GST in India is expected to be a destination based consumption based levy. Destination principle would be applicable in normal course of business to business [B2B] other than for few services and business to consumer [B2C] where the origin or other criterion would apply. GST was proposed to be in place by April 2016 – maybe a bit optimistic as the draft law assuming bill passed in winter session of parliament is passed by the minimum 15 States and other Information Technology platforms and more importantly training and attitudinal change in officers at State and Central level achieved. If pushed through as in case of VAT without proper debate and change management process then it would have limited gain.
What is GST?
GST stands for “Goods and Services Tax”, and is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. Its main objective is to consolidate all indirect tax levies into a single tax, except customs (excluding SAD) replacing multiple tax levies, overcoming the limitations of existing indirect tax structure, and creating efficiencies in tax administration. The single tax would be shared between the Centre and State. (Dual Levy).
The Union Government this year has shown speed in the last few months to push this landmark reform through as it has the following advantages:
1. Make Exports much competitive as cascading to further extent would be reduced. It is expected that directly exports would grow by 10 %.
2. The common market would add at least 1- 2 % to the present GDP of India.
3. The tax collection would become more balanced as most hitherto “tax evaders” would be forced to enter the mainstream.
4. The high level of corruption in the tax department whether Central or State would get dis-incentivised due to hand off policy. Practitioners would have observed that under the VAT regime there was drop in the harassment/ corruption to some extent without any loss of revenue.
5. Tax Collection by both the Centre & the States on the whole would increase over period of 2 years for most.
6. Over a period inflation would be checked. Initially however there is bound to be a higher inflation due to uncertainty and for some products and all services entering the tax regime. Majority of NRN products however would see a fall in total rate,
7. The transaction cost [multiple taxes with different principles taxing the same transaction – requiring record keeping, uploading, returns] and time for compliance would be substantially reduced.
8. Tax Compliant assessee would be favoured and evaders discouraged as penalties would be severe.
The main disadvantages are that the States would lose some autonomy and compensation verification and disbursal could be a political decision. The manufacturing and service providing States like Gujarat, Maharashtra, Tamil Nadu and Karnataka among others could see a lesser comparative advantage as most of their goods and services are consumed outside the State. States with high consumption like Kerala and Goa maybe more advantaged. Some States with low business due to not being developed would see flight of the businesses to other more efficient States as industries who have located due to tax advantage would in GST go where only economic advantages exist.
In an ideal GST, all the credit of taxes paid on purchase of inputs, input services and capital goods are seamlessly allowed for set-off against the tax payable on subsequent sale of goods that are either sold as such or sold upon conversion, or in the context of services, are supplied.
It is required to have a brief revisiting of the existing indirect taxes regime, before proceeding to understanding GST. The practitioners who are already in those areas would have a slight advantage over the others. The excise duty, import duties of customs, VAT/CST and service tax are the main levies at present. The principles of GST could be drawn from the best practices internationally and some time tested principles which have been working well in India. The urge to unreasonably tax which has been seen in drafting the tax laws especially service tax needs to be curbed.
Present Indirect Taxes Link to Proposed GST
a. Excise duty: Central Excise Duty is levied by the Central Government under the Central Excise Act, 1944. The levy is on all goods manufactured and produced in India, which are specified in the schedule to the Central Excise Tariff Act subject to certain exemptions. The effective rate may vary from product to product though most goods are subject to excise duty at 12% (without education cess). If VAT were added this rate for RNR products would be 27%.
Link to Proposed GST
The concepts of cenvat credit, dispute resolution, removal and valuation on intrinsic value under this law may find a place in GST. Also the principle of trusting the tax payer while having the checks and balances of audit rather than suspecting all businessmen would hopefully be adopted.
b. Import Duties: Customs duties are levied by the Central Government under the Customs Act, 1962. The levy gets attracted on all specified goods imported into and exported from India, which are specified in the schedule to the Customs Tariff Act. The customs duties are levied on assessable value and the total customs duty ordinarily would amount to an average of 28 % (subject to cenvat credits) on the value of goods imported. If VAT were added this rate for NRN products would be total of 40%.
Link to Proposed GST
Basic Customs duty would continue but the additional duty of customs (CVD) and special additional duty (SAD)would get subsumed into GST as an IGST. The Classification under customs which is based on the harmonised System of Nomenclature would be adopted under GST.
c. Value Added Tax (VAT): Value Added Tax (VAT) is levied by the State Governments on transfer of property in goods from one person to another, when such transfer is for cash, deferred payment or other valuable consideration. VAT is also payable on certain transactions that are deemed to be sale such as transfer of right to use goods, hire purchase and sale by instalments, works contract and sale of food and drink as a part of rendering of any service.
Link to Proposed GST
The supplies of goods and importantly services would now be available to the States as SGST. States would also get apportioned part of the IGST for stock transfers which would suffer IGST.
d. CST: The rate of CST is 2% against the declaration in Form C and in case the said declaration is not provided by the buyer, they are subject to tax at the rate specified in the local VAT law. Form C is allowed to be issued by the buyer when he purchases the goods for use in manufacture or for resale or for use in telecommunication network or in mining or in generation or distribution of power. Sales without Form C would be at the rate as applicable in State of origin.
Link to Proposed GST
The principles of interstate sales, sales in the course of export/ import with required changes for supplies would be a part of the GST. The aspects of valuation in some parts would also be adopted. The origin based tax of 1% is being proposed akin to CST for a limited period of 2 years to get States to agree to entry tax subsuming.
e. Service Tax: Service tax is levied all activities as defined other than those specified in the negative list and those specifically exempted. Service tax is presently taxed at 12% (without education cess). Ordinarily, service tax is payable by the service provider, except in specified cases where a reverse charge and joint charge has been put in place.
ink to Proposed GST
The principles of point of taxation to decide when the GST is payable may be followed. Further the Place of Provision of Services Rules would be tweaked into place of supply rules to decide the State where the service is destined or deemed to be provided. States would get the SGST part of all services consy\umed in the State whether provided from outside to the State or that which is provided and consumed in the State itself.
Features of an Ideal GST:
GST is a comprehensive value added tax on goods and services. It is levied and collected on value addition at each stage of sale or purchase of goods or supply of services based on input tax credit method but without State boundaries. There is no distinction between taxable goods and taxable services and they are taxed at a single rate in a supply chain of goods and services till the goods / services reach the consumer. The administrative power generally vests with a single authority to levy tax on goods and services. The main features of GST are as under:-
- GST is based on the principle of value added tax and either “input tax method” or “subtraction” method, with emphasis on voluntary compliance and accounts based system.
- It is a comprehensive levy and collection on both goods and services at the same rate with benefit of input tax credit or subtraction of value of penultimate transaction value.
- Minimum number of floor rates of tax, generally, not exceeding two rates.
- No scope for levy of cess, re-sale tax, additional tax, special tax, turnover tax etc.
- No scope for multiple levy of tax on goods and services, such as, sales tax, entry tax, octroi, entertainment tax, luxury tax, additional duty of customs, central excise duty etc. Zero rating of exports and inter State sales of goods and supply of services.
- Taxing of capital goods and inputs whether goods or services relatable to manufacture at lower rate, so as to reduce inventory carrying cost and cost of production.
- A common law and procedures throughout the country under a single administration.
- GST is a destination based tax and levied at single point at the time of consumption of goods or services by the ultimate consumer.
What Compromises made in departure of the Ideal GST?
- The origin based tax of 1% is being proposed akin to CST for a limited period of 2 years to get States to agree to entry tax subsuming. This would cascade.
- Petrol/ Diesel etc (40% of VAT) not in GST – will cascade. Sale of 5 specified petroleum products would continue to be under sales tax and central excise till the GST Council suggests its inclusion in the GST.
- Liquor Not in GST-Alcohol is intended to be kept for state excise ONLY.
- Rate Structure: It is expected that GST would have the following rate structure- standard rate, concessional rate, special rate for bullion &jewellery and exempted/ nil rated. Objective of GST to worked out a Revenue-Neutral Rate (RNR)
- The discussion of GST began with expected rate 6.2 to 9.4 % in the year 2009 and current expected rate around 24 %-alert or shock to service providers!!
- Discussion that some weaker State may join GST regime later- bigger challenge to bring in one time GST implementation. They would definitely become weaker than they are if they do not join.
- Devolution to states substantially increased Rs.1.78 Lakh Crores-to encourage states to join the GST regime
- Only bill is passed in Lok Shaba after much give and take. Present bill passed with the above compromises. GST has many more hurdles for its implementation and many more compromises done and many more to go. .
Concurrent dual GST
Under this model, the tax is levied concurrently by the Centre as well as States. Both the Central Government and the Empowered committee appear to favor this model.
Features of GST
- There would be change from present Origin based to Destination based consumption tax. For B to C transactions it could still continue to be origin based levy.
- Apply to all stages of the value chain – primary, secondary & tertiary including retail.
- Apply to all supplies of goods or services (as against manufacture, sale or provision of service) made for a consideration except:
- Exempted goods or services – common list for CGST & SGST
- Goods or Services outside the purview of GST
- The transactions below threshold limits-of Rs. 25 Lakhs may not be taxed.
- There will be Central GST to be administered by the Central Government andthere will be State GST to be administered by State Governments.
- Central GST will replace existing CENVAT and service tax and the State GSTwill replace State VAT.
- CGST & SGST on intra-State supplies of goods or services in India. SGST bit higher rate.
- IGST (broadly equal to CGST + SGST) on inter-State supplies of goods or services in India which would be levied & collected by the Centre.
- IGST applicable to import of goods or services.
- Export of goods or services would be Zero rated. The philosophy is that taxes are not to be exported.
Other Features of Indian GST:
- There would be multiple statutes whereby there could be one for Centre & one for every State similar to the present VAT laws which are enacted in each state.
- Model GST Law including Rules & procedures to be recommended by GST Council.
- Certain features to be common between Centre & States and across States.
- Certain features may vary to allow flexibility to Centre & States.
- Moreover, tax payment Challan might contain some additional information, e.g., amount of CGST paid on SGST Challan, and vice-a-versa. Payment of tax might be only online through net-banking.
- HSN will form the basis of product classification for Central GST and State GST.
- Other indirect taxes levied by the Centre, States, or local authorities at any point in the supply chain would be subsumed under the Central or the State GST, as long as they are in the nature of taxes on consumption of goods and services.
Subsuming of Taxes in GST:
GST should subsume all major indirect taxes levied by the Central Government i.e. central excise, customs and service tax and majority of the taxes levied by the State Government i.e. VAT, luxury tax, entertainment tax, etc. In this regard, tax on sale of 5 specified petroleum products would continue to be under sales tax and central excise till the GST Council suggests its inclusion in the GST. Alcohol is intended to be kept for state excise ONLY. The following taxes would be absorbed/ subsumed into GST:
The following indirect taxes would be subsumed under GST:
|Duty of excise on manufacture||Centre|
|CVD & SAD (component of customs duties)||Centre|
|Central Sales Tax – Taxes when sale or purchase takes place in the course of inter-State trade||Centre|
|CST- Taxes on consignments that take place in the course of inter-State trade||Centre|
|Taxes on the entry of goods into a local area for consumption, use or sale therein (Including octroi).||State|
|Taxes on sale/purchase of goods within state||State|
All goods or services likely to be covered under GST except:
- Alcohol for human consumption – State Excise.
- Electricity – Electricity Duty.
- Real Estate – Stamp Duty plus Property Taxes would be payable.
- Petroleum Products –5 products for some time to continue under sales tax. Others under GST
- Tobacco products – under GST as well as Central Excise.
What would be the Applicability of Levy?
Under GST, every specified transaction would be subject to tax.
Supply within State: In case the supply being a sale of goods or provision of services is done locally or interstate i.e. the place of consumption rules provide that local GST needs to be applied for the transaction, then the supplier would charge dual GST i.e. SGST and CGST at specified rates on the supply. This is explained with the following example:
|Basic value charged for supply of goods or services||10,000|
|Add: CGST @ 10%*||1,000|
|Add: SGST @ 10%*||1,000|
|Total price charged for local supply of goods or services||12,000|
Note: In the above illustration, the rate of CGST and SGST is assumed to be 10% each
The CGST & SGST charged on the customer for supply of goods or services would be remitted by the seller into the appropriate account of the State/ Central Government.
Supply (other than Sale ) from One State to Another
In case the transfer (supply) of goods or services is done interstate i.e. the place of consumption rules provide that interstate GST (or integrated GST) needs to be applied for the transaction, then the supplier would charge IGST at specified rates on the supply. This is illustrated with the help of the following example:
|Basic value charged for supply of goods or services||10,000|
|Add: IGST @ 20%*||2,000|
|Total price charged for interstate supply of goods or services||12,000|
Note: In the above example, the rate of IGST is assumed to be 20%
The IGST charged on the branch, division, agent would be remitted by the seller into the appropriate account of the Central Government. The CG would share the same with the State of destination and itself.
In case the supply of goods or services are exported out of India i.e. the place of consumption rules provide that regard the transaction as ‘exported’, then the transaction would be zero rate. In other words, the supplier would be allowed to export the goods or services without charging any tax. This is explained with the help of the following example:
|Basic value charged for supply of goods or services||10,000|
|Total price charged for export of goods or services||10,000|
From the above the following features of the GST emerge. The salient features of proposed GST law in India are given below:
- Dual GST: Dual GST signifies that GST would be levied by both, the Central Government and the State, on supply of goods or services. Under the Constitution, presently the taxing powers are presently split between the State and the Centre. In case of certain transactions, the power to tax is vested with the Centre and while in certain others, the power is vested with the State. Under GST, the power to tax on supply of all goods and services would be vested in the hands of both, the State and the Centre. In certain cases, such as the interstate transactions, the power to tax would be vested with the Central Government, while the revenue would in some appropriate manner, get distributed to the States. Considering the dual taxation power to tax transactions under GST, the structure is referred to as Dual GST. Considering the basic framework of the constitution and keeping its structure intact, Dual GST appears to be implementable solution for India scenario.
- Rate Structure: It is expected that GST would be levied on the transaction value i.e. price actually paid or payable for supply of goods and services. The GST for local supplies would be split into SGST and CGST.
- The Task Force on GST of Thirteenth Finance Commission (TFC) has worked out a Revenue-Neutral Rate (RNR) of 12% (5% CGST and 7% SGST) assuming there is a single GST rate and stamp duty & electricity duty are also subsumed in the GST. However the rate now being discussed is in excess of 20%.
GST could have a 4 rate structure with standard rate, concessional rate, special rate for bullion & jewellery and exempted/ nil rated. It is presently the view that services and goods would have the same rate.
SGST – Floor rate with a small band of rates for standard rated goods or services [ 1-3%]
The discussion paper mentions and the Constitution Amendment bill 2014 indicates that the empowered committee has decided to adopt the following rate structure for taxing goods and services:
Rate based on Revenue Neutral Rates (RNR) – [VAT Principal followed] Four rates:
- Merit rate for necessary goods- Concessional rate: Necessities and goods of basic importance [ the concept of declared goods would no longer be relevant] -could be 10%-15% in total.
- RNR- Standard rate for goods or services in general- For all – could be -22% -27% in total.
- Nil rate for exempted goods or services.
- Special rate for precious metals -1%.
- Optional Exemption & Composition scheme – Rs. 25 Lakhs to 75 Lakhs.
- Exempted goods: The short list [Out of 91 items] under the State VAT law-0%
Note: States may be able to fix the SGST based on a band say 9-11%. [1-2 %]
The recommend uniform State GST threshold of INR 25 Lakhs for both goods and services and composition scheme for those between Rs. 25 Lakhs to 75 Lakhs is being discussed.
A 1% tax would accrue to the originating States for a period of 2 years unless extended by the GST council.
GST Council would be put in place which would consist of the FM of Union and States. The issue of veto power for the Union still is to be resolved.
Credit Scheme: GST would be levied on supply of goods and services and the supplier would be allowed credit for the GST paid on purchases.The credit would be seamless except that the credit of CGST paid would not be allowed for set-off against SGST payable and vice versa.
The objective of seamless credit would be met except for those below the threshold limit, those under special composition schemes and the products which are exempted. Presently in the central as well as the state tax laws a number of restrictions exist on eligibility of goods and services used for business. It is hoped that these anomalies would be taken care in the draft law which is expected tobe in place by January 2016.
How would this work?
The assessee dealer would be entitled to avail credit of GST paid on purchases. In this regard, the dealer may purchase the goods or services locally or interstate or as imported. The following taxes paid on purchases when made locally, interstate or imported, would be available as credit in the hands of the dealer:
|Type of purchase||Local||Interstate||Imported|
|GST incidence on purchase (taxes payable)||CGST
|Credit entitled on (with respect to taxes paid)||CGST
The assessee is required to account for CGST, SGST and IGST separately.
Extent of Cross Utilisation:
|Nature of tax paid on purchase||Can be utilized for payment of|
- IGST: Under this model the Centre would levy the IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services.[ This would also include goods and services imports] Inter-State seller would pay the IGST on value addition after adjusting of IGST, CGST and SGST on purchases. The Exporting state would transfer to the Centre the credit of SGST used on payment of IGST.
Likely registration and returns filing procedure:
- State wise 15 digits PAN based GSTIN:
- There would a single registration or taxpayer identification number, based on the Permanent Account Number (PAN) for direct taxation. Three additional digits would be added to the current PAN to identify registration for the Centre and State GSTs. Also known as BIN (Business Identification Number).
- Facility of Facilitation Centre (FC) & Tax Return Preparers (TRP): This could be similar to help desk facility which is available under service tax and TRP could be akin to the Service tax returns preparers’ scheme which is presently available.
- Facility of migration of existing registrants: They may need to be migrated onto the new online registration and returns facility.
- Amendment, Cancellation & Surrender of Registration: Similar to ACES[Automation of Central Excise and Service Tax], the GST may need to have automated online facility for registration, amendment to registration, surrendering and cancelation as well. These could ensure that the intervention of the human interface is minimum leading to more ease in transacting to assesses.
Likely Return Procedure:
- Monthly & Annual Return for normal dealers. There could be one common tax return for both taxes, with one copy given to the Central authority and the other to the relevant State authority electronically. Moreover, most likely, GST returns will be required to be filed online.
- Quarterly Return for compounding dealers. At same time there could continue to be quarterly filing facility to dealers who had opted for compounding scheme.
- Revision of returns-There could be facility given for revising returns for mistakes/errors of omission etc. The same could extend across all supplies made by dealers. At present there is anomaly whereby excise manufacturers cannot file a revised return as there is no provision for same under the provisions. These could be rectified.
- Measures against non-filers and short-filers. There could be stringent measures against short and non-filers to ensure that there is non compliance on part of dealers.
- Compensation to States: In the opinion of the paper writer though some States who are consumer centric like Kerala would immensely benefit by GST most well to do States like Gujarat, Maharashtra, Haryana, Tamil Nadu & Karnataka among others would get a share of the services consumed in the State which is a much bigger proposition [ 59% of GDP]. They would also get a share of the Rs125,000/- of Additional Customs Duty as well as the Special Additional Duty] on imports.
The compensation for the first 3 years would be 100% of the shortfall. Then 75 % and 50% in the 5th year. States which over estimate the impact may find delayed disbursement a possibility.
- Administrative Mechanism: Both the Central Government and State Government would have the authority and control over the assessee as follows.
- The administration of the Central GST would be with the Centre and for State GST with the States.
- Each taxpayer could be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department.
- Keeping in mind the need of tax payers’ convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States. Both the State and Centre may also adjudicate jointly to avoid conflicting decisions.
- The assessee dealer would be required to pay GST into the specified account of the State/ Centre and file periodic returns separately with the State/ Central Government.
Goods and Service tax network [GSTN]
- Goods and Services Tax Network SPV (GSTN SPV) to create enabling environment for smooth introduction of Goods and Services Tax (GST). GSTN SPV will provide IT infrastructure and services to various stakeholders including the Centre and the States.
- The GSTN SPV would be incorporated as a Section 25 (not-for-profit), non-Government, private limited company in which the Government will retain strategic control. It would have an equity capital of Rs. 10 crore, with the Centre and States having equal stakes of 24.5% each. Non Government institutions would hold 51% equity. No single institution would hold more that 10% equity, with the possibility of one private institution holding a maximum of 21% equity.
- GTSN SPV would have a self-sustaining revenue model, based on levy of user charges on tax payers and tax authorities availing its services. While the SPV’s services would be critical to actual rollout of GST at a future date, it is also expected to render valuable services to the Centre / State tax administrations prior to the GST implementation.
- The exclusive national agency responsible for delivering integrated Tax related services involving multiple tax authorities namely:
- Equity Holders
- Central Government – 24.5%
- EC and all States together – 24.5%
- Financial Institutions – 51%
- GST Common Portal to be operational before GST roll out. This could be on lines of ACES facility which could be common gateway for states and centre.
- Common Portal to function as pass-through portal for GST dealers to:
- submit registration application
- file returns
- make tax payments
- Registration, return & payment information submitted by dealers to be passed to the Central and concerned State tax authorities.
- Statutory functions like assessment, enforcement of tax laws, settlement of disputes etc. to be performed by the respective tax authorities only.
- GSTN may develop back-end modules like Assessment, Audit, Refunds, Appeal, Enforcement & tax payer profiling utility, etc.
- GSTN to provide various services.
Place of Supply Rules:
The principles of Place of Provision of Services would be adapted to the place of supply rules. The point of taxation philosophy could also be a viable option. The States are expected to enjoy at least Rs.150,000/- Crores of revenue depending on the intra state consumption of services.
One of the major changes in GST would be consumption tax i.e. From origin to destination
A new rule Place of supply rules- (Draft available – akin to POPS)
- To determine Place of supply of goods or services.
- The place of provision could be destination based for B2B transactions and origin based for B2C transactions.
- To determine whether supplies are intra – state or inter – state
Impact of GST on various sectors
- Generally the purchase price would reduce as tax content of most products would come down. However if a product has evaded tax completely then it may find increase. Further those items which are now taxable where tax rate earlier was zero may be more expensive as exemption and zero rated list may come down in the GST regime
- The tax paid would be transparent in the invoice given to the customer. No hidden taxes would have been paid.
- The difficult choice of paying more if bill demanded and less if without bill would over a period of time disappear as this is a self policing system.
- The free flow of trade (over a period of time) between states and throughout the country would provide more choice to the consumer.
- The impact of tax on the wholesaler or retailer would be limited to the value addition. The tax paid at earlier stages (except SGST of other states) would be available as set off for payment of GST on supplies. Therefore traders would prefer to buy/receive supplies with invoice.
- The tax payable as a percentage of the supply value would be small whereby the compliance would be more cost effective than evasion.
- Cost of products and services would reduce due to the cascading effect of tax being reduced.
- Traders in GST regime can concentrate on growth into a large entities instead of remaining small and fragmented.
- There would be a saving in taxes absorbed at various stages of manufactures thereby reducing the cost of goods sold. This would make them more competitive both in domestic and international markets.
- The exports would be cheaper as taxes paid at earlier stages could be refunded.
- The difference between large manufactures and small would reduce.
- The indignity of harassments and bribe for honest manufacturers would substantially reduce over a period of time.
- The transaction cost of compliance would reduce again over a time once the rough edges of the over proactive law goes away
- Impact on Service Providers:
- The present rate of tax on services is 14% (w.e.f 01.06.2015) which would be doubled in GST. This may seriously impact all the service providers especially who have long periods of realization.
- Those working on low margins may become unviable.
- The net tax payment maybe substantial as most advisory services the manpower costs is the maximum. Hardly any set off would be available.
- The goods used in providing the services would be eligible for credit.
- Hopefully the service exporters would see refunds coming promptly without a direct transaction cost.
- Present destination based to consumption based levy: Presently, service tax is levied at origin and is a destination based levy, the burden of which is borne by the end customer. Under GST, they would be taxed at the place of consumption.
- Service tax-SGST levied by States: Under GST law, the service tax would be levied not just by Centre but also by the States who would be empowered to levy SGST by amendment to the Constitution of India.
- Taxes received by consuming State: If services are rendered from one State to another, then tax would ultimately go to the consuming State.
- The collection of Income tax would increase with increase disclosure.
- The centre would lose out CST, which would gradually be pleased out(may be within 2 years of GST implementation)
- The introduction of GST would make the refunds WTO compliant.
- The country would as a whole reduce corruption and move up ethical chain gradually.
- The compensation of loss to the states on account of implementation of GST would be an outgo.
- The trading sector, manufacturing and service sector in the parallel economy would also get into the mainstream and pay taxes. This would lead to buoyant revenues over a period of time.
- The tax administration would be easier and cost of collection would be reduced.
- The yearly budget ritual could be reduced only to expenditure budget, which could be concentrated on as that is really bleeding this country. It appears that the citizens are working for the government servants as most of the revenue go to that account.
- Other advantages to country as a whole
- It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.
- Single point taxation systems in the entire country for all goods and services making tax compliance easier and more effective.
- Simplify India’s tax structure, broaden the tax base and create a common market across India.
- Implementation of GST-would also bring raise in employment, promotion of exports and consequently a significant boost in overall economic growth and factors of production-land labour and capital.
- GST would ensure equitable burden between the manufacturing and services
- GST would also solve several issues like inflation and fiscal deficit.
Pending Policy Issues:
- Extent of Dual Control: Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT. The common threshold is being canvassed at Rs.25 Lakhs for both goods and services.
- Rate structure: What started as around 15%,today is expected to be between 24- 27%.
- Exempted Goods or Services: List of exempted goods or services to be finalised. it is being discussed whether the exempted list under VAT regime including Goods of Local Importance may be retained in the exempted list under State GST in the initial years.
- Exemption & Composition threshold: Rs. 25 lakh turnover is trader-friendly, will ensure better administration, more focused attention on the big traders.
- Exclusion of certain goods from GST regime: Essential commodities such as rice, wheat, bread, exemption to services such as education could continue to be exempted in new regime.
- Role of States in inter-State Trade: Sharing of IGST need to be worked out.
- Place of Supply Rules for Goods & Services: The place of provision of service could be based on the new rules. The place of taxing would be place where goods are consumed unless specified otherwise.
- Subsuming of Purchase Tax &Octroi: In addition to mainly subsuming union excise duties, customs duties (CVD/SAD), service tax and state VAT into a single levy. It would also subsume purchase tax and octroi.
- Mechanics of IGST model- Bank Model: The Empowered Committee has accepted the recommendation for adoption of IGST model for taxation of inter-State transaction of Goods and Services. The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services. The inter- State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information is also submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.
- Key business processes –
- Single / Multiple registration within one State: It could be a centralized registration on each state wise basis.
- Dispute settlement. This maybe a thorny issue
- Audit: The department audits to be conducted by the revenue with the assistance of Chartered Accountant’s which could be made compulsory beyond some value limits.
- Enforcement issues are in the process of being discussed
- Recovery & Refunds, etc.
Challenges For GST Implementation:
Some expected hurdles to be adequately overcome could be as under:
- One time coverage: Share of revenue from such commodities, which would be kept outside the GST structure, e.g., petroleum products, tobacco, liquor, etc. However, Central Govt. can charge excise duty on tobacco products over and above GST.
- Number of taxes to be subsumed in the GST, for example stamp duty,property tax, toll tax, etc. are kept outside the GST structure.
- Uniformity of 4 rates across most products: All efforts should be made to keep the GST rate as low as possible.
- Protecting present/future revenues of States-Compensation to the Under the GST structure, the tax would be collected by the States where the goods or services are consumed, and hence losses could be heavy for the producer States and the Centre would be required to compensate them for loss of revenue. The Centre had earlier come out with a similar scheme to compensate States for loss of revenue following implementation of value added tax (VAT), which came into effect from April 1, 2005. The compensation structure was 100% in the first year, 75% in the second year and 50% in the third year. Compensation was also provided to the States for loss of revenue due reduction in CST rate from 4% to 2%
- Safeguarding interest of less developed states with low revenue – Due to switch over from origin based to destination based levy model could lead to safeguard the interest of less developed states, which are not major producers but major consumers. The consuming states to get more revenues.
- Seamless credit system – restriction baggage. Presently, no cross credits are available across these taxes and the sales tax paid (on input) or payable (on output). Introduction of GST should thus rationalize tax content in product price, enhance the ability of companies to compete globally, and possibly trickle down to benefit the ultimate consumer. However, it is learnt that under the proposed GST regime, the Centre will give input tax credit (set off) only for Central GST and the States will give input tax credit only for State GST. Cross-utilisation of credit between Central GST and State GST will not be allowed. Nevertheless, the dealers could claim set-off within the respective heads.
- Transition from origin based to destination based: The only exception could be B2C end consumer supplies which could continue to be taxed in the state of origin of the supply.
- Standardization of systems and procedures all over India- This includes items such as the taxpayer registration system, taxpayer identification numbers, tax forms, tax reporting periods and procedures, invoice requirements, cross-border trade information systems and IT systems.
- Unfair dispute resolution with equal powers. A common dispute resolution mechanism [state+ centre] as well as a mechanism for giving advance rulings would further facilitate trade and industry.
- Training/ Equipping Tax administration: Since the dual GST is considerably different from the present indirect tax regime, a massive training initiative would be required at both federal and State levels to familiarize the respective administrations with the concepts and procedures of the dual GST. However, the task is not limited to technical training but also extends to a similar effort to reorient the attitude and approach of the tax administration in order to achieve a fundamental change in mindset.
- Adoption of huge capacity IT to improve efficiency and credit states for input credit utilised as taxes collected would be on account of destination state.
- States not willing to give Veto to Union.
Compensation disbursal doubts.
Status of the Bill as on June, 2015
The constitutional amendment bill sailed through the Lok Sabha on 06.05.2015 and the bill has been referred to the Select Committee on 12.05.2015. The Committee will give its report on the last day of the first week of the Monsoon session.
What is awareness of GST and why it is required?
- Awareness of GST is required to ensure that the law is implemented in timely, effective manner.
- This is required so that all States and Centre could come into framework of GST at the same time.
The objectives of spreading awareness of GST are as under:
1. To educate on change in pricing of goods and services.
2. Capacity of the tax department is a concern.
3. Adequate training should be given to the staff and the GST provisions should be clearly understood by them. The Government could conduct workshops and training programs in partnership with the following-
a. Institute of Chartered Accountants of India
b. Other Trade and professional bodies
Stakeholders in GST
It should be remembered that the same officers who are presently a part of the Commercial Tax Department in various States and officers who are a part of the Central excise and Service tax departments at the Centre would continue even after the GST regime. It maybe a case of old wine in new bottle.
Professionals such as Chartered Accountants, Company Secretaries, Cost Accountants, Tax Consultants, and Tax Practitioners should be made aware of the GST Act, Rules.
The challenge could come when each state has its own SGST enactment, as this could lead to a multiplicity of the SGST laws and procedures unless all states agree on basic commonalities in the SGST law.
The Tax Consultants/Practitioners are required to understand the new laws to ensure compliance is done by their clients. Further if the consultants/practitioners are familiar with the provisions, they can ensure that correct interpretation which is beneficial to their clients is done. This also helps when dealing with the department which has been found to make unreasonable demands citing ignorance on part of assessees.
For instance when joint charge was introduced w.e.f 1.7.12, many assesses were issued notices making demands for period earlier to 1.7.12 also.!!!
The main source of understanding GST for trade and industry are newspaper and magazines. Some of the pertinent issues are:
- Correct usage of invoices.
- Classification of goods to identify exempt vis-à-vis taxable goods.
- GST and Pricing of goods sold.
Drafter / Policy maker’s awareness:
- The Ministry of Finance and CBEC is expected to play an important role in the drafting of GST law and procedures.
- This apart the CBEC would need to prepare, in advance, for meeting the implementation challenges, which are quite formidable. The number of taxpayers is likely to go up as more new assessee come into tax net.
- The existing IT infrastructure of CBEC would need to be suitably scaled up to handle such large volumes.
- Based on the legal provisions and procedure for GST, the software on the lines of ACES (Automated Central Excise & Service Tax) would be needed.
- Allocation of knowledgeable officers would be necessary to handle such large number of taxpayers scattered across the length and breadth of the country.
Information technology awareness and data migration
The data in the current system should be transferred to the new system so that there is continuity of records. During the transition from Sales Tax system to VAT system there were issues in data transition. The continuity of records of taxpayers was lost in the transition. In some cases, dealers who had to pay arrears in the Sales tax system were given refunds under the VAT system.
a. GST Common Portal to be operational before GST roll out. This could be on lines of ACES facility which could be common gateway for states and centre.
b. Common Portal to function as pass-through portal for GST dealers to:
– submit registration application
– file returns
– make tax payments
c. Registration, return & payment information submitted by dealers to be passed to the Central and concerned State tax authorities.
The above steps could result into minimum interaction with department leading to a more pleasant experience to the assessee, leading to larger numbers coming into tax fold.
How to give the awareness needed for the all the stakeholders
(a) Advertise in multi-medias such as Radio/TV/online. Similar cue could be taken from advertisements which were placed on radio/TV and online ticker tape on VCES scheme and its deadlines for compliance.
(b) Advertise in cinema including in multiplexes.
(c) Placing of articles on GST concepts through leading newspapers and publications.
(d) Arranging seminars and conferences such as by the local branches of ICAI and other professional bodies.
(e) Having Google groups and yahoo groups for discussion on GST.
(f) GST website updates which could be subscribed by the dealers/professionals/practitioners and persons employed in industry.
(e) Disseminating information through training programs conducted by IDT experts.
How to Get awareness / start practice in GST?
The delegates who have assembled know the enormous potential of practice especially in the 1 year period leading to GST implementation. The implementation would also require a lot of professional assistance from knowledgeable professionals. Those interested may:
- Start focused reading/ practice in CST/ VAT, Central Excise or Service Taxnow!!
- Use online resources – google gst, caclubindia, yahoo CA groups, taxindiaonline, linked in.
- Form a small group for GST in your area, meet regularly to understand the latest developments.
- Be ready before GST is implemented to add value to your organisation / clients.
- Read books/ attend seminars on topic
With the processes involved in the implementation of GST from the present position, in view of the paper writer, earliest date can be April 2017.
More important, from the businessman and consumer perspective, this change is going to have substantial impact on the business as well cost to consumers depending upon the structure of the business and location of business and consumer. Therefore it becomes essential to restructure the business and location depending upon the assessment of implication of GST on each type of transactions.
The impact analysis and planning for restructuring can be done only after the draft law is released.
However as per the analysis of paper writer, the rate for goods would be lower than it is now in average by 3-4 %. Depending of components of cost, in case of most of the services, the cost to final consumer is going to go up at least by 10%.
We acknowledge the inputs from the GST Research Committee of the ICAI. Adapted from article / presentation in AIFTP seminar.