Introduction to GST

GST (goods and service tax) is a comprehensive tax levy on manufacture,

sale and consumption of goods and service at a national level.
G Goods
S Services
T Tax
GST is a tax on goods and services with value addition at each stage
having comprehensive and continuous chain of set-of benefits from the
producers/ service providers point up to the retailers level where only
the final consumer should bear the tax. Through a tax credit mechanism,
GST is collected on value-added goods and services at each stage of sale
or purchase in the supply chain.
GST is paid on the procurement of goods and services can be set off
against that payable on the supply of goods or services. But being the last
person in the supply chain, the end consumer has to bear this tax and so,
in many respects, GST is like a last-point retail tax.
France was the first country to introduce GST in 1954. Worldwide,
Almost 150 countries have introduced GST in one or the other form since
now. Most of the countries have a unified GST system. Brazil and Canada
follow a dual system vis--vis India is going to introduce. In China, GST
applies only to goods and the provision of repairs, replacement and
processing services.

GST rates of some countries are given below:

Country
Australia
France
Canada
Germany
Japan
Singapore
New Zealand

Rate of GST
10%
19.6%
5%
19%
5%
7%
15%

Basically, GST is a value added tax, levied at all points in the supply
chain with credit allowed for any tax paid on inputs acquired for use in
making the supply. It is indirect tax that brings most of the taxes imposed
on most goods and services, on manufacture, sale and consumption of
goods and services, under a single domain at the national level. It would
apply to both goods and services in a comprehensive manner with
exemptions restricted to a minimum and it is payable at the final point of
consumption.

Need for GST in India

Introduction of a GST to replace the existing multiple tax structures of
Centre and State taxes are not only desirable but imperative in the

emerging economic environment. Increasingly, services are used or

consumed in production and distribution of goods and vice versa.
Separate taxation of goods and services often requires splitting of
transaction values into value of goods and services for taxation, which
leads to greater complexities, administration and compliances costs.
Integration of various taxes into a GST system would make it possible to
give full credit for inputs taxes collected. GST, being a destination-based
consumption tax based on VAT principle, would also greatly help in
removing economic distortions and will help in development of a
common national market.
The implementation of GST will help create a common Indian market
and reduce the cascading effect of tax on the cost of goods and services.
It will impact tax structure, tax incidence, tax computation, credit
utilization and reporting, leading to a complete overhaul of the current
indirect tax system.
GST will have a far-reaching impact on almost all aspects of business
operations in a country, including pricing of products and services; supply
chain optimization; IT, accounting and tax compliance systems. GST is
expected to be a critical reform in spurring growth in the economy. When
introduced, GST will not only make the tax system simpler, but will also
help in increased compliance, boost tax revenues, reduce the tax outflow
in the hands of the consumers and make exports competitive.
It is hoped that the new Government will set forth a roadmap of the GST
implementation in the upcoming Budget. The GST or the Goods and
Service Tax is a long pending indirect tax reform which India has been
waiting for, and which is hoped to iron out the wrinkles in the existing tax

system. This comprehensive tax policy is expected to be one of the most

important reforms in contributing to the India growth story.
The introduction of the GST system is by far the most important tax
reform in India. Consensus and coordination among states is required for
it to succeed. It will affect prices, business processes and investments in
all segments of the economy. It will act as a catalyst for promoting
manufacturing in the country, thereby, supporting the Make in India
program of the Government.
The Government of India is proposing to replace the current complex
structure of multiple indirect taxes in favour of a comprehensive dual
Goods and Services Tax (GST) expected to be implemented from 1 April
2016. GST will be one of the most significant tax reforms in the fiscal
history of India.

Existing taxation system vs. GST

Existing:

Tax is compulsory contribution to state revenue, levied by the

government on workers' income and business profits, or added to the cost
of some goods, services, and transactions.

Direct Taxes:
These types of taxes are directly imposed & paid to Government of India.
There has been a steady rise in the net Direct Tax collections in India over
the years, which is healthy signal. Direct taxes, which are imposed by the
Government of India, are:
Income Tax- Income tax, this tax is mostly known to everyone.
Every individual whose total income exceeds taxable limit has to
pay income tax based on prevailing rates applicable time to time.
By doing investment in certain scheme you can save Income Tax.
For FY 2015-16 Income tax rates are:-

 Wealth tax- A wealth tax (also called a capital tax, equity tax,
or net worth tax) is a levy on the total value of personal assets,
including owner-occupied housing; cash, bank deposits, money
funds, and savings in insurance and pension plans; investment
in real estate and unincorporated businesses; and corporate stock,
financial securities, and personal trusts. Typically liabilities
(primarily mortgages and other loans) are deducted; hence it is
sometimes called a net wealth tax.
A wealth tax taxes the accumulated stock of purchasing power, in
contrast to income tax, which is a tax on the flow of assets.
Capital Gains Tax- Capital Gain tax as name suggests it is tax on
gain in capital. If you sale property, shares, bonds & precious
material etc. and earn profit on it within predefined time frame
you are supposed to pay capital gain tax.
The capital gain is the difference between the money received
from selling the asset and the price paid for it.

Capital gain tax is categorized into short-term gains and longterm gains. The Long-term Capital Gains Tax is charged if the
capital assets are kept for more than certain period 1 year in case
of share and 3 years in case of property. Short-term Capital Gains
Tax is applicable if these assets are held for less than the abovementioned period.

Indirect Taxes:
An indirect tax is a tax collected by an intermediary (such as a retail
store) from the person who bears the ultimate economic burden of the tax
(such as the consumer). The intermediary later files a tax return and
forwards the tax proceeds to government with the return. Some of the
indirect taxes imposed are:
Sales Tax: Sales tax charged on the sales of movable goods. Sale
tax on Inter State sale is charged by Union Government, while
sales tax on intra-State sale (sale within State) (now termed as
VAT) is charged by State Government.
Sales can be broadly classified in three categories. (a) Inter-State
Sale (b) Sale during import/export (c) Intra-State (i.e. within the
State) sale. State Government can impose sales tax only on sale
within the State.
CST is payable on inter-State sales is @ 2%, if C form is
obtained. Even if CST is charged by Union Government, the
revenue goes to State Government. State from which movement

of goods commences gets revenue. CST Act is administered by

State Government.

Service Tax: Most of the paid services you take you have to pay
service tax on those services. This tax is called service tax. Over
the past few years, service tax been expanded to cover new
services.
Few of the major service which comes under vicinity of service
tax are telephone, tour operator, architect, interior decorator,
advertising, beauty parlour, health centre, banking and financial
service, event management, maintenance service, consultancy
service.
Current rate of interest on service tax is 14%. This tax is passed
on to us by service provider.
Value Added Tax: The Sales Tax is the most important source of
revenue of the state governments; every state has their respective
Sales Tax Act. The tax rates are also different for respective
states.
Tax imposed by Central government on sale of goods is called as
Sales tax same is called as Value added tax by state
government.VAT is additional to the price of goods and passed on
to us as buyer (end user). Around 220+ Items are covered with
VAT. VAT rates vary based on nature of item and state.

Government is planning to merge service tax and sales tax in form of

Goods service tax (GST).
Custom duty & Octroi (On Goods): Custom Duty is a type of
indirect tax charged on goods imported into India. One has to pay
this duty, on goods that are imported from a foreign country into
India. This duty is often payable at the port of entry (like the
airport). This duty rate varies based on nature of items.
Octroi is tax applicable on goods entering in to municipality or
any other jurisdiction for use, consumption or sale. In simple
terms one can call it as Entry Tax.
Excise Duty: An excise or excise duty is a type of tax charged on
goods produced within the country. This is opposite to custom
duty which is charged on bringing goods from outside of country.
Another name of this tax is CENVAT (Central Value Added Tax).
If you are producer / manufacturer of goods or you hire labour to
manufacture goods you are liable to pay excise duty.
Entertainment Tax: Tax is also applicable on Entertainment; this
tax is imposed by state government on every financial transaction
that is related to entertainment such as movie tickets, major
commercial shows exhibition, broadcasting service, DTH service
and cable service.
(Indirect taxes)

GST MODEL IN INDIA

Many countries are following single GST. But it is proposed that dual
CST is suitable for federal country like India. The end user, i.e. consumer
cannot recover taxes but a business can recover by claiming input tax
setoff.

DUAL GST
Dual GST means, the proposed model will have two component called
CGST Central goods and service tax for levied by central Govt.
SGST State goods and service tax levied by state Govt.
There would have multiple statute one CGST statute and SGST statute for
every state.

IMPACT OF GST ON AUTOMOBILE

INDUSTRY
POSITIVE
1. Vehicle prices - At present, the excise duty for vehicles is divided
into four slabs, in which the smallest tax rate is applicable to small
cars. With GST implementation, taxes levied by the centre like
excise duty and state levels taxes like sales tax, road and
registration tax would all be subsumed into one.
Assuming that the proposed tax rate of 18-20 percent is accepted,
the vehicle prices are expected to decrease. The vehicle prices are
expected to be more affordable and thus will create demand.
Although it still remains to be seen if there would be a dual tax
structure for small and big cars.

2. 'One Market' - The overall compliance burden is expected to

decrease and bring lot more efficiency in operations. From the
Indirect tax prospective the whole country will be treated as 'One
Market' and will add to operational efficiencies. One could expect
the logjam at checkpost, etc. will get eliminated.
Overall economic activity is expected to increase and we could expect a
better GDP growth that should push demand for vehicle across categories.

NEGATIVE
1. Valuation Disputes - The Automobile industry has seen significant
disputes under central excise valuation like: sale below the cost for
market penetration, inclusion of State Industrial Promotion
Subsidies retained by the manufacturer, deductibility of post-sale
discounts from value under excise, valuation of demo cars,
treatment of PDI charges and other dealer reimbursements,
advertisement charges recovered from dealers etc., and sales
through marketing companies and mutuality of interest. The Model
GST law continues with the concept of 'transaction value' which is
a welcome measure however the powers for rejection of the
transaction value are very wide, and could lead to significant
valuation disputes.

2. Job work - The job work process is the backbone for automobile
industry operations. The Model GST law treats 'job work' as a
service and seeks to maintain existing excise procedures for the job
work transactions, i.e. non-taxability of job work transaction and
providing credits to the principal for supplies to job worker, 180
days condition for bringing back goods after job work, etc.
However, some more clarity is needed in the conceptual framework
for job work else will pose a challenge.
3. Lack of clarity on subsuming of cess - The automotive industry
has witnessed several cesses, including automobile cess, NCCD,
tractor cess and infrastructure cess. In the discussions on GST, the
Government has indicated its intention to subsume all Central and
State cesses into GST. However, on a reading of the Model GST
law and the constitutional amendment bill, it is not clear as to
whether the cesses levied under different legislations (for specified
purposes) will be subsumed into GST or would continue under the
GST scenario.
4. Input Tax Credit - The definition of capital goods has been
drafted on the same lines as the existing CENVAT Credit Rules.
Accordingly, input tax credit will be allowed only of those goods
falling within specified Chapters to the Model GST Law. Further,
the definition of inputs and input services also provides for
exclusions. Therefore, it appears that even under GST, restrictions
on input tax credit will continue. Further, a nexus of goods and
services received is also required to be established with outward
supplies. Accordingly, nexus-related litigation could continue
under GST.