The dual goods and services tax (GST) is fundamentally different from the existing indirect tax regime. This article explains how it is so with the help of arithmetical and diagrammatic illustrations. These illustrations are limited to the manner of taxation of goods both intra-state and inter-state, under the GST.
Taxation of intra-state supplies of goods
The discussion paper envisages the applicability of the dual GST comprising a Central Goods and Services Tax (CGST) as also a State Goods and Services Tax (SGST) that would apply on every transaction of goods. A two-rate SGST structure is proposed for goods. The two-rate structure will comprise a standard rate which would typically apply for most goods and a lower rate which would apply to a limited list of eligible goods. A similar structure is expected at the Centre as well. Input CGST will be available to offset output CGST and input SGST will be available to offset output SGST. Further, one of the key objectives of GST has been to avoid the cascading effect of taxes.
Given all of the above parameters, the following example illustrates the current indirect taxes levied on sale of goods and also how it is proposed to be done in GST.
The aforesaid example assumes that a manufacturer sells his product to a wholesaler at a base price of 100 and that the value addition by the wholesaler and the retailer is 20 each.
It can be seen that in the present tax structure, the excise duty is charged only at the manufacturing stage and not thereafter. Also, the value added tax (VAT) that is charged is inclusive of the excise duty as well and, hence, there is cascading. Assuming the excise duty and VAT at the typical rates of 8.24 per cent (including surcharge) and 12.5 per cent, respectively, the cum tax price to the end customer is 167.
As against this, under the dual GST model, there is no cascading of taxes. Also, the excise duty is replaced by the Central GST, which is assumed at 8 per cent and the Central GST is now applicable throughout the supply chain. The State GST is also assumed to be at 8 per cent and is also applicable throughout the chain. It is in this manner, therefore, that the dual GST will operate in parallel throughout the supply chain with input tax offset against CGST and the SGST, respectively, with no cross utilisation.
Taxation of inter-state supplies of goods
In relation to the taxation of inter-state supplies of goods, an innovative model of Integrated GST (IGST) has been recommended. IGST will apply on all inter-state supplies and will be collected by the Centre alone. IGST will, in turn, be the aggregate of CGST and IGST. The inter-state seller is able to utilise IGST, CGST and SGST input tax credits to discharge the output IGST, as above.
In turn, the inter-state purchaser will be able to utilise IGST so charged to him by the seller, towards payment of his output SGST on his onward intra-state supplies. The exporting state will remit to the Centre the quantum of the input SGST used by the seller in offsetting the output IGST. The Centre will remit to the importing state the quantum of IGST used by the purchaser in that state to offset his output SGST. Besides, the Centre will also remit the SGST component of the IGST to the importing state. These payments will be effected by the Centre through a clearing house mechanism.
The IGST model is explained below with the help of an example. The assumptions are:
* Dealer in state-1 sells goods of value 100 to a dealer in state-2. On the inter-state invoice generated by dealer in state-1, IGST would be charged (which will be the aggregate of CGST and SGST);
* The dealer in state-1 can utilise the input tax credits of IGST, CGST and SGST in that order for the payment of output IGST;
* Since the output IGST is 16, and available input tax credit is 14, the dealer in state-1 will be required to pay only 2 as cash;
* The credit of input SGST utilised by the dealer in state-1 for the payment of output IGST will be transferred to the central government by state-1;
* Dealer in state-2 makes a intra-state sale with a value addition of 50;
* The value of goods on the intra-state invoice will be 150;
* Both CGST and state-2 GST will be levied by the dealer;
* For discharge of the output CGST and SGST by the dealer in state-2, he would utilise the credit of input IGST, CGST and SGST, again in that order;
* The input IGST credit utilised by the dealer in state-2 for the payment of output SGST would be transferred by the Centre to state-2;
The IGST will have the following advantages, as enunciated in the Discussion Paper:
* Maintains an uninterrupted chain of ITC claims on inter-state transactions
* No upfront payment of tax and blockage of funds for the inter-state dealer
* No refunds in the exporting state as the inputs are used up in paying output taxes.
* It is a self-policing model
* The requirement of computerisation is limited to the central agency. The inter-state dealers will only require access to PC and internet connectivity.
* There will be no requirement of road check posts
The IGST model appears to be an elegant and business friendly model to tax inter-state supplies of goods.
Supported by Anita Rastogi
S Madhavan is Leader (Indirect Tax Practice), PricewaterhouseCoopers. Anita Rastogi is Principal Consultant, PricewaterhouseCoopers
Email: pwctls.nd@in.pwc.com
