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GST Laws, Rules & Rates

Goods & service Tax (GST)

The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by The President of India post its passage in the Parliament (Rajya Sabha on 3 August 2016 and Lok Sabha on 8 August 2016) and ratification by more than 50 percent of state legislatures. The Government of India is committed to replace all the indirect taxes levied on goods and services by the Centre and States and implement GST by April 2017.

India is on the fast track to usher in the Goods and Services Tax (GST).

GST is intended to remove inefficiencies in the supply chain due to breakage of credit chain and cascading effect of taxes. It will subsume a plethora of indirect taxes presently levied at the central and state level in India. GST envisages a common national market for goods and services and removal of trade barriers. GST will have impact on supply chain, value additions and pricing of final outputs. Thus, businesses will have to examine transaction restructuring, supply chain optimization, business processes, training enterprise personnel, book keeping and making changes in the IT infrastructure so that they are GST ready.

The model GST law as proposed, adopts many aspects of the existing indirect taxes sought to be subsumed - Excise, Service tax and VAT. Transition to the new tax regime will require businesses to plan properly, taking into account existing issues as also understanding the issues likely to arise.

With GST, it is anticipated that the tax base will be comprehensive, as virtually all goods and services will be taxable, with minimum exemptions.

GST will be a game changing reform for the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, 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 the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.

Goods and Services Tax would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. This method allows GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity. Taxable goods and services are not distinguished from one another and are taxed at a single rate in a supply chain till the goods or services reach the consumer. Administrative responsibility would generally rest with a single authority to levy tax on goods and services. Exports would be zero-rated and imports would be levied the same taxes as domestic goods and services adhering to the destination principle.

The introduction of Goods and Services Tax (GST) would be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax should lead to easier administration and enforcement. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%, free movement of goods from one state to another without stopping at state borders for hours for payment of state tax or entry tax and reduction in paperwork to a large extent.

What changes there would be if India launches GST- “The tax rate under GST may be nominal or zero rated for the time being. It has been proposed to insulate the revenues of the States from the impact of GST, with the expectation that in due course, GST will be levied on petroleum and petroleum products.” The central government has assured states of compensation for any revenue losses incurred by them from the date of introduction of GST for a period of five years.

Are You Ready For GST

GST would bring in significant change in doing business in India. Advocacy for best practices, gearing up for changes in processes, training teams and developing IT systems for being GST compliant are the key areas to be assessed.

The Government is committed to introduce GST by April 2017. Tax payers need to be GST compliant to be able to test system changes in time. Depending on the operating geographies, size and sector, the changes would be substantial and may require proactive planning with a time-bound action plan.

In order to prepare for the implementation of GST, companies need to understand GST policy development and its implications for scenario planning and transition roadmap preparation.

Impact of GST on your business

Sourcing Inter-state procurement could prove viable
May open opportunities to consolidate suppliers/vendors
Additional duty/CVD and Special Additional duty components of customs duty to be replaced
Distribution Changes in tax system could warrant changes in both procurement and distribution arrangements
Current arrangements for distribution of finished goods may no longer be optimal with the removal of the concept of excise duty on manufacturing
Current network structure and product flows may need review and possible alteration
Pricing and profitability Tax savings resulting from the GST structure would require repricing of products
Margins or price mark-ups would also need to be re-examined
Cash flow Removal of the concept of excise duty on manufacturing could result in improvement in cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory
System changes and transaction management Potential changes to accounting and IT systems in areas of master data, supply chain transactions, system design Existing open transactions and balances as on the cut-off date need to be migrated out to ensure smooth transition to GST Changes to supply chain reports (e.g., purchase register, sales register, services register), other tax reports and forms (e.g., invoices, purchase orders) need review
Appropriate measures such as training of employees, compliance under GST, customer education, and tracking of inventory credit are needed to ensure smooth transition to the GST regime

The key imperatives for companies are:

  • Understand key areas of impact in their business
  • Prepare different scenarios for the design and application of GST
  • Continually track policy development regarding GST and update prepared scenarios
  • Identify any areas of adverse impact and prepare contingency measures
  • Identify issues and concerns requiring representation to authorities and develop a strategy for effective advocacy

More on GST

  • A GST Council consisting of representatives from the Centre as well as State will be formed within 60 days of the enactment of the Bill. The Council will make recommendations to the Union and the States on model Goods & Service tax laws, rates including floor rates with bands of goods & service tax,, Place of Supply rules and any other matter relating to GST as the Council may decide.
  • Reports of Joint Committee constituted by Empowered Committee of the State Finance Ministers on business processes of payment, registration refund and return under GST have been released and put in the public domain for suggestions.
  • The draft model GST Law was released and put in public domain in June 2016.
  • GST Network, an IT backbone of GST, which will facilitate online registration, tax payment and return filing, will be launched.
  • States will frame their respective GST Legislations to enable them to implement GST. It will be in line with the Central GST Legislation.

Salient features of the proposed Indian GST System

  • The power to make laws in respect of supplies in the course of inter-state trade or commerce will be vested only in the Union Government. States will have the right to levy GST on intra-state transactions, including on services.
  • The Centre will levy IGST on inter-state supply of goods and services. Import of goods will be subject to basic customs duty and IGST.
  • GST is defined as any tax on supply of goods and services other than on alcohol for human consumption.
  • Central taxes such as Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty and Special Additional duty as well as state-level taxes such as VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax and Octroi will subsume in GST.
  • Petroleum and petroleum products, i.e., crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas, shall be subject to GST - date to be notified by the GST Council.
  • Provision will be made for removing imposition of entry tax /Octroi across India.
  • Entertainment tax,, imposed by states on movie, theatre, etc., will be subsumed in GST, but taxes on entertainment at panchayat, municipality or district level will continue.
  • GST may be levied on the sale of newspapers and advertisements. This would mean substantial incremental revenues for the Government.
  • Stamp duties, typically imposed on legal agreements by states, will continue to be levied.
  • Administration of GST will be the responsibility of the GST Council, which will be the apex policy making body for GST. Members of GST Council comprise Central and State ministers in charge of the finance portfolio.

Understanding GST

In keeping with the federal structure of India, it is proposed that GST will be levied concurrently by the Centre (CGST) and the states (SGST). It is expected that the base and other essential design features would be common between CGST and SGST across SGSTs for individual states. Both CGST and SGST would be levied on the basis of the destination principle. Thus, exports would be zero-rated, and imports would attract tax in the same manner as domestic goods and services. Inter-state supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the destination State).

In addition to the IGST, in respect of supply of goods, an additional tax of up to 1% has been proposed to be levied by the Centre. Revenue from this tax is to be assigned to origin states. This tax is proposed to be levied for the first two years or a longer period, as recommended by the GST Council.

Benefits of GST

GST has been envisaged as an efficient tax system, neutral in its application and distributionally attractive. The advantages of GST are:

  • Wider tax base, necessary for lowering tax rates and eliminating classification disputes
  • Elimination of multiplicity of taxes and their cascading effects
  • Rationalization of tax structure and simplification of compliance procedures
  • Harmonization of center and state tax administrations, which would reduce duplication and compliance costs
  • Automation of compliance procedures to reduce errors and increase efficiency

Taxes to be subsumed

GST would replace most indirect taxes currently in place such as:

Central Taxes State Taxes
  • Central Excise Duty [including additional excise duties, excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955]
  • Service tax
  • Additional Customs Duty (CVD)
  • Special Additional Duty of Customs (SAD)
  • Central Sales Tax ( levied by the Centre and collected by the States)
  • Central surcharges and cesses ( relating to supply of goods and services)
  • Value-added tax
  • Octroi and Entry tax
  • Purchase tax
  • Luxury tax
  • Taxes on lottery, betting and gambling
  • State cesses and surcharges
  • Entertainment tax (other than the tax levied by the local bodies)
  • Central Sales tax ( levied by the Centre and collected by states)
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