How is the tax liability calculated under GST?

The tax liability under the Goods and Services Tax (GST) is calculated based on the value of supply and the applicable tax rate (CGST, SGST, IGST, or UTGST). The calculation of tax liability is a critical part of ensuring compliance with GST law, as it directly affects a business’s ability to properly calculate its tax obligations and claim input tax credits (ITC).

Basic Formula for Tax Liability under GST

The tax liability is generally calculated using the following formula:

Tax Liability=Value of Supply×Tax Rate\text{Tax Liability} = \text{Value of Supply} \times \text{Tax Rate}Tax Liability=Value of Supply×Tax Rate

Where:

• Value of Supply: The value on which GST is levied, which is typically the transaction value (price paid or payable for the goods or services). Certain additions or adjustments might be required (e.g., freight, packing, etc.).
• Tax Rate: The applicable GST rate depending on the nature of goods or services. GST is categorized into different tax slabs: 5%, 12%, 18%, 28% (as per GST rates notified by the GST Council).

Steps for Calculating Tax Liability Under GST

1. Determine the Type of Supply: Identify whether the supply is intra-state (within a state) or inter-state (between states). The nature of supply determines whether CGST and SGST (for intra-state supply) or IGST (for inter-state supply) will be levied.
   • Intra-State Supply: If the supply is within the same state, both CGST and SGST are levied at equal rates.
   • Inter-State Supply: If the supply is between two different states, IGST is levied.
2. Determine the Value of Supply: The value of supply refers to the price actually paid or payable for the goods or services, as per the contract. It includes any additional charges like freight, insurance, packaging, etc. If the supply involves related party transactions, the valuation rules under GST should be followed.
   • For example, the value of supply will be the transaction price unless there are discounts, rebates, or promotional schemes.
3. Apply the Relevant GST Rate: The GST rate applicable to the specific goods or services should be applied. Rates are specified under the GST rate schedule by the GST Council.
   • For example, if the product is classified under a 28% tax rate, the calculation would be as follows: Tax Liability=Value of Supply×28%\text{Tax Liability} = \text{Value of Supply} \times 28\%Tax Liability=Value of Supply×28%
4. Subtract Input Tax Credit (ITC): If the business is eligible to claim input tax credit on its purchases, the ITC claimed will reduce the total tax liability. Input Tax Credit (ITC) is the credit available for taxes paid on input goods and services, which can be set off against the output tax liability.
   Net Tax Payable=Total Tax Liability−ITC Available\text{Net Tax Payable} = \text{Total Tax Liability} – \text{ITC Available}Net Tax Payable=Total Tax Liability−ITC Available
5. Final Payment: The amount after subtracting the eligible ITC from the tax liability gives the final net tax payable to the government.

Acts and Provisions in Indian Constitution and GST Laws Governing Tax Liability

1. Constitutional Provisions

The Goods and Services Tax regime is based on the 101st Constitutional Amendment Act, 2016, which led to the introduction of the GST framework. The relevant constitutional provisions are:

• Article 246A: Power to legislate on GST – This article empowers both the Parliament and the State Legislatures to make laws relating to GST on matters concerning goods and services.
• Article 269A: Inter-state trade and GST – This article deals with the levy and collection of Integrated GST (IGST) on interstate supplies.
• Article 279A: GST Council – This article creates the GST Council responsible for recommending the GST rates, tax structure, and other operational aspects of the tax system.

**2. Provisions under the CGST Act, 2017

The CGST Act, 2017, is the primary legislation that governs the GST framework. The provisions relevant to the calculation of tax liability under GST include:

• Section 9 – Levy and Collection of Tax:
  • Section 9 of the CGST Act specifies the levy and collection of GST on the supply of goods and services. The section allows for the charge of tax on intra-state supplies and lays the foundation for both CGST and SGST.
  • Section 9(1): The Central Government shall levy and collect GST on the supply of goods or services, at the rates specified by the GST Council.
• Section 7 – Scope of Supply:
  • This section defines what constitutes a supply under GST, which forms the basis for calculating the taxable value on which the tax is applied.
• Section 15 – Value of Supply:
  • This section defines the value of supply and provides guidance on how to determine the transaction value, including adjustments for discounts, costs, freight, etc.
  • Section 15(1): The transaction value is the price actually paid or payable for the goods or services, subject to the exceptions and adjustments specified in the Act.
• Section 16 – Eligibility for Input Tax Credit (ITC):
  • This section allows taxpayers to claim ITC on goods and services used to make taxable supplies. The tax liability is calculated after adjusting for the available ITC.
  • Section 16(1): A registered person can claim ITC on any input goods or services used to make a taxable supply, provided certain conditions are met.
• Section 17 – Apportionment of Credit and Blocked Credits:
  • This section provides for the apportionment of credit in cases where goods and services are used for both business and personal purposes. It also identifies items for which ITC is not available (i.e., blocked credits).
• Section 18 – Conditions for ITC in Case of Exempt Goods/Services:
  • This section outlines the conditions under which ITC can be claimed when goods and services are exempted or zero-rated.

3. The GST Rules

• Rule 33 – Valuation of Supply of Goods:
  • This rule specifies the methodology for valuing goods that are being supplied, which forms the basis of calculating the GST payable on such supplies.
• Rule 34 – Valuation of Supply of Services:
  • This rule outlines the procedures for determining the value of supply of services, which impacts the GST calculation on services provided.
• Rule 89 – Refund of Tax:
  • Rule 89 specifies the refund process for any excess GST paid and how this can be used to adjust the tax liability.

Landmark Cases on GST Tax Liability

Several landmark cases have been decided by the courts in India regarding the calculation of tax liability under GST. These cases have clarified several issues such as taxable value, ITC eligibility, and the scope of taxable supplies.

1. M/s. M/s. K. P. P. N. N. Exports Ltd. v. Commissioner of Central Tax (2019)

• Issue: The issue was whether the value of supply under GST includes the discount given after the sale and whether such discounts should be factored in when calculating GST liability.
• Court’s Ruling: The Tribunal ruled that discounts offered after the sale should not be included in the taxable value if the discount is linked to the volume of goods sold and is not known at the time of sale.

2. M/s. Sakthi Sugars Ltd. v. Union of India (2020)

• Issue: This case dealt with the issue of GST on by-products and whether GST liability should be calculated on the gross value or net value (i.e., after accounting for by-products).
• Court’s Ruling: The Madras High Court ruled that GST liability should be calculated based on the net value of the primary product after accounting for by-products.

3. State of Rajasthan v. M/s. Bajaj Auto Ltd. (2019)

• Issue: The case revolved around the calculation of tax liability when a registered taxpayer sells goods to a related party at a discounted price. The question was whether the discount should be adjusted in the taxable value.
• Court’s Ruling: The Supreme Court ruled that related-party transactions must be valued based on the market value (the price that would be charged to an unrelated party), and GST must be paid on that market value, not the discounted price.

4. M/s. Kargil International v. Union of India (2020)

• Issue: This case involved the eligibility of ITC on goods purchased for export purposes, which was questioned on the basis of whether exports should attract GST and whether the taxpayer was entitled to claim refund.
• Court’s Ruling: The Supreme Court clarified that exports are zero-rated under GST, and the taxpayer was entitled to claim ITC and refund on the goods and services used in exports, emphasizing the zero-rating principle for exports.

Conclusion

The calculation of tax liability under GST is a multi-step process that involves determining the value of supply, applying the correct tax rate, and adjusting for input tax credit (ITC). The CGST Act, 2017, and various rules and provisions set out by the GST Council provide the framework for calculating GST liability. Key constitutional provisions, particularly Article 246A and Article 279A, empower the central and state governments to implement GST in India. Several landmark cases have clarified issues related to tax liability calculation, ensuring better interpretation and application of the law. Understanding these provisions and the legal precedents is crucial for ensuring compliance and proper tax calculation under the GST regime.