Through my previous article I had initiated a series about understanding Goods and Service Tax (GST) from the business as well as consumers point of view. To summarise in a nutshell GST will be a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level under which no distinction will be made between goods and services for levying of tax. It will mostly substitute all indirect taxes levied on goods and services by the Central and State governments such as Excise duty, Service Tax, VAT etc and is aimed to eliminate the cascading effect of taxes on production and distribution cost of goods and services and thereby improve the competitiveness of original goods and services market.
Its pertinent to remember that GST will be levied by both Central as well the State government ie Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) for transactions within the same state, conversely GST will be collected only by the central government in the form of Integrated Goods And Service Tax (IGST) if the transaction involves parties from different states. My earlier covered the mechanism of collection and setoff of GST for transactions within the same state, moving ahead let’s look at some more aspects of GST using illustrations.
Sale in one state resale in another
For example if a refrigerator worth Rs 30,000 is sold by a distributor based in Siolim to a wholesaler in Benaulim, since the sale is within the same state ie Goa; the distributor from Siolim will collect both SGST and CGST from the wholesaler in Benaulim. For illustration sake let’s say the GST rate is 20% ie SGST 10% and CGST 10%. The Siolim distributor will collect a total output tax of Rs 6,000 (10% SGST on Rs 30,000 plus 10% CGST on Rs 30,000) and this total tax of Rs 6,000 (Rs 3,000 SGST and Rs 3,000 CGST) paid on purchases by the wholesaler in Benaulim will be taken as his Input Tax Credit. Subsequently this wholesaler from Benaulim sells the respective refrigerator to a retailer in Karwar (Karnataka state) after adding his respective margin of say 10% for Rs 33,000. Since this sale is to a party outside Goa the wholesaler shall now levy Integrated Goods and Service Tax (IGST) @ 20% and there by collect Rs 6,600 from the retailer in Karwar. However while depositing GST with the government he shall first setoff input credit on purchases paid earlier to the distributor ie Rs 3,000 CGST and Rs 3,000 SGST and pay the difference of only Rs 600. which means that both input taxes are taken as input credit to claim setoff.
Current scenario
If we compare this with current structure of indirect taxation, such a transaction involving parties between two different states would have attracted Value Added Tax (VAT) collected by the dealer from the exporting state along with Central Sales Tax (CST) collected on behalf of the Central government by the same dealer. Unlike GST neither the VAT nor the CST paid by the buyer is allowed as input credit and hence is not available for setoff towards the payment of his subsequent tax liability in case of further sale made by him. Therefore it is apparent that in the absence of a setoff mechanism, the tax paid by the buyer of the importing state will add to his cost of purchase and will eventually lead to cascading effect ie tax on tax paid by the end consumer.
When VAT was introduced back in 2005, it was based on the same premise that tax credit in respect of VAT paid would be available for all transactions on which VAT was charged, thereby making the whole country a unified market place, not distinguishing between intra state and interstate sales. It’s been more than a decade since this tax reform was implemented. But unlike what was promised at the time of its introduction no input credit is available for setoffs for VAT paid on interstate sales. One only hopes that GST is implemented in the same letter and spirit as is promised. Only then will be a win-win situation for all the stake holders be it the government, business enterprise or the eventual consumer.
