(Image source from: Goods And Services Tax: How GST works})

The Goods And Services Tax (GST) is a much desired indirect tax that is in news again. India's Finance Minister Arun Jaitley recently met the finance ministers of states and union territories to try and implement the proposed GST at the earliest all over the country.

The proposed indirect tax has been widely discussed and has been in the offing for almost a decade now, but it's yet to be rolled out. The GST will definitely be an improvement on India's tax system followed at present.

My previous article GST: A dream of India pending since decade dwelt on the benefits of this uniform tax system for the entire country. This article will be on how the GST is calculated or how it works.

Salient features of GST

The proposed GST will have two components: Centre (Central GST) and State (State GST) level. The respective rates for Central GST and State GST will be prescribed after appropriate consideration on revenue. Multiple statutes (one for CGST and SGST statute for every State) will be laid down to implement the dual GST model. However, the basic features of these statutes would be unifor. Law dealing with definition of taxable event and taxable person, chargeability, measure of levy including valuation provisions, basis of classification etc. would be same for all states.

The dual GST will be applicable to all transactions made for goods and services, except goods and services placed under exempted category and for transactions that are below the taxable limit.

The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited).

The Central GST and State GST will be treated separately. Individual or corporate taxpayers will have to maintain separate details in books of account, which would be needed for refund of credit.

Taxes paid under the Central GST will be marked under input tax credit (ITC) for the Central GST and can be used only for the payment of Central GST. Similar principle would be used in case of the State GST. Besides, the rules would be aligned when it comes to taking and utilization of credit for the Central GST and the State GST.

Taxpayers cannot indulge in cross utilization of Income Tax Credit between the Central GST and the State GST. However, such cross utilization will be applicable in case of inter-State supply of goods and services that comes under the IGST model.

As far as possible, both the Centre and the States should avoid credit accumulation from refund of GST, except in cases involving purchase of capital goods, exports, input tax at higher rate than output tax etc. However, such cases of refund or adjustment has to be time bound.

Separate legislation for Central GST and State GST will be enacted. The laws enacted for collection of both Central GST and State GST will be uniform, as much as feasible.

Both the Centre and the States would have their concurrent jurisdiction for the administration of the respective Central GST and the State GST. All taxpayers will have to pay their taxes for goods and services to the prescribed administrative division.

All taxpayers will have to submit periodical returns, in prescribed format, to the concerned Central GST authority as well as the State GST authorities.

A PAN-linked taxpayer identification number will be allotted to each taxpayer. The taxpayer identification number will have 13/15 digits in total. The idea is to bring GST PAN-linked system in line with the existing PAN-based system.

At every point the convenience of the tax payer will be kept in mind. Functions like tax assessment, enforcement, scrutiny and audit will be done keeping taxpayer's convenience in mind. Moreover, there will be active sharing of information between the Centre and the State tax authorities.

How GST works?

Under GST each dealer will pay a GST (specified by government) to the tax authorities and charge the same on his product. In this system only the specified tax is paid by each dealer and do not have to bear the tax burden as GST is an indirect tax. Only the last customer will have to bear the burden of GST. This is because GST is included in the price of the goods and services paid by the final consumer, who can't claim input credit.

For a steb-by-step understanding:

1. Dealers to charge tax on the goods/services sold

Each dealer who is registered under GST (Manufacturers, Wholesalers and Retailers and Service Providers) will have to charge GST on the final product (which will be the specified rate of tax). The price paid by the customers will include the GST which was paid by the dealer. This amount of GST will be deposited to the Government by the supplier.

2. Credit of GST

Each registered dealer can claim credit for the amount of GST he has paid. Of course he has to have the proper tax invoice.

The “input tax credit” will be setoff against any GST (Out Put), when the dealer charges his customers on the goods and services supplied.

3. Last customer bears burden of tax

As the value chain of goods advances, at every stage GST is collected and paid to the tax authorities. Dealers pay GST but get paid back from the next customer. Meaning they only act as collecting agents for the Government. So it's the last buyer who bears the burden of GST.

4. Registration

Dealers need to be registered for GST to charge the goods and services tax from the next customer as well as to claim credit for the GST he has paid. Such dealers include the suppliers, manufacturers, service providers, wholesalers and retailers.

5. Tax Period

GST has to be collected within a particulat time frame, which has to be decided by statues. Usually it's monthly and/or quarterly. Dealers who have more output credit than the input credit have to deposit the tax on a particular tax period, which is based on the the opening balance ( if any) of the input credit.

6. Refunds

Dealers who have more input credit than output credit are eligible for refunds for a tax period, subject to the law applicable. If there is any excess it can be carried forward to the next tax period or immediately refunded, again depending on the law.

7. Goods and services that are Eeempted

Government may declare certain goods and services as being exempted from tax. In such cases the dealer cannot charge the input credit.

8. Zero Rated Goods and Services:

Goods and services meant for export are generally zero-rated. Any GST paid by the exporters will be refunded.

9. Tax Invoice

In the GST system, tax invoice is the most important document. All dealer registered under GST issue a tax invoice, based on which the credit (Input) can be claimed. All tax invoice has to carry the supplying dealer's name, his tax identification nos., address and tax invoice nos. Along with the name and address of the purchasing dealer, his tax identification nos., address and description of goods sold or service provided.

(AW: Pratima Tigga)