GOODS AND SERVICE TAX

Direct tax- is the tax whose burden is directly borne by the person on whom it is imposed, i.e., its burden
cannot be shifted to others. It is deducted at source from the income of person who is taxed. For example:
Income tax is a direct tax because the person, whose income is taxed, is liable to pay the tax directly to the
Government and bear the burden of the tax himself. Other examples of direct tax are:
i) Corporation Tax: It is levied on profit of corporations and companies.
ii) Wealth Tax: It is imposed on property of individuals depending upon the value of property.
iii) Gift Tax: It is paid to the Government by the recipient of gift depending on value of gift.
iv) Estate Duty: It is charged from successor of inherited property. It is not desirable to avoid payment of
taxes. They are levied directly on income and property of persons, who pay directly to the Government.
On the other hand when (i) liability to pay a tax is on one person and (ii) the burden
of that tax shifts on some other person, this type of tax is called an indirect tax. Thus,
Indirect Tax is a tax whose burden can be shifted to others. For example:
i) Sales Tax or VAT [up to 30/06/2017] It is an indirect tax on sale of goods because liability to collect tax

is that of shopkeeper but the burden of that tax falls on the customer. The shopkeeper realizes the tax
amount from the customer by including it in the price of the commodity that he sells.,
ii) Central Excise duty: It is paid by the producer (manufacturer) of goods, who recovers it from
wholesalers and retailers.
iii) Service Tax: It is raised on provision of Service .

GOODS AND SERVICE TAX

GST tax regime has been finally implemented from 1st July, 2017 across India. Thus there
is a economic union of the country with ONE TAX, ONE MARKET AND ONE NATION.

MEANING OF GOODS AND SERVICE TAX

GST is a destination based indirect tax on consumption of goods and services, i.e., the tax would accrue to the
taxing authority (State/Union Territory) which has jurisdiction over the place of consumption, which is termed
as place of supply. Under the GST scheme, no distinction is made between goods and services for levying of
tax. In other words, goods and services attract the GST. It is imposed at all stages right from
manufacture/supply of services up to final consumption with credit of input taxes paid at each stage available
as setoff in the subsequent stage of taxation . In short, only value addition will be taxed and burden of tax is to
be borne by the final consumer.
Need for GST (Pre-GST Scenario):
The existing tax law system had the following deficiencies and difficulties which led to the introduction of
GST:-
1. Multiplicity of taxes:- This multiplicity of taxes at the State and Central levels had resulted in a
complex indirect tax structure in the country with hidden costs for the trade and industry. Also, there
was no uniformity in various taxes and tax rates across States. The following are the some of the
indirect taxes which were levied in India before GST:
a. Excise duty
b. CST (Central sales tax)
c. VAT (value added tax)
d. Octroi
e. Luxury tax
f. Entertainment tax etc.

WHAT IS CASCADING EFFECT OF TAXES:-

There was cascading effect of taxes due to 'tax on tax'. No credit of excise duty and service tax paid at
the stage of manufacture/ provision of service was available to the consumers while paying the State
level sales tax or VAT and vice-versa. Further, no credit of taxes paid in one State could be availed in
other States. Hence, the prices of goods and services used to get inflated.
Example:
A of Punjab bought raw material worth ₹1000 and manufactured the final product after incurring
expenditure of ₹500 on the goods and sold to B of Haryana after levying excise duty @10% and CST
@2%. B then incurred a value addition of ₹317 and sold it to C of Haryana after levying VAT @ 10%.
Effect when goods are sold by A to B
Raw Material 1000
Add Manufacturing Expenses 500
Total Cost 1500
Add Excise duty @10% 150
Value after excise duty 1650
Add CST @2% 33
Sale Price 1683

Further effect when B sold goods to C

cost of goods for B 1683

 Add Value addition 317
total cost 2000
Add VAT @10% 200
Sale Vale 2,200

Now look at the change if GS is leavy

Effect when goods are sold by A to B
Raw Material 1000
Add Manufacturing Expenses 500
Total Cost 1500
Add IGST @12% 180
Sale Price 1680

Further effect when B sold goods to C

cost of goods for B 1500
Add Value addition 317
total cost 1817
Add CGST @ 6% 109
Add SGST @ 6% 109
Sale Vale 2035

Input Tax credit of IGST will be utilised for payment of CGST and remaining carried forward.

GST Council
GST council is the main decision making body, which is formed to finalized the design of
Goods and Service Tax. It is a Governing body and Union Finance Minister is the chairman of this council, it
also includes the Minister of State (Revenue) and the State Finance / Taxation Ministers. The GST council
will make recommendation on:
I. Taxes, cusses and surcharges to be subsumed under GST
II. Goods and services, which may be taxed to, or exempt from GST;
III. The threshold limit of turnover for application of GST;
IV. Rates of GST;
V. Model GST laws, principles of levy, apportionment if IGST and principles that governs;
VI. The place of supply;
VII. Rates including floor rates with bands of GST
 VIII. Special provisions with respect to the Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand; and other
related matters.

1. Supply Based Tax- GST is applicable on “supply” of goods or services as against the
previous concept of tax on the manufacture of goods or on sale of goods or on provision of services.
2. Destination- Based Consumption Tax- GST is a destination-based tax. This implies that all SGST

(or UTGST) collected will ordinarily accrue to the State (or Union Territory) where the consumer of
the goods or services receives supply.
3. Dual GST- Both Centre and States simultaneously have the power to impose GST across the
entire supply chain.
INTRA STATE AND INTER STATE
Intra-state supply- Centre would levy and collect Central Goods and Services Tax (CGST) and States would
levy and collect the State Goods and Services Tax (SGST) on all supplies within a State.

INTER-STATE SUPPLIES-IGST MECHAN1SM

1. The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on:
2. All inter-State supply of goods and services in India.
3. Inter-state stock transfers of goods.
4. Import of goods/services.
5. Export of goods/services.

The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another.
The inter-State supplier would pay IGST on the supply of his goods and/or services to the Central
Government, which will be collected by the Central Government as IGST.
The importing consumer ( dealer/manufacturer) will claim credit of IGST while discharging his output tax
liability (both CGST and SGST) in his own State. Centre will importing State the credit of IGST used in
payment of GST.
GST applies to all supplies of goods / services (as against manufacture, sale or provision of service) made for
a consideration except:
a. An agriculturist.
b. Exempted goods / services (0% tax).
c. Transactions below threshold limits (20 Lakhs or 10 Lakhs).
d. Goods / services outside the purview of GST -the taxes imposed on the following products will continue as
per the structure before GST implementation.

i. Petroleum crude and four petroleum products (it will come in GST fold later).
ii. Alcoholic liquor for human consumption.
iii. Tobacco

TAX SLABS OF GST:

GST rates will be uniform across the country. Initially, the Government categorized 1211 items under five tax
slabs, i.e., 0%, 5%, 12%, 18% and 28%. The list is not exhaustive. Some of the items also attract cess in
addition to GST at the applicable rates.
Zero rated goods v/s exempted goods
 Zero rated goods Exempted goods
The rate of GST applicable to these goods is The rate of GST is not ZERO but due to
ZERO exemption applicable to these goods the
effective rate is ZERO
The benefit of Input Tax credit paid on input The benefit of Input Tax credit paid on input
is available in case these goods to be setoff is not available in case these goods to be
against output liability of the dealer , if any or setoff against output liability of the dealer i.e
it can be claimed as refund. it will lapse
This scheme is more advantageous to dealers This scheme is less advantageous to dealers

Also, there is similarity between zero rated goods and exempted goods that in both cases the output tax
liability is nil.

EXPORTS
i. Exports are zero-rated goods therefore the rate of GST applicable to these goods is zero.
ii. The benefit of Input tax credit paid on inputs is available in case of these goods to be set off against
output liability of the dealer, if any or it can be claimed as refund.
iii. This scheme is more advantageous to the dealer and the exporters gain significantly due to the
'Zero Rating'.
iv. Supply to SEZ/EOU are also zero-rated.(SEZ- special economic zones , EOU – export oriented
units)

COMPOSITION SCHEME:
 INTRODUCTION: Small taxpayers including and many Small and Medium Enterprises may
find it difficult to have resources and expertise to meet the increased tax compliances under
GST regime, therefore an alternative method is provided to such taxpayers, namely composition
scheme.
 OBJECTIVE: The objective of composition scheme is to bring simplicity and to reduce the
compliance cost for the small taxpayers.
 ELIGIBILITY: A tax payer with an aggregate turnover in a financial year up to Rs. 1.5 crore

may register under composition scheme. (75 lakhs in case of eight special category states).
 OPTIONAL SCHEME: This scheme is optional and not mandatory. The dealer may opt the
scheme considering the merits and demerits of the scheme.
 MERITS:

i. A dealer registered under composition scheme is not required to maintain detailed records
as in the case of a normal taxpayer.
 ii. He shall pay tax as a percentage of his turnover during the year.
iii. Quarterly payment of taxes and filing of annual return instead of monthly compliances.
 DEMERITS:
i. A composition dealer cannot claim the benefit of ITC (Input Tax Credit).
ii. Such a dealer cannot issue a tax invoice as well. A buyer from composition dealer will not
be able to claim inp ut tax on such goods.
iii. A Composition dealer shall not collect any tax from his customers.
 INELIGIBILITY:
i. Tax payers making inter-state supplies.
ii. Persons paying tax on reverse charge basis shall not be eligible for composition schme.
iii. Service providers other than restaurants service.
iv. Dealers having turnover exceeding the limits prescribed in this scheme.
RATES: The rates for this scheme are as follows: irson Ra
t
ate STlCategory of Registered Person Rate of CGST Rate of SGST TOTAL
Manufacturer (other than manufacturers of 0.5% 0.5% 1%
notified goods)
Supplier of food and drinks for human 2.5% 2.5% 5%
consumption (except alcohol)
Other supplies like traders 0.5% 0.5% 1%
Service Providers (other than restaurants) Not eligible for composition scheme

THRESHOLD LIMIT:
Threshold exemption is built into a tax regime to free the small suppliers from compliance cost and effort.
Thus, suppliers below the threshold limit are not required to register or pay tax. Moreover, it is difficult to
administer small traders (suppliers) and cost of administering of such traders (suppliers) is very high in
comparison to the tax paid by them. Under VAT regime, the threshold limits varied from state to state.
Under the system of GST, the threshold limit is as follows:

1. Manipur, Mizoram, Nagaland , Tripura - 10 lakh for both goods and Services .
2. Arunachal Pradesh , Meghalaya, Sikkim, Uttarakhand, Pondicherry, Telangana - - 20 lakh for both
goods and Services .
3. Jammu and Kashmir, Assam, Himachal Pradesh and other all States –
i. 20 lakh for both goods and Services.
ii. 20 lakh for both goods and Services
iii. Supply intra state only Rs 40 lakh , other cases 20 Lakh .

INPUT TAX CREDIT:

The basic concept of GST is based on providing the set-off for the
 tax paid on the inputs used and this is given effect through the
concept of input tax credit. This input tax credit means setting off the amount of input tax by a registered
dealer against the amount of his output tax. The GST is based on the value addition to the goods and the
related tax liability of the dealer can be arrived at by the supplier by discharging input tax credit from tax
collected on supplies during the payment period.

The credit would be permitted to be utilized in the following manner:

1. IGST credit should first be utilized towards payment of IGST.

2. Remaining IGST credit, if any, can be utilized towards payment of CGST and SGST/UTGST in any order
and in any proportion, i.e. remaining ITC of IGST can be utilized —
i. first towards payment of CGST and then towards payment of SGST; or
ii. first towards payment of SGST and then towards payment of CGST; or
towards payment of CGST and SGST simultaneously in any proportion e.g. 50: 50, 30: 70, 40: 60 and so

on.
3. Entire ITC of IGST should be fully utilized before utilizing the ITC of CGST or SGST/UTGST.
4.ITC of CGST should be utilized for payment of CGST and IGST in that order. ITC of CGST cannot be
utilized for payment of SGST/UTGST.
5. ITC of SGST /UTGST should be utilized for payment of SGST/UTGST and IGST in that order. However,
ITC of SGST/UTGST should be utilized for payment of IGST, only after ITC of CGST has been utilized
fully. ITC of SGST/UTGST cannot be utilized for payment of CGST.
The ITC of tax paid on inward supply of goods and/or services used/intended to be used in the course or
furtherance of business by a registered person (receiver)will be allowed subject to the following four
conditions:
1.He is in possession of tax invoice.
2.He has received the goods or services.
3.Tax has been actually paid by supplier to Government.
4. The valid return is filed under section 39.
Time limit for availing ITC- ITC pertaining to a particular FY can be availed by 20 th October of next FY or
filling of annual return , whichever is earlier.
RETURNS:
A return is a document, which is filed by the taxpayer according to law with the tax Administrative
authorities.
HIERARCHY OF UTILISATION OF INPUT TAX CREDIT (ITC) Accounts would be settled periodically
between the Centre and the States to ensure that the credit of SGST used for discharge of IGST is transferred
to the consumer state. Similarly the IGST used for payment of SGST would be transferred by the Centre to
the Importing State. Further the SGST portion of IGST collected on B2C supplies would also be transferred
by the Centre to the destination State. The transfer of funds would be carried out on the basis of information
contained in the Returns filed by the taxpayers. ITC cannot be availed on invoices more than one year old.
The ITC of tax paid on goods and/or services used for making taxable supplies by a taxable person (receiver)
will be allowed subject to four conditions: u He is in possession of tax invoice. u He has received the goods or
services. u Tax has been actually paid by supplier to Government.

ADVANTAGES OF INTRODUCING GST:

For Government and Economy

1. Dual GST:The introduction of GST has marked an end to the scheme of distribution of fiscal
powers envisaged in the Constitution. The dual GST considers taxation of the same taxable event,
i.e., supply of goods and/or services, simultaneously by both the Centre and the States. Therefore,
both Centre and States will have the power to impose GST across the supply chain from the stage
of manufacture/ provision of service (supply) to consumption
2. Effective Administration of Taxation:GST will simplify and the indirect tax regime in the country.
The complexity of the tax structure due to multiplicity of taxes and tax rates will be reduced to a
great extent. This will help in effective administration of taxation system in the country.

3. Increase in Competitiveness of Indian Industry:It is expected to reduce cost of production and

inflation in the economy, thereby making the Indian trade and industry more competitive,
domestically as well as internationally. It is also expected that introduction of GST will foster a
common or seamless Indian market and contribute significantly to the growth of the economy.
 4. Broaden Tax Base:GST will broaden the tax base, and result in better tax compliance due to a robust IT and
online infrastructure, seamless transfer of input tax credit from one stage to another in the entire supply chain
of value addition and decline in number of tax on goods and services.

For Traders and Manufacturers:

1. Easy Compliance:A robust and comprehensive IT system would be the foundation of the GST
regime in India. Therefore, all tax payer services such as Registrations, Returns, Payments, etc.
would be available to the taxpayers online, which would also make compliance easy and
transparent.

2. Uniformity of Tax Rates and Structures:GST will ensure that indirect tax rates and structures are common
across the country, thereby increasing certainty and ease of doing business. In other words, GST would make
doing business in the country tax neutral, irrespective of the choice of place of doing business.
3. Removal of Cascading:A system of seamless tax-credits throughout the entire supply chain, and
across boundaries of States, would ensure that there is no cascading of taxes. This would reduce
hidden costs of doing business.

4. Increase in Competitiveness:The new regime would reduce the cost of locally manufactured goods
and services.this will increase the competitiveness of Indian goods and services in the international
market and give boost to Indian exports. The uniformity in tax rates and procedures across the
country will also go a long way in
reducing the compliance cost.

For Consumers:
1. Reduction in overall Tax Burden:From the consumer point of view, the biggest advantage would
be in terms of a reduction in the overall tax burden on goods and services
2. Simpler Tax System:Life for a common man will get simpler as GST will replace a number of
indirect tax levies. Complexity of taxation will be reduced to a great extent and tax compliance
will become easier and cheaper.

3. Reduction in Prices of Goods & Services due to Elimination of Cascading:In the GST system,
taxes for both Centre and State will be collected at the point of supplies. Both will be charged on
the manufacturing cost or service provision
cost. Also, the credit of GST paid on inputs at every stage of supply
chain would be available for the discharge of GST liability on the
output, thereby ensuring GST is charged only on the component of
value addition at each stage. This would ensure that there is no 'tax on tax' in the country.
4. Uniform Prices: Tackling with the problem of multiplicity of tax rates will help to approach
uniform prices throughout the country.

5. Transparency in Taxation System: Computerisation of the processes of Registration, Payment and

Return to tax payers and maintenance of electronic cash ledger and electronic ITC ledger will
ensure transparency in the taxation system.

6. Increase in Employment opportunities: Augmentation of human resource in the field of

accountancy, taxation and information technology will lead to an increase in employment
opportunities
CHALLENGES:

1. Establishment and upgradation of IT framework:The number of taxpayers is likely to

go up significantly. Also, the process of tracking inter (or intra) State transactions will
be online. The type of clearing house mechanism through GSTN considered in the
dual model GST will handle large volumes of data. For this purpose, the Goods and
Service Tax Network (GSTN) has been set up by the Government to create enabling
environment for smooth introduction and implementation of GST.

2. Meeting Implementation Challenges:The implementation of GST systems and

procedures would not be very lengthy and complex process in a long run. A GST
implementation Advisory Committee has been constituted within CBEC for overall
supervision and monitoring of progress towards implementation of GST.

3. Tax Administration:The Central Board of Excise and Customs (CBEC) and the State
Tax Administrations will be responsible for implementing CGST and SGST
respectively. For implementing dual GST, a robust and integrated tax administration is
required to efficiently track supply of goods and services across the country as also to
precisely account for the taxes. Putting in risk management system will give
meaningful results only when there will be an efficient tax administration.
4. Effective Coordination between Centre & State Tax Administrations:The assignment
of concurrent jurisdiction to the Centre and the States for the levy of GST would
require a unique institutional mechanism that would ensure that decisions about the
structure, design and operation of GST are taken jointly by them. For it to be effective,
such a mechanism also needs to have Constitutional force. There is a need of
harmonization of processes & procedures between CGST / SGST & IGST Law.

5. Training of Officials and Trade & Industry:Until the people from trade and industry
are adequately educated about the laws and procedures related to GST, there is
 possibility of non-compliance and tax evasion. Training / Eamiliarisation of trade
industry on a large scale will also be required.

6. Spreading Accounting and IT Literacy:Augmentation of human resources would be

necessary to handle large taxpayers base in GST scattered all over the country.
Capacity building, particularly in the field of Accountancy and Information
Technology, for the departmental officers has to be taken up in a big way
7. Reorganisation of Audit Procedures:The various rules and procedures of conducting
audit will have to be modified in tune with the GST laws as against the earlier systems
of VAT / Central Excise/Service Tax