Intangible goods / services

Presently, intangible goods / services / rights are taxed as one of the declared services under section 66E(c)under temporary transfer of intangible property right services. Such services are also liable to VAT and often there is a dispute on levy of Service Tax or VAT or both. This is likely to be resolved in GST regime as such services will suffer one common tax, i.e., GST. In many countries, transfer of such assets / services are taxed as a service only. Examples of such services could be copyright (excluded presently), trademarks, designs, patents, good will, IT software etc.

Electricity / Power

Power to levy tax on the consumption or sale of electricity vets with the State Governments under Entry No. 53 in List-II of Seventh Schedule of the Constitution of India. Though electricity is ‘goods’, sales tax is not imposed on sale of electricity in India. Therefore, it is tax-free goods.

Presently, they can purchase goods for generation and distribution of electricity from other States at a concessional rate of tax (CST) of 2%. With the abolition of CST Act and inability of these companies to purchase at concessional rate, this sector will be adversely affected, unless sale of electricity is brought within the scope of GST and set-off of input tax credit is allowed for tax paid on purchases.

It is not clear as to what stand would be taken in GST regime. However, any tax / cess on electricity should be subsumed in the proposed GST.

Tourism, Hospitality and Restaurants

India already has a higher hotel tariff due to multiple taxes, both at centre and those levied by states. With revenue neutral rate being higher than the present tax rates, the industry is likely to suffer higher rates which will discourage tourists and users of services. In case of restaurants, presently, there is double taxation in the form of VAT and Service Tax being levied on the same transaction.

Products outside the GST ambit

GST shall be applicable across the products and services over the taxing jurisdictions with few exceptions. One such exception is petroleum products. The Centre has decided to keep petroleum production tax out of the taxing jurisdiction of the States while the States have retained the power to tax sale of petroleum products and potable alcoholic liquor with themselves. The reason cited for the same is that petroleum production tax fetches nearly 45% of the Centre’s Indirect Tax revenue while sale of petroleum products and potable alcoholic liquor constitutes nearly 55% (35% plus 20%) of the State tax income.

This is to provide fiscal security to stages and ensure that there is a minimum guaranteed income under the proposed GST regime. Another such product is tobacco which will come under the GST but from a future date.

The exclusion of petroleum, liquor and tobacco, which accounts for nearly 40 per cent of total revenue, has been a point of criticism. However, it is to be understood that the share of revenue on petroleum may be high, but to judge the impact on the GST on the basis of just share of revenue is to miss the macroeconomic picture. Petroleum is a bulk commodity and is also traded in bulk. So the impact of non-inclusion of petroleum does not adversely affect the creation of a common market for the general merchandise, like raw materials and machines. Moreover, there can be a proper system of value-added tax (VAT) at state level and CENVAT at the central level for petroleum and tobacco, which will solve the problem of input credit. No great harm is done if parallel VAT runs with GST. For alcohol, tobacco and mineral oil, even in the European Union, there is excise in addition to VAT with different rates in different countries.

Tobacco Products

As per the existing provisions of The Constitution (One Hundred and Fifteenth Amendment) Bill, 2011, States can only impose GST on Tobacco and Tobacco Products while the Centre can impose both GST and Excise Duty. Standing Committee on Constitutional Amendment Bill had recommended that keeping in view the requests received from several States and the fact that the States are already levying VAT at very high rate on Tobacco and Tobacco Products, therefore, the States may also be allowed to levy State Excise Duty or any other tax in addition to GST on Tobacco and Tobacco Products. This could be achieved by making amendment in Entry 51 in the State List of Seventh Schedule of the Constitution by incorporating ―(c) tobacco and tobacco products.

The Constitution Amendment Bill, 2014 has amended List II of Schedule VII of the Constitution according to which states may continue to levy tax on tobacco products.

The proposed entry No. 84 will include duties of excise on the following goods manufactured or produced in India –

  1. petroleum crude;
  2. high speed diesel;
  3. motor spirit (commonly known as petrol);
  4. natural gas;
  5. aviation turbine fuel; and
  6. tobacco and tobacco products.

Tobacco manufacturing companies presently pay VAT of about 25 percent plus excise duty. It is feared that there products may be taxed at about 40 percent in GST regime. It excise duty paid by such manufacturers continue in GST regime, it will be a huge tax burden. The Government appears to be aggressive on taxing cigarettes citing ‘sin tax’. In any case, both excise and GST cannot be levied. This may lead to tax evasion.

Goods / services on which uncertainty prevails on their inclusion / exclusion under GST regime

  • Petroleum and diesel products
  • Alcoholic beverages
  • Real estate transactions
  • Tobacco products
  • Electricity / power
  • Banking and financial services
  • Certain IPR transactions
  • Health care
  • Education services
  • Public transport / railways
  • Statutory services, etc
  • Special economic zones

By: Dr. Sanjiv Agarwal December 21, 2015


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