Dr. Sanjiv Agarwal
So far, VAT at the state or Cenvat at the central level, along with services tax, have been major steps in tax reforms. Before the present tax regime, there was the sales tax regime, where there was a cascading effect on tax. VAT has removed this burden, but it had deficiencies. The Cenvat load remains. There were several state taxes which were not subsumed in any one tax. The inter-state sales tax or CST was not fully relieved. All this will be accomplished by the state GST. If VAT was a major improvement in the indirect tax system, GST will be the next logical step and a major breakthrough in the history of tax reforms in the country. With the GST, the positive impact on the GDP and state domestic product may be as high as a 2 per cent gain.
As a first major step in the GST direction, the release of first discussion paper is a major break through. The second step is the need for a Constitutional amendment, as the power of levying service tax will be given to the state, because it is a dual structure. To subsume so many, many Acts, we also require a Constitutional amendment. The GST on imports will also require one. The first draft of the Constitutional amendment is expected by the end of November. Side by side, work on the draft for the Central GST and draft model state GST legislation, and draft for inter-state GST (IGST) and rules and procedure will start.
State governments have autonomy in selecting rates. In GST, the rates will be exactly the same , so it will be a harmonious structure. If there is an exigency, or state have items of local importance in our choice of the list of exempted items which do not effect inter-state trade- these will be given flexibility. All federal structures have faced the problem. We are going to take care of it through Constitutional amendments.
Threshold limit in GST
A threshold of gross annual turnover of Rs.l 0 lakh, both for goods and services for all the States and Union Territories will be prescribed with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. After taking into consideration the interest of small traders and small & medium scale industries and to avoid dual control, it has been proposed that the threshold for Central GST for goods will be lakh, Rs.l.5 crore and the threshold for services should also be appropriately high.
Service Tax under GST
Service Tax is presently levied at 10.3% (inclusive of Education Cess) percent tax on more than 105 services. States do not levy or collect service taxes at present, but get a share from the Centre’s collections. It is proposed that states will keep the entire collection from certain services from this year. States would also tax another set of proposed new services, collect and appropriate as \ part of compensation for central sales tax phase-out in 2010. Since there would be issues on taxing cross border services it is expected that the. State GST would only include services that are essentially of “local nature”. It has also been proposed that Service tax rate under Central GST and State GST is likely to be uniform.
Though State Service Tax proposed to be levied on new local services would add to the cost, a redeeming feature is that Input Tax Credit would be eligible on the State Service Tax and a host of other levies like entry tax, electricity tax, and luxury tax etc that would be integrated under State GST. Of course, the service will qualify as an eligible input service for claiming cenvat credit.
Inter-state Transactions of Goods and Services (IGST)
Integrated GST (IGST) model for taxation of inter-state transaction of goods and services has been proposed by the discussion paper. According to this model, Centre would levy IGST which would be CGST plus SGST on all ‘inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of 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 off GST used in payment off GST.
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 will also be 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.
The advantages of IGST model are as follows-
- Maintenance of uninterrupted input tax credit chain on inter State transactions.
- No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.
- No refund claim in exporting State, as ITC is used up while paying the tax.
- Self monitoring model.
- Level of computerization is limited to inter-State dealers and Central and State Governments should be able to computerize their processes expeditiously.
- As all inter-State dealers will be e-registered and correspondence with them will be by e-mail, the compliance level will improve substantially.
- Model is likely to take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.
Taxpayer Identification number
Under the GST regime, each taxpayer will be allotted a PAN inked taxpayer identification number with a total on 13 to 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.
According to the discussion paper, composition/compounding scheme for the purpose of GST will have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular, there would be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for dealers with turnover below the compounding cut-off.
Documentation and compliance
Due to the dual structure of the GST, the assessees will be required to maintain separate accounts for Central GST and State GST. There will be one periodical return for both CGST and SGST with one copy each to be submitted to the respective GST authority.
GST will give more relief to industry, trade and agriculture through a more comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several Central and State taxes in the GST and phasing out of CST. The transparent and complete chain of set-offs which will result in widening of tax base and better tax compliance may also lead to lowering of tax burden on an average dealer in industry, trade and agriculture. 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 is likely to increase the competitiveness of Indian goods and services in the international market and to boost Indian exports.