Goods and Service Tax

Introduction to Goods and Service Tax Act

Goods and Services Tax is the latest Indirect Tax which was introduced in whole of India except Jammu
and Kashmir on 1st July 2017 replacing erstwhile Central Excise, Service Tax, State Value Added Tax,
Central Sales Tax, State Luxury Tax, Entertainment Tax etc. After the necessary law being passed in
Jammu and Kashmir the same became effective to Jammu and Kashmir w.e.f. 8 th July,2017. So GST
now applies to whole of India.
In the constitutional framework prior to 101st Amendment Act it was not possible for the Union/Central
Government to charge taxes on sales, while State Governments could not charge taxes on manufacture
of goods and provisions of services. Similarly, the principle of Value Added Taxcould not be fully
implemented leading to cascading effect (i.e. tax on tax) of taxes resulting into rise in prices of goods
and services. At the same time, Government also could not ensure the fullcollection of taxes as the
continuous chain of the movement of goods from the manufacturer till the ultimate consumer was not
ensured due to non-availability of full input tax credit. This resulted into breaking the chain and the
taxes could be evaded. Normal flow of goods will be as follows-

Manufacturer → Wholesaler → Retailer → Consumer

Value of goods and tax payable with and without input tax credit would be as follows-
Dealer Without input credit With input credit Tax p’ble
Price plus Tax Price Tax To Govt
Manufacturer’s Price (Value) 100 100
Tax @ 10% 10 10 10
Purchase price for wholesaler 110 100 10
Value addition by wholesaler 90 90
Selling price of wholesaler 200 190
Tax @ 10% 20 19 9 = 19-10
Purchase price for retailer 220 190 19
Value addition by retailer 80 80
Selling price of retailer 300 270
Tax @ 10% 30 27 8 = 27-19
Price for the consumer 330 297
Actual value addition (100+90+80) 270 270
Total Tax @ 10% 60 (multiple taxes) 27 No Cascading effect
Actually, under VAT mechanism tax is collected by Government only at final stage, i.e. consumption
stage. Till then Government will pass on input credit. However such credit is passed on only when the
payment of tax is made by earlier party and necessary returns have been filed. This ensures better tax
compliance & revenue collection.

When input credit is allowed, Government loses its revenue to that extent (as shown above) but since
proper chain of movement of goods and services is established it restricts the tax evasion. Such better
compliance leads to increase in Government collection of taxes. This was evident when Value Added
Tax concept was first applied in Central Excise in the form of ModVAT way back in the year 1985,
later on extended to Service Tax and Customs duty in the form of CENVAT. The concept was later
applied to State Level Sales Tax and accordingly the Sales Tax was renamed as State VAT.

There were limitations in these Value Added Taxes as they were applied in part and for different
categories. It was very much required to have one uniform nationwide Value Added Tax mechanism
to reduce the tax burden on one side and increasing compliance level on other side. Many countries
had already adopted GST as a nationwide Value Added Tax which was also discussed and finally
implemented in India with effect from 1st July 2017.

Advantages of GST as mentioned on www.cbec.gov.in site.

Advantages to citizens
a) Simple tax system
b) Reduction in prices of goods and services due to elimination of cascading effect
c) Uniform prices throughout the country (variation due to different rates of taxes eliminated)
d) Transparency in taxation system
e) Increase in employment opportunities
Advantages to trade and industry
a) Reduction in multiplicity of taxes
b) Migration of cascading/double taxation
c) More efficient neutralization of taxes especially for exports
d) Development of common national market
e) Simpler tax regime – fewer rates and exemptions
Advantages to Governments
a) A unified common national market to boost foreign investment and make in India campaign
b) Boost to export/manufacturing activity, generation of more employment, leading to reduced
poverty and increased GDP growth
c) Improving the overall investment climate in the country which will benefit the development
of states
d) Uniform SGST and IGST rates to reduce incentive to tax evasion
e) Reduction in compliance costs as no requirement of multiple record keeping

Important definitions –
Consideration 2(31): Consideration in relation to the supply of goods or services or both includes
a) any payment made or to be made, whether in money or otherwise, in respect of, in response
to, or for the inducement of, the supply of goods or services or both, whether by the recipient
or by any other person but shall not include any subsidy given by the Central Government or
a State Government.
b) the monetary value of any act or forbearance, in respect of, in response to, or for theinducement
of, the supply of goods or services or both, whether by the recipient or by any other person but
shall not include any subsidy given by the Central Government or a State Government.
Continuous supply of goods 2(32): Continuous supply of goods means a supply of goods which is
provided, or agreed to be provided, continuously or on recurrent basis, under a contract, whether by
means of a wire, cable, pipeline or other conduit, and for which the supplier invoices the recipient on
a regular or periodic basis and includes supply of such goods as the Government may, subject to such
conditions, as it may, by notification, specify.

Continuous supply of services 2(33): Continuous supply of services means a supply of services which
is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period
exceeding three months with periodic payment obligations and includes supply of such services as the
Government may, subject to such conditions, as it may, by notification, specify.

Goods 2(52): Goods means every kind of moveable property other than money and securities but
includes actionable claim, growing crops, grass and things attached to or forming part of the land which
are agreed to be severed before supply or under a contract of supply.
Explanation – For the purposes of this clause, the term moveable property shall not include any
intangible property.
Goods must be moveable and marketable. This concept is being followed since Central Excise regime.
The goods must be capable of being bought and sold. The goods must be known in the market. This view
was taken in the famous Supreme Court judgment in Union of India v/s. Delhi Cloth Mills. According
to this judgment to become goods an article must be something which can ordinarily come to market
for being bought and sold. Actual sale is immaterial and only capacity of being bought and sold is
important.

Interestingly, the focus under Central Excise was manufacture of goods and actual sale was not material.
The focus under GST has been shifted to supply of goods and services. This point will be dealt with at
length in the subsequent parts.

Services 2(102): Service means anything other than goods, money and securities but includes activities
relating to the use of money or its conversion by cash or by any other mode, from one form, currency
or denomination to other form, currency or denomination for which a separate consideration is charged.
Explanation 1: services include the transaction in money but does not include money and securities.
Explanation 2: Transaction in money relating to the use of money or its conversion by cash or by any
other mode, from one form, currency or denomination, to another form, currency or denomination, for
which a separate consideration is charges, is service. E.g.
Exchanging Rs.2000 note with 10 notes of Rs.200 is not a service.
Demand draft purchased by paying cash or cheque is conversion of money hence no service is involved.
However, commission charged for drawing such Demand Draft by the bank is a service and accordingly
subject to GST.

Actionable claims 2(1): defines actionable claims to have meaning as assigned to it in Sec.3 of the
Transfer of Property Act 1882.
As per Sec.3 of Transfer of Property Act 1882 Actionable claim means a claim to any debt, other than
a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property
or to any beneficial interest in moveable property not in possession, either actual or constructive, of the
claimant which the Civil Courts recognize as affording grounds for relief, whether such debt or
beneficial interest be existent, accruing, conditional or contingent.
In simple words, actionable is such a situation for which there is enough evidence to support the filing
of a lawsuit. There must be enough facts to support the claim that a wrongdoing happened to make a
charge.

Central Tax 2(12): Central Tax means the Central Goods and Services Tax levied u/s.9.

Integrated Tax 2(58): means the integrated goods and services tax levied under the Integrated Goods
and Services Tax Act.

State Tax 2(104): State tax means the tax levied under any State Goods and Services Tax Act.

Input 2(59): Input means any goods other than capital goods used or intended to be used by a
supplier in the course or furtherance of business.
Input Service 2(60): Input service means any service used or intended to be used by a supplier in the
course or furtherance of business.

Input Tax 2(62): Input tax in relation to a registered person, means the Central tax, State tax, Integrated
tax or Union Territory tax charged on any supply of goods or services or both made to him and includes-
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-section (3) and (4) of Sec.9[CGST];
(c) the tax payable under the provisions of sub-section (3) and (4) of Sec.5 of Integrated Goods
and Services Tax Act; [IGST]
(d) the tax payable under the provisions of sub-section (3) and (4) of Sec.9 of respective State
Goods and Services Tax Act; [SGST] or
(e) the tax payable under the provisions of sub-section (3) and (4) of Sec.7 of Union Territory
Goods and Services Tax Act, [UTGST]
but does not include the tax paid under the composite levy.

Input Tax Credit 2(63): input tax credit means the credit of input tax.
One of the most important feature of GST is availability of input tax credit to a very large extent. We
will study the input tax credit mechanism in subsequent chapters.

Intra-state supply of goods 2(64): Intra-state supply of goods shall have the same meaning as assigned
to it in Sec.8 of the Integrated Goods and Services Tax Act.
Sec.8 of IGST Act defines intra-state supply as where the location of supplier and the place of supply
of goods are in the same State or same Union Territory.

Intra-state supply of services 2(65): Intra-state supply of services shall have the same meaning as
assigned to it in Sec.8 of the Integrated Goods and Services Tax Act.
Sec.8 of IGST Act defines intra-state supply of services where the location of the supplier and the place
of supply of services are in the same state or same Union Territory.

Output tax 2(82): Output tax in relation to a taxable person, means the tax chargeable under this Act
on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by
him on reverse charge basis.

Outward supply 2(82): Outward supply in relation to a taxable person, means supply of goods or
services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any
other mode, made or agreed to be made such person in the course or furtherance of business.

Place of supply 2(86): Place of supply means the place of supply as referred to in Chapter V of the
Integrated Goods and Services Tax Act.
Chapter V of IGST Act provides for determination of the place of supply in respect of any supply of
goods or supply of services. This expression has utmost significance in determining the nature of tax
payable on a supply.

Place of business 2(85): Place of business includes-

(a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown
or any other place where a taxable person stores his goods, supplies or receives goods or
services or both: or
(b) a place where a taxable person maintains his books of account; or
 (c) a place where a taxable person is engaged in business through an agent, by whatever
namecalled.
Works contract 2(119): Works contract means a contract for building, construction, fabrication,
completion, erection, installation, fitting out, improvement, modification, repair, maintenance,
renovation, alteration or commissioning of any immovable property wherein transfer of property
in goods (whether as goods or in some other form) is involved in the execution of such contract

Union Territory 2(114): Union Territory means the territory of

a) Andaman and Nicobar Islands,
b) Lakshadweep,
c) Dadra and Nagar Haveli,
d) Daman and Diu,
e) Chandigarh, and
f) Other territory
There are two types of Union Territories a) Union Territories with Legislature and b) UT without
Legislature. Delhi and Puducherry are UT with legislature while others are governed by Central
Government (through an Administrator). The UTs with legislature will have their own UTGST
while for others the matter rests with Central Government.