Goods and Service Tax (GST) is a comprehensive Indirect Tax levied on goods and services consumed in an economy. GST is levied at every stage of the supply chain with eligibility of Input Tax Credit in respect of the tax remitted at previous stages. It is basically a tax on final consumption with tax being collected at each stage. To explain it in simple words, GST is a tax on supply of goods and services, which is levied at each point of supply of goods / services with a mechanism to claim input tax credit paid on procurement of goods or services.
Let us understand the working of GST on a manufactured commodity from point of view of a manufacturer, wholesaler, retailer and final consumer.
|Stage of Supply Chain||Value of Supply||Rate of GST||GST on Output||Purchase Value of Input||Input Tax Credit (ITC)||Net GST Payable = GST on Output – ITC|
|Manufacturer to Wholesaler||1500||20%||260||1000||200||260 - 200 = 60|
|Wholesaler to Retailer||1300||20%||300||1300||260||300 - 260 = 40|
|Retailer||1600||20%||320||1500||300||320 - 300 = 20|
The adoption of GST is perceived as a positive form of tax since it increases consumption and encourages savings and investments. It is a form of taxation which will be more evenly spread across the population, minimizing economic distortions by providing comprehensive coverage.
|Tax / Duty||Incidence of tax||Assesse||Nature of tax||Rate of Tax||Government|
|Custom Duty||Import of goods into India||Importer||Destination based tax on goods||BCD – 10%
CVD – 12.5%
SAD – 4%
|Excise Duty||Manufacture/Removal of goods||Manufacturer/First Stage Dealer||Origin based tax on goods||12.5%
|Service Tax||Provision/receipt of services||Dealer of such goods||Destination based tax on services||15%||Central Government|
|CST||Inter – state sale of goods||Service provider/receiver||Origin based tax on goods||2%
|VAT||Intra – state sale of goods||Dealer of such goods||Destination based tax on goods||1%
|Entry Tax||Import of goods from other states||Importer (Dealer) of such goods||Destination based tax on goods||Rate varies locally||State Government|
|Entertainment Tax||Event providing entertainment||Entertainment provider||Destination based tax on entertaining events||Destination based tax on entertaining events||State Government|
|Octroi||Import of goods into municipal area||Importer (Dealer) of such goods||Destination based tax on goods||Rate depends on municipality where goods are consigned||Municipality|
The most significant contributing factor to tax cascading is the partial coverage by Central and State taxes. Wholesaler, retailer and range of services remain outside the ambit of the CENVAT and service tax levied by the Centre. The exempt sector is not allowed to claim for the CENVAT of the service tax paid on their inputs.
Similarly, under the State VAT, no credits are allowed for the inputs to the exempted sectors, which include the entire service sector and sale of exempted goods. Another major contributing factor to tax cascading is the CST on inter – state sales, collected by the originating state, for which no credit is allowed by any State Government.
The distinction between goods and services has become more complex. Transfer of software, copyrights, patents and other intangible goods are always in dispute: whether these are sales of goods or provision of services.
Further, goods, services, and other types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements.Each Government can tax only a part of the bundle, creating a possibility of gaps or overlaps in taxation.
VAT rates, procedures, methods of computation and exemptions provided vary across states in India.
Whether a sale takes place in one State or another, i.e. to fix the situsof a sale transaction, is the major conflict, as its taxability affects the revenue of the State. Though CST is a tax levied by the Central Government, it is collected and retained by the collecting State. A significant number of litigation pertains to this issue.
Classification issues which impact the duty liability is a major issue for litigation under the current indirect tax regime. Also, to decide whether an activity is sale or works contract; sale or service, is a matter of much deliberation.
There are many structural and design deficiencies of each of the taxes under the present regime of indirect taxes. Many of the administrative processes are still manual and are not automated. This leads to increased cost of compliance and also undermines revenue collection for the Government.