Once implemented efficiently and expeditiously, the GST is supposed to enhance operational efficiency and procedural compliance besides reducing the overall tax burden on the consumer. Read to know more.
he passage of the 122nd Constitution Amendment Bill in the both Houses of Parliament dawns the arrival of a new dispensation of indirect taxation in India. It is supposed to usher in changes that will impact all aspects of India’s business and accelerate India’s economic progress. It is the single biggest reform since independence which is going to change India’s indirect taxation for good. The introduction of Goods and Services Tax (GST) is an important landmark in the fiscal history of India.
Since 2003, when the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle to its first introduction in the Lok Sabha in 2011 and to its final passage in the both Houses of Parliament this month, it has been a long journey for the GST. According to India’s Task Force on Direct and Indirect Taxes, a good tax system besides being simple minimize distortion and bring efficiency and equity. The GST looks to be scoring high on being a forward looking, more equitable and simple taxation, but the challenge for making this an efficient tax system remains a daunting task.
Taxation is a constitution matter in India. Indian Constitution provides for the division of taxation power between the centre and the state. The states have the power to levy taxes on sale of goods and the Centre has the power to levy taxes on services and the manufacture of goods. In order to bring about the GST, the amendment to the Constitution was required to give concurrent powers to Parliament and State legislatures to levy taxes on goods services.
The 122nd amendment to constitution now confers simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax. Under the GST regime, taxes would be levied by both the state and the central governments on supply of goods and services.
However, there are some exceptions to it. GST can be levied on all goods and services, except alcoholic liquor for human consumption. Petroleum and petroleum products shall be subject to the levy of GST on a later date notified on the recommendation of a new Goods and Services Tax Council which shall function under the Chairmanship of the Union Finance Minister and will have all the State Governments as members. The amendment also provides for compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period of five years.
The introduction of GST is expected to remove the cascading effect of taxes by moving to a common tax base and subsuming various state and central taxes which we have been paying and don’t know of. These taxes have been built over the many years in the price of a commodity, ultimately paid by the consumers along with the price. Under the present VAT regime, the government, both at the centre and at the state, levy a host of indirect taxes, with incomplete or no input tax credits available at progressive stages of value addition. But in the GST, as per the government, the credits of input taxes paid at each stage will be available in the subsequent stage of value addition, making GST essentially a tax only on value addition at each stage. The experts point out that the issue of cascading taxation was partly addressed through the VAT regime. However, several central and state taxes were excluded from VAT. Sectors such as real estate, oil and gas production etc. were exempt from VAT. Further, goods and services were taxed differently, thereby making the taxation of products complex.
Under the GST, however, the final consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. So, the GST, the new indirect taxation dispensation, is going to be a single tax on the supply of goods and services, right from the manufacturer to the consumer. GST marks the transition from an existing origin-based taxation regime to a destination-based taxation regime. It is supposed to make India one unified common market.
The benefits of GST are counted as many. The government says there will be uniformity in taxes across Indian. GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. GST would make doing business in the country without any special tax benefit or burden irrespective of the choice of place of doing business.
There will be no cascading of taxes which means there will be no tax over tax. A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
There will be immense gain for the manufacturers and exporters as the subsuming of major Central and State taxes in GST, complete and comprehensive setoff of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.
Besides reducing the logistics and inventory costs, GST will lead to drop in the evasion of tax. GST will bring unorganized sector into the tax net leading to price gap between the unorganized and the organised. According to experts, since input tax credit will be available for all taxes paid earlier in the value chain, firms would require evidence of compliance from the preceding links to claim setoffs. Thus, they would prefer sourcing inputs from compliant firms. This could increasingly bring unorganised players under the tax net, thereby reducing their price competitiveness against organized players.
At the Central level: Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs.
At the State level: Subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling.
There will be two components of GST: Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of Central Excise.
In the case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services under Article 269A (1) of the Constitution. The IGST would roughly be equal to CGST plus SGST.
According to GST Bill, under the IGST mechanism, the inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). 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 (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.
GST will also subsume the Additional Duty of Excise or CVD and the Special Additional Duty or SAD presently being levied on imports. As per explanation to clause (1) of article 269A of the Constitution, IGST will be levied on all imports into the territory of India. Unlike in the present regime, the States where imported goods are consumed will now gain their share from this IGST paid on imported goods.
GST will significantly impact the procurement patterns, supply chains and distribution networks of the business. This presents both opportunities and challenges for firms doing business in India. The implementation will now be vital for the success of this reform. It is going to be herculean task both for the government and the companies to make changes in the processes in order to be GST compliant.
For the implementation of GST, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non- Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders.
The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/UT governments. GSTN will be a state-of-theart comprehensive IT infrastructure with the common GST portal providing frontend services of registration, returns and payments to all taxpayers, as well as the backend IT modules for certain States that include processing of returns, registrations, audits, assessments, appeals, etc.
According to the government, all States, accounting authorities, RBI and banks, are also preparing their IT infrastructure for the administration of GST. There would no manual filing of returns. All taxes can also be paid online and all mis-matched returns would be auto-generated, and there would be no need for manual interventions. Most returns would be self-assessed.
According to the Bill, the GST Council will consist of: (a) the Union Finance Minister (as Chairman), (b) the Union Minister of State in charge of Revenue or Finance, and (c) the Minister in charge of Finance or Taxation or any other Minister, nominated by each state government. All decisions of the GST Council will be made by threefourth majority of the votes cast; the centre shall have one-third of the votes cast, and the states together shall have two-third of the votes cast.
The GST Council will make recommendations on: (a) taxes, cesses, and surcharges to be subsumed under the GST; (b) goods and services which may be subject to, or exempt from GST; (c) the threshold limit of turnover for application of GST; (d) rates of GST; (e) model GST laws, principles of levy, apportionment of IGST and principles related to place of supply; (f) special provisions with respect to the eight north-eastern states, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand; and (g) related matters. The GST Council may decide the mechanism for resolving disputes arising out of its recommendations.
There are several challenges for the government before it introduces the GST in April next year. The government is still to get the ratification of GST at least by half the states of India and notify GST Rules and exemptions, and finalise the structure of GST rate. The rate of GST is the point of debate and there are some figures doing the round such as standard rate of 18% for most of the items, 40% for luxury goods and 12% for merit goods. The GST Council has to finalise the rate before the roll out in April next year.
GST is going to impact the economy in a big way. According to business analysts, after an initial, transitory increase in inflation, there will be growth. In the long term, lower tax and logistic costs under the GST will reduce inflation. According to Morgan Stanley, the overall impact of better allocation of resources, improving efficiency of domestic production and exports is likely to improve overall growth. As per estimates from the National Council of Applied Economic Research (NCAER), growth could increase by 0.9% to 1.7%. The biggest beneficiary of the GST will be automobile sector. Currently, the two-wheelers, small cars, commercial vehicles witness tax outgo of 27%. With the introduction of GST, if a standard of 18% would be levied, it will result in a 9% reduction which might result in reducing price and inducing demand. Besides automobiles, all consumer companies like HUL, Colgate, Britannia will stand to gain with respect to supply chain and logistics. Large car makers will see their gain by 5% as their total outgo at present is 45% and they will be charged under GST at the rate of 40%. They will also benefit from saving on logistics and warehousing. However, there are concerns of some sates strong in manufacturing like Tamil Nadu about their economy being impacted negatively because of GST. Since the GST is a destination-based tax, there will be outflow of revenue to the other states which will consume goods. But the fact is GST has a provision to compensate such states for the revenue loss for five years. And more importantly, as Bhanu Pratap Mehta writes “collectively, they (states) will have to be mindful of the aggregate national-level macro-economic impact on things like inflation. In short, the states will have to think nationally as well.” Tamil Nadu for this reason is opposed to GST has so far not ratified the bill.
There is a host of issues related to transition which is not done quite expeditiously could create problem as the roll out date is not far off. However, the government seems prepared for making this transition to GST smooth and event free. The economists say that once implemented in earnest, the GST will enhance operational efficiency, ease procedural compliance, and increase the overall tax payer base, besides leading to the reduction in the overall tax burden on the consumer. Quite a recipe for a robust growth of the economy!
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