Illustrative guide how the transaction will take place good and service tax, GST, Good and Service Tax, Salient Features of GST , How will GST actually work?, Illustration I: Selling within the state, Illustration II: Selling within the state and then outside the state, Illustration III: Selling outside the state and then within the state

1. Illustrative guide to how transactions will take place after tax reform
CA Narayan Lodha, Chartered AccountantPrivileged and Confidential
Good and Service Tax (GST)
Illustrative guide to how transactions will take place after tax reform
We are on the wink of biggest tax reform since independence with an enormous change in entire
Indirect Taxation effecting businesses across India. It will be going to change demographics of each state
with the increased consumption in GST, the destination state is going to get the tax.
The GST will subsume almost all state and central level indirect taxes and levies in India. Here's how
exactly a transactions will take place under GST and how one can avail input tax credit.
Salient Features of GST
 Goods and Service Tax (GST) is applicable on “supply” of goods or services as against the present
concept of tax on the manufacture/ sale of goods or on provision of services.
 GST is based on the principle of destination based as against the present principle of origin
based taxation.
 There would be dual GST with the Centre and the States simultaneously levying it on a common
base.
 The GST levied by the Centre would be called Central GST (CGST) and
 The GST levied by the States would be called State GST (SGST). Union territories without
legislature would levy Union territory GST (UTGST).
 An Integrated GST (IGST) would be levied on inter-State supply (including stock transfers) of
goods or services. This would be collected by the Centre so that the credit chain is not disrupted.
 Import of goods would be treated as inter-State supplies and would be subject to IGST in
addition to the applicable customs duties.
 Import of services would be treated as inter-State supplies and would be subject to IGST.
 It is Proposed to be levied at the each stage of business
 Goods and Service Tax (GST) is applicable on “supply” of goods or services as against the present
concept of tax on the manufacture/ sale of goods or on provision of services.
 GST is based on the principle of destination based as against the present principle of origin
based taxation.
 There would be dual GST with the Centre and the States simultaneously levying it on a common
base.
 The GST levied by the Centre would be called Central GST (CGST) and
 The GST levied by the States would be called State GST(SGST). Union territories without
legislature would levy Union territory GST (UTGST).
 An Integrated GST (IGST) would be levied on inter-State supply (including stock transfers) of
goods or services. This would be collected by the Centre so that the credit chain is not disrupted.
 Import of goods would be treated as inter-State supplies and would be subject to IGST in
addition to the applicable customs duties.
 Import of services would be treated as inter-State supplies and would be subject to IGST.
 It is Proposed to be levied at the each stage of business

2. Illustrative guide to how transactions will take place after tax reform
CA Narayan Lodha, Chartered AccountantPrivileged and Confidential
Subsuming of Existing Taxes
The Indian indirect tax system presently has myriad taxes. The Goods and Service Tax (GST) that is slated
to come into force from July 1 2017, will subsume all these taxes into one. Before delving into detail, let
us understand the various taxes that will collapse into GST.
All transactions such as sale, transfer, barter, lease, or importation of goods and/or services made for
consideration will attract GST.
How will GST actually work?
India shall adopt a Dual GST model, which means that the GST would be administered by both the
Central and the State Governments. The dual GST model and the taxes levied on each kind of
transaction can be seen as below:
Dual GST
Intra State
Transactions
CGST
SGST /
UTGST
Inter State
Transactions
IGST
Taxes currently levied and collected by the
Centre
 Central Excise Duty;
 Additional Duties of Excise
 Duties of Excise (Medicinal and Toilet
Preparations)
 Service Tax;
 CVD (Additional Customs Duty)
 Special Additional Duty of Customs(SAD)
 Cesses and surcharges insofar as they
relate to supply of goods or services.
 State VAT;
 Central Sales Tax;
 Purchase Tax;
 Luxury Tax;
 Entry Tax (All forms);
 Entertainment Tax (except those levied by
the local bodies);
 Taxes on advertisements;
 Taxes on lotteries, betting and gambling;
 State cesses and surcharges insofar as they
relate to supply of goods or services
Taxes currently levied and collected by the
States and/ or Union Territories

3. Illustrative guide to how transactions will take place after tax reform
CA Narayan Lodha, Chartered AccountantPrivileged and Confidential
 The GST to be levied on intra-state supply of goods and /or services, by the Centre is Central
GST (CGST) and that by the States is State GST (SGST)/ Union territories GST (UTGST) .
 On inter-state supply of goods and services, Integrated GST (IGST) will be collected by Centre.
IGST will also apply on imports.
 GST is a consumption based tax i.e. the tax should be received by the state in which the goods or
services are consumed and not by the state in which such goods are manufactured. IGST is
designed to ensure seamless flow of input tax credit from one state to another. One state has to
deal only with the Centre government to settle the tax amounts and not with every other state,
thus making the process easier.
Illustration I: Selling within the state
Suppose a manufacturer in Rohatak, Haryana sells goods to dealer in Rewari, Haryana worth Rs 10,000.
The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. The tax collected is Rs. 1800; Rs.
900 will go to the central government and Rs. 900 will go to the Haryana Government.
Now the dealer sells the goods to customers in Gurgram for Rs 15,000. Here again CGST at 9% and SGST
at 9% will be levied. The sale price increases and so does the tax liability. The tax collected will be Rs.
2700. In this case of resale, the credit of input tax of Rs. 1800, input CGST (Rs. 900) and input SGST (Rs.
900) is claimed, and the remaining taxes of Rs. 900 (2700-1800) go to the respective governments. i.e.
Rs. 450 will go to the central government and Rs. 450 will go to the Haryana Government.
Illustration II: Selling within the state and then outside the state
Suppose a manufacturer in Rohatak, Haryana sells goods to dealer in Rewari, Haryana worth Rs 10,000.
The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. The tax collected is Rs. 1800; Rs.
900 will go to the central government and Rs. 900 will go to the Haryana Government.
Now the dealer sells the goods to customers in Delhi for Rs. 15,000. The applicable GST now will be IGST
– at 18% (IGST will be the sum of CGST and SGST) this will work out to Rs 2700. But the dealer will be
able to take the input tax credit – CGST (to the tune of Rs. 900) and SGST (to the tune of Rs 900). The
credit of input tax of Rs. 1800, input CGST (Rs. 900) and input SGST (Rs. 900) is claimed, and the
remaining taxes of Rs. 900 (2700-1800) go to central Government as IGST
Against IGST, both the input taxes are taken as credit. But we see that although SGST never went to the
central government, the credit is still claimed. This is the crux of GST. Since this amounts to a loss to the
Central Government, the state government compensates by transferring the credit to Central
Government.
Illustration III: Selling outside the state and then within the state
Suppose a manufacturer in Delhi sells to a dealer in Gurugram, goods worth Rs 10,000. The applicable
GST is IGST at the rate of 18%. The manufacturer collects Rs 1800 and this will go to the Central
government. Now the dealer sells it to customers in Rewari for Rs 15,000. The applicable GST will now
be CGST (at 9%) and SGST (at 9%).
Against CGST and SGST, 50% of the IGST — that is, Rs. 900 is taken as a credit. But we see that although
IGST never went to the state government, the credit is still claimed against SGST. Since this amounts to a

4. Illustrative guide to how transactions will take place after tax reform
CA Narayan Lodha, Chartered AccountantPrivileged and Confidential
loss to the state government, the Central Government compensates the state government by
transferring the credit to the state government.
How should one avail of the tax credit?
 Availability of Input Tax Credit (ITC) at various levels is one of the most important features of
GST.
 For claiming of the ITC, billions of buyer and seller invoices will have to be uploaded and
matched every month. The Common GST Portal which has been developed by GSTN (Goods and
Services Tax Network) will handle this task on the basis of invoice level data filed as part of
return by all the taxpayers.
 In the case of Inter-state supplies where goods or services will be supplied from the state of
origin to the state of consumption, the taxation will be done accordingly, as GST is a destination
based tax. The claim of IGST and the utilisation of credit will be done on the basis of the returns
filed on the GST portal.
 So every entity with an annual turnover of greater than Rs 20 lakhs will have to be registered
and every transaction detail will have to be uploaded in the portal.
 So if a good or service is procured from an entity with annual turnover of less than Rs 20 lakhs
GST has introduced a reverse charge mechanism - the buyer is the responsible person to pay the
GST tax because the registration was not taken from the department by the seller.
 Here the buyer should not claim any input tax credit but GST will be collected from him on his
sale.
For details please refer to my two Presentations at Slide share
1) Presentation on GST https://www.slideshare.net/narayanlodha/a-presentation-on-gst
2) Input Credit under GST https://www.slideshare.net/narayanlodha/1-presentation-on-input-tax-
credit-under-gst

5. Illustrative guide to how transactions will take place after tax reform
CA Narayan Lodha, Chartered AccountantPrivileged and Confidential
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