Goods and Service Tax-Allowability of Credit

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Goods and Service Tax means a tax on supply of goods or services, or both, except taxes on supply of alcoholic liquor for human consumption [proposed Article 366(12A) of Constitution of India]. It will be a Destination Based Tax.

There will be no term like trader or provider of Service any more. Everything will get covered under the term “Supply”. Thus, stock transfers, branch transfers will also get covered under GST net.  GST is a tax on goods and services under which every person is liable to pay tax on his output and is entitled to get input tax credit (ITC) on the tax paid on his inputs(therefore a tax on value addition only) and ultimately the final consumer shall bear the tax.

Under GST no distinction is made between goods and services for levying of tax. It will mostly substitute all indirect taxes except the following taxes levied on goods and services by the Central and State governments in India:

I) Customs duty II) Excise duty on Tobacco products III) Specific Cess IV) Taxes on liquor V) Electricity Cess VI) Property tax VII) Toll tax (VIII) Stamp Duty (VIII) Taxes collected by local bodies.

 

PROPOSED GST MODEL

 

The Dual GST model is proposed by the Empowered Committee and accepted by the Centre.  Dual GST Model shall have two components i.e.

  • Central GST
  • State GST

Therefore, a dual structure in India would mean that there would be a Central GST and a State GST, each levied on a comprehensive base comprising both goods and services. Thus, every transaction would attract both taxes. It is also learned that under the proposed GST regime, the Centre will give input tax credit (set off) only for Central GST and the States will give input tax credit (set off) only for State GST. Cross-utilization of credit between Central GST and State GST will not be allowed. However, the dealers could claim set-off within the respective heads. After introduction of GST, all the traders will be paying both the types of taxes i.e. CGST and SGST.

Taxability of sale/service also determines the eligibility of input tax credit, as under:

S. No

Nature of Supply

Availability of Input Tax

1

Taxable Supply

Yes

2

Zero Rated Supply

Yes

3

Exempted Supply

No

 

 

 

 

 

 

Moreover, only the registered dealers would be eligible for input tax credit.

 

 LEVY OF GST ON INTRA-STATE TRANSACTIONS

The dual GST model shall have two components i.e.  Central GST and State GST. Both will be charged on a common base at the rates decided by the GST Council. There will be two parallel Statutes –one at the Centre and the other under the respective State GST Act –governing the tax liability of the same transaction.

Cross utilization of ITC both in case of Inputs and capital goods between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services (i.e. IGST).

 

LEVY OF GST ON INTER-STATE TRANSACTIONS

The existing CST will be discontinued. Instead, a new statute known as IGST will come into place. It will empower the CG to levy and collect the tax on the inter-state transfer of the Goods and Services. Rate of IGST will roughly be equal to the sum of CGST and SGST. Revenue from inter - state transactions will accrue to the Destination state and not to the Origin state.

Supplier in the origin State will charge IGST on Inter State transactions, which will be aggregate of CGST & SGST, i.e., IGST = CGST+SGST. Inter-State Supplier shall use his input CGST and input SGST for payment of IGST, i.e., he shall pay net IGST.

Inter-State Buyer shall avail input tax credit on the basis of tax invoice for payment of his own IGST, CGST or SGST.

Since ITC of SGST shall be allowed, the Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his SGST liability (while supplying the goods and services in state itself). Thereafter, the Centre will transfer to the importing State the credit of IGST used in payment of SGST.

IGST model permits cross-utilization of credit of IGST, CGST & SGST for paying IGST. IGST credit can be utilized for payment of IGST, CGST and SGST in sequence by Importing dealer for supplies made by him.

 

Input Tax Component                           

Output Tax Liability

IGST

CGST

SGST

IGST

CGST

X

SGST

x

 

As per 122nd Constitutional Amendment Bill, it is proposed that Central Government would levy and collect an additional tax at the rate of not more than one percent, in respect of the supply of goods in course of inter-state trade or commerce. The tax is proposed to be levied for a period of 2 years. The additional tax would be collected by the Centre and would be apportioned to the state from where the supply originates. The additional tax would be non- vatable.

 

LEVY OF GST ON EXPORTS

GST on export would be zero rated.

 

LEVY OF GST ON IMPORTS

Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed.  Full and complete set-off will be available on the GST paid on import of goods and services.

 

LEVY OF GST ON BRANCH TRANSFERS

Branch transfers are now taxable under the proposed GST structure and they would be treated like a normal transaction of sale.

 

TREATMENT OF FOLLOWING SPECIFIC GOODS UNDER GST

(I)               TOBACCO PRODUCTS:

Tobacco and its products will be subjected to GST. Simultaneously, Centre will be allowed to levy excise duty on tobacco and its products in addition to i.e. over and above GST.

(II)             ALCOHOLIC LIQUOR FOR HUMAN CONSUMPTION:

It is kept outside the scope of GST. Sales Tax/VAT will continue to be levied on alcoholic liquor as per the existing practice. Excise duty, which is presently being levied by the states, will also not be affected. It would require another Constitutional Amendment whenever brought within ambit.

(III)           PETROLEUM PRODUCTS:

Specified petroleum goods will be brought within the GST ambit from the date as recommended by the GST Council. Until then, Union Excise Duty/VAT will continue to be levied on these goods in the present manner. However, it is stated that these goods will also be subject to GST but at Zero Rate. Following goods have been specified under this category:

i)                 Petroleum products

ii)                High speed diesel

iii)               Motor spirit(commonly known as petrol)

iv)               Natural gas, and

v)                Aviation turbine fuel

 

Now, to understand the concept of Input Credit we will be discussing few illustrations as well:

 

Example 1: Comparison between Multiple Indirect tax laws and proposed one law:

Particulars

Without GST

With GST

 

      (Rs.)                                (Rs.)

Manufacture to Wholesaler:

   

Cost of Production

5,000.00

5,000.00

Add: Profit Margin

2,000.00

2,000.00

Manufacturer Price

7,000.00

7,000.00

Add: Excise Duty @ 12%

840.00

Total Value(a)

7,840.00

7,000.00

Add: VAT @ 12.5%

980.00

Add: CGST @ 12%

840.00

Add: SGST @ 12%

840.00

Invoice Value

8,820.00

8,680.00

 

   

Wholesaler to Retailer:

   

COG to Wholesaler(a)

7,840.00

7,000.00

Add: Profit Margin@10%

784.00

700.00

Total Value(b)

8,624.00

7,700.00

Add: VAT @ 12.5%

1,078.00

Add: CGST @ 12%

924.00

Add: SGST @ 12%

924.00

Invoice Value

9,702.00

9,548.00

     

Retailer to Consumer:

   

COG to Retailer (b)

8,624.00

7,700.00

Add: Profit Margin

862.40

770.00

Total Value(c)

9,486.40

8,470.00

Add: VAT @ 12.5%

1,185.80

Add: CGST @ 12%

1,016.40

Add: SGST @ 12%

1,016.40

Total Price to the Final consumer

10,672.20

10,502.80

 

 

Example 2: Input Tax Credit

Mr. X, a registered dealer had input tax credit in respect of purchase of inputs and capital goods as follows:

CGST Rs.750 and SGST Rs.1050.

He manufactured 1800 liters of finished products. The final product was sold at uniform price of Rs.10 per liter as follows:-

Goods sold within State – 800 liter.

Finished product sold in inter-State sale – 650 liter.

Goods sent on stock transfer to consignment agents outside the State – 350 liter.

Further, CGST and SGST rate on the finished product of dealer is 5% and 7% respectively. Further IGST rate is 12%. Calculate tax liability of SGST and CGST to be paid after tax credit.

 

Solution:

Output Tax Calculation

Particulars

Sales Within State

Stock Transfer Outside State

Inter State Sales

Total

Qty. Sold

800

350

650

 

Price per unit

10

10

10

 

Value of Goods Sold

8,000

3,500

6,500

18,000

Tax Amount:

       

Tax Amount – CGST(5%)

400

400

Tax Amount – SGST(7%)

560

560

Tax Amount – IGST(12%)

420

780

1,200

Calculation of Tax Payable

Particulars

CGST

SGST

IGST

 Total

Tax Payable Amount

400

560

1200

 

Less: Input Tax Credit

     

 

CGST

400

350

750

SGST

560

490

1050

Balance Payable

360

360 

Example 3: Input Tax Credit

Now, continuing with the above example 2, suppose the dealer purchases goods interstate and have input tax credit of IGST available is Rs.2,000/-. Compute the tax payable.

Solution:

Calculation of Tax Payable

Particulars

CGST

SGST

IGST

Total

         

Tax Payable Amount

400

560

1,200

 

Less: Input Tax Credit

       

CGST

 

SGST

 

IGST

400

400

1,200

2000

Balance Payable

160.00

160

 

 

Example 4: Import

Mr. X imported goods for Rs. 10,000/- and incurred expenses to produce final saleable goods. BCD @ 10 % was chargeable on imported goods. These manufactured goods were sold within the state at Rs. 45,000 plus applicable GST. Rate of CGST and SGST is 5% and 7% respectively. Compute Cost, Sale value and tax payable for the transaction.

Solution: Calculation of Net cost of imported goods

Particulars

Amount

(Rs)

Cost of Goods imported

10,000

Add: Basic Customs Duty @ 10%

1,000

Cost of imported goods (including BCD)

11,000

Add: CGST on Import @ 5%

550

Add: SGST on Import @ 7%

770

Cost of imported goods (including BCD & GST) (Note below)

12,320

Calculation of Sale value after import

Particulars

Amount(Rs)

Sale Value (before tax)

45,000

Add: CGST on Import @ 5%

2,250

Add: SGST on Import @ 7%

3,150

Sales Value

50,400

Tax Payable Calculation

Particulars

CGST

SGST

(Rs.)

(Rs.)

Output tax

2,250

3,150

Less: Input tax credit

CGST

550

SGST

770

Net tax payable

1,700

2,380

Note: Please note that GST shall be levied including Basic Customs Duty.

Example 5: Export

Now continuing with the above example 4, suppose the same good is exported after 1 year of use after adding margin and modification amounting Rs.10,000/- and use factor of 1 year for refund calculation is 0.20. Therefore the refund will be 0.80 of Duty amount. Compute Export Value and Refund Value.

Solution: Export Value calculation

Particulars

Amount

(Rs)

Cost of Imported Goods(from above example)

50,400

Add: Margin and Modification Amt.

10,000

Sale Value

60,400

Add: CGST on Export @ 5%

Add: SGST on Export @ 7%

Export Value

60,400

Refund Calculation

Particulars

Amount

 

(Rs)

 

Basic Customs Duty(BCD, from above example)

1,000.00

 

Refund Factor

0.80

 

Refund amount of BCD

800.00

 

Add: CGST(from above example)

550.00

 

Add: SGST(from above example)

770.00

 

Total Refund amount

2,120.00

 

 

CONCLUSION

 

All the shortcomings of the present taxation regime lead us to develop a new system of Taxation for the ease of doing business and for the seamless flow of credit across the whole supply chain. If we have been following some system that is now obsolete for years, it does not mean that we need to continue with it in the fore coming years as well. Friends, I just want my CA fraternity, my friends, my brothers to support this move of the Govt. This is how India will change.

 

The proposed model of GST is criticized on the ground that the GST is fractured due to the compromises. But the compromised model in any case would be better than no model at all. Also the bitter truth is that a compromise often becomes necessary in Federal democracies.

The dual model will be like a joint venture between centre and the 29+ states. In order to make this joint venture successful, one has to take all the states on board with the compromises it entails. Some states might lose revenue after introduction of GST but you cannot hold entire country hostage because of one or two such states. One should keep in mind that an ideally perfect GST has never been practised in any federal democracy.

Every expert was once a beginner. No full proof plan can be developed in a single stroke. Over the years things may come out to be very positive and it’s quite possible that the estimate of only 1-2% rise in GDP might be too low in comparison to the actual growth percentages it may achieve.

Category:
Source/Author: SAMARTH JAIN




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