Understanding Goods and Service tax
The taxation system in India is composed of various taxes on different activities and governed by various Tax Laws and Regulations. The taxes are levied on various types of activities such as manufacturing, trading, services, imports etc., In indirect tax structure the ultimate bearer of tax is not the person, who is paying the tax but the end users or customers who are using various products and services. The Indirect Tax Structure includes following taxes;
Miscellaneous Taxes: includes
1. Entry Tax
3. Luxury Tax
4. CST etc.
The Indirect Taxes has contributed more than 34% in total revenue of India during financial year 2014-15.
Revenue tax collection , Interim budget 2014 15
Budget 2014-15 (interim) Sources - Tax Revenue projected (figures in crores) Amount Percentage Amount Total Budgeted expenditure 100% 17,63,214 Corporate tax 4,51,005 26% Income Tax 3,06,466 17% Service tax 2,15,478 12% Customs 2,01,314 11% Union Excise duties 2,00,585 11% Taxes on union territories 3,401 Wealth tax 950 Total tax receipts 13,79,199 78% Less 1.State’s share 3,87,732 2.Contignency fund 5,050 22% Net tax revenue 9,8,6417 56% Non tax revenue 1,80,714 10% Total revenue receipts 11,67,131 66% 11,67,131 Deficit 34% 5,96,083
PROBLEMS IN PRESENT INDIRECT TAX STRUCTURE;
Taxes Central Excise, Service Tax, VAT etc., is levied by the Central and State Governments are multistage value added taxes. Before introduction of VAT in Sales Tax and CENVAT in Central Excise and Service Tax, the tax system is very complex and has cascading effect. The product or services are taxed on various stages or destinations. The tax levied at one destination is also be taxed on another destination. In recent past there is much significant progress in the taxation scenario, which not only improved the tax structure by using new and improved technologies. Many changes held on taxation front such as single point sale has been replaced by Value Added Tax, service tax has been introduced by the Central Government. In Central Excise government has introduced CEVAT by allowing set off taxes paid on inputs, while producing output products. The introduction of VAT System in India is a progressive step towards implementation of Goods and Services Tax in India. There are some deficiencies in the Current System of Taxation.
- The CENVAT (Excise Duty) is levied on the products manufacturer or produced in India. But there are various definitions related to manufacture and various ruling given by the courts. There are also various disputes regarding valuation of products. The issue related to the applicability of CENVAT (Excise Duty) only at manufacturing level, which is an impediment to an efficient and neutral flow o tax credit. Various countries have replaced VAT system by implementing GST.
- The Constitution of India has bifurcated the power of taxation between Central Government and the State Government. The State Government has power to levied taxes on all matters or items falling under State List. Now in case of Service Tax the Central Government has power to levy tax on Services but in case of Work Contracts the State Government also has power to levy tax. This type of system creates difficulties and disputes in revenue generation and distribution.
- The distinctions between goods and services are getting closer due to improvement in technology and innovation. The copyrights, patents, software etc., are not considered as goods and falling under domain of State Government. So the goods are getting colours of services and their classification becomes more complicated by the tax authorities. Let us consider an example in case of Leasing of Equipments, without transfer of machinery and control to the lessee, would this be taxable as Service or Sale. There are various cases, where disputes raised in present taxation scenario.
- The Service Sector is growing rapidly and Central has exclusive power to levy tax on services. The State Government is losing its revenue by not levying tax of services under the State.
- There is some shortcoming in CENVAT system of Government of India is because of non-inclusion of several central taxes in the overall framework of CENVAT. Many taxes such as Additional Customs Duty, Surcharge etc., are not included in CENVAT System. There are various services such as Oil, Gas Production, Mining, Agriculture, Wholesale and Retail Trade, Real Estate Construction has been kept out of range of CENVAT Credit. These taxes are included in the output services and products are producing cascading effects. In VAT system also various taxes such as Entry tax, Octroi, Luxury Tax, Entertainment tax are kept outside of VAT Scheme.
- In case of CST on Inter State Sales, no set off is allowed, which also increase cascading effect.
- The Central and State Government are using new and modern technologies to administer the taxes, but more improvement required. The present system, the dispute resolution system is complex and more time and money consuming. These difficulties should be addressed.
- There are various tax forms and returns are required to be filed related to various duties under various taxation laws and rules. These returns are complex and lengthy, and these should be simplified.
- There is lack of cross verification of returns filed under various State as well as Central Taxation Rules and there are different in detailed filed by the assessed by paying Central and State taxes simultaneously.
- At present there are more than fifteen taxes under Indirect Tax System. All these taxes are of different rates and required to be filed through different forms and returns.
- The State Government are levying Entry Tax and Octroi and compliance to it are time consuming. The transporters are required to wait more than four hours on border of a state, while entering in other state.
- The tax structure in India is complex and burden sum. There are various definitions of the same transaction in different States as well as Central Laws. These should be addressed.
WHAT IS GOODS AND SERVICES TAX;
The Goods and Services Tax, Globally known as VAT or GST is levied on “Taxable Supply”. Since India is a federal country, it has central as well as State as its participants. The GST also has two components such as CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax), these are levied by Central and State respectively and these are applied on both, whether it is Goods or Services. These taxes are levied on each stage and benefit of taxes paid on previous stage will be given as input credit. The credit of taxes paid on input is available in case of CGST, whether the transaction is Inter State or Intra State. But there are restrictions that CGST input can be claimed from CGST output only and same SGST input can be set off against output SGST. In case of interstate transactions a combined CGST and SGST is levied in the form of IGST ( Integrated Goods and Services Tax) and same will be available for setoff to both CGST and SGST.
GST and INDIA;
The introduction of GST to replace the existing multiple tax structure of Central and State taxes is not only desirable but imperative in the emerging economic environment. The GST will bring harmonisation in indirect taxation system in India. In GST , both the cascading effect of CENVAT and Service Tax are removed with setoff , and a continuous chain of setoff from the original producers’ point and service providers’ point up to retailers’ level would be established. In GST taxes are levied on single point as against on multiple stages in present taxation system. This will bring more transparency and administration of taxes.
India is emerging as a manufacturing hub and our economy is more globalized now. There are various trade agreements, treaties have been signed by India in various parts of the world. The Indian companies are spreading their area of operation in all over the world. There is demand of free import all over the world. So we need a simple and single nationwide taxation system, to empower our trade and industries to compete with International traders.
Now we can achieve following goals by implementing GST;
- It will reduce cascading effect of taxes;
- Compliance cost will reduce;
- Few numbers of rates;
- Time saving due to call of Entry, Octroi taxes;
- Reduction of corruption;
- Simplification of tax collection and administration;
- Lower burden of taxes on end consumers;
- Give edge to the industry on their foreign competitors;
- Easy flow of resources across the country;
- Reduction in inflation;
- Widening tax base and tax collection of Central as well as States
HISTORICAL BACKGROUD OF GST;
France is the first country in the world, which has implemented GST in 1954. In India Finance Ministry has placed 122nd Constitution Amendment Bill in Lok Sabha in 19th December, 2014. The Government of India has appointed various committees, task force to give their views to introduce a vibrant and modern Indirect Tax Structure in India, some of views are ;
- Dr. Amaresh Baghchi Report, 1994 suggests that the introduction of “ Value Added Tax (VAT) ‘ will act as root for implementation of Goods and Services Tax in India
- Dr. Ashim Dasgupta, 2000 empowered committee, which introduces VAT System in 2005, which has replaced old age taxation system in India.
- Mr. Vijay Kelkar Task Force 2004, it strongly recommended that the integration of indirect taxes into the form of GST in India.
- Announcement of GST to be implemented by 1st April, 2010 after successfully implementation of VAT system in India and suggestion of various committees and task forces on GST, the Union Government first time in Union Budget 2006-07 announced that the GST would be applicable from 1st April, 2010.
- The government has formed various Joint Working Groups of state finance ministers to study the impact of GST on the revenue of various States.
- The empowered committees of State Finance Ministers after various meetings reached on amicable formula for implementation of GST in India.
- Task force of Finance Ministers has submitted their report in December, 2009 on structure of GST in India.
- Government of India has issued first discussion paper in November, 2009.
- Constitution (115th Amendment) Bill introduced on 22nd March, 2011 and same was referred to Parliamentary Standing Committee on Finance for discussion.
- Finance Minister in his speech announced that the GST will be rolled out by April, 2011.
- Constitution (122nd Amendment) Bill introduced in the Parliament in December, 2014; since 115th Amendment Bill has been lapsed due completion of parliamentary terms. The Government of India has introduced Constitution (122nd Amendment) Bill on 19th December, 2014 the Lok Sabha has passed the bill on 6th May, 2015 but Bill is pending in Rajya Sabha.
- Till date the bill is pending in Rajya Sabha and we urge our politicians to pass the same in the interest of nation.
PROPOSED GOODS AND SERVICE TAX MODEL IN INDIA;
In the proposed GST model, there will be no distinction between Goods and Services for the purpose of taxation because common legislation is applicable to both Goods and Services. This duel GST model would be implemented through various statues. CGST would be implemented through Central Statue and SGST would be State Statue for each state and there will be a separate Statute for Inter State Supply of Goods and Services i.e. IGST (Integrated Goods and Services). The CGST will in the accounts of Central Government and SGST in the accounts of State Government. Bit IGST has both CGST and SGST components and in this case also CGST will go to Central and SGST will go with State governments.
FOLLOWING TAXES TO BE SUBSUMMED UNDER GST;
- Central Excise Duty;
- Additional Excise Duty;
- The Excise duty levied under Medicinal and Toiletries Preparation Act;
- Service Tax;
- Additional Custom Duty (CVD);
- Special Additional Duty of Custom(SAD);
- Surcharges and;
- VAT/Sales Tax;
- Entertainment Tax;
- Luxury Tax;
- Taxes on Lottery, gambling and betting;
- State levy and surcharges
- Entry tax (not in lieu of Octroi);
SUPPLY OF GOODS AND SERVICES UNDER GST
As explained above GST will be collected on each point of supply of Goods and Services by giving credit facilities of taxes paid on inputs used in supply of Goods and Services.
Meaning of Supply of Goods and Services;
Article 366(12A) has been amended through 122nd Constitutional Amendment Bill, 2014 to define GST as
“Goods and service tax” means any tax on supply of goods, or services or both except taxes on supply of the alcoholic liquor for human consumption.
Article 366(26A) defines service as “Services” means anything other than goods.
Let’s consider definitions from other countries;
The Australian New Tax System (Goods and Services Tax) Act, 1999 defined the meaning of Supply; Section 9.10 of Division 9 of Part 2-2
- A supply is any form of supply whatsoever.
- Without limiting subsection(1), supply includes any of these;
- A Supply of goods;
- A Supply of Services;
- A provision of advise or information;
- A grant, assignment or surrender of real property;
- A creation ,grant, transfer, assignment or surrender of any right;
- A financial supply;
- An entry into, or release from , an obligation;
- To do anything; or
- To refrain from an act; or
- To tolerate an act or situation
- Any combination of any 2 or more of the matters referred to in paragraphs (a) to (g)
Note: the above definition does not include a supply of money unless the money is provided as consideration for a supply that is supply of money.
- It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.
Section 4 of the Malaysian GST, 2014 defines “Supply” as;
“Supply” means all forms of Supply, including supply of imported services, done for a consideration and anything which is not a supply of goods but is done for a consideration is a supply of services.
- Matters to be treated as supply of goods or a supply of services shall be specified in the First Schedule.
- Matters to be treated as neither supply of goods not a supply of services shall be specified in the Second Schedule.
- The minister may, by order published in the gazette, amend the First Schedule and Second Schedule.
- Any order made under sub section (4) shall be laid before the Dewan Rakyat.
Section 10 of the Singapore’s Goods and Services Tax Act, 1993 defines;
- The Second Schedule shall apply for determination what is, or is to be treated as, a supply of goods or supply of services.
- Subject to any provisions made by the Second Schedule and to orders made under subsection (3)-
- “Supply” in this Act includes all forms of supply, but not anything done otherwise than for a consideration;
- Anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of Services.
- The Minister may by order amend the Second Schedule and may also provide by order with respect to any description of transaction-
- That it is to be treated as a supply of goods and not as a supply of services;
- That it is to be treated as a supply of services and not as a supply of goods; or
- That it is to be treated as neither a supply of goods not a supply of services,
And without prejudice to the foregoing , such an order may provide that paragraphs 5(3) of the Second schedule is not to apply, in relation to goods of any prescribed description used or made available for use in prescribed circumstances, so as to make that a supply of services under that paragraphs.
- For the purposes of this section , where goods are manufactured or produced from any other goods, those other goods shall be treated as incorporated in the first mentioned goods.
From above some definitions and various papers, drafts and suggestions of various business bodied, we have came to the conclusion that a transaction should have following ingredients to be taxed in GST;
- Supply must be against a “ Consideration”;
- Supply be ‘ in the course of business or furtherance of business;
- Transaction must be either supply of goods or a supply of services;
- Supply should be by a taxable person; and
- Supply of goods or services should be a taxable supply.
Note: in case of some transactions we cannot find all ingredients of supplies, such as in case of Interstate Stock Transfer, supply of samples, gifts or self supplied etc., now in these cases, we shall consider these supply as deemed to be supply for GST purpose.
Meaning of “Supply of Goods”; this term has been defined in different ways by various GST legislations, the 122nd Constitution Amendment Bill, 2014 also does not define its meaning.
Article 10 of the VAT Code of the European Union Sixth Directive defines as; “ Supply of Goods” means the transfer of right to dispose of tangible property as an owner.
This means that transfer of both i.e. the title of any goods and possession thereof, or control over the goods. Now let’s understand definitions of Title, Possession and Control;
Title: Title is defined as the owenership of real property or personal property, which stands against the right of anyone else to claim the property. In case of real property the title is evidenced by Deeds, Agreements or other records.
Possession: means ownership, control or occupancy of a thing such as land, personal property by a person.
Control: means power to direct, manage, oversee and/or restrict the affairs or assets of a person or entity.
Meaning of Supply of Services;
Same as “Supply of Goods” the Supply of Services also does not have unique or similar definitions in all legislations implemented all over the world.
Article 18 of the VAT Code of the European Union Sixth Directive defines as;
“Supply of Services” means any transaction which does not constitute a supply of goods within the meaning of this code.
The UK VAT has also been adopted definition of EU for “Supply of Services”;
“Supply of Services” means anything that is not a supply of goods, but is done for consideration.
The Article 366(26A) of the Constitution of India as amended through 122nd Constitution Amendment Bill, 2014 defines; “Supply of Services” means anything other than goods.
Now discussion paper 2009 proposed the definition of “ Supply of Services” means a supply which is not a supply of goods, but which is done for a consideration’( including ,if so done, the granting, assignment or surrender of any right).
Following Transactions will also be included in the definitions of “Supply of Services”;
- Grant, assignment or surrender of right.
- Hire/Purchase of immovable property.
- Right to enter any property.
- Assignment of intangible property.
- Obligation to refrain from an act etc.
VALUATION OF SUPPLY OF GOODS AND SERVICES UNDER GST
Goods and Service Tax (GST) will be levied on taxable supply of goods and services. GST will be levied on value addition on each stage of supply of goods and services by allowing setoff facilities at each stage to avoid double taxation. GST is the demand of the country. The Central Government is very serious in this regard and we hope that it will be enforced after 1st April, 2016. The GST wills benefits all stakeholders and ease of doing business in India.
As we know GST is applicable on taxable supply of goods or services, and to be taxed under GST requires various ingredients. The most important ingredient is “Consideration.”
Anything received reciprocally for the supply of goods or services or both, can be termed as consideration. The consideration may be in any form in terms of money, payment through credit card, internet banking, payment in kind, payment in money or partly in kind etc.
PAYMENT OF CONSIDERATION THROUGH MONEY;
- Payment in cash;
- Payment through Credit Card or Debit Card;
- Payment through Electronic means
PAYMENT NOT RECEIVED IN MONEY;
1. Barter arrangements;
2. Exchange of Services;
Example: suppose a caterer has supplied his services to a Chartered Accountants birthday and in exchange CA will file caterers return free of cost.
3. Condition imposed upon the making of the supply
Example: Lets us consider a pharmacy company agreed to supply medicine to the dealer at discount of @20% on condition that the dealer will provide a separate self at his shop for the products of Pharmacy Company. The dealers in this case supply non monitory services by providing separate self to the pharmacy company.
CONSIDERATION RECEIVED PARTLY IN MONEY;
In this case consideration against supply of goods or services or both is received partly in form of money and partly in kind.
Example: consider Mr. A wish to sale his car for Rs. 80,000 and Mr. B wants to buy that car for his business purpose. Mr. B put proposal before Mr. A to buy car for Rs. 70,000 and paint the house of Mr. A. Not in this case Rs. 10,000 will be paid through supply of services in kind.
VALUATION RULES FOR SUPPLY OF GOODS AND SERVICES;
Some rules have been framed for valuation of supply of goods or services or both for GST purpose. These rules are;
- General Valuation Rules ; and
- Special Valuation Rules
GENERAL VALUATION RULES;
These rules can be applied in cases, where supply of goods or services or both will be made against consideration wholly in terms of money or cash. Thus the consideration for supply will be equal to value of supply of goods or services or both and GST on the supply.
Consideration = Value of Supply + GST
Consideration=Value of Supply + [(Value of Supply)* GST rate]
SPECIAL VALUATION RULES; this rule is applicable when;
- The consideration received is not in money;
When consideration against supply of goods or services or both is received not in money, then the value of supply will be taken as Open Market Value less GST applicable.
Value of Supply= Open Market Value (of supply of goods or services or both)-GST (on OMV)
Example 1; Let us consider Sonu sold his cycle to Monu for Rs. 2200. Now in exchange Monu gave his mobile phone to Sonu. Lets us consider the GST rate on mobile phones is @20% and market rate of mobile at that time was Rs. 2400.
Value of cycle= Rs. 2400-(Rs.2400*20/120)=Rs.2400-Rs400=Rs.2000
- Lets us consider grosser shopkeeper has supplied goods to a CA costing Rs. 22000, now in return CA has filed his returns and provided taxation services to the shopkeeper. Now the value of taxation services in open market will be Rs. 30,000 and GST rate is @20%. Now the valuation will be
Valuation of tax opinion=Rs. 30,000-Rs. 30,000*20/100=Rs. 25,000
- Special Valuation Rules for the supply in which consideration is received partly in money and partly in kind;
In this case the valuation of supply will be taken as aggregate of;
- To the extent of consideration which is received in money for the supply or goods or services , the amount of money; and
- To the extent of consideration is received in kind i.e., not in money for the supply of goods or services, the Open Market Value of the consideration which is received in kind.
Consideration=Monitory Portion+ OMV of the consideration in kind
Value of Supply=Consideration –GST on consideration
Example: lets us consider in exchange offer a shopkeeper sold to Mr. A, a wardrobe of Rs.10000. Now Mr. A has paid Rs.6000 in cash and return to chairs to the shopkeeper. The Open Market Value of chairs is Rs 4000 and rate of GST applicable is @20%
Consideration of wardrod= Rs. 6000+ Open Market Value of 2 chairs=Rs. 6000+ Rs.4000=Rs.10000
GST Portion=Rs. 10000*20/120=Rs. 1667.
Value of Supply of Goods=Rs. 10000-Rs. 1667=Rs 8333
Valuation of Imported Services;
In this case the consideration paid for such supply will be treated as the value of supply of imported services.
Example: Lets us consider A Ltd., is a company registered in Singapore supplying services to B Limited in India for development of a township. The cost of services is Rs. 20 Lakhs. The project comprises 40% commercial properties and rest residential. Not GST rate on commercial properties is @10%.
Value of supply of Services= Consideration paid=Rs. 20,00,000
Percentage of taxable supply= 40% *Rs.20,00,000=Rs. 8,00,000
GST to be paid=Rs.8,00,000*10%=Rs. 80,000
Valuation of Imported Goods;
The value of supply of imported goods will be determined as per the Customs Act. The valuation rules prescribed in the Customs Act will be used as a base for determination of value of imported goods. The GST rate will be applied on the sum total of custom value of imported goods and the import duty paid thereon.
Example: A Ltd. has imported chemicals from Sudan for a custom value of Rs. 800000. The rate of custom duty is @30%. It has provided export exemption on import duty @50% and applicable rate of GST is @20%.
The value on which GST is chargeable;
Custom value= Rs. 8,00,000
Custom duty=30 %( exemption50%) = (Rs.8, 00,000*30%)*50%=Rs. 1, 20,000
Total Value for GST=Rs. 8, 00,000+ Rs. 1, 20,000=Rs. 9, 20,000
GST =20%* Rs. 9, 20, 0000=Rs. 1, 84,000
Valuation for Discount;
In this case the value of supply of goods will be determined as original price charged for the goods net of discount offered and the GST will be charged on the value of goods so arrived.
Example: Lets us consider a manufacture supplied some goods to Mr. A on the condition that Mr. A will receive discount @10% if he will pay consideration within specified period. Now the value of goods supplied was Rs. 50,000. Mr. A is allowed to pay the same in five equal instalments plus GST. He has to pay on the last day of every month for five months to get the discount. The GST rate applicable is @20%.
The original value of supply of goods=Rs. 50,000
Discount received on prompt payment=3*10%*Rs.10000=Rs.3000
Actual Value of Supply of goods=Rs. 50,000-Rs. 3000=Rs. 47000
GST to be paid=Rs. 47000*20%=Rs. 9400
REVENUE NEUTRAL RATE UNDER GST REGIME
Revenue Neutral Rate is an important concept in GST regime, as per Law Lexicon Dictionary by P. Ramanath Aiyar “Changes in the tax law which result in the same amount of overall total revenue”. There will no increase or decrease in the revenue of government after giving or providing any setoff/deductions/rebate to the tax payers. Suppose if government has given some tax rebate to the individuals by increasing tax rate on corporations. The tax rebate on individuals will be compensated against the tax on corporations. The net collection for the government will be same as before giving rebate to the individuals.
Now in the context of GST, Revenue Neutral Rate is the rate at which tax revenue of the Central Government and State Government will remain the same under proposed GST as is under the present Indirect Tax structure in India.
The RNR is treated as a factor which will keep the revenue of governments under GST regime same as in Indirect Tax Structure applicable in India.
Example: let us consider an example suppose in state A people’s expenditure the whole year is Rs. 2,00,000 Crore, now to collect Rs. 20,000 Crores as taxes the Government levied tax @10%. When due to some compulsions the government provides exemption to the tune of Rs. 40,000 Cores on expenditure to the people. Then to collect Rs. 20, 0000 Crores, the government will charge @16% instead of @10% earlier. Now in this case rate @16% will be Revenue Neutral Rate.
The Kelkar Task Force Report has suggested the RNR rate will be @20%, which will be divided between Centre and State at the rate of @12% and @8% respectively. But this rate is very high as compared to other countries where GST is applicable. These countries have applied GST on all types of transactions without giving exemptions. They have expended the base of GST keeping rate low @3% in Singapore and @10% in New Zealand.
Now in India it is difficult to decide RNR due to various exemptions and threshold limit provided in different states by state as well as central governments.
Factors Influencing RNR:
- Threshold Limit: Is a quantum of turnover below which firms, manufactures, traders, dealers or service providers got the privilege not to register/pay tax under respective statue. We can say that threshold limit is that quantum of turnover below which any dealer, manufacture, trader or service provider in not bound to register with statutory authorities and pay taxes.
Central Government has provided threshold limit in case of Central Excise up to Rs.1.50 Crore and Rs. 10.00 Lakhs in case of Service Tax. The State Governments also has provided threshold limits in VAT due to political pressure or welfare regime in the state.
As we know if the threshold limit is lower in a tax regime, then to achieve the same amount of tax, one has to increase tax rate on the taxable quantum. The low threshold limit enables government to lower rate of tax. But when we are going to increase tax base, the administrative cost will increase. So while deciding RNR it is important to consider all factors, which will influence the rate of tax.
The International Monitory Fund (IMF) devised C-Efficiency ratio to monitor RNR.
Aggregate Revenues from GST
Revenue from GST@ Standard Rate
Aggregate Revenues from GST
Total Private Consumer expenditure on all goods and services@ Standard rate
Note: any deviation from a 100% C-Efficiency indicates deviation from single tax rate on all consumptions. If government gives exemptions or make any consumption as zero rated then the C-Efficiency ratio will be less than 100% or if government added more items to be taxed then the rate will be above of 100%.
Lets us consider an example , assume Private Final Consumption Expenditure of any state for one year is Rs. 10,00,000 and the rate of GST is @20%, then according to C-Efficiency Formula;
If there is no zero rating or exemptions;
2,00,000(20% of Rs. 10,00,000)
Suppose Rs. 2,00,000 Expenditure has been exempted or is Zero rated;
1,60,000(20% of Rs. 8,00,000)
Note: The above example shows that if there will be some exemption or zero rated expenditure then the C-Efficiency will be less than 100% and affects the rate of GST. Thus the exemptions limit effects RNR rate, if threshold limit will be lower than RNR will be lower and if threshold limit is higher than RNR will also be higher.
2 ZERO RATED GOODS AND SERVICES THAN EXEMPTED GOODS AND SERVICES:
Exemption as the term denotes is used to define a product or service which is exempted under a regime of tax and service provider or seller of the product will not charge any tax on the same.
As we know the transportation services related to transport of food grains has been exempted from service tax. The service provider, the transport agency does not charge Service Tax from the service recipient as well as not allowed to take CENVAT Credit on input services used in providing output Service.
Lest us consider an example Mr. A, a transport service provider is providing services to Mr. B in tax free economy. The cost of service for Mr. A is Rs. 90/- and his margin is Rs. 10/- , now the service provided by Mr. A to Mr. B is exempted and Mr. A con not claim CENVAT credit of the input service used by him in providing output service to Mr. B , suppose it is Rs. 9/-. Now in tax free regime Mr. A will add Rs. 9/- in the cost of providing services to Mr. B and the cost will be Rs. 99/- instead of Rs. 90/-. Now he will claim Rs. 108.90/- from Mr. B adding his profit margin. Now this cost 108.90/- will bear by Mr. B without getting any setoff under CENVAT Rules and ultimately the tax burden will pass to the consumers.
Now in tax regime Mr. A will charge Rs. 110/-(Rs. 100 + 10 profit margin) and he is eligible to claim Rs. 9/- as setoff as CENVAT Credit. Now Mr. B is bearing burden of Rs. 9.90/- as taxes paid to Mr., if Mr. B. is not eligible to CENVAT Credit then the cost of production will increase and Mr. B will charge the same from consumers.
Now in Zero rated services , if Mr. A is rendering Zero Rated services then he will not charge any tax on his services provided to Mr. B, now in this case, whatever he has paid as taxes on input services i.e. Rs. 9/-, will be refunded to him by the Revenue Department.
Now in this case the real benefit will pass to the final consumers.
The Exemptions and Zero Rated will increase the RNR rate and effects Standard Rate of GST.
3. Zero Rated Exports; means when the Goods and Services are exported out of country and no GST would be charged on them. Now in this case if the GST is charged on input Goods and Services, same would be refunded to the exporter. This is for betterment of exports and competitiveness in the World Market. Many countries provide various types of exemptions to increase their export and to compete in the export market. Since in GST the Goods and Services would be taxed on the basis of point of consumption not on the basis of Origin.
Now this loss of revenue due to Zero Rated Exports would nevertheless be compensated by imposing additional burden of GST on other items of Goods and Services.
4. Exemption and Lower Rate of tax for certain items such as Food, Healthcare Etc.:
The Government Should impose GST on all Goods and Services for better tax management but due to welfare and social services it has exempted or taxed with lower rate of some Goods such as Food grains and Services such as Health Care, Education as these are important for the people living below poverty line.
The Organization for Economic C-operation and Development (OECD) Publication 2004 sets out “Standard Exemptions” in GST system for OECD countries. These “ Standard Exemptions” includes Hospital and Medical care, Transport of Sick and injured person, Human Blood, Tissue Organs, Dental care, Postal Services, Education, Non Commercial Activities of Non Profit making organizations, Cultural Services, Radio and Television broadcasting services etc.
Some countries adopted “Standard Exemptions” as provided by OECD and some has been departed such as New Zealand it has applied tax on all Goods and Services listed above.
In India taxing food items will cost live of poor and as a welfare state, it is duty of the government to take care of people below poverty line. Now in these cases the RNR rate will increase.
5. Exemption Mechanism for Special Industrial Area:
The Government is providing various tax exemptions to the industries established in less develop areas of North Eastern Ares, Jammu and Kashmir, Himanchal Pradesh, etc., as we know these exemptions are not working properly and gave chance of corruption and erosion of taxes.
These exemptions are generally given for attracting investment and development of areas but are not working properly. These would have negative impact on GST and may increase RNR rates.
6. Compounding Scheme under GST:
There are various compounding and composition schemes in present Indirect tax regime. These are issued to help small traders, manufacturers and service providers. Under this scheme the government has set some threshold limit under which traders, manufactures and dealers may opt to pay specified some of duty or pay at specified rate as prescribed without taking relevant credit on taxes paid on input goods and services. On other hand he has to pay full tax levied on goods and services after taking full tax credit of taxes paid on input goods and services.
7. Abatements; it is a partial exemption from payment of total taxes levied. As we know government has provided abetments related to various services through Notification No. 26/2012 dated 20/06/2012.
If abetments would be provided in GST also as provided in recent scheme, then this would impact negatively and RNR would increase to compensate this revenue loss.
Other various incentives and exemption schemes of the government would impact GST and hence it is necessary to think twice about these schemes and incentives before implementing GST regime.
CALCULATION OF REVENUE NEUTRAL RATE:
Indirect Tax Collection
Revenue Neutral Rate = ----------------------------------------------
Private Final Consumption Expenditure
Lets us consider date of 2010-11 total Indirect Tax Collection of Government was Rs. 3,43,178 Crores for Central and Rs. 3,98,170 Crores for States respectively. The Private Final Consumption Expenditure was Rs. 43, 60,323 Crores;
Revenue Neutral Rate = ---------------------------- *100
RNR = 17%
Note: from above details we can analyze that the RNR will go up is we provide incentives, rebates, abetments, exemptions or compounding and other various incentives.
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