Goods and Service Tax (GST) – How it works

Last blog was about need of GST and how it will mitigate the cascading effect of tax. In this blog, let us try to understand what exactly GST means and how it will actually function.

GST is destination based tax levied on consumption of Goods and Services. First thing is very clear that GST is charged on consumption (i.e. on use of goods and Services). 

Secondly, GST will be charged at every stage right from manufacture of goods up to the final consumption by the end user. In every stage, GST paid at earlier stage will be available as set off. Due to this, only value addition will be charged at every stage. 

For eg. if Mr. A purchase Goods worth Rs. 1000/- and pays GST of Rs. 100/-. After processing he sells the goods for Rs. 1500/- and collects GST of Rs. 150/-. Though he has collected Rs. 150/-, will he deposit entire Rs. 150/- to govt.? NO. He will deposit only Rs. 50/-. (Rs. 150/- GST collected from customer minus Rs. Rs. 100/- GST already paid to the supplier). This means, Mr. A will take the credit of GST already paid by him and will deposit only the residual amount.

Now look at this from other perspective. Mr. A has purchased goods of Rs. 1000/- and have sold the same for Rs. 1500/-. What is the value addition done by Mr. A? Rs. 500/-. And how much GST he is actually depositing to Govt.? Rs. 50/-. Thus, to put in other words, GST will actually charge only the amount of value addition done at every stage. This is essentially required to avoide cascading effect of tax (Pl refer earlier blog for more details on cascading effect of tax). 

GST is expected to subsume following type of Indirect taxes currently prevailing in India:

1) Excise Duty which is currently charged on Manufacture

2) Custom Duty which is currently charged on Import of goods. (At present, we have three custom duties. Basic Custom Duty, Countervailing Custom Duty (CVD) and Special additional Customs Duty (SAD). Out of this three duties, CVD and SAD will be merged in GST. However, Basic Custom Duty will remain after GST also.

3) Service Tax currently charged on supply of services

4) VAT / CST currently charged on sale of goods.

5) Entertainment tax

6) Luxury tax

7) Entry Tax (eg. Octroi or LBT) charged by local authorities.

At present, all the above taxes are levied by different Govt. authorities. GST will be single tax and hence, there has to be some mechanism to share the revenue collected from GST to different authorities. For this, in India, we are planning to apply Dual GST system. This will have total four types – CGST (Central GST), SGST (State GST), UTGST (Union territory GST) and IGST (Integrated GST). Will try to focus on this in next blog.

Till then, stay tuned and happy reading 😊.

Goods and Service Tax – Why we need GST?

Loksabha has recently passed the GST bill, and most likely it will become effective from 01 July 2017.

Major benefit of GST is it will avoid cascading effect of tax. To put in very simple words, cascading effect of tax means ‘Tax on Tax’. For eg. Mr. A sells goods of Rs. 1000/- to B. Assume sales tax @ 10%. A will charge Rs. 1100/- from B. (Actual Price Rs. 1000/- + Sales Tax Rs. 100/-). Now Mr. B again sells the same goods to Mr. C. Here Mr.B will charge Rs. 1,210/- to Mr. C. (Actual price Rs. 1100/- + Sales Tax Rs. 110/-). In this case, Rs. 1100/- already includes tax of Rs. 100/-. Still Mr. B has charged 10% Sales Tax on entire amount of Rs. 1100/-. This is called as tax on tax (i.e. cascading effect of tax).

Due to this, few years ago VAT was introduced. In VAT, every next stage dealer gets the credit of tax paid by earlier dealer. This avoides ‘Tax on Tax’ as given in above example. Same funda applies to Service Tax and Excise where input tax Credit in form of CENVAT is available. 

Now, a million dollar question arise that if we have input tax machanism to avoide cascading effect of tax, why we need GST? Reason is, we can set off VAT against VAT, or excise against excise but we cant set off VAT against Excise or Excise against CST or VAT against Customs or Service tax against Octroi!!!

Confused? You must be. Cos Indirect Tax structure in India is really complex. We have Excise (for manufacture), VAT/CST (for sale of goods), Service Tax (for sale of services), Octroi/LBT (as entry point tax), Customs (for imports) and so on. All these taxes are regulated by various statutes and collected by different authorities. For eg. excise and customs is collected by Central Govt. VAT is collected by State Govt. Octroi is collected by local authority etc. Since tax collecting authorities are different, they do not allow for set off for tax paid to another authority at earlier level. This results in cascading effect of tax. Moreover, overall indirect tax administration become highly complicated.

And here comes the magic of GST. GST will be the single tax which will replace all indirect taxes (Though there are few exceptions, same will be dealt in next blogs). GST will make tax administration easier, simpler and tax payer friendly. Since almost all Indirect taxes will be absolved in one single tax, cascading tax effects will become minimum. It may also increase the revenue of the government. Rather than increase in revenue, it will reduce the cost of the govt to great extent. Imagine various type of taxes given above, manpower deployed for tax collection, infrastructure and overhead cost involved in collection of taxes. When all the taxes will be replaced by GST, tax collection cost for the government will surely reduce.

Implementation of GST is a cumbersome process. Cos it will change the entire mechanism of Indirect tax collection. How GST will actually work, how it will be implemented, what will be the rates, what will become costlier and what will be cheaper are some of the questions to be answered.

Will try to focus on some of these aspects in next blog. Till then, stay tuned and happy reading 😊

Vodafone – Idea Merger : How your mobile bill will reduce

Idea and Vodafone India have today officially announced their decision of friendly merger. Buzz was going on in the market from last one month which has rallied the Idea share price by over 20% on NSE. However no assertive communication was being made from both the parties. Today Aditya Birla (MD of Idea) and Viltorio Colao (CEO of Vodafone) addressed a press conference where merger arrangement has been officially announced. 

Both of them made goodie goodie statements but purposly avoided to speak about main reason for their merger – Reliance Jio. Prior to entry of reliance jio, telecom industry in India was dominated by three major players – Airtel, Idea and Vodafone. Airtel is the largest company with subscriber base of 27 Crores. Vodafone comes second with 20 Crore customers and Idea is no.3 with 18 Crore customers. Everything was going well till the entry of Reliance Jio. Reliance Jio entered and started offering everything Fukat. Sim card free, voice call free, internet free, sms free, jio services free and much more. Of course, this all came with very pathetic and worst network, but afterall we cant expect A1 quality service when its absolutely free. Within just six months, Jio has increased its customer base to 7.50 Crores subscribers and is now fourth largest player in telecom industry.

Reliance Jio is owned by Reliance Infocom Ltd which is wholly owned subsidiary of Reliance Industries Ltd. Jio has a mammoth financial support from Reliance Group and thats why in spite of huge Capex involved, it can afford to offer everything for free.

This is not the case for Airtel, Idea and Vodafone. In order to match Jio offers, all of them have drastically reduced their tarrif rates. This has resulted in heavy loss of revenue. None of these companies can afford this for longer. Thats the reason why wise decision of merger is taken by Vodafone and Idea. 

Combined entity of Vodafone and Idea will have combined customer base of 38 Crores and will now be the largest telecom company in India. Major benefit will be reduction in Capex Cost. Costs incurred towards spectrum allocation and other Infrastructure Capex will reduce. Marketing costs will come down as well. Some employee lay off may also take place which will reduce salary cost. This all will increase the cash surplus and merged entity can now provide call rates at par with Jio or even lower than that.

As per agreed terms, vodafone will have 45% shareholding of new company. Idea will have 26%. Both the companies will retain their existing brand name. Aditya Birla will continue as MD and CEO of new entity, whereas CFO will be appointed by Vodafone.

This new entity will be giant and can compete with Jio aggresively. To increase the customer base, both the companies will offer further lucrative call / data rates which will directly benefit the customers.

Lets wait for better deals from telecom players! Further good days are yet to Come!!

Restriction on Cash Receipts – How it will affect you

Last blog gave cursory glance of newly inserted section 269ST by this years budget. As per this newly inserted section, no person can receive more than Rs. 3.00 Lakh in hard cash from a person:

1) In a single Day

2) In respect of Single Transaction

3) In respect of various transactions but relating to one occasion.

By raw reading of the section it is clear that receipts above Rs. 3.00 Lakh can be accepted only by cheques, DD, electronic payments / any other banking channels.

Section also provides that it WILL NOT BE applicable for following entities:

1) Government

2) Banking Companies

3) Co Operative Banks

4) Any other Persons / entities as certified by the Govt. (as on date no entity is specified under this).

Deeper understanding of the section reveals following facts:

1) The section covers all type of cash receipts. Whether amount received is revenue receipt / Capital receipt / taxable Income / Exempt Income / loan / donation / gift etc. etc. all receipts are covered.

2) Section also covers amount received from sale of agricultural products as well. This can be troublesome to small farmers. May be some exemption will be provided for this soon.

3) Section even applies to events of personal nature like marriage etc. Since this belong to ‘single occasion’, if you receive more than Rs. 3.00 Lakh in cash as gift in your marriage, section 269ST will apply.

5) Section even covers transactions pertaining to loans and advances. If loan / advance amount is more than Rs. 3.00 Lakh, it cannot be given in cash. This will affect private money lenders. Even agricultural credit or Micro credit instititions will also be effected in short term since most of the times their diabursement in cash. However once the cashless infrastructure is developed, hurdles will reduce.

6) Interestingly, Section also applies to banking transactions. Though section has exempted banks, its only for receipt of money. Not for payments. Eg. If you deposit Rs. 4.00 Lakh in bank, you are payer and bank is receiver. As per section, receiving more than Rs. 3.00 Lakh cash is not allowed. However, banks are specifically exempted from this. So if you deposit Rs. 4.00 Lakh in bank (i.e. if bank is receiving Rs. 4.00 Lakh in cash), this section will not apply. This is very clear and no ambiguity persists here.

However, take a reverse situation.You go to the bank and ask for withdrawal of Rs. 4.00 Lakh. Here bank will be the payer and you are receiver. Section has provided no exception to this transaction. Therefore if you withdraw Rs. 4.00 Lakh from bank (i.e. when you receive Rs. 4.00 Lakh from bank), you are in trouble. You will be liable for penelty which is 100% of the amount!😲Bank in such situation need not worry, since penelty will be on the person who is receiving the money (i.e. on the customer). But if banks entertain such transactions, this means they are supporting their customer in breaking the law!😮 Will banks do this? Matter of debate!!🤔

As given in last blog, this new section is a milestone decision to make India less cash economy. Any big change will always bring some hardships in short term. We all may face some troubles for the time being. But in long term, like demonetisation, this step of the government too will benefit the economy in long run.

Will try to write more about this in next blog.

Till then, stay tuned and happy reading. 😊.

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Revolution of Budget 17 – Restriction on Cash Deposits

Budget 17 has made many amendments in existing provisions and have incorporated some new sections. Section 269ST is one of such newly incorporated section which puts restriction on cash deposits above Rs. 3.00 Lakh. This provision will be a milestone to make India Cashless economy.

What does this section 269ST say? Bare reading of the section is as follows:

No person shall receive an amount of three lakh rupees or more—

(a) in aggregate from a person in a day; or

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account

By plain reading of this section it is clear that it restricts the Cash Receipts above Rs. 3.00 Lakh per person per day. That is, you cannot receive more than Rs. 3.00 Lakh a day from single person.

What if you do not comply with the provisions? Then there is a penelty. This is given in section 271DA. This section provides for imposing 100% penelty on amount of transaction. (I.e. if you receive Rs. 5.00 Lakh in cash, penelty can be Rs. 5.00 Lakh!)

At present, there are many sections in IT Act which deal to curb the cash transactions. (Eg. Section 269SS, 269T, 40A(3) etc). However this all sections deal with cash payments exceeding a particular amount. 269ST is the first section which restricts the cash receipts.

Compliance of this section will be on the person who receives the amount. Eg. If A pays to B sum of Rs. 5.00 Lakh in cash, A is the payer and B is receiver. A can give numerous reasons for making payment in Cash, like B is not having bank account, he lives in remote place, not ready to accept cheque, urgency of payments etc etc etc. However, if we apply this new section, now onus is on B to prove as to why he has received Rs. 5.00 Lakh in cash.

Clausewise analysis of this section widens the scope to great extent. Further, exceptions given can provide relief in genuine hardships. Will try to cover this in next blog.

Till then, stay tuned and happy reading 😊.

Budget 2017 – See how you have got richer this time!😃

Good News!

If you are earning less than Rs. 50.00 Lakh, thank the Govt. for making you richer in this years budget.

Union Budget was declared on 01/02/2017 and as anticipated in second last blog, Govt has left the tax slabs unchanged but have reduced the tax rate for lowest slab. Currently, there is no tax up to Rs. 2.50 Lakh. For tax slab of Rs. 2.50 Lakh to Rs. 5.00 Lakh current tax rate is 10%. Govt has reduced this rate to 5%. This directly results in tax saving of Rs. 12,500/-.

However to compensate the loss in revenue, rebate u/s 87a has been reduced from Rs. 5000/- to Rs. Rs. 2,500/-.

Cumulative impact of above two major changes will be as follows:

1) If you are earning up to Rs. 3.00 Lakh, after taking rebate u/s 87a, your tax liability will be NIL.😊

2) If you are earning up to Rs. 4.50 Lakh and utilise entire deduction of Rs. 1.50 Lakh u/s 80C and avail rebate u/s 87a, your tax liability will be Nil.😊

3) If you are earning up to Rs. 5.00 Lakh, net Income Tax saved by you will be Rs. 10,000/-.😄

4) If you earn up to Rs. 50.00 Lakh, Net Income Tax saved by you will be Rs. 12,500/-.😄

5) However, if you are earning above Rs. 50.00 Lakh, you wont be saving anything😑. On the contrary, your tax liability will increase due to imposition of surcharge😟. (Will try to write on this in next blog).

As anticipated in second last blog, govt have not raised the basic exemption limit and have kept the same at Rs. 2.50 Lakh. Since Income level of citizens is rising, keeping basic exemtion limit unchanged will bring more citizens in tax net and will increase the % of tax paying population.

After demonetisation it was expected that some big relief will be provided in Personal Income Tax. Against this expectation, Govt. has given modest tax relief as given above. 

But dont get lured away by this. Govt has made adequate provisions that revenue lost will be compensated by another stringent new provisions. Will try to write about the same in next blog. 

Till then, stay tuned and Happy Reading. 😊.

Budget Bonanza continued – What more can you expect?

Apart from some relief in Personal and Corporate Income Tax (as given in last blog), India is much hopeful about this years union budget.

Apart from relief in Income Tax, following are the broad expectations from coming budget:

1) More incentives will be offered for Cashless / digital transactions. Further to propogate agenda of Govt for Digital Economy, more sops and incentives will be provided for digital business. This may also take form of curbing cash use by penalising the cash transactions, say  above Rs 50,000/-

2) Demonetisation has resulted in huge inflow of funds into the banks. This has resulted in reduction in Deposit rates. Retired senior citizens who earn their livelihood from FD Interest are most affected due to this. This budget is likely to announce new scheme / bonds for senior citizens which will provide them higher Rate than Bank FD’s.

3) Last year Govt has announced project of 100 smart cities. List was announced and fund allocation was started but nothing fruitful has emerged yet. This years budget may take agenda of smart cities forward.

4) At present, Stocks and MF units are exempt from Long Term Capital Gain Tax if held for more than 12 months. There is widespread speculation that this years budget will remove this LTCG exemption. If not, period of holding will be increased from 1 year to 3 years. If implemented, it will affect equity investors badly  and share market can crash like anything.

5) Govt initiative of Start up India – Stand up India will get further boost. Tax concessions – both direct and indirect are likely to be offered for start ups. Period of the concession will be limited to first 3 or 5 years.

6) Budget 16 had deferred General Anti Avoidance Rules (GAAR) by 1 year. This means, most probably, GAAR will become applicable from 01/04/2017.

7) Interest Subvension Scheme meant especially for Agricultural Credit may be announced.

8) Credit growth in India is at multi year low. Demonetisation has further worsen the situation. Most affected borrowers belong to MSME catagory, since they are heavily dependent on banking channel for their credit needs. Coming budget is likely to provide schemes / measures which will boost credit delivery to MSME sectors.

9) Affordable Housing will get further boost. Apart from being social welfare measure, this is required to give some relief to real estate sector which is bleeding currently.

10) Like previous 4 to 5 budgets, infrastructure, FDI Inflow and renewable energy will remain Govt priority.

And after all this, budget can never get complete without populist measures! Time for presenting this years budget is quite unique. State elections will be held shortly in UP and Punjab and Govt will surely try to increase its vote bank through goody goody announcements (Extent of their implementation pose a big question which is never asked till next years budget!!)🤐🤐🤐.

Now lets wait for 1st Feb and see what happens!

Till then stay tuned and happy reading😊.

Bonanza of Union Budget – Will Income Tax Reduce?

Every one looks at the Budget with different perspective. Economists looks for the deficit control, businessman and salaried people looks for tax breaks, industrialist looks for policy initiatives and NGO’s look for measures of social wellbeing. And the central Govt who prepares the budget tries to please everyone of them and at the same time try to increase their Vote Bank!
This year Govt has taken historic decision of Demonetisation. It has surely troubled some sectors of society. Govt is ought to provide some relief to them. 

Reduction in Income Tax is most awaited news from union budget. Some relief will surely be provided in Personal Income Tax this year. What provision will be made is a matter of debate. I personally feel that present tax slabs will be kept unchanged. Reason is, at present only 3% of Indian population pay Income tax 😞.(So if you are one of them, feel Proud!🤓). Majority tax payers belongs to 10% tax slab. If Govt increases basic exemtion limit of Rs. 2.50 Lakh by even Rs. 20,000/-, it will through out lakhs of current taxpayers from Income Tax. On the contrary, Govt is trying hard to to bring maximum people into the tax net. Hence, I feel increase in the exemption limit is very unlikely move.

However, Personal Income Tax will surely come down. For this Govt. can provide some additional exemptions. Presently, if you belong to 10% slab, you get exemption of Rs. 5,000/- in tax u/s 87a. This limit may be raised up to Rs. 7,500/- or Rs. 10,000/-. One more possibility is existing tax rates will be reduced. (I.e. 7.50% for first slab instead of 10%, 17.50% for second slab instead of 20.00% etc.).

Another likely move is limit for deduction of Interest on Housing Loan will be increased. This will facilitate Govt. agenda of ‘home for everyone’ and at the same time will give some boost to real estate sector (since it is the worst affected sector post demonetisation!)

Good News is also expected in Corporate Income Tax which is currently 30%. Govt. has already assured that it will reduce Cotporate Income Tax phasewise up to 25%. Last year, no provision was made to this effect. This year, some steps can be taken in this direction. Existing exemptions from Corporate tax may be wirhdrawn and Tax rate can be reduced to compensate the same.

Coming Budget is expected to provide relief in many other sectors, which will be covered in next blog.

Till then, stay tuned and Happy Reading. ☺.

Union Budget – How it is prepared?

Preparing Union Budget is a mammoth task. As we all know, budget is presented by Finance Minister. But to be specific, budget is prepared by Budget Division of Central Govt. This budget division works under Department of Economic Affairs which in turn forms part of Finance Ministry. Thus, the person who is ultimately responsible for preparation of Budget is Finance Minister of India.

Budget preparation starts in the month of August/September Every year. It involves following steps:

1) Deciding Gross Budgetery Support

Extensive meetings are held with various Govt. Departments, Govt. Ministries and NITI aayog to decide Gross Budgetery Support available for particular year.

2) Discussions with various Stakeholders

Once Gross Budgetery Support is determined, views and opinions from various stakeholders like RBI, ICAI, Stock Exchanges, Industrial Groups, Farmers and MSME associations etc are requsted. Openions furnished are referred as ‘Pre Budget Memoranda’. Analysis is thereafter done by officials of Finance Ministry.

3) Planning of Expenditure

Various Dept and ministries submit their requirement to finance ministry regarding how much funds they require for their ministry. This includes regular payments like salaries, other administrative expenses, general overheads etc. This also includes new schemes and initiatives particular Dept or ministry intends to implement. Data received from various sources is collated which provides total fund requirement from annual budget.

4) Revenue Estimation

Revenue expected by the Govt.is estimated thereafter. Revenue can be either Tax Revenue (received from Income Tax, Service Tax, Excise etc.) or Non Tax revenue (Interest on loans given, fees for services rendered, Dividends and Profits from Govt units etc). Any receipt of Capital nature like donations received or loan taken from World Bank or IMF is also considered here.

5) Deficit Planning

Most crucial task starts here which involves matching of estimated revenues with probable expenditure. Excess of expenditure over revenue is termed as deficit which government finances from issuing long term Interest bearing securities. As per FRBM Act, government is bound to keep the deficit level below 3%. To match this level, either expenses are curtailed or measures to increase the revenues are anticipated.

6) Preparing Final Draft

After deficit percentage is finalised, draft budget is prepared. Same is discussed with Prime Minister and his approval is taken.Finance Minister also briefs the entire cabinet broad structure on which budget will be based. Conflicts, if any, between various departments and ministries is resolved at this stage. Once finalised, printing of budget document starts at this stage.

Next blog to give more details on coming union Budget 2017.

Till then, stay tuned and Happy Reading. 😊 

Union Budget – Meaning and significance

Hon. President of India recently accorded his consent to present the Union Budget on 01/02/2017.

From last many years, budget is presented on last day of February – i.e. 28th Feb or 29th Feb. From this year onwards govt. has decided to present the budget on 01 Feb every year.

To simply put in, union budget gives the details of Income and Expenditure of the Central Govt for a particular Financial year. It shows how govt is planning to use public resources for economic development and overall well being of its citizens. Every budget give details of following 4 aspects – actuals of last year, estimates of current year (as per last budget), revised estimates of current year and projection of next year.

I.e. budget which will be presented on 01/02/17 will contain the following:

1. Actual Income and Expenditure for FY 15-16

2. Estimated Income and Expenditure for FY 16-17 (as per budget presented last year)

3. Revised estimates for FY 16-17 (This takes into consideration actual figures upto Dec 16 and based on that revised estimates for FY 16-17 are worked out)

4. Estimated / Projected Income and Expenditure for next Financial year i.e. F.Y. 17-18.

Union Budget carries massive important in any democratic country because of the following –

1. It gives detailed status and position of economy. It shows where the economy of a nation stands and in which direction it is expected to move in future.

2. It decides allocation of resources done to various sectors by govt. I.e. from the total receipts, how much govt is planning to spend on education, healthcare, irrigation, defence, infrastructure and other various areas is given in the union budget.

3. Budget comprises of amendments to Tax Laws that become operative from next Financial Year. This forms very sensitive part since it directly affect the income of Tax paying population.

4. Govt controls various leading financial institutions of the country. Eg. Nationalised banks, Insurance Companies, various PSU’s etc. Strategic decisions pertaining to these organisations are also spelled in union budget.

5. Budget also includes policy initiatives govt is willing to take to boost the GDP growth rate and to control to fiscal deficit of the country.

Parliament of India needs to approve the budget to make its provisions operative from next Financial Year.

Since budget day is approaching fast, next few blogs will deal with Union Budget.

Till then, stay tuned and Happy Reading. ☺.