Goods and Services Tax: The goods and services tend to become costlier for manufacturers and service providers when a lot of inputs are used and when these inputs are taxed at higher rate.
Goods and Services Tax: In a room full of economists, industry experts and tax analysts, a voice emerged: Sir, please bring the health care services under 5% tax bracket. It was a post-Budget session with Finance Minister Arun Jaitley at FICCI. The Finance Minister, then, asked, “Are you saying that you want to be taxed?” The person replied, “Yes”, adding that GST exemption is becoming costlier.
But how is it possible? The answer lies in GST’s Inverted Duty Structure, where the government offsets a part of unutilised input tax credit of the supplier. Inverted duty structure covers the scenario where the GST rate on inputs is higher than the GST rate on output supply of goods (except goods/services that are exempted). The GST law allows the refund of unutilized input tax credit to the supplier of such goods/services,” Saloni Roy, senior director, Deloitte told FE Online.
Unutilised input tax credit is the part of the input tax credit that remains after offsetting the actual GST liability on the final product. “However, if output supply of goods/services is exempt from the GST, then input tax credit on the procurement of goods/services cannot be taken by the supplier. Such GST paid on procurement of goods/services becomes a cost to the supplier,” she added.
In simpler words, under the GST, you can offset the tax you have paid on raw materials (input) for manufacturing goods or rendering services from the final tax (output tax). And if the input tax is higher than the final tax, a part of the remaining amount is refunded by the government.
The goods and services tend to become costlier for manufacturers and service providers when a lot of inputs are used and when these inputs are taxed at higher rate. For example, medicine pills are taxed at 5%. So if the cost of manufacturing the pill is Rs 100 including Rs 8 as input tax and the final tax is Rs 5, the manufacturer will offset Rs 5 from Rs 8 and can claim a part of the balance Rs 3 from the government.
But let’s take the case of a book, which is tax exempt. If the cost is Rs 100 including Rs 8 as input tax, and there is no refund, the manufacturer bears the cost of the entire input tax, Abhishek Rastogi, Partner at law firm Khaitan & Co explained
So should the government allow input tax credit refund even when the goods or services are tax exempt? No, said Abhishek Rastogi, adding: This scenario happens only when there is a lot of input taxed at a higher rate of 12% or 18%. “I think the government should move some of these to 5% tax bracket,” he added. However, doing this could impact government’s revenue.