26/06/2017
Mr A:- Hello sir, Good day to you. How are you?
CA:- I am doing fine Mr. A, how about you?
Mr A:- I am fine and wanted to know about what actually GST is which everyone is talking about?
CA:- Sure, Mr. A, GST means Goods and Service tax and it is the new indirect taxation system which is being adopted in India.
Currently there are various types of indirect taxes like VAT, CST, Excise, Service tax, Entertainment tax, Entry tax etc which not only increase the compliance burden on a person, it also leads to double taxation, various hurdles in free flow of goods, set-off is not allowed for one tax with another i.e. you cannot take input of Service tax paid against your output VAT liability.
Hence, GST is being adopted to streamline the indirect taxation picture by eliminating various taxes and providing path for one tax in all over India.
Mr A:- Oh, that’s great. But how the process will work in GST?
CA:- Under GST, there will be 3 type of taxes i.e.
i) CGST which will be collected by Central Government,
ii) SGST or UTGST which will be collected by State or Union Territory government respectively and
iii) IGST which will be levied on interstate transactions and it is managed by Central Government.
Mr A:- Ohkey, but can you please provide more information that how the tax will be charged on invoices?
CA:- Sure.. Let us say you are selling your goods for transactional value of 100 within state. Assume the CGST rate is 9% and the SGST rate is also 9% then tax of Rs 9 (9% of Rs 100) for CGST and Rs 9 (9% of Rs 100) for SGST will be levied on your sale. You need to show CGST and SGST separately on the invoice and hence the invoice total comes to 100 + 9 + 9 = 118 Rs.
Mr A:-Ok, and what about in case of interstate sale?
CA:- In that case only IGST will be levied on your bill.
Mr A:- Ok, but in CGST, central government takes the tax and in SGST, state government takes the tax. So who will take the tax in case of IGST?
CA:- That’s a very good question.
Mr A. GST is a destination based tax and hence the state part of tax belongs to the state where the goods or services are lastly consumed or provided.
IGST would be broadly CGST plus SGST and shall be levied on all inter-State taxable supplies.
The inter-State seller will pay IGST after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. This is how the tax will be ultimately transferred to importing state.
To understand this concept, please refer an example where Mr. X (Trader in Kerala) sold goods to Mr. Y (Trader in Kerala) and then Mr. Y sold goods Mr. Z (Trader in Gujarat) and lastly Mr. Z sold goods to Mr. A (Trader in Gujarat):
| TXN | Particulars | Amount | OUTPUT |
| Kerala | Gujarat | Centre |
| | | SGST | SGST | CGST | IGST |
| 1 | X to Y | 100000 | 9000 | – | 9000 | – |
| INPUT | | | 0 | – | 0 | – |
| Net [A] | | | 9000 | – | 9000 | – |
| 2 | Y to Z | 120000 | – | – | – | 21600 |
| INPUT | | | – | – | – | 18000
(9000+9000) |
| Net [B] | | | – | – | – | 3600 |
| 3 | Z to A | 150000 | – | 13500 | 13500 | – |
| INPUT | | | – | 8100
(21600-13500) | 13500 | – |
| NET [C] | | | – | 5400 | 0 | – |
| | | | | | |
| Adjustment [D] | | | -9000 | 8100 | | 900 |
| | | (Will go to Center for credit utilized in txn 2) | (Will come from Center for credit utilised for txn 3) | | (Residual of receipt from Kerala after adjusting 8100 for Gujarat) |
| | | | | | |
| Net Receipts [A+B+C+D] | | 0 | 13500 | 9000 | 4500 |
Here, we can find that the tax paid in Kerala will eventually migrate to Gujarat (Place of final consumption/destination).
Mr A:- Oh, I understand. So IGST credit can be utilized against CGST and SGST liability?
CA:- Cool, I understand on what benefit your thinking as a businessman. The answer is yes and below is the summary of utilization of credit:
i) CGST input tax paid shall first be utilized for payment of CGST output liability and any amount remaining can be utilized towards payment of IGST.
ii) SGST input tax paid shall first be utilized for payment of SGST and any amount remaining can be utilized towards payment of IGST.
iii) IGST input tax paid shall first be utilized for payment of IGST and any amount remaining shall then be utilized first for CGST and then for SGST in that order.
| Input Credit of | Can be Utilised for Output |
| First | Second | Third |
| CGST | CGST | IGST | |
| SGST | SGST | IGST | |
| IGST | IGST | CGST | SGST |
Mr A:- Amazing, so GST will streamline various taxes into one and therefore will allow setting off of the input tax paid even on interstate supplies. This can really lead to margin expansion. Cool, Many thanks Mr. A and I may take a leave now but I will be back tomorrow for my GSTbyte No. 2
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About the author
HIMANSHU TIWARI
CHARTERED ACCOUNTANT
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