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A Presentation on SALIENT FEATURES OF GOODS & SERVICE TAX (GST) At ByResidential Refresher Course Dr. Sanjiv AgarwalOrganized by ICAI – CMI FCA, FCS,Hosted by Goa Branch of WIRC Jaipur June, 2012
SALIENT FEATURES OF GOODS & SERVICE TAX (GST)This Presentation Covers : • Indian Economy- An overview • Taxonomy of Indian taxation • Present – tax system suffer from • Need for GST • GST- Journey so far • What is GST and its key features • GST- Global perspective • GST- How it works ? • GST - Issues yet to be decided
Indian Economy – An overview• India’s economy is the 11th largest economy in the world and the third largest by purchasing power parity (PPP)• G-20 major economies and a member of BRICS• World is presently facing recession-II but Indian economy is still better than comparable economies.• Agriculture, services and industry are the major sector of India an economy. Contribution of different sectors in March, 2012 was : • Agriculture 19% • Services 59% • Industry 22% to be contd…….
Indian Economy – An overview Agricult ure 19% Service Sector Industry 59% 22% GDP C O MPO SITIO N IN MARC H, 2012
Growth in Tax GDP Ratio – Slow but Steady Years Tax GDP ratio 2003-04 9.2% 2007-08 11.9% 2009-10 9.7% 2010-11 10.3% 2011-12 10.1%
Power to Tax in India• Central Government and the State Governments under Part XI of Indian Constitution have power to levy taxes.• Legislative power v Administrative power• Legislative power has three lists:- Union list, States list and Concurrent list• Administrative power – CBDT, CBEC• Union list consists of 100 items -Parliament has exclusive power to levy Tax.• State list consists of 66 items -Individual states have exclusive authority to levy Tax.• Concurrent list consists of 47 items - both governments can levy tax. to be contd……..
Power to Tax in India• India has a two tier federal power to collect tax – the Union Government, the State Governments including urban/rural local bodies• Presently goods are liable to Vat / Excise / Customs duty while taxable services attract service tax.• Certain transactions subject to both - Vat and Service tax• Efforts to revamp the direct tax structure - New direct tax code (Income Tax Act, 1961 & Wealth Tax Act, 1957 would be scrapped) proposed• Efforts to bring on a single indirect tax – GST proposed
Taxonomy of Indian TaxationTAXATION POWERS OF UNION Income Tax – on income, except agricultural income Excise Duty – on goods manufactured Custom Duty – on imports Service Tax – on specified services Central Sales Tax – on inter-state sale of goods Stamp Duty – on 10 specified instruments To be contd…..
Taxonomy of Indian TaxationTAXATION POWERS OF STATE VAT / Sales Tax - on sale of goods, other than newspapers Stamp Duty - on other than 10 specified instruments Tax - on agricultural income Toll tax - on utilities Other taxes - on Land and buildings Entry of goods in local Area (Entry Tax or Octroi) Consumption or sale of electricity Vehicles Luxuries including taxes on entertainment, Betting and gambling Alcoholic Liquor, Narcotic Drugs and Opium
Present – tax system suffer from Confusion and Mistrust Complex and lacking in stability Hidden tax on exports, no state tax on imports High transaction costs Narrow base High compliance cost To much litigations Lack of harmony and inter state practices Highly corruption
Goods & Service Tax (GST) A Common Tax onGoods Services
Pre-requisites for migrating to a GST regime• Setting up of empowered committee for GST (like VAT) which can steer the road map into action - done• Broaden the tax base for excise duty (presently 40% comes from petroleum products) – being done• Finishing area based and product based exemptions – being done• Rationalization of concessions and exemptions including that on exports – being done• Expanding service tax to almost all services – now proposed• Common/unified tax rate for goods and services which may be ideally, revenue neutral (a suitable GST rate) – dual tax proposed• Avoiding or minimizing differential tax rates – under discussions• Abolition of other small taxes - under discussions• Abolition of CST in a phased manner - being done• Power to levy service tax on select/agreed services to States - under discussions• Issue of inter-State services and goods movement vis-à-vis levy of duty or tax to be sorted out - under discussions• Revenue sharing mechanism to be rationalized - under discussions
GST - Journey so far Feb, 2006 : First time introduced concept of GST and announced the date of its implementation in 2010 Jan. 2007: First GST study by ASSOCHAM released by Dr. Shome Feb. 2007: F.M. Announced introduction of GST from 1 April 2010 in Budget April 2007 : CST phase out started - CST reduced to 3%, currently 1% May 2007: Joint Working Group formed by EC Nov. 2007: Joint Working Group submits report April 2008 : Empowered Committee (EC) finalizes views on GST Structure July 2009: FM announces commitment to bring GST from April 2010 Consultation on interstate services in progress to be contd……
GST - Journey so farBudget 2010 – to achieve the roll out of GST by April 2011 – Revamping of indirect tax administration at centre/ states internal work processes based on use of information technology - massive information technology (IT) platform – project ‘ACES- Automation of Central Excise and Service Tax’ rolled out – rate of service tax retained at ten per cent – states to revamp their internal work processes to be contd……
GST - Journey so farBudget 2011• non-committal on timing and roll out but the Government keen to bring in Constitutional Amendment Bill• overall amendments targeted towards moving close to harmonize with GST regime in future• major highlights of budget discussions/proposals on GST – DTC and GST to mark a water shed Decisions on GST to be taken in concert with the states Areas of divergence between centre and states narrowed Constitutional Amendment Bill likely to be introduced in current session Drafting of model legislation for central and state GST underway Establishment of IT infrastructure in process (GST network) NSDL selected as technology partner for GST Tax rates maintained at same level of 10% to stay on course towards ST Certain central excise rates changed to prepare the ground for transition to GST by reducing number of exemptions Nominal central excise duty of 1% imposed on 130 items, no Cenvat credit allowed on such items. • In service tax, proposals aim to achieve a close fit between the present service tax regime and GST.
GST - Journey so farBudget 2012• No announcement on GST rollout date• GST to be implemented in consultation with the States at the earliest• GST network (GSTN) likely to be in place from August, 2012• GSTN will implement common PAN based registration, return filing and processing of payments for centre and all states on a shared platform.• Bringing closer of Service Tax and Central Excise for transition to GST• Drafting of modal legislation for CGST and SGST under progress.• Common forms for Service Tax and Central Excise registration and return proposed.• Place of Supply Rules, 2012 to trigger debate to assess issues that may arise in taxation of inter state services for eventual launch of GST.
The Journey – beginning of end Past Now FuturePast Now FutureNational GST Dual GST ???????
GST today – Need & Advantages• As a developing country, India needs a transparent & unambiguous tax structure• A complex tax structure with multiple rates of taxes• Multiple taxes across the supply chain• High transaction cost in the hands of the tax payers• Increased tax collections due to wider tax base and better compliance• Improvement in international cost competitiveness of indigenous goods and services.• Enhancement in efficiency in manufacture and distribution due to economies of scale• GST encourages an unbiased tax structure that is neutral to business processes, business models, organization structure, product substitutes and geographical locations• Helping as a weapon against corruption• GST operates on a negative list i.e. all goods and services are subject to GST unless specifically exempted
GST today – Need & Advantages• Nature of complexities i.e. classification to valuation regarding taxability, exist in the present structure. Some of such burning issues are: Excise on MRP Excise, VAT and Service Tax on Software, VAT & Service tax on: • Works Contracts • Right to Use • Composite Contracts such as AMC transactions to be contd…..
GST today – Need & Advantages• Tax cascading effect – Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government – being phased out now Real estate transactions are outside the scope of both VAT and CENVAT Exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs
What is GST• GST is a comprehensive value added tax on goods and services• It is collected on value added at each stage of sale or purchase in the supply chain• No differentiation between Goods and Services as GST is levied at each stage in the supply chain• Seamless input tax credit throughout the supply chain• At all stages of production and distribution, taxes are a pass through and tax is borne by the final consumer• All sectors are taxed with very few exceptions / exemptions• Full tax credits on inputs – 100 % set off• In most countries, a single VAT exists which covers both goods and services.• Typically it is a single rate VAT but two - three rate VAT systems are also prevalent – India will be following multi rate / multi tier tax• Canada and Brazil alone have a dual VAT• Standard GST rate in most countries range between 15-20 percent• GST exists in over 140 countries .
GST : P roposed Key Features Dual GST : Central GST & State GST Destination based State GST Common Base Uniform Classification Uniform Forms – Returns, Challans ( in electronic mode) No cascading of Central and State taxes Cross credit between Centre and State not allowed Tax levied from production to consumption to be contd……..
GST : P roposed Key Features HSN to be applied for goods One Common return for both Central and State GST Uniform collection procedure for central and state GST 13 digit PAN based Common TIN registration TINXSYS ( Tax Information Exchange System) to track transactions States to collect CGST for SSI < 150 L and transfer to Central Government Balance of Fiscal Autonomy to Center and States and need for Harmonization
Goods & Service Tax - GST• GST is expected to be more efficient system of taxation• Boost to the revenues of the Centre and states Years Excise Service Tax2000-01 68,282 2,6122010-11 1,37,427 70,3912011-12 1,50,600 95,0002012-13 (target) 1,94,350 1,24,000
Taxes proposed to be subsumed in GSTCentral Taxes – Excise Duty – Additional Excise duty – Excise duty under medicinal and toilet preparation Act – Service Tax – Additional Custom duty commonly k nown as countervailing duty (CVD), special additional duty( SAD) – Surcharge – CessState Taxes – Value added tax (VAT) – Entertainment tax levied by states – Luxury Tax – Tax on Lottery, betting and gambling – Entry tax other than for local bodies – State surcharge Cess / to be contd…..
Taxes proposed to be subsumed inGST State governments still not have consensus on following taxes to be subsumed in GST – • Purchase tax • Octroi duty • Tax on alcoholic beverages (country liquor / IMFL) • Tax on petroleum products • Tax on tobacco items
GST- WHAT ALL IT WILL INCLUDE• A sale or supply includes a sale of goods• Lease of premises• Hire of equipment• Giving advice• Export of goods and supply of other things.• A purchase includes an acquisition of goods or services such as trading stock a lease, consumables and other things.
GST : Global Perspective• More than 140 countries have introduced GST.• It has been a part of the tax landscape in Europe for the past 50 years.• It is fast becoming the preferred form of indirect tax in the Asia- Pacific region.• It is interesting to note that there are over 40 models of GST currently in force, each with its own peculiarities.• While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions.• In China, GST applies only to goods and the provision of repairs, replacement and processing services.• It is only recoverable on goods used in the production process, and GST on fixed assets is not recoverable.• There is a separate business tax in the form of VAT. to be contd…..
GST : Global Perspective• Goods and Services Tax in Canada • GST is a multi-level value added tax introduced on January 1, 1991. • The GST replaced a hidden 13.5% Manufacturers’ Sales Tax (MST). • As of May 18th, 2010, the GST rate is 5% and some goods & services are exempt from GST zero-rated goods & services • Model has helped the Canada’s economy to be more efficient and competitive• Goods and Services Tax in Japan • In Japan, VAT or GST is known as Consumption Tax (CT) introduced in January 1989. • It requires re-calculation and payments to the tax authorities at each transaction point in the onward sales chain. • The Japanese Consumption Tax rate is currently 5% and out of which 4% is national levy and 1% regional levy. • There is an annual threshold of YEN 10 million, based on the base year of two years prior to the tax year. to be contd…..
GST : Global PerspectiveGoods and Services Tax in Australia • Consumption tax is called Value Added Tax. • GST provisions are set out in a piece of Legislation called the ‘A New Tax System (Goods and Service Tax) Act 1999’ and the GST was implemented on 11th July, 2000. • GST@10% will be charged on most goods and services consumed in Australia. • All imported goods are assigned a tariff classification obtained from the Australian Customs Tariff which determines the rate of duty will pay for the product. • GST is not intended to apply to goods and services which are exported from Australia and there are specific provisions in the GST law designed to make exports GST-free. to be contd…..
GST : Global Perspective• Goods and Services Tax in Brazil • Brazil was the first country to adopt GST system. • Brazil has adopted a dual GST where the tax is levied by both the central and the provincial governments. • GST rate is 20 %.
GST- CAN WE ADOPT IT• An information network allowing states to cross-check payment information (TINXSYS) has been put to trial and is expected to improve compliance and reduce evasion.• What is needed is an IT system like the Tax Information Network (TIN), where the TDS or the VAT credit is recorded in a central database.• Paper bills and fraud to be largely eliminated.• Obligations to be fulfilled by IT System – Registration Return Current status of the system Refund Tax Deposition• GSTN to be operational by August, 2012
Features of Dual GST Model– Dual levy – by Centre & States– Various taxes that get subsumed in GST– Manner of Implementation Dual Chain vis a vis Single Chain Inter-chain VAT ability Inter State VAT ability– Items included in each chain– Dual rates of taxation
Key Features of CreditMechanism• CGST can be set off against CGST• SGST can be set off against SGST• CGST cannot be used for set off against SGST and vice versa.
Seamless Credit Mechanism• Input tax credit to be available for Central GST as well as State GST paid irrespective of the collecting agency• Create a nationwide clearinghouse mechanism to facilitate transfer of Central and State GST and allow credit for tax paid
Seamless Credit Mechanism• It will also end the distortion in differential tax treatment of various goods and services.• GST is going to be pinnacle of achieving an integration of excise duties, service tax, State value added tax and other local taxes.• With GST, uniformity of levy of indirect taxes will be ensured across the country.
Central GST (CGST)• levied by the Centre through a separate statute on all transactions of goods and services made for a consideration.• Exceptions would be exempted goods and services, goods kept out of GST and transactions below prescribed threshold limits.• CGST would be levied across the value chain.• Rates for CGST would be prescribed appropriately reflecting revenue considerations and acceptability.
State GST (SGST)• Levied by the States through statute on all transactions of goods and services made for a consideration.• Exceptions would be exempted goods and services, goods kept out of GST and transactions below prescribed threshold limits.• Basic features of law such as chargeability, taxable event, measure, valuation, classification would be uniform across these Statutes as far as practicable.• State GST would be paid to the accounts of the respective State.
Inter-state Transactions• Centre would levy IGST which would be CGST + SGST.• IGST would be levied on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.• Inter-State dealer will pay IGST after adjusting available, IGST, CGST and SGST on purchases.
IGST• The seller in State - A will pay the IGST to the Centre.• While paying IGST the seller will adjust against available credit of IGST, CGST and SGST.• State Government - A will have to transfer the credit of SGST used by the seller for payment of IGST to the Centre. To be cont.
IGST• Buyer in State - B can avail credit of the IGST charged.• Buyer in State - B can use the IGST to discharge output tax liability in his own State.• Centre has to transfer credit of IGST used for payment of SGST to State Government - B. .
IGST – ILLUSTRATION• Maharashtra seller selling to Karnataka buyer for Rs.1,00,000/-.• IGST payable assuming an 8% rate is Rs.8,000/-.• Rs.8,000/- can be paid by adjusting – Inter-State purchases (IGST) Rs.3,000/- – Local purchases (CGST) Rs.1,500/- – Local purchases (SGST) Rs.1,500/-• Since dealer has used SGST of Maharashtra to the extent of Rs.1,500/-, Centre has to transfer Rs.1,500/- to Maharashtra Government.
IGST – ILLUSTRATION• IGST of Rs.8,000/- is availed as credit by Karnataka buyer.• Karnataka dealer sells the goods at Rs.2,00,000/- attracting CGST of say Rs.16,000/- and SGST of Rs.16,000/-.• If IGST of Rs.8,000/- is used to pay the SGST then Karnataka Government has to transfer Rs.8,000/- to the Centre.
Taxing of Inter State Transactions Tax Payment by exporting dealer to the account of receiving state Credit allowed to the buying dealer by receiving state on verification Retention by receiving state on sale to non-dealer Declaration form to be discontinued
Knowing more about GST• We all will pay GST on every product or service we buy/ consume• All indirect taxes levied by the States and the Centre will be merged into one GST, we would exactly know how much tax we pay which at present is difficult to understand.• No distinction would be made between imported or Indian goods and they would be taxed at the same rate.• The sellers or service providers collect the tax from their customer.• Before depositing the same to the exchequer, they deduct the tax they have already paid.• The success of GST would rest upon efficiency, equity and simplicity.
GST- How It Works• Dealers will charge GST on the price of goods and services.• Claim credits (CENVAT) on purchases of goods and services.• collect the tax from their customer, and deduct the tax already paid.
Imports sh ould be taxed?• Dual GST should be levied on imports also with facility of credit for the tax paid• Exports must be zero rated i.e. there should be no tax element in the price of goods exported
Tax Exemptions• Area Based To be discontinued after current eligibility period• Product Based To be converted in to refund route• Limited Flexibility To Centre & States barring few exceptions
GST- It’s System Invoice System• In this system, the credit of GST paid is claimed on the basis of invoice.• It is claimed when the invoice is received.• It is immaterial whether payment is made or not.• The GST (Output) is accounted for when invoice is raised.• The time of receipt of payment is immaterial.• The advantage of invoice system is that the input credit can be claimed without making the payment.• The disadvantage of the invoice system is that the GST has to be paid without receiving the payment.
GST - Challenges• Rapid increase in assessee• Place of supply even after place of supply rules• Legislative challenge• Effective credit mechanism• IT Infrastructure
Issues from Trader’s Perspective• Dialogue with Trade & Industry and all other stake holders• Industrial inputs, Capital goods to be at lower rate• List of exempted goods – specific/common across states• Stock transfers should be exempted monitors through system based controls
Issues from Industry’s Perspective• All declaration forms (Form F, C) should be abolished• Monitoring through system based controls• Full set-off of Input tax credit to the assessee / entity, based on principle of business cost and expenditure• Immediate credit of stock transfers, without one-to-one co-relation.• Set-off should be on entity / concern basis.• Refunds, if any, should be automatic through system based controls.
Issues From Industry’s Perspective• Multiple state jurisdictions.• Full set-off : a question mark• Building of IT backbone• Uniform legislation, forms, rules, rates, compliance requirements.• Any change post implementation should be uniform by all states not piecemeal.• Bar on increase in rates, imposition of new taxes by states
Issues Yet To Be Decided• Constitutional amendment authorizing state to collect and retain tax on services.• Integration of certain Central & State taxes (Various Cess, Electricity duty, Entertainment tax etc)• Stock transfers• Road permits and check posts to be contd….
Issues Yet To Be Decided• Taxation of inter-state services and their method of taxation Difficulties in defining Place of supply, place of delivery Group Health Insurance Consulting services However most of the B2B services not a problem because of availability of credit Disputes even with regard to classification of goods Jurisdictional Issues with regard to registration and SCN / Assessments
Favorable Impact o n Industry Seamless credit to trade and industry throughout supply chain will improve competitiveness Common Tax Base will eliminate tax cascading CST phase-out will reduce supply chain cost Economy in production scale & efficiency in distribution Simplified structure to reduce transaction cost
GST - HumorBusiness Man: Sir do you really think that ‘negative list of services’ is a milestone in the road towards GST ?CA: Well…..I think it is not a milestone, it seems to be a Pavement to the GST road.Business Man: Not understood Sir ……!!CA: I mean the negative list has a capacity to exist along with Centre- state disconnects on the services to be covered there under which are partially forming part of the GST disconnects.Business Man: Sir………I still could not understand anything.CA: OK….I will tell you in your language…….states asked for35 services to be included in the negative list….correct?Business Man: Yes Sir.Business CA: And Government kept only 17 services in the list and have not included therein many services specified by the states. correct? to be contd…….
GST - HumorBusiness Man: Yes Sir.CA: Now Empowered Committee of states is saying that their demand was not taken into consideration and negative list will lead to double taxation and litigation….correct?Business Man: Yes Sir.CA: So the negative list of services when implemented will Complement the Centre -States contended road to GST, and can fit in as pavement along with that road whenever it comes into existence….Understood??Business Man: No Sir……..I mean. Yes Sir……I mean I will think over it…and am sure that I will understand!!!
THANK YOU FOR YOUR PRECIOUS TIME AND ATTENTION Dr. Sanjiv Agarwal FCA, FCS, Jaipur email@example.com@gmail.com