Goods & Services Tax (GST): So Close Yet So Far! The Roadmap Ahead

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Goods & Services Tax (GST): So Close Yet So Far! The Roadmap Ahead

Gajanan Khare | February 2015

Goods & Services Tax (GST) is being promised to be a game changer. However, there are many challenges before this goal is going to be realized. Read on to know the complete picture.

INTRODUCTION

The Central Government must address five challenges if its April 1, 2016 deadline for rolling out the Goods & Service Tax is to be met. First challenge is the design of Goods & Service Tax. This has to be arrived at in two steps. Firstly, the tax base needs to be agreed on. Secondly, the methodology of levy, collection and appropriation needs to be finalized. So far, neither has been done. The states have not yet agreed to the Centre’s proposal to subsume taxes on petroleum products and entry into the Goods & Service Tax. No unanimity has been reached on the proposed threshold of ` 10 lakh.

Also, two major issues that will significantly broaden the Goods &Service Tax base and lower the revenue neutral rate (RNR) have not been examined: the inclusion of real estate and the treatment of e-commerce in the Goods & Service Tax. The preliminary calculations reveal that additional revenue of about ` 20000 crore can be generated including property transactions in the Goods &Service Tax. Goods &Service Tax will be a destination based consumption tax, and will cover both intra state and interstate trade and commerce. Interstate sales will be subjected to interstate Goods & Service Tax which is combination of Central Goods & Service Tax & State Goods &Service Tax. With the original date for its introduction on April 1, 2010 having been missed due to various reasons, business community is now eagerly looking forward to its promised new date of April 1, 2016. They are, therefore, monitoring all major Goods & Service Tax developments that are taking place under new regime.

SIGNIFICANT DEVELOPMENTS

122nd Constitution Amendment Bill, 2014 Of many developments, the most important is the 122nd Constitution Amendment Bill, 2014, which was tabled by the Central Government before the lower house of Parliament on December 19, 2014. This Bill replaces an earlier bill introduced in 2011 by the erstwhile government which had since lapsed. Let us discusses some scenarios under Goods &Service Tax regime in the light of recent developments.

BROAD FEATURES OF GST REFLECTED IN THE CONSTITUTION AMENDMENT BILL AND OTHER ANNOUNCEMENTS.

The Bill proposes to replace the current indirect tax regime consisting of multiplicity of taxes with a single tax. At present the Constitution does not provide for any concurrent taxation powers to the Centre as well as the States for the same subject matter of tax.
The Constitution is therefore proposed to be amended for conferring concurrent taxing powers on the Centre and states for levying Goods & Service Tax on every transaction of supply of goods or services or both. The Goods & Service Tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State Goods & Service Tax will be levied on all transactions involving supply of goods and services, except for few goods which are kept out of the purview of the Goods & Service Tax. Once the new tax system comes into place, there will be three indirect taxes namely Central Goods & Service Tax (CGST), State Goods & Service Tax (SGST) and Integrated Goods & Service Tax (IGST) apart from the customs duty which is levied only on imported goods.
The proposed Bill, provides for:
- Subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services.
- 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, Taxes on lottery, betting and gambling; and State Cesses and Surcharges in so far as they relate to supply of goods and services. C. Dispensing with the concept of ‘declared goods of special importance’ D. Levy of Integrated Goods &Service Tax on inter-State transactions of goods and services.
In the existing system, inter-State transactions of goods are taxable under the Central Sales Tax Act, 1956 with the revenue being collected and retained by the originating State. The tax on CST purchases is not allowed as an input tax credit and hence it distorts the supply chain, cost structure and product pricing. In the existing system there is no separate levy of service tax on inter-State transactions of services since services are taxed only by the Centre through Finance Act, 1994.

THE PROPOSED INTERSTATE GOODS &SERVICE TAX MODEL INVOLVES THE FOLLOWING:

Centre would levy Interstate Goods & Service Tax which would be the aggregate of Central Goods & Service Tax and State Goods &Service Tax rates.
Interstate Goods & Service Tax would be levied on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.
Inter-State dealer will pay Interstate Goods & Service Tax after adjusting available, Interstate Goods &Service Tax, Central Goods & Service Tax and State Goods & Service Tax on his purchases.
The seller in State-A will pay the Interstate Goods & Service Tax to the Centre.
While paying Interstate Goods & Service Tax the seller will adjust against available credit of Interstate Goods & Service Tax, Central Goods & Service Tax and State Goods &Service Tax.
State Government-A will have to transfer the credit of State Goods & Service Tax used by the seller for payment of Interstate Goods & Service Tax to the Centre.
Buyer in State-B can avail credit of the Interstate Goods & Service Tax charged.
Buyer in State-B can use the Interstate Goods & Service Tax to discharge output tax liability in his own State. ix. Centre has to transfer credit of Interstate Goods & Service Tax used for payment of State Goods &Service Tax to State Government-B.

The model broadly is based on the philosophy that if a State tax (State Goods & Service Tax) credit has been used to pay a Central tax (Interstate Goods & Service Tax) then the said State will have to transfer the amount of State Goods & Service Tax used to the Centre. Similarly, if a Central tax (Interstate Goods & Service Tax) credit has been used to pay a State tax (State Goods & Service Tax) then the Centre has to transfer the amount of Interstate Goods & Service Tax used to the State. The entire process would be facilitated through a clearing house mechanism. Every State would be both selling and purchasing State and therefore there would be netting of funds through the clearing house. The input tax credit chain is uninterrupted and the buyer in another State is in a position to avail credit of the Interstate Goods & Service Tax charged by the seller in one State.

The possibility of unutilized credit in a seller State is minimized since the seller would have used the credits available to pay the Interstate Goods & Service Tax.

Levy of an additional tax on supply of goods, not exceeding one per cent. In the course of inter-State trade or commerce to be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates
Conferring concurrent power upon Parliament and the State Legislatures to make laws governing Goods & Service Tax
Coverage of all goods and services, except alcoholic liquor for human consumption, under Goods & Service Tax. In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of Goods &Service Tax till a date notified on the recommendation of the Goods &Service Tax Council.
Compensation to the States for loss of revenue arising on account of implementation of the Goods & Service Tax upto a period of five years.
Creation of Goods & Service Tax Council to examine issues relating to Goods &Service Tax and make recommendations to the Union and the States on parameters like rates, exemption list and threshold limits. The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of revenue or finance as member, along with the minister in-charge of finance or taxation or any other minister nominated by each State Government. It is further provided that every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present wherein the vote of the Central Government shall have a weightage of one-third of the total votes cast, and the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.

IMPORTANT LEGAL PROVISIONS IN THE AMENDMENT BILL

This is to facilitate the Parliament and States to make laws with regard to Goods & Service Tax imposed by the Union or such State. Accordingly Article 246A provides as follows:

Notwithstanding anything contained in articles 246 and 254, Parliament, and. subject to clause (2), the Legislature of every State, have power to make laws with respect to Goods &Service Tax imposed by the Union or by such state.

Parliament has exclusive power to make laws with respect to Goods &Service Tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Explanation: – The provisions of this article, shall, in respect of Goods &Service Tax referred to in clause (5), of article 279A, take effect from the date recommended by the Goods & Service Tax Council

INSERTION OF ARTICLE 269A

This is to facilitate apportionment of interstate taxes on supply of goods and services. Article 269 facilitates levy and collection of interstate tax on sale and consignment of goods for being assigned to States. Now a separate article 269A has been inserted to apportion such taxes levied on both goods and services. Accordingly Article 246A provides as follows:

Goods and service tax on supplies in course of inter-state trade or commerce shall be levied and collected by government of India and such tax shall be apportioned between the Union and states in the manner as may be provided by the parliament by law on recommendations of goods and service tax council

Explanation: – For the purpose of this clause, supply of goods, or of services, or both in course of import into the territory of India shall be deemed to be supply of goods or of services or both in course of interstate trade or commerce.

Parliament may by law, formulate the principles for the determining the place of supply, and when a supply of goods, or of services, or of both takes place in course of interstate trade or commerce.

At present inter-State supply of goods attract Central Sales Tax. Now, an inter- State supply of goods or services will attract Interstate Goods & Service Tax ((i.e. Central Goods & Service Tax plus State Goods & Service Tax)

It may be noted that Interstate Goods & Service Tax will be levied and collected by the Centre and proceeds of IGST will be shared amongst the Centre and the States. Thus, import of goods will attract BCD and Interstate Goods & Service Tax. It may be noted that import of services, as against service tax at present, in Goods & Service Tax regime, will attract Interstate Goods & Service Tax.

INSERTION OF NEW DEFINITIONS IN ARTICLE 366

Through these definitions every commercial transaction is sought to be covered under Goods & Service Tax by including under the terms Service anything other than goods.

NEW CLAUSE 12A

“Goods and Service Tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.

Thus, all supply of goods or services or both will attract Central Goods & Service Tax (to be levied by Centre) and State Goods & Service Tax (to be levied by State). As Goods & Service Tax will be applicable on ‘supply’ the erstwhile taxable events such as ‘manufacture’, ‘sale’, ‘provision of services’ etc. will lose their relevance. It may be noted that the term ‘supply’ is not defined or elaborated or qualified (such as supply for a consideration). Thus, it needs to be seen whether even free supply will attract Goods & Service Tax.

NEW CLAUSE 26A

“Services” means anything other than goods

AMENDMENT OF SEVENTH SCHEDULE

IN THE UNION LIST

for entry 84, the following entry shall be substituted, namely: Entry 84. Duties of excise on the following goods manufactured or produced in India, namely: — petroleum crude; high speed diesel; motor spirit (commonly known as petrol); natural gas; aviation turbine fuel; and tobacco and tobacco products.

Existing entry 84 levies excise duty on all goods manufactured or produced in India except alcoholic liquors & drugs.

With this amendment now excise duty will be retained only for petroleum products and tobacco products. Manufacture of all other goods will now be under Goods & Services Tax.
Entries 92 and 92C shall be omitted. These entries at present relate to: Taxes on the sale or purchase of newspapers and on advertisements published therein. 92C. Taxes on services

With this amendment now tax on services and newspaper advertisements is removed from exclusive domain of Centre so that it is now also available to the States. In the State List,
Entry 52 shall be omitted. This entry at present relates to: Taxes on the entry of goods into a local area for consumption, use or sale therein. This deletion enables coverage of entry tax and octroi into Goods &Service Tax
for entry 54, the following entry shall be substituted, namely: 54. Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”; This entry at present relates to: Entry 54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I. With this amendment now State VAT will be applicable only on local sales of petroleum products and alcohol.
for entry 62, the following entry shall be substituted, namely:

Entry 62. Taxes on entertainments and amusements to the extent levied

And collected by a Panchayat or a Municipality or a Regional Council or a District Council.

This entry at present relates to:

Entry 62. Taxes on luxuries, including taxes on entertainments, amusements, Betting and gambling.

With this amendment Luxury tax & Entertainment tax levied by States is covered under Goods & Service Tax and entertainment tax can now be levied only by municipal bodies and not by State Government.

CONCLUSION

One should also remember that the introduction of the Bill is only a stepping stone towards the mammoth tasks of transitioning and implementation. The much desired reform is faced with onerous challenges, contentious issues and substantial amount of ground work. The success of Goods & Service Tax is equally dependent upon a robust IT system at the end of both revenue and the assesse, efforts towards which are being made like the setting up of Goods & Service Tax Network (GST-N). In addition, both the revenue officers (Centre as well as the states) and Taxpayers would require sufficient time to adapt to and be acquainted with the new regime and systems. Add to this, the issue of transition which is bound be complicated. Proper training and checks would be required to be put in place to ensure seamless implementation of this much needed reform. The government needs to be applauded for the determination and momentum put in due to which Goods & Service Tax Seems much more realistic now. However, it would need to be seen how the finance minister finishes this long drawn battle and is able to achieve a result which could catapult our economy and benefits all stakeholders.