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GST explained for non tax professionals

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Have you had trouble making sense of the hundreds of articles on the Goods and Service Tax? We did too. We realized that we could not make sense of GST because we did not understand the basics. So we studied many documents and met a lot of experts to understand the logic of GST.

We are very happy to share that understanding with you. You can learn about Input Tax credit, what changes with GST, how many taxes are going away and what does it all mean for industry and government. What is more, all this has been communicated using simple examples and easy language.

If you find this presentation useful, please do share it on Email, FaceBook, Twitter and other social media.

Published in: Economy & Finance

GST explained for non tax professionals

  1. 1. Get Clarity! (Goods and ServiceTax) Explained ForThe Rest of Us GST
  2. 2. 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
  3. 3. 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
  4. 4. What is GST? ALSO, MULTIPLETAXATION AGENCIES... ...WILL BE REPLACED BY A SINGLE AGENCY (GSTN) !!!
  5. 5. 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”
  6. 6. Understanding Input Tax Credit 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
  7. 7. 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. Understanding Input Tax Credit
  8. 8. 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
  9. 9. 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.
  10. 10. 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
  11. 11. 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 How GST improves the current system: Intra State Sale Pre GST
  12. 12. 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 How GST improves the current system: Intra State Sale Challenges
  13. 13. 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 How GST improves the current system: Intra State Sale 100 Value addition is 200
  14. 14. 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. How GST improves the current system: Intra State Sale Benefits of GST
  15. 15. 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.
  16. 16. 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.
  17. 17. 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
  18. 18. *Actual CGST and SGST would be different. 10% taken for ease of computation. **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 How GST improves the current system: Interstate Sale Value addition is 200
  19. 19. *Actual CGST and SGST would be different. 10% taken for ease of computation. 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 How GST improves the current system: Interstate Sale COST WITHOUT TAX IGST CREDIT BALANCE 10 SGST CREDIT 50 TAX PAID 100-10-50=40 Value addition is 200
  20. 20. 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
  21. 21. 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 GST improves the current system: Interstate Sale
  22. 22. 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.
  23. 23. 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
  24. 24. 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.
  25. 25. 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
  26. 26. 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
  27. 27. 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.
  28. 28. 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.
  29. 29. 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
  30. 30. 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%
  31. 31. 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
  32. 32. 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.
  33. 33. 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!

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