Goods & Services Tax: Changing Dynamics & Concepts

Cutting Edge

Goods & Services Tax: Changing Dynamics & Concepts

Lex Witness Bureau | August 2017

Article 366(12A) defines the Goods and Services tax (GST) as a tax on supply of goods or services or both. This change has brought in many new concepts and new dynamics to the system of indirect taxation. Read on to know more.

Even less than a month after the roll-out of Goods and Services tax (GST), the Prime Minister of India in an address to the nation in his Man ki Baat in late July said that GST was successful and it has led to economic benefits to the nation and its people.

A declaration of the GST’s success even when it is not implemented in full measure may seem far-fetched. But such is the government’s euphoria that the prime minister thought better of maintaining any discretion before announcing the GST’s success.

However, the finance minister Arun Jaitley earlier said that the Goods and Services Tax was not an easy reform to implement. Stressing on the notion of one nation one tax, Jaitley said that politically we became one, but for all commercial and economic purposes we were not one.

In the Constitution of India, the fiscal powers between the state and the Centre were clearly demarcated with no overlap. The Centre had the powers to levy tax on the manufacture of goods, while the states had the powers to levy tax on sale of goods. In case of interstate sales, the Centre had the power to levy central sales tax but the tax was collected and retained entirely by the originating states. As for services, it was the Centre alone that was empowered to levy service tax.

So, introduction of the GST required amendments in the Constitution so as to concurrently empower the Centre and the states to levy and collect the GST. So, to address this issue, the Constitution (122nd Amendment) Bill was introduced in the 16th Lok Sabha in 2014. The Bill was finally passed by both the Lok Sabha and Rajya Sabha in August 2016 and the Bill received the assent of the President on 8th September, 2016 and has since been enacted as Constitution (101st Amendment) Act, 2016. Now article 246A of the Constitution empowers the Centre and the States to levy and collect the GST.

According to Dr. Vijay Kelkar, real architect of the GST and the former chairman of 13th Finance Commission, GST was born out of a realisation that the states have a much larger responsibility and development commitments, without matching access to resources, as compared to the Centre. The thought, he further informed, then struck that a grand bargain could be worked out between the Centre and the States where the tax base was enlarged and they could share the tax base.

GST is a historic Act and the most significant reform in the history of India. It is a new system of indirect taxation with no multiplicity and cascading/double taxation. Article 366(12A) of the Constitution as amended by 101st Constitutional Amendment Act, 2016 defines the GST as a tax on supply of goods or services or both, except supply of alcoholic liquor for human consumption.

GST is a destination-based tax applicable at various stages of production and services and their distribution. According to the government, the biggest advantage from the consumer point of view will be the reduction in the overall tax burden on goods.

But there were many pitfalls. It was no easy task to introduce and switch over to GST. GST subsumed various indirect taxes such as excise duty, octroi, surcharges, local taxes, entertainment tax, sales tax, etc. Listing out the challenges, the Revenue Secretary Hasmukh Adhia had said that calculation of revenue base of Centre and States, along with compensation requirements of Centre; GST rates structure; list of exemptions are some of the challenges before the government. Besides these, he had further said, forming consensus on Model GST Bill, threshold limits, compounding limits, and cross empowerment to mitigate ill-effects of dual control were also issues which needed to be addressed. The government fixed July 1 2017 as the roll-out for the GST in India. Before this the government had to make infrastructure ready for its successful roll out.

COMPONENT OF GST

Under GST regime, taxes ranging from Nil, 5, 12, 18 to 28 per cent will be levied both by the state and the central governments on supply of goods and services. Tax will be levied on every supply of goods and services. In fact, the taxable event under GST is supply of goods or services or both.

Central Goods and Services Tax (CGST): Centre would levy and collect CGST

State Goods and Services Tax (SGST): States would levy and collect the SGST on all transactions within a state.

Integrated GST (IGST): IGST will be levied and administered by Centre on every interstate supply of goods and services.

The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, SGST would be chargeable only when the supplier and the recipient are both located within the State.

Under Article 269A of the Constitution, the GST on supplies in the course of inter- State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

SOME OF THE STRIKING FEATURES OF GST

GST has five-tier tax structure ranging from Nil, 5, 12, 18 to 28 per cent
GST is applicable on supply of goods or services as against the concept of tax on the manufacture of goods or on sale of goods or on provision of services.
GST would be based on the principle of destination-based consumption taxation as against the principle of origin-based taxation.
GST would apply to all goods and services except Alcohol for human consumption. Supplies of all goods and services are taxable except alcoholic liquor for human consumption.
GST would replace the taxes currently levied and collected by the Centre such as Central Excise Duty, Additional Duties of Customs, Special Additional Duty of Customs (SAD), Service Tax, Cesses and surcharges, State VAT, CST, Entry Tax, Entertainment tax, taxes on advertisements, lotteries, etc.
Five petroleum products viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel have temporarily been kept out and GST Council shall decide the date from which they shall be included in GST. Furthermore, electricity has been kept out of GST.
Exports would be zero-rated. No tax will be payable on exports of goods or services; however credit of input tax credit will be available and same will be available as refund to the exporters.
Imports of Goods and Services will be treated as inter-state supplies and IGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services.
Securities have been specifically excluded from the definition of goods as well as services. Thus, the transaction in securities shall not be liable to GST.
Electronic filing of returns by different class of persons at different cut-off dates.
Various modes of payment of tax available to the taxpayer including internet banking, debit/ credit card and National Electronic Funds Transfer (NEFT) / Real Time Gross Settlement (RTGS).

MEANING AND SCOPE OF SUPLLY UNDER GST

Taxable event under GST is supply of goods or services or both. Since GST has replaced excise and VAT, the scope of supply has undergone a sea change. A taxable supply means a supply of goods or services or both which is chargeable to goods and services tax under the GST Act.

In order to constitute a supply, the following elements are required to be satisfied:

The activity involves supply of goods or services or both;
The supply is for a consideration unless otherwise specifically provided for;
The supply is made in the course or furtherance of business;
The supply is made in the taxable territory;
The supply is a taxable supply; and
The supply is made by a taxable person

According to new law, the term supply is wide in its import and covers all forms of supply of goods or services or both that includes:

Sale
Transfer
Barter
Exchange
License
Rental

Lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

Supply also includes import of service.

MATTERS TO BE TREATED AS SUPPLY OF GOODS OR SERVICES

Transfer

Any transfer of the title in goods is a supply of goods.
Any transfer of goods or of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.
Any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, is a supply of goods.

Land and Building

Any lease, tenancy, easement, licence to occupy land is a supply of services.
Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

Treatment or process

Any treatment or process which is being applied to another person’s goods is a supply of services

Transfer of business assets

Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.
Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services
Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.
Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

The business is transferred as a going concern to another person; or (b) the business is carried on by a personal representative who is deemed to be a taxable person.

The following shall be treated as “supply of service”

Renting of immovable property;
Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier

The development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software shall be treated as supply of services as listed in the above Schedule II of the model GST law.

Under this schedule, supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

The following shall be treated as supply of goods

Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

MATTERS TO BE TREATED AS SUPPLY OF GOODS OR SERVICES WITHOUT CONSIDERATION

The model GST law also provides for including certain transactions made without consideration within the scope of supply

Permanent transfer/disposal of business assets.
Temporary application of business assets to a private or non-business use.
Services put to a private or non-business use.
Assets retained after deregistration.
Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business. Provided that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of good

SUPPLY MADE IN THE COURSE OR FURTHERANCE OF BUSINESS

According to this law, business is defined under Section 2(17) include any trade, commerce, manufacture, profession, vocation etc. whether or not undertaken for a pecuniary benefit. Business also includes any activity or transaction which is incidental or ancillary to the aforementioned listed activities. In addition, any activity undertaken by the central government or a state government or any local authority in which they are engaged as public authority shall also be construed as business. From the above, it may be noted that any activity undertaken included in the definition for furtherance or promoting of a business could constitute a supply under GST law.

NEITHER A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

Schedule-III of the model GST law lists certain activities which will be treated neither a supply of goods or supply of services. They include:

Services by an employee to the employer in the course of or in relation to his employment,
Services by any Court or Tribunal established under any law
Functions performed by members of Parliament, State Legislatures members of the local authorities, Constitutional functionaries
Services of funeral, burial, crematorium or mortuary
Sale of land
Actionable claims other than lottery, betting and gambling.

ZERO RATED SUPPLY UNDER GST

Zero rated supply means export of goods and/or services or supply of goods and/or services to a SEZ developer or a SEZ Unit.

EXEMPTION LIMIT AND COMPOSITION SCHEME

Tax payers with an aggregate turnover in a financial year up to Rs.20 lakhs & Rs.10 Lakhs for North East and special category states would be exempt from tax.

Small taxpayers with an aggregate turnover in a preceding financial year up to Rs. 50 lakhs shall be eligible for composition levy. Under this scheme, a taxpayer shall pay tax as a percentage of his turnover in a state during the year without the benefit of ITC.

A tax payer opting for composition levy shall not collect any tax from his customers. The government may increase the above said limit of Rs. 50 lakhs up to ` 1 crore, on the recommendation of GST Council.

Tax payers making inter- state supplies or making supplies through ecommerce operators who are required to collect tax at source shall not be eligible for composition scheme.

RATES OF TAX FOR COMPOSITION SCHEME?

There are different rates for different sectors. In normal cases of supplier of goods (i.e. traders), the composition rate is 0.5 % of the turnover in a State or Union territory. If the person opting for composition scheme is manufacturer, then the rate is 1% of the turnover in a State or Union territory. In case of restaurant services, it is 2.5% of the turnover in a State or Union territory. These rates are under one Act, and same rate would be applicable in the other Act also. So, effectively, the composition rates (combined rate under CGST and SGST/UTGST) are 1%, 2% and 5% for normal supplier, manufacturer and restaurant service respectively.

ANTI-PROFITEERING MEASURE

As per section 171 of the CGST/SGST Act, any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. An authority may be constituted by the government to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

COMPLIANCE RATING MECHANISM

As per Section 149 of the CGST/SGST Act, every registered person shall be assigned a compliance rating based on the record of compliance in respect of specified parameters. Such ratings shall also be placed in the public domain. A prospective client will be able to see the compliance ratings of suppliers and take a decision as to whether to deal with a particular supplier or not. This will create healthy competition amongst taxable persons.

CHALLENGES & IMPACT

Since GST is a massive reform, the challenges are also big. The businesses need to make a massive change and put in place infrastructure for compliance. They will have to invest in IT and operations massively. As per the new law, businesses will now have to file returns three times in a month as against once in three months. First by the 10th for details of supplies, then by the 15th for details of purchases and lastly by the 20th of the month for details of taxes paid and input credit taken. Besides this, they will have to file annual returns as well which totally adds upto 37 returns each a year. Moreover, since GST has five-tier tax structure ranging from Nil, 5, 12, 18 to 28 per cent, there is a great confusion among traders and buyers. However, following the rollout of GST, the number of registrants originally paying taxes is growing. But as many as 27 lakh businesses are yet to complete registration on the GSTN portal and the process has to be completed before they file their returns by August 20. According to the rule notified, if a taxpayer does not submit entire details within three months of getting provisional ID, then the ID stands cancelled.

The manufacturing and service sector in July have been severely impacted with the introduction of the GST. According to reports, following contraction in manufacturing early this month, the Nikkei India Services Purchasing Managers’ Index (PMI) plunged to 45.9 this month, the lowest since September 2013. The impacted services PMI, according to report, is the first downturn in output since the start of this year. But the India Inc, however, is optimistic and feel that in the medium and long term there will be some impact, but prospects look better when there will be clarity, and henceforth there will be more compliance in the new law. As per the new law, businesses will now have to file returns three times in a month as against once in three months. First by the 10th for details of supplies, then by the 15th for details of purchases and lastly by the 20th of the month for details of taxes paid and input credit taken. Besides this, they will have to file annual returns as well which totally adds upto 37 returns each a year.

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