Dr. V Bhaskar’s lecture on GST organised by PIC

Lecture:

Pune International Centre (PIC) in association with Mahratta Chamber of Commerce Industries & Agriculture (MCCIA) organised a lecture on “Goods and Service Tax (GST) Revolution: Challenges and Opportunities” on 20th June, 2017. The lecture was given by Dr. V. Bhaskar, Former Special Chief Secretary, Finance Govt. of Andhra Pradesh. In the esteemed presence of Dr. Vijay Kelkar, former chairman of the 13th Finance Commission and architect of GST. The programme was chaired by Mr. Pramod Chaudhari Founder Chairman, Praj Industries Ltd., Trustee, PIC and President, MCCIA.

Profile of the speaker:
The main speaker, Dr. V Bhaskar retired from the IAS with international to state level experience on policy formulation and implementation of issues relating to public administration; issues such as finance, taxation, and energy regulation.

In the varies duties that he has performed in the past, he has been the Chairman, Andhra Pradesh Electricity Regulatory Commission and Special Chief Secretary in the Finance Department of the Government of Andhra Pradesh. He has also worked in the International Monetary Fund at Washington DC, in the Ministry of Finance and Ministry of Commerce and Industry for Government of India at New Delhi. He has also played an instrumental role in the Thirteenth Finance Commission which suggested the GST reform in first place. He has also worked as Collector and District Magistrate of Anantapur and Visakhapatnam districts in Andhra Pradesh. Prior to joining the IAS, he worked in the management cadre of the State Bank of India, specializing in credit to industries.

Dr. V. Bhaskar obtained his Masters in Public Administration from Harvard University and Masters in Science from St Stephen’s College, Delhi followed by which he also secured a PhD in Economics from the University of Hyderabad. He is also a Certificated Associate of the Indian Institute of Bankers, Mumbai. During and post his academic tenure he has published a number of research papers on the topics of his professional interests which include taxation, public finance, governance and energy regulations.

Dr. Bhaskar provided insightful explanations on the need, operations and tricky parts of GST. This report is a collated version of the entire talk.

 

What is GST?

Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition.

There are multiple steps an item goes through from manufacture or production to the final sale, these can be called as multiple stages. Buying of raw materials is the first stage. The second stage is production or manufacture. Then, there is the warehousing of materials. Next, comes the sale of the product to the retailer. And in the final stage, the retailer sells you – the end consumer – the product, completing its life cycle.

The various stages of the life cycle would be like this:

GST will be levied on each of these stages, which makes it a multi-stage tax on value addition. Value addition can be explained using an example.

Let us assume that a manufacturer wants to make a shirt. For this he must buy yarn. This gets turned into a shirt after manufacture. So, the value of the yarn is increased when it gets woven into a shirt. Then, the manufacturer sells it to the warehousing agent who attaches labels and tags to each shirt. That is another addition of value after which the warehouse sells it to the retailer who packages each shirt separately and invests in marketing of the shirt thus increasing its value. GST will be levied on these value additions – the monetary worth added at each stage to achieve the final sale to the end customer.

Destination-Based Taxation:

Goods and Services Tax will be levied on all transactions happening during the entire manufacturing chain. Earlier, when a product was manufactured, the centre would levy an Excise Duty on the manufacture, and then the state will add a VAT tax when the item is sold to the next stage in the cycle. Then there would be a VAT at the next point of sale.

So, earlier the pattern of tax levy was like this:

Now, Goods and Services Tax will be levied at every point of sale. Assume that the entire manufacture process is happening in Rajasthan and the final point of sale is in Karnataka. Since Goods & Services Tax is levied at the point of consumption, so the state of Rajasthan will get revenue in the manufacturing and warehousing stages, but lose out on the revenue when the product moves out Rajasthan and reaches the end consumer in Karnataka. This means that Karnataka will earn that revenue on the final sale, because it is a destination-based tax and this revenue will be collected at the final point of sale/destination which is Karnataka.

Need of GST:

A significant chunk of Dr. Bhaskar’s talk focused on the need of a unified taxation through the country because of the overly complicated pre existing structure of the taxation. As briefly discussed above currently, the Indian tax structure is divided into two – Direct and Indirect Taxes. Direct Taxes are levies where the liability cannot be passed on to someone else. An example of this is Income Tax where you earn the income and you alone are liable to pay the tax on it.

In the case of Indirect Taxes, the liability of the tax can be passed on to someone else. This means that when the shopkeeper must pay VAT on his sale, he can pass on the liability to the customer. So, in effect, the customer pays the price of the item as well as the VAT on it so the shopkeeper can deposit the VAT to the government. This means that the customer must pay not just the price of the product, but he also pays the tax liability, and therefore, he has a higher outlay when he buys an item.

This happens because the shopkeeper has paid a tax when he bought the item from the wholesaler. To recover that amount, as well as to make up for the VAT he must pay to the government, he passes the liability to the customer who has to pay the additional amount. There is currently no other way for the shopkeeper to recover whatever he pays from his own pocket during transactions and therefore, he has no choice but to pass on the liability to the customer.

Goods and Services Tax will address this issue after it is implemented. It has a system of Input Tax Credit which will allow sellers to claim the tax already paid, so that the final liability on the end consumer is decreased. Input Tax Credit is a credit an individual receives for the tax paid on the inputs used in manufacturing the product. So, if there is a 10% tax that the individual must submit to the government, he can subtract the amount he has paid in taxes at the time of purchase and submit the balance amount to the government.

The GST being unification of various taxes is another strong advantage that this new taxation system offers the Indian market.  Prior to GST, Indian markets dealt with around 46 different types of taxes. Ideally this number should be in single digit, GST has done a substantial work in getting it down to 22 in one swooping act.

Working of GST:

So essentially, Goods & Services Tax is going to have a two-pronged benefit. One, it will reduce the cascading effect of taxes, and second, by allowing input tax credit reducing the burden of taxes and prices as seen above.

When Goods and Services Tax is implemented, there will be 3 kinds of applicable Goods and Services Taxes:

CGST: where the revenue will be collected by the central government

SGST: where the revenue will be collected by the state governments for intra-state sales

IGST: where the revenue will be collected by the central government for inter-state sales

In most cases, the tax structure under the new regime will be as follows:

Example:

A dealer in Maharashtra sold goods to a consumer in Maharashtra worth ₹ 10,000. The Goods and Services Tax rate is 18% comprising CGST rate of 9% and SGST rate of 9%. In such cases the dealer collects ₹ 1800 and of this amount, ₹ 900 will go to the central government and ₹ 900 will go to the Maharashtra government.

Now, let us assume the dealer in Maharashtra had sold goods to a dealer in Gujarat worth ₹ 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such case the dealer has to charge ₹ 1800 as IGST. This IGST will go to the Centre. There will no longer be any need to pay CGST and SGST as the dealer will get a credit in his name against this IGST which can be later claimed by the dealer while filing the suitable tax returns. 

How does GST benefit the common man:

Let us understand this with a hypothetical numerical example:

Say a shirt manufacturer pays ₹ 100 to buy raw materials. If the rate of taxes is set at 10%, and there is no profit or loss involved, then he has to pay ₹ 10 as tax. So, the final cost of the shirt now becomes ₹ (100+10=) 110.

At the next stage, the wholesaler buys the shirt from the manufacturer at ₹ 110, and adds labels to it. When he is adding labels, he is adding value. Therefore, his cost increases by say ₹ 40. On top of this, he has to pay a 10% tax, and the final cost therefore becomes ₹ (110+40=) 150 + 10% tax = ₹ 165.

Now, the retailer pays ₹ 165 to buy the shirt from the wholesaler because the tax liability had passed on to him. He has to package the shirt, and when he does that, he is adding value again. This time, let’s say his value add is ₹ 30. Now when he sells the shirt, he adds this value (plus the VAT he has to pay the government) to the final cost. So, the cost of the shirt becomes ₹ 214.5 Let us see a breakup for this:

Cost = ₹ 165 + Value add = ₹ 30 + 10% tax = ₹ 195 + ₹ 19.5 = ₹ 214.5

So, the customer pays ₹ 214.5 for a shirt the cost price of which was basically only ₹ 170 (Rs 110 + ₹ 40 + ₹ 30). Along the way the tax liability was passed on at every stage of transaction and the final liability comes to rest with the customer. This is called the ‘Cascading Effect of Taxes’ where a tax is paid on tax and the value of the item keeps increasing every time this happens.

In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input. What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes.

In our example, when the wholesaler buys from the manufacturer, he pays a 10% tax on his cost price because the liability has been passed on to him. Then he adds value of ₹ 40 on his cost price of ₹ 100 and this brings up his cost to ₹ 140. Now he has to pay 10% of this price to the government as tax. But he has already paid one tax to the manufacturer. So, this time what he does is, instead of paying Rs (10% of 140=) 14 to the government as tax, he subtracts the amount he has paid already. So, he deducts the ₹ 10 he paid on his purchase from his new liability of ₹ 14, and pays only ₹ 4 to the government. So, the ₹ 10 becomes his input credit.

When he pays ₹ 4 to the government, he can pass on its liability to the retailer. So, the retailer pays ₹ (140+14=) 154 to him to buy the shirt. At the next stage, the retailer adds value of ₹ 30 to his cost price and has to pay a 10% tax on it to the government. When he adds value, his price becomes ₹ 170. Now, if he had to pay 10% tax on it, he would pass on the liability to the customer. But he already has input credit because he has paid ₹14 to the wholesaler as the latter’s tax. So, now he reduces ₹ 14 from his tax liability of ₹ (10% of 170=) 17 and has to pay only ₹ 3 to the government. And therefore, he can now sell the shirt for ₹ (140+30+17) 187 to the customer.

In the end, every time an individual was able to claim input tax credit, the sale price for him reduced and the cost price for the person buying his product reduced because of a lower tax liability. The final value of the shirt also therefore reduced from ₹ 214.5 to ₹ 187, thus reducing the tax burden on the final customer.

In addition to the change in the pricing, GST improves the implementation of taxation stages. Now, taxation is applied in 4 main stages including:

  • Levy
  • Collection
  • Appropriation
  • Apportion

In the previous taxation scheme, different governmental bodies were performing different roles with different types of taxes without much consistency across nation. With GST reform, there is a clear cut mandate of which agencies to take care of the respective stages of the taxation process, this will cause a much harmonies procedure  leading to a very efficient management of taxation funds by the government in most coherent fashion.

Overview of GST:

GST is being implemented by the government with a clear cut purpose to achieve the following:

  1. Ease of doing business in India
  2. Promote investments (external and internal)
  3. Give rise to competitive business culture
  4. Harmonise the national marketing
  5. Cause a catalyst to the growth of India
  6. Provide a unified taxation platform for services and goods likewise

Promoting Empathy and Change Making’ – Using Real World Data & Gamification

About the Speaker: Parag Mankeekar is a medical & public health professional and an anthropologist. He is currently the founder director of Neeti Solutions, which develops simulations games and interactive learning products for societal challenges. He has closely researched on terrorism and had met terrorist groups in Afghanistan to understand how it impacts nations and lives of the common man.

Parag likes traveling and meeting different people, which helped him to fabricate different components of a real life simulation game. He is an Ashoka and Erasmus Fellow. The below article is an excerpt from the lecture given by Parag as a part of Social Innovation Lecture Series held at Venture Center, Pune.

Talk:

Ever since the industrial revolution, with the introduction of machines and technology, we imagined the world would get closer and become a better place. Our needs made us inventors to seek for solutions to make our life easier and comfortable. However, this development came with a price, which was only accessible to the ones who can afford it. “ The promise of globalization was to create a win-win situation, where consumers in the rich world will get cheaper goods and people in the poor world will get jobs which will help them to get out of poverty”, says John Hilary, Executive Director War on Wants in the documentary True Cost.

During Parag’s travel to Paris, he came across Yann Arthus-Bertrand who worked on the film HUMAN. One of the speakers in the film says, “We invented a mountain of superfluous needs. You have to keep on buying, throwing away. It’s our lives we are dilapidating.”

After 275 years in the industrial revolution, the world faces challenges where 6 billion people are living in poverty, there are war and hate crimes, migrations, xenophobia, climate change and the list goes on. There is inequality in the world at every level in terms of resources, money, and talent. Why are we not able to change it?

What we forgot goes in the old Sanskrit phrase, “Vasudev Kutumbakam” which translates to “the world is one family”. This can only be achieved by having empathy.

Following are the remarks of Barack Obama to Northwestern graduates at 2006 Commencement:

“The world doesn’t just revolve around you.

There’s a lot of talk in this country about the federal deficit.  But I think we should talk more about our empathy deficit – the ability to put ourselves in someone else’s shoes; to see the world through those who are different from us – the child who’s hungry, the laid-off steelworker, the immigrant woman cleaning your dorm room.”

This is what the game, ‘Real Lives’ intends to do by enabling people to experience someone else’s shoes without going to the actual place. The game events are simulated based on the authentic statistical data from over 193 countries. A user is born in the game in a different socio-economic condition at any part of the world, experiences different life events and life decision making while living a virtual life. The objective of the game is to enable people to become empathetic global citizens by the use of technology. The game is very well received and currently, ranks no. 2 on CNET.

Figure 1: Snapshot from the game ‘Real Lives’

Through his travel journeys and experiences, Parag has well-connected his passion with Real Lives which shows that if you have a purpose you can be a change maker.

 

About the Author: Shubham Singh is presently working as the BIRAC Social Innovator at Venture Center, Pune.

Immersion – KK Nag Industry Visit

The SIIP team visited K. K. Nag industries as part of immersion visits.

K. Nag Pvt. Ltd represents more than half a century of pioneering enterprise. Headquartered in Urse, Near Pune, is renowned for having introduced several innovative plastic products into India for the first time and are a premier Indian manufacturer of EPS (Thermocole), EPP and myriad speciality plastics.

The main line of business of Nag industries is Expanded Polystyrene (EPS) moulded packaging and components. Most of the manufacturing takes place at total 4 locations, 2 in Pune, one each on Puducherry and Chennai. These factories also process other foamed plastics. Company also prepares rotationally moulded products in LLDPE and various other plastics, and has in-house facilities for PU foaming.

Approximately 15 years ago Nag industries ventured into the field of sanitation under the able and passionate leadership of Mr. M. K. Nag (MD, K. K. Nag Pvt. Ltd).

One of their first and iconic products were ‘squatting slabs’. A squatting slab is a plastic moulded slab retrofitted with a steel frame inside to bear the weight of the person. The slab is classically set up on top of a pit latrine. This system is usually used in rural areas and/or in areas affected by natural calamity. The squatting slab is very successful product as it offers an easy sanitation solution and stops the spread of diseases like Diarrhoea, Dysentery, Typhoid and Cholera caused due to open deification. The seepage of such a system into the ground water system can still be a problem and hence this system is not advised unless absolutely necessary.

Their most prominent product in sanitation niche is a bio-digester, devised to disintegrate the faecal matter. Nag industries use the Bio-Digester Technology developed by DRDO, Ministry of Defence, Govt of India. This technology was initially developed to cater to the needs of Indian soldiers posted in high altitude regions like Siachen. With successful results, the technology is being offered to the entire country under the Swacch Bharat Mission.

The bio-digester has two key components:

  1. Anaerobic Microbial Inoculum (AMI): Non bio-hazard solution a combination of 150 different type of bacteria. These bacteria break down the faecal matter into water, carbon-di-oxide and methane. Nag Industries have an incubator which makes the AMI, the incubator has a cycle of 100 days in which the bacteria is introduced in the incubator using cow-dung as a carrier and later as food for the bacteria.
  2. Bio-digester tank: A specially designed bio-digester tank makes sure that uses toilet discharge as input and is designed in such a way that it gives bacteria enough time to process the input and break down the faecal matter. Nag industries manufacture these bio-digester tanks sing rotational moulding facility. They have perfected the design to get optimum results.

Nag industries are a license holders from DRDO to use their technology to manufacture and distribute the AMI. The Nag industries’ manufacturing facility is inspected by the DRDO officials every 3 months to evaluate the viability of the AMI after which it is allowed to be distributed to the customers. One of the main clients of Nag industries are Indian Railways. Some other clients involve private societies and bungalows.

Human waste (faecal matter) disposal is an ever growing problem leading to threat of organic pollution & rise of infectious diseases due to contamination of ground water, food chain and drinking water resources. Bio-digester tanks are a need of the hour, as most of the faecal matter entering in the environment is not disposed for a long time and needs to be managed at the source itself.

Currently, in India use of septic tanks is very common as compared to the a bio-digester tank.

 

Septic Tank:
In India, Septic Tank is a very commonly used product for storage and disposal of Human Faecal matter at places / sites that lack connection to main sewage pipes which normally are provided by local government bodies. Sadly in our country, the sewerage network is missing and in fact most of our urban clusters lack 100% sewage connections thus leading to higher usage of Septic Tanks which is NOT an Eco Friendly Solution. Since Septic Tanks require large drainfields to dispose of the sludge (Human Faecal Matter), they are not suitable for densely built cities and in fact pollute the environment. Periodic preventive maintenance is required to remove solids (faecal matter) that remain and gradually fill the Septic Tank which reduces its efficiency and thus regular pumping out is a must to de-sludge the Septic Tank. If this is not done then the faecal matter (solids) escapes from the Septic Tank and clogs the drainage pipes / surrounding areas thus polluting and creating numerous health hazards. Additives to improve the effluent quality from septic tanks, reduce sludge build-up and to reduce odours have been promoted by some manufacturers, however, these additives – which are commonly based on “effective micro-organisms” – are usually costly in the longer term and fail to live up to expectations of the users.

Disadvantages of a Septic Tank:

  • Septic tanks do not treat the waste but only store it thus they basically just postpone the problem of treating the waste and act as containers of waste material.
  • In many rural areas no proper equipment is available to pump out the waste matter from the septic tanks and many a times people manually clean the septic tanks which is tantamount to manual scavenging, a practice that is morally repugnant, dehumanising and against the law.
  • The agencies that “clean” the septic tanks do not treat the waste – they just dump it in the water bodies or ditches, thus polluting the environment.

Environmental concerns due to Septic Tank Systems:

Odour and gas emissions:
Septic Tank systems typically generate hydrogensulphide, a pungent and toxic gas along with ammonia which is also generated due to breakdown of Nitrates and organic nitrogen compounds. Both these gas emissions are not desirable for human beings and for our environment.
Nutrients in the effluent:
Septic tanks are ineffective at removing nitrogen compounds that have potential to cause algal blooms in waterways into which the septic tank dischargefinds its way. Furthermore the system keeps phosphates in a soluble and mobilized form which can trigger prolific plant growth including algal blooms which also include the blooms of the potentially toxic cyanobacteria.
Groundwater pollution:
In urban areas with high population density, septic tank system pollutes the ground water beyond acceptable limits which in turn pollutes the food chain leading to health hazards.
Surface water pollution:
In areas adjacent to water bodies, septic tank systems pollute the water thus harming the marine life leading to lower harvest levels (less number of fishes in the water) and ecological destruction.
Health Hazards:
In India, the extensive usage of Septic Tanks along with Soak Pits / Leach Pits and Open Defecation has led to degradation of our environment posing serious health hazards.
The list of diseases that could be reduced with proper sanitation and hygiene practices is very long. For example, in India, 15 diseases have been listed which could be stamped out by proper sanitation practises.

  1. Anaemia, malnutrition
  2. Ascariasis (a type of intestinal worm infection)
  3. Campylobacteriosis
  4. Cholera
  5. Cyanobacteria toxins
  6. Dengue
  7. Hepatitis
  8. Japanese encephalitis(JE)
  9. Leptospirosis
  10. Malaria
  11. Ringwormor Tinea (a type of intestinal worm infection)
  12. Scabies
  13. Schistosomiasis
  14. Trachoma
  15. Typhoid and paratyphoid enteric fevers

According to DRDO, the published comparative study of a Septic System Tank system and a Bio-Digester system is as follows:

Working Features Septic Tank Bio-Digester
Waste Degradation Aerobic dominant Anaerobic
Waste Decomposition Only 30% pathogen reduction Up to 99% pathogen reduction
Additives Periodic addition required One time charge of Bacterial Inoculum.
Sludge Formation Yes No
Maintenance Periodic removal of sludge, to be emptied every 2 years or earlier as per IS 2470 norms. High Maintenance Costs. Maintenance-free.
Discharge from Tank Odorous (hydrogen sulphide and ammonia gases), sludge formation and hazardous waste. Discharge water is unsafe for any kind of use and has to be disposed of safely. The discharged water contaminates the ground / water bodies. Odourless, colourless and hazard-free waste (water only)Discharge water is safe to be used for irrigation, gardening or to be let off into water bodies or over the ground. It does not contaminate.
Sensitivity towards Cleaning Agents Cannot tolerate toilet cleaning agents Bacteria conditioned to remain unaffected by cleaning agents up to permitted limits
Size of the system Three times bigger than the Bio-Digester, hence costly to construct and occupies more space a major constraint in the urban areas One third the size of the Septic Tank, hence economical and has a smaller footprint leading to lower construction cost.
Impact on Environment Significant No impact…100% Eco-Friendly system

 

Key advantages of Bio-Digester technology:

  1. No bad smell in toilets from the tanks
  2. No infestation of cockroaches and flies
  3. Faecal matter in the tank not visible.
  4. No clogging of digester.
  5. Effluent is free from offensive odours, solid waste and does not contaminate the ground water / soil like other systems do.
  6. No maintenance required.
  7. Reduction in organic matter by 90%.
  8. No requirement of adding bacteria/ enzyme.
  9. No need of removal of solid waste.
  10. Normal Cleansing Agents like Phenyls, Toilet Cleaners can be used

 

Design and working of a Bio-Digester system:

More information of K.K. Nag industries and DRDO technology of Bio-Digester tank can be found on the following link:
http://biodigester.in/bio-digester-technology/