does or abstain from doing or promises to do or abstain from doing something, such an act or abstinence or promise is called consideration for the promise”.

What does ‘Supply’ mean in GST?

Under GST, the sale / transfer / barter / exchange / license / rental / lease; made for a consideration; as known as supply. However, the supplies which made with or without consideration; coming under GST are specified in Schedule I and the activities or transactions which are not treated supplies are specified in Schedule III, and there is schedule IV which provide details of activities or transactions by Central Government / State Government / Local Authorities not treated as supply under GST. The GST Council is empowered to notify the transactions to be treated as ‘supply of goods or not as a supply of goods’ or ‘supply of services and not as a supply of goods’ or ‘Neither a supply of goods nor a supply of services’.
In case of mixed or composite supplies; supply will be considered which attracts the higher rate of tax.

Registration for GST:

There are provisions to display the GSTIN in the name board of the business at the entry of office; and the GSTIN provided is 15 Digit PAN based number including ‘Excise Registration Number + Tax Identification Number + Sales Tax Number’. In case of new registrations, it includes first two characters of State Code, then ten characters of PAN, 13th Character of Entity Code, 14th is blank and 15th is a ‘check digit’.
In GST, there is no paper based enrolment and the GST Network itself is sufficient to process and generate GSTIN. While levying GST, if place of supply is intrastate then CGST and SGST are levied and in case, the place of supply is interstate, then IGST is levied by manufacturer, trader, or service provider.

Intrastate Vs. Interstate Supply:

Intrastate supply refers to the supply where location of supplier and place of supply both are within the same state. The seller or service provider charges the CGST and SGST from customers and remit the same into the appropriate account of Central and State Governments. Interstate supply refers to the supply where location of the supplier and place of supply are in different states. The seller or service provider charges the IGST from customers and remit the same into the appropriate account of the Central Government. Further, the Central Government would share the same with the State of Destination.

Time on which GST becomes liable to be paid:

The goods and services are supplied and payment for the same is received. But there may be different time of supplying and time of receiving payment; in such case, confusion arises on which time, the GST becomes liable to be paid to the Government.

(i) When dates of invoice and amount received are different:

In case of ‘supply of goods’; the date of invoice or date of receiving payment whichever is earlier is treated as ‘time of supply’ considered for levying GST. In case of date of receipt, it will be ‘the date on which payment is entered in the books of accounts’ or ‘the date on which payment is credited into the bank account’ whichever is earlier.

(ii) For purposes of Reverse Charge:

(a) In case of supply of Goods:

The date of supply for considering the Reverse Charge will be ‘Date of receipt of Goods’ or ‘Date on which payment is made’ or ‘the date immediately following 30 days from the date of issue of invoice by the supplier’ whichever is earliest. However, in case it is not possible to determine the date of receipt or date of payment or date of invoice; then ‘date of entry’ in the book of accounts will be treated as date of supply.

(b) In case of supply of services:

The date of supply for considering the Reverse Charge will be ‘Date on which payment is made’ and ‘the date immediately following sixty days from the date of issue of invoice by the supplier’. However, in case it is not possible to determine the date of payment or date of invoice; then ‘date of entry’ in the book of accounts will be treated as date of supply.

Value of Transaction on which GST is levied:

The price actually paid or payable for a supply of goods or/and services is taken as an amount on which GST is levied. It includes taxes, duties, fees and charges levied under any other statue; incidental charges such as commission and packing charges charged by the supplier to the recipient; interest or late fees or penalty for delayed payment of any consideration for any supply; also an amount incurred by the recipient but supplier is liable to pay even if not included in the price.
In case of tax credit, the GST credit is available to manufacturer, trader or service provider and can be setoff at the time of filing of GST return. The income tax credit on GST paid will be available only if the following conditions are satisfied:

(i) the claimant has tax invoice or debit note issued by supplier or other taxpaying document;(ii) the claimant has received goods or/and services;
(iii) the claimant is claiming income tax credit which is charged by the supplier and the amount has also been paid by the supplier to the appropriate account of Government;
(iv) the claimant has furnished the return under section 34.

It is worth to note that the income tax credit for any invoice cannot be claimed after the expiry of one year form the date of issue of the tax invoice relating to such supply. In case, a person claimed wrong Income Tax Credit and same has been taken by him, such credit will be recovered from the person later on.

Returns for Goods and Services Tax (GST):

Types of GST Returns_1
Types of GST Returns_2
In case, the GST Returns are not furnished for a continuous period of 6 months, the registration of GST will be cancelled.

Maintenance of Accounts and Audit thereof in GST:

The manufacturer, trader and service providers are required to maintain true and correct account either in physical form or electronic form. The person will keep the records relating to (i) Account of production or manufacturing of goods, (ii) Inward and Outward supply of goods or/and services, (iii) Stock of goods, (iv) Input tax credit availed, (v) Output tax payable and paid, (vi) Such other particulars as prescribed by the GST Act. The records will be maintained at ‘Principal Place of Business (PPOB).
Section 53(4) states that every registered taxable person with turnover exceeding the prescribed limit (i.e. Rs. 40 Lacs), shall get his accounts audited by a Chartered Accountant or Cost Accountant and shall submit a copy of audited annual accounts, the reconciliation statement u/s 39 (2) to the proper officer.

Technological Phases of Submitting Goods and Services Tax (GST):

Both the offline and online utilities are available to compute the amount of GST and submit the returns of GST. The downloads on GST portal are direct support of each taxpayer. The e-invoice system can be used by the taxpayers with the turnover more than Rs. 500 Crores. 
The suppliers with Nil tax liability in any month can file Nil GSTR-1 through SMS from the registered phone number. 

*Copyright © 2018 Dr. Lalit Kumar. All rights reserved.

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