How GST will work? – Case studies for simple understanding

Goods and Service Tax (GST) is considered to be one of the biggest Indirect Tax Reforms in India. The New Model law is aimed to subsume various Indirect Taxes like the Excise Duty, Service Tax, VAT, CST, Luxury Tax, Entry Tax etc. The Central Government, after considering the suggestions given from Trade and Industry has recently issued the Revised Model GST Law. The GST Act provides insights on the detailed provisions regarding Supply, Levy and collection etc. This article tries to provide complete details for “How GST will work?”

Basic understanding about the GST

GST is a value-added tax levied at all points of the supply chain with credit allowed for any tax paid on input, input services used or intended to be used in the course or furtherance of business. It would apply to both goods and services in a comprehensive manner. In fact, it is not a single taxation system but it has emerged in India as a dual taxation system, viz. CGST for Central Govt. and SGSTs for State Govts.

How GST will work? – Case Studies

Due to our federal structure, we could not succeed to come out with the single taxation system and we have to welcome the dual indirect taxation system. This will certainly help in reducing the cascading effect of tax, in making the entire nation to be a single market, in maintaining all the tax records through online network for good governance and transparency.

Case 1: Sale in the final consuming state

Goods are moving from Vadodara to Ahmedabad. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government as pointed out in the diagram. Then the goods are resold from Ahmedabad to Rajkot. This is again a sale within a state, so CGST and SGST will be levied. Sale price is increased so tax liability will also increase. In the case of resale, the credit of input CGST and input SGST will be available and the remaining taxes go to the respective governments.

Case 2: Sale in one state, resale in another state

Goods are moving from Vadodara to Ahmedabad. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to the Central Government and the State Government. Later the goods are resold from Ahmedabad to Mumbai (outside the state). Therefore, IGST will be levied. Whole IGST goes to the central government.

Against IGST, both the input taxes are taken as credit. But SGST never went to the central government, still the credit is claimed. Since this amounts to a loss to the Central Government, the state government compensates the central government by transferring the credit to the central government.

Case 3: Sale outside the state, resale in that state

Goods are moving from Ahmedabad to Mumbai. Since it is an interstate sale, IGST will be levied. The collection goes to the Central Government. Later the goods are resold from Mumbai to Pune (within the state). Therefore, CGST and SGST will be levied…

Against CGST and SGST, credit of IGST will be available. But IGST never went to the state government, still the credit is claimed against SGST. Since this amounts to a loss to the State Government, the Central government compensates the State government by transferring the credit to the State government.

After referring case-2 and case-3, one may conclude that GST is a destination base/consumption base taxation system

When GST is Roll Out in India

A simple and clear statement by the Hon’ble Finance Minister regarding preparatory work being taken up on priority for implementation of GST according to schedule is noticeably assuring. Interestingly, general exemption 12/1012 (CE) has been amended to include a sunset clause of 30 June, 2017 (vide 6/2017) is a resounding indicator of the goal of ‘1 July, 2017’ for roll-out of GST.

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