Pranay Bafna & Co.

GST is a huge reform for indirect taxation in India, the likes of which the country has not seen post-Independence. GST had simplified indirect taxation, reduce complexities, and remove the cascading effect.

Comprehensive:

GST had subsumed all of the current indirect taxes. Plus, by bringing in a unified taxation system, across the country, it will ensure that there is no more arbitrariness in tax rates.

Multi-stage:

GST is levied each stage in the supply chain, where a transaction takes place.

Value-addition:

This is the process of addition to the value of a product/ service at each stage of its production, exclusive of initial costs. Under GST, the tax is levied only on the value added.

Destination-based consumption:

Unlike the traditional indirect taxes, GST is collected at the point of consumption. The taxing authority with appropriate jurisdiction in the place where the goods/ services are finally consumed will collect the tax.

For example: Let’s say that cotton garments are being shipped from Karnataka to Maharashtra. Karnataka is the producer state and Maharashtra is the consumer state. Tax revenue under GST will go to Maharashtra.

Let’s understand how this will impact imports and exports. Exports are not taxable, because the place of consumption is outside India. Imports are taxable, because the place of consumption is in India.

The tax on imported goods will therefore be just the same as domestically-produced goods. Thus, the export industry will become more competitive when compared to its international peers. Also, domestic goods will be protected by making imports at par with domestic goods.

What is SGST, CGST and IGST?

Suppose goods worth INR 10,000 are sold by manufacturer A in Maharashtra to Dealer B in Maharashtra. B resells them to trader C in Rajasthan for INR 17,500. Trader C finally sells to end user D in Rajasthan for INR 30,000.

Suppose CGST= 9%, SGST=9%. Then, IGST= 9+9=18%

Since A is selling this to B in Maharashtra itself, it is an in-tra-state sale and both CGST and SGST will apply, at the rate of 9% each.

B (Maharashtra) is selling to C (Rajasthan). Since it is an inter- state sale, IGST at the rate of 18% will apply.

C (Rajasthan) is selling to D also in Rajasthan. Once again it is an intra-state sale and both CGST and SGST will apply, at the rate of 9% each.

*** Any IGST credit will first be applied to set off IGST then CGST. Balance will be applied to setoff SGST.

Since, GST is a consumption-based tax, i.e., the state where the goods were consumed will collect GST. By that logic, Maharashtra (where goods were sold) should not get any taxes.

Rajasthan and Central both should have got (30,000 * 9%) = 2,700 each instead of only 2,250.

Maharashtra (exporting state) will transfer to the Centre the credit of SGST of INR 900 used in payment of IGST.

The Centre will transfer to Rajasthan (importing state) INR 450 as IGST credit used.

**Note: Custom duties are not part of this tax structure.