1. Highlights Of Model Goods And Service Tax Law GST WELCOME DELEGATES PRESENTED BY CMA S.K.BHATT-CHAIRMAN NIRC of ICAI-CMA, New-Delhi Telefax : 011-22710059, 9971066266 Email : skbmica@gmail.com Web Site : skbhatt.com

2. THE NEED FOR GST We begin by elaborating on the important concept of – cascading effect of taxes. It is also, logically, referred to as “taxes on taxes”. It is simple to illustrate – say A sells goods to B after charging sales tax, and then B re-sells those goods to C after charging sales tax. While B was computing his sales tax liability, he also included the sales tax paid on previous purchase, which is how it becomes a tax on tax.

3. This was the case with the sales tax few years ago. At that time, a VAT system was introduced whereby every next stage dealer used to get credit of the tax paid at earlier stage against his tax liability. This reduced an overall liability of many traders and also helped to reduce inflationary impact this had on the prices. Similar concept came in the duty on manufacture – The Central Excise Duty – much before it came for sales tax. The CENVAT credit scheme (earlier known as MODVAT) was also a welcome move by trade and industry where credit of excise duty paid at the input stages was allowed to be set-off against the liability of excise on removal of goods. With effect from 2004, this system was extended to Service Tax also. Moreover, cross utilisation of credit between excise duty and service tax was also permitted. To a huge extent, the problem of cascading effect of taxes is resolved by these measures.

4. However, there are still problems with the system that have not been solved The credit of Input VAT is available against output VAT. In the same manner, the credit of input excise/service tax is available for set-off against output liability of excise/service tax. However, the credit of VAT is not available against excise and vice versa. VAT is computed on a value which includes excise duty, and no CENVAT credit is allowed for it. This shows that there is a tax on tax!

5. PRESENT SYSTEM OF INDIRECT TAXES The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be charged even after the introduction of GST. Other indirect taxes, such as stamp duties etc shall also continue. India shall adopt a Dual GST model, meaning that the GST would be administered both by the Central and the State Governments. This makes it the first tax of its kind in India!

6. DUAL GST MODEL SGST – State GST, collected by the State Govt. CGST – Central GST, collected by the Central Govt. IGST – Integrated GST, collected by the Central Govt.

7. HOW GST OPERATES?

8. Case 1: Sale in one state, resale in the same state

9. Case 2: Sale in one state, resale in another state

10. Case 3: Sale outside the state, resale in that state

11. POINTS TO PONDER : FOOD FOR THOUGHT Firstly, it is really required that all the states implement the GST together and that too at the same rates. Otherwise, it will be really cumbersome for businesses to comply with the provisions of the law. Further, GST will be very advantageous if the rates are same, because in that case taxes will not be a factor in investment location decisions, and people will be able to focus on profitability.

12. For smooth functioning, it is important that the GST clearly sets out the taxable event. Presently, the CENVAT credit rules, the Point of Taxation Rules are amended/ introduced for this purpose only. However, the rules should be more refined and free from ambiguity. The GST is a destination based tax, not the origin one. In such circumstances, it should be clearly identifiable as to where the goods are going. This shall be difficult in case of services, because it is not easy to identify where a service is provided, thus this should be properly dealt with.

13. The GST framework could easily be one of the most important tax reforms to be tabled for discussion in the parliament. An ideal tax system collects taxes at various stages of production, supply and retail. It is based on the value that the producers, suppliers and retailers individually add to the product. However, the current tax regime is unfairly skewed against most producers. Let's outline and simplify the current system of taxes to see how it operates: Assume there is a soap manufacturer that procures raw materials at 500 lakhs per batch. The manufacturer keeps his operating profits at 100 lakhs and encumbers a processing cost of 50 lakhs. The flow would look something like this:

14. If we calculate the total tax that the producer has to pay in this case, it would be 120 lakhs(50 lakhs on procurement and 70 lakhs on sales). Now if you have a GST framework in place, the total tax that the producer pays is 70 lakhs. How? The producer had initially paid an input tax of 50 lakhs. Now when he goes on to sell his batch for 700 lakhs, he gets a tax credit of 50 lakhs. Thus, he pays 20 lakhs in the form of taxes for the final transaction. This adds up to just 70 lakhs for the producer.

15. The GST hence, reduces the tax burden on producers. The biggest benefit of such a system is that it would contain various indirect taxes currently levied on various participants in the supply chain. Reducing such taxes would lower the overall production cost and increase the output of the economy in the long run.

16. THANK YOU FOR YOUR TIME CMA S.K.BHATT CHAIRMAN NIRC OF ICAI-CMA 09971066266 Web: skbhatt.com