OVERARCHING TAXATION GUIDES
TAX REFORMS in INDIA
with focus on
VALUE ADDED TAX (VAT)
&
GOODS & SERVICE TAX (GST)
1
Chidana...
Tax Policy is not only designed to collect
tax & finance development & public
goods & services, but also meant to bring
ec...
3
OUTLINE
OVERARCHING TAXATION GUIDES
 Tax GDP Ratio Worldwide
 Indian Tax Distribution
 International Tax Distribution
 Effects...
TAX REFORMS in INDIA
 Direct Taxes
 Customs
 Central Excise
 Service Tax
5
VAT
 Principles of VAT
 VAT Computation & Levy
 Input Tax Credit (ITC) & No ITC
 ITC on Purchase Tax
 VAT over Sale T...
GST
 Why GST
 Taxes to Subsume in GST
 How GST Different from VAT
 Cascading Effect of Excise on VAT Vs GST
 Cascadin...
CONSTITUTIONAL PROVISIONS
 Constitutional Implications
 Centre State Relations
 Legislative, Administrative & Financial...
PROGRESS UPDATES
 Stand Off Between Centre & States on Compensation
in Lieu of CST Loss
 GSTN SPV
 GSTN Portal
 Negati...
10
DETAIL
OVERARCHING TAXATION GUIDE
11
TAX GDP RATIO WORLDWIDE
12
Tax GDP Ratio 2012 by Heritage Foundation
Canada 32.2
Mexico 29.7
USA 26.9
Australia 30.8
Japan...
INDIAN TAX DISTRIBUTION
13
All India Tax Distribution 2012-13 ($/Rs conversion at 12-13 level apx)
figures are approximati...
INTERNATIONAL TAX DISTRIBUTION
14
Comparison of OECD Countries in % of total Tax (Aproximately)
USA
Canad
a
Mexic
o UK
Ger...
EFFECT of DIRECT TAX
15
 People paying income tax again pay tax on spending-
Cascading
 Profit earned by a Corporate/ Pe...
LOW INCOME GROUP MID INCOME GROUP
 Earns $100
 Exemption Limit=$100
 Balance for Consumption=
$100
 Pays VAT@10%= $9
...
CASCADING EFFECT of DIRECT TAX on CONSUMER
17
 Corporation C sells cold drinks @ $1 per bottle
 Consumer pays VAT/GST @ ...
Income Tax Consumption Tax
 A earns $100
 Pays Tax @ 20%=$20
 Balance=$80
 Consumption in Yr 1
 $40
 Investment 4m Y...
INCOME TAX CONSUMPTION TAX
 Consumption in Yr 10
 $72
 Total Effect
 Total Earning $140
 Tax=$28
 Actual Consumption...
SPENDTHRIFT ECONOMICAL
 A earns $100
 Pays Tax @ 20%=$20
 Balance=$80
 Consumption in Yr 1
 $80
 B earns $100
 Pays...
SPENDTHRIFT ECONOMICAL
 B’s Consumption in
comparison to no tax
scenario=$80/100=80%
 Consumption in Yr 10
 $144
 Cons...
WELFARE DEAD WEIGHT LOSS
HARBERGER’S TRIANGLE
22
TREND in TAX REFORM
23
 Reduction of Exemption & Deduction
 Growth with increase in horizontal & vertical Equity
 Reduc...
TAX REFORMS in INDIA
24
25
 No change in concept or computation in direct tax reform
 Scope of revenue leakage is high-Transfer Pricing, income/...
NEW DIRECT TAX CODE
26
 Simplified & rationalized
 Reduced exemption & incentives, lowering rate & structure, ambiguitie...
27
 Exempt Exempt Tax EET (PPF, Insurance) Vs previous EEE
 Parity of long term & short term capital gain-indexation ben...
28
 MAT moving from income to asset based
 Companies will try to reduce wasteful assets & gestation
period
 Wholly situ...
CUSTOMS
29
 Peak customs duty 10 %, committed to bring to 5%
 Multiple tax rates persists for closely related items
 Ex...
CENTRAL EXCISE
30
 Structure & rates of duty lowered: peak rate 16% & two
rates
 CENVAT (Credit/ Set off) diluted
 Casc...
SERVICE TAX
31
 Tax Base increase by leading to double tax by centre &
state
 Interpretation of Services as Goods by sta...
VAT
32
PRINCIPLES of VAT
 Uniform Tax Rate PAN India to eliminate Tax War
 No Double Taxation & Cascading effect
 ITC (Input T...
VAT COMPUTATION
 VAT =(Output tax + Purchase tax) - Input tax
 VAT- on the sale & purchase
 A dealer collects tax on hi...
VAT LEVY on SALE & PURCHASE
 Tax on sale turnover of taxable goods.
 Purchase tax is on transactions, unlike purchase ta...
INPUT TAX CREDIT (ITC)
 ITC can be claimed only by Regd. VAT Dealers.
 ITC on goods purchased within the state from Regd...
ITC on CAPITAL GOODS
 ITC to be allowed on capital goods spread over
2/3 years followed by refund
 ITC on consumables ex...
NO INPUT TAX CREDIT- ITC
 Against CST, VAT paid in another state
 In respect of sales exempted from VAT
 On material pu...
NO INPUT TAX CREDIT-ITC (Cont)
 To liable unregistered dealer
 Purchase & Sale of Suspended Dealer
 Raw materials when ...
ITC for PURCHASE TAX
40
 VAT manufacturer purchased taxable goods locally
from unregistered traders worth $ 500 in April
...
SALES TAX VAT
 OMC (ore) sells $1000/
collects & Pays Tax@4% $40/
 Shree Metallics (sponge
iron manufacturer)
purchases ...
SALES TAX VAT
 Saurav Alloys (manufacturer
of ingot)
purchases $1144/
margin $56/
sells $1200/
collects & pays Tax $48/
...
SALES TAX VAT
 Trader purchases at
$1352/ including tax of
$184/
 Companies keep margin
of $168/
 No further Tax
 Trad...
SALES TAX VAT
 TIISCO, Odisha sells at
$1200/
Does not get ITC $ 40 tax on
input of $ 1000/
 Collects no tax
 Trader , ...
SALES TAX VAT
 JMC, Jharkhand - Iron Ore
sells $ 1000/
Tax 4% $ 40/
 TIISCO , Jharkhand
manufactures Coils
purchases $ 1...
STOCK TRANSFER CST
 JMC, Jharkhand- Iron Ore
sell $1000/
VAT (J) @ 4% $ 40/
 TIISCO- Jharkhand
purchase $ 1040/
no ITC f...
ZERO VAT
ITC for Zero rated sales.
Zero rating on
Goods exported out of the state
Goods exported out of the country
G...
ADJUSTMENT of ITC
 ITC to be adjusted against outstanding tax, penalty under the VAT
Act or against tax due under CST Act...
REFUND
 Refund arising out of an order to be allowed,
without application, within a period of 60 days
 Refund to be adju...
CONSUMPTION TAX BENEFIT to POOR STATE
 Net consuming state to benefit the reduction of CST &
refund of ITC in producing s...
ACHIEVEMENT of VAT
51
 Abolition of First Point (under pricing) or Last Point
(intractable) Sale Tax- Appropriate Revenue...
DEFICIENCY in VAT
52
 Tax War not fully contained
 Still many rates & many taxes persist
 Exemptions continue or crept ...
GST
53
WHY GST
54
 Conflict between Union Govt (Central Excise) & State
VAT on taxing new products as Goods/ Services
 Mobile R...
55
 To reduce cost of Administration
 To reduce Cost of Compliance
 Registration & routine works handled by State
 Ret...
WHY GST (Cont)
56
 Next Stage in Tax Reform
 Unified Market
 Both Central Excise & State CT Dept wants to
increase tax ...
UNION TAXES STATE TAXES
 Central Excise Duty
 Additional Excise Duty
 The Excise Duty levied under
Medicinal & toiletri...
HOW GST DIFFERENT from VAT
58
 Same concept of ITC as VAT
 ITC for service & goods combined
 ITC on Centre GST & state ...
EXCISE@10%, VAT@10% CGST @10%, SGST@10%
 Mnfr A sells $100+CENVAT $10,
Pays CENVAT to Centre = $10
 Purchase cost for Tr...
CENVAT @10% CGST @10%
 Mnfr A sells $100+CENVAT $10
 Trader B purchases $110
 With mark up @10%, Trdr B
sells at $ 121 ...
MODEL 1: GST on DEVOLUTION
61
 State GST:
 State levy & collect GST
 Centre withdraws from tax on Trade & Service
 Cen...
UNION STATE
 Gross Turnover of
Services upto $ 1.5 Crore
 GTO above $ 1.5 Crore
for Goods & Services
Note: Cannot predic...
MODELS in INTERSTATE SALE
63
 VAT-CST Model: Zero Rated; ITC Adjusted/Carried Forward &
Refunded/ Transferred for Seller;...
VAT @10% + CST @2% SGST/IGST @10%
 Trdr A (State 1) purchases $
100+VAT $ 10
 With Mark Up@10%, Trdr A makes
interstate ...
CHALLENGES for CLEARING HOUSE
65
 State 1 accepting an interstate sell by Trader A to trader B
in State 2.
 Verifying IT...
CENVAT @10% CGST @10%
 Mnfr A (State1)sells at
$100+CENVAT $10
 Trader B (State2) purchases
$ 110
 With mark up @10%, T...
RATE & BASE in DUAL GST-STATE STAND
67
 Standard Rate= 8/ 9% CGST+8/ 9% SGST
 Essentials life support= 4% CGST+4% SGST
...
RATE & BASE in DUAL GST- GOI STAND
68
 Petroleum Products out of GST = Taxed as present
 Special Central Excise on Tobac...
CHALLENGES in PLACE of CONSUMPTION
69
 Place of sale of Goods & supply of Service /
Consumption – conflict among states
...
CONSTITUTIONAL IMPLICATION
70
CENTRAL GOVERNMENT STATE GOVERNMENT
 Does not have power to Tax
goods during Trading
 Does not have power to tax
Interst...
CONSTITUTION AMENDMENT
72
 Art 246 to Art 279:Amendment of relation of Centre &
State
 Legislative, Administrative & Fin...
CONSTITUTION AMENDMENT (Cont)
73
 Art 286:Restricting States to tax Export & Import
 Art 366 12A :Definition of Goods & ...
74
 Seventh Schedule: Union & State List
 Union List No 84: Union Excise duty list included Petroleum
products (Earlier ...
Progress
Updates
75
STAND OFF
76
 Draft Bill in its current form
 Issue of integrated GST for inter-state movement of
goods & VAT on imports...
GSTN-SPV
77
 AOA, MoA, Shareholders Agreement
 Equity Sharing (51 Pvt+24.5 Centre+24.5 States, Uts &
EC)
 Board of Dire...
GSTN PORTAL
78
 Single window for e-filing of CGST, IGST & SGST in the
shared portal
 E-Services shall be done through t...
NEGATIVE LIST on SERVICES
79
 Included
 Transport
 Advertizement
 Entertainment
 Sale of Goods
 Not Included
 Perso...
80
Chidananda Jena
Email: chidananda.jena@gmail.com
Skype/ YM: chidanandajena
Upcoming SlideShare
Loading in …5
×

Tax Policy Reforms with focus on VAT & GST in India - Jena

1,733 views

Published on

Updated 80 slides training material on Goods and Service Tax of India is designed keeping the Value Added Tax and General Sales Tax in the background. General tax reforms in major direct and indirect taxes of India are discussed as introduction keeping overarching taxation guides in background. Impact of direct taxation is analyzed with some original concepts and examples. Some of the concepts and most of the examples and computations demonstrated in VAT and GST section are also original of the author.

0 Comments
7 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,733
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
0
Comments
0
Likes
7
Embeds 0
No embeds

No notes for slide

Tax Policy Reforms with focus on VAT & GST in India - Jena

  1. 1. OVERARCHING TAXATION GUIDES TAX REFORMS in INDIA with focus on VALUE ADDED TAX (VAT) & GOODS & SERVICE TAX (GST) 1 Chidananda Jena Email: chidananda.jena@gmail.com Skype/ YM: chidanandajena
  2. 2. Tax Policy is not only designed to collect tax & finance development & public goods & services, but also meant to bring economic & social change, reduce inequality, form capital of federal & local governments, corporations, households & individuals & instill in governments & residents or otherwise a sense of shared responsibility in each stated objective. 2
  3. 3. 3 OUTLINE
  4. 4. OVERARCHING TAXATION GUIDES  Tax GDP Ratio Worldwide  Indian Tax Distribution  International Tax Distribution  Effects of Direct Tax  Cascading Effect of Direct Tax on Earnings  Cascading Effect of Direct Tax on Consumer  Reduction of Wealth in Direct Tax  Direct Tax Rewards Spendthrifts  Welfare Dead Weight Loss-Harberger’s Triangle  Trend in Tax Reform 4
  5. 5. TAX REFORMS in INDIA  Direct Taxes  Customs  Central Excise  Service Tax 5
  6. 6. VAT  Principles of VAT  VAT Computation & Levy  Input Tax Credit (ITC) & No ITC  ITC on Purchase Tax  VAT over Sale Tax  Consignment Transaction for Principal of Other State  Interstate Sale  Comparison of Consignment & Interstate Sale in VAT  Zero VAT, ITC Carry Forward & Refund  VAT: Consumption States to Benefit  VAT: Achievements & Deficiencies 6
  7. 7. GST  Why GST  Taxes to Subsume in GST  How GST Different from VAT  Cascading Effect of Excise on VAT Vs GST  Cascading Effect of CENVAT  Different Models of GST  Models of Interstate Sale  IGST Vs Current VAT-CST  Challenges before Clearing House  Shifting of CGST Share from Producing to Consuming State  Tax Rates & Base in GST: GOI & States Stand  Challenges for Determining Place of Sale or Supply 7
  8. 8. CONSTITUTIONAL PROVISIONS  Constitutional Implications  Centre State Relations  Legislative, Administrative & Financial  Inter State Trade  GST Council & Dispute Settlement Authority  Taxing Export & Import  Taxing Petroleum & Edible Alcohol  Sixth Schedule  Seventh Schedule: Union & State List 8
  9. 9. PROGRESS UPDATES  Stand Off Between Centre & States on Compensation in Lieu of CST Loss  GSTN SPV  GSTN Portal  Negative List of Services 9
  10. 10. 10 DETAIL
  11. 11. OVERARCHING TAXATION GUIDE 11
  12. 12. TAX GDP RATIO WORLDWIDE 12 Tax GDP Ratio 2012 by Heritage Foundation Canada 32.2 Mexico 29.7 USA 26.9 Australia 30.8 Japan 28.3 New Zealand 34.5 Denmark 49 France 44.6 Germany 40.6 Italy 42.6 Netherland 39.8 UK 39 OECD Un-weighted Average 34.8 Argentina 37.2 China 17 India 17.7 Russia 36.9 Source (wikipedia)
  13. 13. INDIAN TAX DISTRIBUTION 13 All India Tax Distribution 2012-13 ($/Rs conversion at 12-13 level apx) figures are approximations in Bn $ ($1=$ 50) % of PAN India Tax Corporate Tax 70.34 21.53% Income Tax 38.26 11.71% GoI Direct Taxes 108.61 33.24% Customs 32.97 10.09% Union Excise 34.40 10.53% Service Tax 26.54 8.12% GoI Indirect Taxes 93.91 28.75% Total Govt of India Taxes 207.61 63.55% State share transferred 58.81 18.00% Balance tax with National Govt 148.42 45.43% VAT of State 74.51 22.81% State Own Tax Revenue (mostly Indirect) 124.18 38.01% Total Tax at the disposal of State 182.99 56.01% PAN India Total Indirect Tax 218.09 66.76% PAN India Total Tax 326.69 100.00%
  14. 14. INTERNATIONAL TAX DISTRIBUTION 14 Comparison of OECD Countries in % of total Tax (Aproximately) USA Canad a Mexic o UK German y France Finlan d EU (unweig hted) Austral ia Japan (some taxes missing) OECD (unwei ghted) Personal Income Tax 35.3 34.6NA 28.7 23.9 17.5 31 25 38.5 17.5 24.9 Corporation Tax 8.1 10.4NA 7.8 3.5 5.7 7.7 8.1 16.7 13 9.3 Social Security Contribution 26.4 17.5 18.7 18.5 40.5 40.2 26.7 29.8 5.6 18.5 27 Direct Tax from earning 69.8 62.5 18.7 55 67.9 63.4 65.4 62.9 60.8 49 61.2 Property Tax 12.1 10 1.6 11.9 2.4 7.3 2.3 5.4 9.5 10.3 5.6 Goods & Service Tax 18.2 26.1 52.5 32.7 29.4 25.5 32 30.4 29.7 20.3 32.1 Consumption Tax (in GST) 8.4 15.1 19.4 19.8 17.9 16.8 19.4 18.9 13.7 9.5 18.9 Source: Tax Reform Trend in OECD Countries; Centre for Tax Policy & Administration, OECD
  15. 15. EFFECT of DIRECT TAX 15  People paying income tax again pay tax on spending- Cascading  Profit earned by a Corporate/ Person from revenue earned through sale of goods & service are ultimately paid by consumer-payable income tax is built in the prices of goods & services-Cascading  Tax on earning reduces people’s wealth more than equivalent consumption tax  Direct Tax punishes savings
  16. 16. LOW INCOME GROUP MID INCOME GROUP  Earns $100  Exemption Limit=$100  Balance for Consumption= $100  Pays VAT@10%= $9  Consumption= $91  Tax to Government on total earning=$9=9%  Earns $200  Exemption Limit=$100  Income Tax @20%=$20  Balance for Consumption =$180  Pays VAT@10%=16  Consumption=$164  Tax to Government on total earning=$36=18% 16 CASCADING EFFECT of DIRECT TAX on EARNING Note: Scenario is different for high income groups as the spending is much less than total income, Tax Credit refund for low income group is practiced in developed economy, but no relief for mid income group, i.e. majority of tax payers
  17. 17. CASCADING EFFECT of DIRECT TAX on CONSUMER 17  Corporation C sells cold drinks @ $1 per bottle  Consumer pays VAT/GST @ 10%=10 cents per bottle  Corpn C sells 1 Bn bottles & gross revenue is $10Bn  Corpn C collects from consumer & pays VAT/ GST of $1Bn  Operating Expenses etc. $1 Bn  Raw materials cost $ 5Bn  Depreciation, interest etc $ 2 Bn  Profit after depreciation & interest=$ 2 Bn  Income Tax due at this stage @ 20%= $40 Mn  Consumers utlimately pay this $ 40 Mn hidden in the cost of cold drinks sold by Corpn C  VAT/ GST @ 10% on $ 40 Mn is $ 4 Mn  Consumers pay VAT of $ 1 Bn in which there is $4 Mn cascading effect of direct tax + direct tax of $ 40 Mn= $ 1.4 Bn
  18. 18. Income Tax Consumption Tax  A earns $100  Pays Tax @ 20%=$20  Balance=$80  Consumption in Yr 1  $40  Investment 4m Yr 1-10  $40  Earnings $40  Tax@20% on earning=$8  Net=$72  No Income Tax  B earns $100  Consumption in Yr 1  $50 inclusive of tax  Tax@20%=$10  Actual Consumption=$40  Investment 4m Yr 1-10  $50  Earnings $50  Total =$100 18 REDUCTION of WEALTH in DIRECT TAX
  19. 19. INCOME TAX CONSUMPTION TAX  Consumption in Yr 10  $72  Total Effect  Total Earning $140  Tax=$28  Actual Consumption=$112  Tax effect=@20%  Consumption in Yr 10  $100 inclusive of Tax  Tax @20%=$20  Actual consumption=$80  Total Effect  Total Earning $ 150  Tax=$30  Actual consumption=$120  Tax Effect=@20% 19 REDUCTION of WEALTH in DIRECT TAX (Cont) Note: Assuming rate of earning on savings more than inflation, there is a net loss to the public under income tax regime
  20. 20. SPENDTHRIFT ECONOMICAL  A earns $100  Pays Tax @ 20%=$20  Balance=$80  Consumption in Yr 1  $80  B earns $100  Pays Tax @ 20%=$20  Balance=$80  Consumption in Yr 1  nil  Investment 4m Yr 1-10  $80  Earnings $80  Tax@20% on earnings=$16  Net=$144 20 DIRECT TAX REWARDS SPENDTHRIFT Source: Progressive Consumption Taxation; The choice of Tax Design by Alan Viard, American Enterprise Institute, NYU, School of Law
  21. 21. SPENDTHRIFT ECONOMICAL  B’s Consumption in comparison to no tax scenario=$80/100=80%  Consumption in Yr 10  $144  Consumption in comparison to no tax scenario=$144/200= 72% 21 DIRECT TAX REWARDS SPENDTHRIFT (Cont) Source: Progressive Consumption Taxation; The choice of Tax Design by Alan Viard, American Enterprise Institute, NYU, School of Law
  22. 22. WELFARE DEAD WEIGHT LOSS HARBERGER’S TRIANGLE 22
  23. 23. TREND in TAX REFORM 23  Reduction of Exemption & Deduction  Growth with increase in horizontal & vertical Equity  Reduce Compliance Cost  Reduce Administrative Burden  Reduce Discretion & Corruption  Voluntary Compliance & Self Assessment  Heavy penalty for non-compliance & evasion  Removal of ambiguity used for tax avoidance  E- Services & services through PPP  Increase Tax Base & Reduce Tax Rate
  24. 24. TAX REFORMS in INDIA 24
  25. 25. 25  No change in concept or computation in direct tax reform  Scope of revenue leakage is high-Transfer Pricing, income/ profit transfer internationally, Tax Haven/ different tax rates internationally, tax treaties etc.  Parity of CIT & PIT-Corporatization is high due to scope for avoiding tax (Refer share of PIT & CIT in total tax) - Rent Seeking tendency high  Cascading effect is enormous in Direct Tax DIRECT TAX REFORM
  26. 26. NEW DIRECT TAX CODE 26  Simplified & rationalized  Reduced exemption & incentives, lowering rate & structure, ambiguities eliminated to the extent possible  One Accounting Year, all taxes in one code Income (personal, corporate, capital gain), dividend, fringe benefit & wealth  Reduction of provisions that can be abused  Tax neutral for public & government  Proviso & explanations eliminated as those were incomprehensible to non- experts  Formulae & tables used for comprehension  Essential & principles in statute, details in rules & schedules  Tax Law is logically reproduced in form  Regulatory function removed  Tax rates in schedule, not in annual finance bill
  27. 27. 27  Exempt Exempt Tax EET (PPF, Insurance) Vs previous EEE  Parity of long term & short term capital gain-indexation benefit  Tax rate same at 25% for domestic & foreign firms, removal of deduction, moving towards assets base deduction  Parity of domestic & foreign firms, Clarity in definition of resident & non-resident  Loss carried forward till adjustment  Assets classification simplified- depreciation at same rate NEW DIRECT TAX CODE (Cont)
  28. 28. 28  MAT moving from income to asset based  Companies will try to reduce wasteful assets & gestation period  Wholly situated modified to partly situated- good for foreign firms/ NRIs  Taxing media companies broadcasting from abroad, Indian program through satellite to Indian audience, generating revenue from advertisements of Indian Companies  Commission given lots of power in permanent establishment, transfer pricing, associated enterprise, arms length price issue NEW DIRECT TAX CODE (Cont)
  29. 29. CUSTOMS 29  Peak customs duty 10 %, committed to bring to 5%  Multiple tax rates persists for closely related items  Exemptions persist  Standard Commodity Classification followed  Transaction Value instead of deemed value  Fast Track Clearance Scheme limited-Delay persists  Should encourage self declaration as much as possible  Provision for Advance Ruling implemented, but lingering  MODVAT with negative list
  30. 30. CENTRAL EXCISE 30  Structure & rates of duty lowered: peak rate 16% & two rates  CENVAT (Credit/ Set off) diluted  Cascading still persists  Populist exemptions persist  Physical restriction by tax administration reduced largely with self declaration of tax payer  Adoption of standard commodity classification list
  31. 31. SERVICE TAX 31  Tax Base increase by leading to double tax by centre & state  Interpretation of Services as Goods by states leading to double taxation  ITC not interchangeable with tax paid for Goods to State VAT or Central Excise  Revenue sharing between centre and states withdrawn, Centre exclusively retains this revenue
  32. 32. VAT 32
  33. 33. PRINCIPLES of VAT  Uniform Tax Rate PAN India to eliminate Tax War  No Double Taxation & Cascading effect  ITC (Input Tax Credit)-differential to be paid to Govt.  Tax is not a part of sale price  Entire tax collected at different stages inside a state to be refunded/ adjusted in case of Interstate Sale/ Export  Parity of Interstate Sale & Consignment Transfer  CST sale would have been tax free within few years 33
  34. 34. VAT COMPUTATION  VAT =(Output tax + Purchase tax) - Input tax  VAT- on the sale & purchase  A dealer collects tax on his sales, retains the tax paid on purchases & pays the balance in every tax period  TOT- Nominal rate on TTO of Sale 34
  35. 35. VAT LEVY on SALE & PURCHASE  Tax on sale turnover of taxable goods.  Purchase tax is on transactions, unlike purchase tax 3B goods of Sales Tax Act.  Purchase tax is levied when taxable goods are purchased under circumstances where no tax on sale is leviable.  When purchased from unregd. dealers.  Where the goods consumed or used otherwise than through intra-state/ inter-state/ export /SEZ/STP/EHTP/EOU sale. 35
  36. 36. INPUT TAX CREDIT (ITC)  ITC can be claimed only by Regd. VAT Dealers.  ITC on goods purchased within the state from Regd. VAT Dealers .  ITC allowed on  Intra State Sale  Inter state sale/STP/SEZ/EOU/EHTP/Export out of the country.  Consignment/ Commission Transaction from one state to another  On stocks held on appointed day.  ITC Readjustment for goods returned.  Tax Invoice fundamental for claim of ITC. 36
  37. 37. ITC on CAPITAL GOODS  ITC to be allowed on capital goods spread over 2/3 years followed by refund  ITC on consumables except negative list goods. 37
  38. 38. NO INPUT TAX CREDIT- ITC  Against CST, VAT paid in another state  In respect of sales exempted from VAT  On material purchased from a regd. VAT Dealer, but given away as gift  For TOT dealers  In respect of stock of goods remaining unsold at the time of closure of business  On old capital goods/ vehicles for conveyance or transport 38
  39. 39. NO INPUT TAX CREDIT-ITC (Cont)  To liable unregistered dealer  Purchase & Sale of Suspended Dealer  Raw materials when the finished product is exempt.  Proportionately if part of finished goods is exempt 39
  40. 40. ITC for PURCHASE TAX 40  VAT manufacturer purchased taxable goods locally from unregistered traders worth $ 500 in April  Purchase Tax (PT) paid in April tax return @10%=$50  Manufacturer produces taxable goods worth of $600 & tax free goods worth of $400 & sells in the month of May from same goods purchased in April  ITC to be given on PT paid on purchase of goods = (600X500)/(600+400)=$300  ITC@10%=$30 in the return of May against output tax @10% on sale of taxable goods worth $600= $60
  41. 41. SALES TAX VAT  OMC (ore) sells $1000/ collects & Pays Tax@4% $40/  Shree Metallics (sponge iron manufacturer) purchases $1040/ margin $60/ sells $1100/ collects & Pays Tax@4%$44/ total $1144/  OMC sells $1000/ Collects & PaysVAT @4% $40/  Shree Metallics purchases $1000/ margin $60/ sells at $1060/ Collects VAT@4% $42.4/ Pays Tax $ 2.4/ 41 SALES TAX Vs. VAT
  42. 42. SALES TAX VAT  Saurav Alloys (manufacturer of ingot) purchases $1144/ margin $56/ sells $1200/ collects & pays Tax $48/  Rerolling Mill manufacturer purchases $1248/ margin $ 52/ sells $ 1300/ collects & pays Tax $52  Saurav Alloys purchases $1060/ margin $56/ sells $1116/ collects VAT $44.64/ pays tax $2.24/  Rerolling Mill purchases $ 1116/ margin $ 52/ sells $ 1168/ collects VAT $46.72/ pays tax $2.08/ 42 SALES TAX Vs. VAT (Cont)
  43. 43. SALES TAX VAT  Trader purchases at $1352/ including tax of $184/  Companies keep margin of $168/  No further Tax  Trader purchases at $ 1168/ & total VAT $46.72/ total $ 1214.72/  All Companies keep margin of $168/  Trader sells to consumer adding margin of few dollars & adding tax of few cents 43 SALES TAX Vs. VAT (Cont)
  44. 44. SALES TAX VAT  TIISCO, Odisha sells at $1200/ Does not get ITC $ 40 tax on input of $ 1000/  Collects no tax  Trader , Jharkhand sells with 10% margin = $1320/  Jharkhand Sales Tax $ 52.8/ Odisha Sale Tax $ 40/  TIISCO sells at $1200/ Gets ITC in access of $ 40 on input of $ 1000/=no ITC here  Collects no tax  Trader, Jharkhand sells with 10% margin = $ 1320 /  Jharkhand VAT(J) $ 52.8 / Odisha VAT(O) $ 40 / 44 CONSIGNMENT TRANSACTION by AGENT in ANOTHER STATE Tax Benefit under VAT if tax rate is higher than CST rate. Excess tax shall be given ITC
  45. 45. SALES TAX VAT  JMC, Jharkhand - Iron Ore sells $ 1000/ Tax 4% $ 40/  TIISCO , Jharkhand manufactures Coils purchases $ 1040/ margin $ 160/ sells $1200/ CST 4% $ 48/ total $1248/  JMC, Jharkhand - Iron Ore sells $ 1000/ VAT 4% $ 40/  TIISCO , Jharkhand - CR Coils purchases $ 1000/ margin $ 160/ sells $1160/ CST 4% $ 46.4/ ITC- $ 40/ refunded total $ 1206.4/ 45 INTERSTATE SALE
  46. 46. STOCK TRANSFER CST  JMC, Jharkhand- Iron Ore sell $1000/ VAT (J) @ 4% $ 40/  TIISCO- Jharkhand purchase $ 1040/ no ITC for VAT of $ 40 / margin@10%= $104/ sell Value $1144/ No CST  Jharkhand tax $40/  Benefit of $4 to TIISCO  JMC, Jharkhand- Iron Ore sell $1000/ VAT(J) @ 4% $ 40/  TIISCO, Jharkhand purchase $ 1000/ margin @10%= $ 100/ sell $1100/ CST (J) @4%=$44/ VAT(j)-$40/ refunded Total Value=$1144/  Jharkhand Tax $ 44/  Loss of $4 to Jharkhand State 46 CONSIGNMENT TRANSFER Vs INTERSTATE SALE in VAT
  47. 47. ZERO VAT ITC for Zero rated sales. Zero rating on Goods exported out of the state Goods exported out of the country Goods sold to SEZ, STP, EHTP, EOU 47
  48. 48. ADJUSTMENT of ITC  ITC to be adjusted against outstanding tax, penalty under the VAT Act or against tax due under CST Act  Excess of ITC after adjustment to be carried over as an input tax credit to subsequent tax periods up to 2 years.  Refund of ITC will be given after 2 years / the dealer may opt for further carry forward.  Refund of ITC on goods exported out of the country on application in every tax period. 48
  49. 49. REFUND  Refund arising out of an order to be allowed, without application, within a period of 60 days  Refund to be adjusted against arrears  Refund for export to be allowed on application within 90 days after audit  Audit to be completed within 30 days  Refund can be granted provisionally against bank guarantee  8% interest on refund after due date 49
  50. 50. CONSUMPTION TAX BENEFIT to POOR STATE  Net consuming state to benefit the reduction of CST & refund of ITC in producing state  Consumers bear the State Sales Tax & CST of other states in addition to the own state ST of Orissa for goods brought in- VAT will reduce tax burden.  Integration of Industry will stop. Industries will migrate to less developed state- raw material, Coal, Land & Labour is cheap & plenty. Doubling & Cascading effect of tax is no more a worry.  Ancillary Industries will grow-generation of huge employment & new business avenues.  Main cause of industries in mineral rich states now-VAT 50
  51. 51. ACHIEVEMENT of VAT 51  Abolition of First Point (under pricing) or Last Point (intractable) Sale Tax- Appropriate Revenue Collection at appropriate level  Reduction of Cascading effect of Tax at manufacturing stages as ITC on raw materials & Capital goods allowed  Reduction of Cascading effect for Refund of VAT for Inter- state sale & Export  Reduction of CST leading to further reduction of cascading  Rationalization of Tax Structure & Uniform Floor Rate amongst States  Consuming state collects VAT from Consumers  Self Assessment
  52. 52. DEFICIENCY in VAT 52  Tax War not fully contained  Still many rates & many taxes persist  Exemptions continue or crept in  Narrow Base  CST not abolished as Revenue Neutrality not achieved  Check Post System could not be abolished  No Coordination between Central Excise & States on cross verification of transactions  Many Taxes on Goods & Services both by Centre & States  Conflict between state & centre whether service/goods  Cascading effect not eliminated fully  Commodity classification not standardized
  53. 53. GST 53
  54. 54. WHY GST 54  Conflict between Union Govt (Central Excise) & State VAT on taxing new products as Goods/ Services  Mobile Recharge Vouchers (Goods)/ Easy Recharge (Not Goods)  Software sold online/ Software sold in a DVD  Beverages Served in Luxury Hotels attract VAT & Service Taxes in addition to Central Excise & State Excise  Assembling/Packaging - whether Manufacturing/ Service & thus taxable as Excise/ Services  States taxing selective services under Luxury Taxes, Hire Purchases/Right to Use/Lease  Works Contract a Service/ Goods/ Manufacturing?
  55. 55. 55  To reduce cost of Administration  To reduce Cost of Compliance  Registration & routine works handled by State  Return for CGST/ SGST/ IGST will be simultaneous  Payment of all GSTs simultaneous  Reduce Tax burden on Public, Trade & Manufacturing  Coordination between all Indirect Taxing Authorities  Abolition of many taxes  Information sharing through robust GST Network  One Standard commodity classification by all states & Indian Tax administrations WHY GST (Cont)
  56. 56. WHY GST (Cont) 56  Next Stage in Tax Reform  Unified Market  Both Central Excise & State CT Dept wants to increase tax base by including goods & services  Followed by more than 100 nations  Better mechanism to transfer ITC from one State to another rather than refunding to Tax Payers in selling state
  57. 57. UNION TAXES STATE TAXES  Central Excise Duty  Additional Excise Duty  The Excise Duty levied under Medicinal & toiletries preparation Act  Service Tax  Additional Custom Duty (CVD)  Special Additional Duty  Surcharge/ Education Cess Note: One major taxes administered by Central Govt. is left out, i.e Customs/Import (for the time being)  VAT  Entertainment Taxes  Luxury Taxes  Entry Taxes  Tax on lottery  State Cess & Surcharge on supply of goods & services Note: CST (shall be abolished) Most of the Taxes administered by Com Tax Dept included 57 TAXES LIKELY to SUBSUME in GST
  58. 58. HOW GST DIFFERENT from VAT 58  Same concept of ITC as VAT  ITC for service & goods combined  ITC on Centre GST & state GST not interchangeable  National excise & state VAT shall integrate  No CST Law  No tax incentive/disincentive for different types on interstate Transaction  Further reduction of cascading due to abolition of CST, integration of central excise, service & state VAT
  59. 59. EXCISE@10%, VAT@10% CGST @10%, SGST@10%  Mnfr A sells $100+CENVAT $10, Pays CENVAT to Centre = $10  Purchase cost for Trader B $110  With mark up @10%, Trdr B sells at $ 121+VAT $12.10, Pays VAT to state = $ 12.10  With mark up@ 10%, Trdr C sells at $ 133.10+VAT $13.31, Pays VAT =13.31-12.10= $ 1.21  Consumer Pays = $146.41  CENVAT=$10+VAT=$13.31=$ 23.31  MnfrA sells$100+CGST&SGST=$10 each; Pays tax to Centre & state  Purchase cost for Trader B $100  With mark up @10%, Trdr B sells at $ 110+CGST&SGST=$11 each Pays CGST & SGST = $ 1 each  With mark up@ 10%, Trdr C sells at $ 121+CGST &SGST=$12.1 each Pays CGST & SGST = $ 1.1 each  Consumer Pays = $ 145.2  Total CGST & SGST = $ 12.1 each Consumer & Centre Gains & State Looses in same tax rate of both regime 59 CASCADING: EXCISE on VAT Vs GST
  60. 60. CENVAT @10% CGST @10%  Mnfr A sells $100+CENVAT $10  Trader B purchases $110  With mark up @10%, Trdr B sells at $ 121 to Trdr C  With mark up@ 10%, Trdr C sells at $ 133.10 to Mnfr D  With mark up @ 100%,Mnfr D sell at $266.20+CENVAT $26.62  Cost to Consumer $ 292.82  CENVAT = $10+$26.62 =$36.62  No ITC for break in Mnfcr Chain  Mnfr A sells $ 100+CGST $ 10  With mark up @10%, Trdr B sells $ 110+CGST $ 11 to Trdr C  With mark up@ 10%, Trdr C sells $121+CGST $12.10 to Mnfr D  With mark up @ 100%, Mnfr D sells $242+CGST $24.20  Cost to Consumer $ 266.20  Total CGST $24.20 60 CENVAT-CASCADING CENVAT leads to cascading in cases where chain of traders involved in purchases from manufacturing unit & sells to manufacturing Unit-Break Manufacturing ITC Chain Saving by consumer= $26.62 (Tax $12.42+ Effect of Mark up on tax included in cost $14.20)
  61. 61. MODEL 1: GST on DEVOLUTION 61  State GST:  State levy & collect GST  Centre withdraws from tax on Trade & Service  Centre have excise tax with state & centre sharing model  Central GST:  Centre levy & collect Tax  State VAT merged with CENVAT & Service Tax  Centre share more tax with respective States  Dual GST  State & Centre both collect Tax @ same Rate  Commodity Base Synchronised
  62. 62. UNION STATE  Gross Turnover of Services upto $ 1.5 Crore  GTO above $ 1.5 Crore for Goods & Services Note: Cannot predict if GTO will decline below threshold  Gross Turnover of Goods upto $ 1.5 Crore  GTO above $ 1.5 Crore for Goods & Services Note: Cannot predict if GTO will exceed the threshold 62 MODEL 2 GST on the BASIS of THRESHOLD
  63. 63. MODELS in INTERSTATE SALE 63  VAT-CST Model: Zero Rated; ITC Adjusted/Carried Forward & Refunded/ Transferred for Seller; Purchaser pays full VAT in consuming state  Reverse Charge Mechanism: Seller pay SGST to Exporting State; Purchaser pays again SGST in Consuming State; Purchaser gets certificate from Consuming State & gives to Seller; Seller claims refund-Taxing Tax Payers  Clearing House Mechanism: Seller pay SGST in exporting state, provide details to clearing house; clearing house will collect SGST from exporting state to Consuming State; Issue Certificate to Seller & Purchaser; Seller can claim refund & Purchaser can claim ITC- Challenging  IGST Model: Seller pay differential tax to Centre; Exporting State transfer credit used in IGST to Centre; Purchaser claim ITC; Centre transfer ITC claimed by Purchaser to Consuming State; Clearing House-More Challenging
  64. 64. VAT @10% + CST @2% SGST/IGST @10%  Trdr A (State 1) purchases $ 100+VAT $ 10  With Mark Up@10%, Trdr A makes interstate sale to Trdr B (State 2) at $ 110 + CST $ 2.20=$ 112.20  Trdr A claims refund from State1 =$ 10-$2.20 =$ 7.80  With marks up @10%, Trdr B sells $ 123.42+VAT $ 12.34  Consumer pays $ 135.76  State 2 CTD gets VAT 12.34  State 1 gets CST of $2.20  Total Tax=14.54  Trdr A (State 1) purchases $ 100 + SGST $ 10  With Mark Up@10%. Trdr A makes interstate sells to Trdr B (State2) $ 110 + IGST $ 11  With marks up @10%, Trdr B sells $121 + SGST $ 12.10  Consumer pays = $ 133.10  Trdr B gives State 2 SGST=$ 12.10 - $11=$ 1.10  Trdr A gives Centre IGST= $11-$10=$ 1  Clearing House collects $ 10 from State 1+ $ 1 from Centre IGST & pay $ 11 to State 2 64 IGST Vs VAT-CST MODEL
  65. 65. CHALLENGES for CLEARING HOUSE 65  State 1 accepting an interstate sell by Trader A to trader B in State 2.  Verifying ITC on purchases of Trader A by State 1 before transferring ITC to Clearing House is a challenge  Correlating invoice to invoice of purchase to sale not possible  Presently refund is not easily given & hence ITC is carried forward for a long time  Trader B availing ITC while State 2 would not receive the ITC transfer will be a huge strain on consuming state  Without clarity, verification mechanism, Enforcement mandate of clearing house, State 1 will gain at the cost of State 2
  66. 66. CENVAT @10% CGST @10%  Mnfr A (State1)sells at $100+CENVAT $10  Trader B (State2) purchases $ 110  With mark up @10%, Trdr B sells at $121  Total CENVAT $ 10  If Centre & State Sharing is 50:50, State 1 gets $ 5  Mnfr A (State1)sells at $100+CGST $10 to Trdr B (State2)  With marks up @10%,Trdr B sells at $110+CGST $11  Total CGST $ 11  CGST chain is not broken, CGST credit will be reflected in Central Excise Commissionerate of state2  If Centre & State Sharing is 50:50, State2 gets $ 5.50 66 SHARE of CGST to CONSUMING STATE Consuming State does not get share of CENVAT Centre: State Tax Sharing Arrangement as ITC on CENVAT stops at manufacturing-if manufacturing happens in one state & consumption in another
  67. 67. RATE & BASE in DUAL GST-STATE STAND 67  Standard Rate= 8/ 9% CGST+8/ 9% SGST  Essentials life support= 4% CGST+4% SGST  Gold Silver Bullion Diamond=1% CGST+1% SGST  Common Exempt List with limited regional exceptions  SIN (Alcohol + Tobacco) Products + Petroleum Products out of GST = Taxed as present
  68. 68. RATE & BASE in DUAL GST- GOI STAND 68  Petroleum Products out of GST = Taxed as present  Special Central Excise on Tobacco even as it will be in GST  For rest start with different Rate: Graduate to one Rate 1st Year  Standard Rate= 10% CGST+ 10% SGST  Services = 8% CGST+8% SGST  Essentials life support= 6% CGST+6% SGST 2nd Year  Standard Rate= 9% CGST+ 9% SGST  Services = 8% CGST+8% SGST  Essentials life support= 6% CGST+6% SGST 3rd Year  One Rate = 8% CGST+8% SGST
  69. 69. CHALLENGES in PLACE of CONSUMPTION 69  Place of sale of Goods & supply of Service / Consumption – conflict among states  Online Sale of Commodities by one dealer located in Delhi to States all over India  Consultancy Services provided by one Corporate in all states against a work order received centrally from another agencies in Delhi  Mobile Phone Services provided to a corporate house centralized at Delhi, but services utilized in different states
  70. 70. CONSTITUTIONAL IMPLICATION 70
  71. 71. CENTRAL GOVERNMENT STATE GOVERNMENT  Does not have power to Tax goods during Trading  Does not have power to tax Interstate trade (in the scenario of taxing (IGST)  Does not have power to Tax Services  Does not have power to tax import 71 CONSTITUTIONAL IMPLICATION Note: need for amendment of constitution: 115th Amendment Way Out: Centre levy tax & fix rate on services, states collect & appropriate; consensus required on modalities, rate & services devolved to states-No more discussed
  72. 72. CONSTITUTION AMENDMENT 72  Art 246 to Art 279:Amendment of relation of Centre & State  Legislative, Administrative & Finance  269A: Inter State Trade  279A: GST Council Centre to have Veto & 2/3rd majority of States/ Consensus/ Act of Parliament & Recommendatory; Like EC but as a Constitutional Body  279B: Dispute Settlement Authority States’ apprehend this will dilute federalism
  73. 73. CONSTITUTION AMENDMENT (Cont) 73  Art 286:Restricting States to tax Export & Import  Art 366 12A :Definition of Goods & Services Tax excludes Petroleum & Human Consumption Alcohol  Sixth Schedule: Dist Council of Autonomous Dist gets power to tax Entertainment & Amusement
  74. 74. 74  Seventh Schedule: Union & State List  Union List No 84: Union Excise duty list included Petroleum products (Earlier tobacco), excluded alcohol & narcotic drugs  Union List No 92:Service omitted  State List 52: Entry Tax power taken away from State & given to local bodies  State List 54:Taxes on Sale or Purchase of Goods replaced by Taxes on Sale; excludes Petroleum & Human Consumption Alcohol  State List 62: Local Bodies/Regional/Dist Council to tax Entertainment & Amusement CONSTITUTION AMENDMENT (Cont)
  75. 75. Progress Updates 75
  76. 76. STAND OFF 76  Draft Bill in its current form  Issue of integrated GST for inter-state movement of goods & VAT on imports  Revenue neutral rate on GST - one that is not too high for the traders & not too low for states  Mechanism so that tax payers have to coordinate only with one agency - centre or state  Arrear compensation not given since 2010-11 (Rs. 6,394 crore budgeted in 2013-14 for 2010-11)
  77. 77. GSTN-SPV 77  AOA, MoA, Shareholders Agreement  Equity Sharing (51 Pvt+24.5 Centre+24.5 States, Uts & EC)  Board of Directors  6 from Govt+Govt nominated Chairman  CEO from Private Sector ( EC has recommended change)+7 from Pvt  Instantaneous Information & timely settlement of States Shares  GSTN IT Infrastructure owner EC
  78. 78. GSTN PORTAL 78  Single window for e-filing of CGST, IGST & SGST in the shared portal  E-Services shall be done through this portal- disseminated at back end to respective states & Excise Dept.  Full Service Model: Some States can utilize  Limited Service Model: Regn, Return, Payment  Application Programming Interface (API): Adhere to common RRP formats, can have additional fields in their own system  Provide local language support
  79. 79. NEGATIVE LIST on SERVICES 79  Included  Transport  Advertizement  Entertainment  Sale of Goods  Not Included  Personal Services  Land & Building  Cable Operator & DTH Services  Note: Financial Services are not part of GST
  80. 80. 80 Chidananda Jena Email: chidananda.jena@gmail.com Skype/ YM: chidanandajena

×