It is essentially a tax only on value addition at each stage and a supplier

at each stage is permitted to setoff through a tax credit mechanism

which would eliminate the burden of all cascading effects.

Under GST structure, all different stages of production and distribution

can be interpreted as a mere tax pass through and the tax essentially
sticks on final consumption.

Currently, a manufacturer needs to pay tax when a finished product

moves out from the factory, and it is again taxed at the retail outlet
when sold. The taxes are levied at the multiple stages such as
CENVAT, Central sales tax, State Sales Tax, Octroi, etc. will be
replaced by GST to be introduced at Central and State level.

Continued.
 All goods and services, barring a few exceptions, will be
brought into the GST base. There will be no distinction
between goods and services.

Under GST, the taxation burden will be divided equitably

between manufacturing and services, through a lower tax
rate by increasing the tax base and minimizing
exemptions.

The existing CST will be discontinued. Instead, a new

statute known as IGST will come into place on the inter-
state transfer of the Goods and Services.
 Tax Structure

Direct Tax Indirect Tax

Income Tax Wealth Tax Central Tax State Tax

Entry Tax, luxury

Excise Service Tax Custom VAT tax, Lottery Tax,
etc.
 Tax Structure

Indirect Tax =
Direct Tax GST (Except
customs)

Income Tax Wealth Tax Intra- state Inter State

CGST (Central) SGST (State) IGST (Central)

 Central Excise

CGST
Additional duties of Custom (CVD)
Service Tax
Surcharges and all cesses

VAT/sales tax
Entertainment Tax
Luxury Tax
Lottery Tax
Entry Tax(all forms)
SGST Purchase Tax
Tax on advertisements

CST
IGST
 SGST and CGST for intrastate transaction : In the
GST system, both Central and State taxes will be
collected at the point of sale. Both components (the
Central and State GST) will be charged on the
manufacturing cost. This will benefit individuals as
prices are likely to come down.

IGST for Interstate transaction: IGST Model will

be in place for taxation of inter State transaction of
Goods and Services. The scope of IGST Model is that
center would levy IGST which would be CGST plus
SGST on all inter State transactions of taxable goods
and services.
 Input Credit of Goods+ services
Manufacturer After taking set off of Input credit, pay the Output Liability on value addition

Input Credit of Goods+ services from manufacturer

Wholesaler After taking set off of Input credit, pay the Output Liability on value addition

Input Credit of Goods+ services from wholesaler

Retailer After taking set off of Input credit, pay the Output Liability on value addition

Consumer Ultimate Output Liability recovered from consumer

 Since the Central GST and State GST are to be treated
separately, in general, taxes paid against the Central GST
shall be allowed to be taken as input tax credit (ITC) for the
Central GST and could be utilized only against the payment of
Central GST. The same principle will be applicable for the
State GST.

Cross utilization of ITC between the Central GST and the State
GST would, in general, not be allowed.
 Manufacturer : Let us suppose that CGST rate is 10% and SGST rate is 5% ,
with the manufacturer making value addition of Rs.30 on his purchases
worth Rs.100 of input of goods (CGST paid @10%) and services used in
the manufacturing process. The manufacturer will then pay net CGST of Rs.
3 after setting-off Rs. 10 as CGST paid on his inputs (i.e. Input Tax Credit)
from gross CGST of Rs. 13 and Rs, 6.5 as SGST.
Gross Value:130 on that CGST 13/- and SGST 6.5/-
Input Credit: CGST 10-/ and SGST NIL/-
Net Liability: Rs. 3 + 6.5 = 9.5/-

Wholesaler: The manufacturer sells the goods to the wholesaler. When the
wholesaler sells the same goods after making value addition of (say), Rs.
20, he pays net CGST of only Rs. 2, after setting-off of Input Tax Credit of
Rs. 13, from the gross CGST of Rs. 15 and net SGST of only Rs. 1, after
setting-off of Input Tax Credit of Rs. 6.5, from the gross SGST of Rs. 7.5 to
the manufacturer.
Gross Value:150 on that CGST 15/- and SGST 7.5/-
Input Credit: CGST 13-/ and SGST 6.5/-
Net Liability: Rs. 2 + 1 = 3/-
Continued.
 Retailer: Similarly, when a retailer sells the same goods after a
value addition of (say) Rs. 10, he pays net CGST of only Re.1,
after setting-off Rs.15 from his gross GST of Rs. 16 and net
SGST of only Rs. 0.5, after setting-off of Input Tax Credit of Rs.
7.5, from the gross SGST of Rs. 8/- paid to wholesaler.
Gross Value:160 on that CGST 16/- and SGST 8/-
Input Credit: CGST 15-/ and SGST 7.5/-
Net Liability: Rs. 1 + 0.5 = 1.5/-

Total Liability: Thus, the manufacturer, wholesaler and retailer

have to pay only Rs. 6 (= Rs. 3+Rs. 2+Rs. 1) as CGST Rs. 8 (= Rs.
6.5+Rs. 1+Rs. 0.5) as SGST and on the value addition along the
entire value chain from the producer to the retailer, after
setting-off GST paid at the earlier stages. This is shown in the
table in next slide. The same illustration will hold in the case of
final service provider as well.
Continued.
 Value Net
at Inpu Net SGST
Purc
Stage Which t CGST= =SGS
hase Rate SGST Input
of Valu Supply Rate CGST Tax CGST T on
Valu of on Tax
Suppl e Goods of on Cre on outpu
e SGS Outp Credi
y Addi and CGS Outpu dit output- t-
Of T ut t on
Chai tion Service T t on Input Input
Inpu SGST
n s Made CGS Tax Tax
t
to Next T Credit Credit
Stage
Man 6.5-
1310
ufact 100 30 130 10% 5% 13 6.5 10 0 0=
=3
urer 6.5
Whol
7.5-
e 1513
130 20 150 10% 5% 15 7.5 13 6.5 6.5=
Selle =2
1
r
8-
Retai 1615
150 10 160 10% 5% 16 8 15 7.5 7.5=
ler =1
0.5
 After introduction of GST, all the traders including manufacturer will be paying both the types of taxes
i.e. CGST and SGST. The Central GST and the State GST would be levied simultaneously on every
transaction of supply of goods and services except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the prescribed threshold limits.
Further, both would be levied on the same price or value unlike State VAT which is levied on the value
of the goods inclusive of CENVAT, i.e CGST & SGST will be charged on same price
Supply of Goods: Suppose the rate of CGST is 10% and that of SGST is 10%. When a wholesale
dealer of steel in Uttar Pradesh supplies steel bars and rods to a construction company, which is also
located within the same State for , say Rs. 100, the dealer would charge CGST of Rs. 10 and SGST of
Rs. 10 in addition to the basic price of the goods.
Supply of Services : Suppose, that the rate of CGST is 10% and that of SGST is 10%. When an
advertising company located in Mumbai supplies advertising services, to a company manufacturing
soap which is also located within the State of Maharashtra for, Rs. 100, then the ad company would
charge CGST of Rs. 10 as well as SGST of Rs. 10 to the basic value of the service.

In both the cases, he would be required to deposit the CGST component into a Central Government
account and the SGST portion into concerned State Government account.
Tax on items containing Alcohol: Alcoholic beverages
would be kept out of the purview of GST. Sales Tax/VAT
could be continued to be levied on alcoholic beverages as
per the existing practice.

Tax on Petroleum Products: It has also been provided that

petroleum and petroleum products shall not be subject to
the levy of GST till notified at a future date on the
recommendation of the GST Council.
 Major flaw of this model is ,Local Dealers have to pay
CGST in addition to SGST.
Some left leaning writers have dubbed the reform as anti-
democratic and against the spirit of federalism as states
loose authority to chart their own course.
The issue which still needs to be resolved are, the revenue
sharing between States and Centre, and a framework for
exemption and thresholds.
 The state will loose control over Taxation policy as
would the other states. However the state currently
enjoys the power to impose service tax which finds
no parallel in rest of the country.
Adoption of GST regime in its current form will
further erode the special status enjoyed by the
state as a consequence of Article 370 enshrined in
the constitution of India.
On the positive side the State Economy is expected
to grow faster and tax kitty is expected to swell
appreciably.
One estimate puts the increase in tax revenues
between 1000-2000 crore annually.