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Indian GST – Between extremes…

Short of saying “GST will make integration of all Indian rivers possible,” we have heard many hypes about the Goods and Services Tax Act. But then some numbers are hard to digest.

Indian GST – Between extremes…

Social media says, “Pharmaceuticals industry’s profit will go up by 3.24162 per cent(!)”  And ‘observers’ remark with killing jargons, “B2B transactions will have a moderate impact.  However, B2C sales will become costly.  Intra-state transactions will be revenue neutral while Inter-State sales will become auto corrected.” Blah. Blah. And blah.

Let’s try to simplify the story to the extent we can.


The current situation...


In a transaction, indirect taxes are the taxes collected by one party and remitted to the state.  The Central government can tax certain transactions, while the state government can tax certain other transactions. To make matters worse, the same transaction ‘may’ have a component taxable by state and another by central government.  For example: if you check your air conditioned restaurant bill, you will see state government’s VAT, as well as Central government’s Service Tax.


GST In India

We shall have three kinds of GST

i)    State Goods and Service Tax (SGST)

ii)  Central Goods and Service Tax (CGST)

iii) Integrated Goods and Service Tax (IGST)

The proposed SGST will subsume all the existing state taxes like State Value Added Tax, Octroi, Luxury Tax, Betting Gambling Tax, Entertainment Tax, Motor Vehicle Entry Tax, etc.  SGST will be levied on supplies of goods or services within a particular state.  In other words, if the buyer and seller of any goods or services are within the same state, SGST will be levied on a supply of any such good or service.

The proposed CGST will subsume existing taxes like Central Excise duty, Countervailing Duty, Special Additional Duty, Service Tax, Swachh Bharat Cess, Krishi Kalyan Cess, etc., CGST will be levied on supplies of goods or services within a particular state itself.  In other words, if the buyer and supplier of any goods or services are within the same state, CGST will be levied on the supply of any such good or service.

Yes, there will be two taxes on the same transaction hereafter too.  Your Restaurant Bill will have SGST and CGST. A manufacturer will have SGST and CGST on his invoice. But the departure from the past is that instead of having dozens of taxes, there will be only two and these will be standardised throughout India in such manner that you will not have ‘state wise’ interpretation and tax levies. There is a third charge, IGST too. This is not a separate levy as such though technically this is a distinct tax.  Let’s understand with a simple explanation.

Notice that the SGST and CGST are levied on the supply of goods or service within the same state.  If supply happens from one state to another, IGST will be imposed.  In other words, if  Mr. Chennai, Tamil Nadu sells ten litres of paint to Ms. Chengalpattu, Tamil Nadu,   SGST at (say) 12 per cent and CGST at (say) 10 per cent are applicable.  If ten litres of paint is sold by Mr Chennai, Tamil Nadu, to

Ms Pune, Maharashtra then single IGST (of course, 10 per cent + 12 per cent = 22 per cent) is applicable thereon.  Hence, IGST is just a variant of two-tier GST only.  


GST Input Tax Credit


Input Tax Credit is a mechanism in which tax paid by a supplier in the process of purchasing his inputs can be set off against his outward tax liability arising on his supply to others. If a tax system allows Input Tax Credit seamlessly, tax on tax does not happen.

Consider a furniture manufacturer who has an operation model as follows –

•    Cut wood purchased (paying Value Added Tax within same state)

•    Glue and quality rubber bushes purchased [paying CST in an Inter-state transaction.  Also, the glue or bush manufacturer would have charged excise duty)

•    When purchased for workplace at certain cities, goods reach city point [paying Entry Tax to city corporation]

•    Unique designs bought [paying Service Tax]

These are the expenses with various tax costs.  He sells the manufactured furniture.  He has to collect Central Excise Duty and Value Added Tax from the buyer of the furniture.  While paying such VAT, at best he can avail VAT paid on cut woods; while paying Central Excise Duty he can avail Service Tax paid on designing charges.

What then happens to the CST paid by him on glue or rubber bush? What about the Excise Duty charged by a manufacturer who supplied to supplier of our furniture manufacturer? And what about Entry Tax paid?

Well, all these will become costs, and the furniture manufacturer will treat these taxes as his purchase cost and accordingly increase his sale price to the customer.  If the sale price is increased, the related tax on sale price increases too (tax on tax).


What is the change when GST takes effect?  


Input credit arising due to most of the SGST payments already made by a supplier while he made purchases, are available as GST Input Tax Credit while discharging SGST dues of a vendor.  Please remember, in proposed GST environment SGST subsumes a considerable number of state / local authority taxes.  Similarly, most of the existing Central government taxes are to be subsumed in CGST.  Naturally, major part of CGST payments already made by a supplier while he made purchases, are available as GST Input Tax Credit while discharging CGST dues of a vendor.     If IGST credit is available, inter-state transaction related IGST dues can be reduced.  Also, IGST credits are available to meet SGST and CGST dues also.

There are some check points. SGST credit can be used against SGST dues only.  CGST Credits can be utilized against CGST only. Further, unlike an Ideal GST, Indian GST will allow only restricted GST credits only.


Input Tax Credit chain should be unbroken


A GST system will be tenable only when the Input Tax Credit chain remains intact.  

Considers this example. A supplies goods to B.  In turn, with some profit, B provides to C.  Then, C sells to D. In this chain A should report in his electronic return about his supply to B. Only then B can claim credit through his electronic return. Ditto for C and D.

If B fails to furnish data, A’s GST return will cause mismatch alert from GST officer! If C fails to record his supply to D, D’s GST return will create mismatch alert from GST officer! Hence, if the GST is introduced without restriction as to GST credits, every supplier will act as Quasi GST officer to point out non-reporting by his peer!  


What is the impact of GST on prices?


The GST rate (CGST + SGST) ‘may’ be 20 to 22 per cent.

GST input credit system supported by state of art IT data base is going to be flawless.  Accordingly all these days, several paid taxes were not available as credit to suppliers to the tune of several lakhs of crores of rupees.  Now, Indian GST will correct this to some reasonable extent.

First compliance will increase and later the price will come down. This is because instead of ‘Theory of Honesty’, ‘Law of Profit’ will take precedence. Let me explain:

If a tax evader wants to be out of GST regime, he should find out tax evading supplier and tax evading buyer who in turn should find his tax evading buyer.  In practice, the situation mentioned above is quite difficult.  No prudent businessman would like to forego credit amount of 20 per cent-22 per cent and indulge in risky GST evasion.

All these days, honest suppliers have felt that cost of honesty had been quite high.  Hereafter, the cost of non-compliance will be quite high comparing to that of compliance.  

When compliance increases the rate of tax would come down over a period, say a decade. When reported transaction increases, black money will lose its importance and perhaps in five decades, will die away.

So, let us come back to the famous unanswered question: Whether GST is right or wrong? The answer: Ideal GST is certainly excellent.  Proposed Indian GST is Good.

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