CA Diwakar Jha
In the world of changes, the only thing which is constant is the change itself.
It’s been more than a decade now since we have been listening the buzz about Goods and Services Tax (GST), but now we have seen implementation of GST turning into reality as the Govt. has launched GST on 01/07/2017. The GST is a value added tax that will replace all indirect taxes levied on goods and services by the Government, both Central and States. Amalgamating several central and state taxes into a single tax would mitigate cascading or double taxation, facilitating a common nation market. This is the biggest taxation reform since independence that is going to take place in India. The basic idea is to create a single, cooperative and undivided Indian market to make the economy stronger and powerful.
It is a tax trigger which will transform the businesses of all the industries. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods. The GST will see a significant breakthrough towards an all-inclusive indirect tax reform in the country.
Flaws in earlier structure of indirect taxes in India:
Some major flaws of earlier structure of indirect taxes in India are listed as follows:
- Tax Cascading: Tax cascading occurs under both Centre and State taxes. The most significant contributing factor to tax cascading is the partial coverage by Central and State taxes.
- Lack of Uniformity and Rates: Earlier VAT structure across the States lacked uniformity, which was not restricted only to the rates of tax, but also extended to procedures and, sometimes, to the definitions, computation and exemptions.
- Interpretational Issues: Another problem arisen in respect of interpretation of various provisions and determining the category of the commodities. We found a significant number of litigation surrounding this issue only. To decide whether an activity is sale or works contract; sale or service, was not free from doubt in many cases.
- Complexity in determining the nature of transaction –Sale vs. Service: The distinctions between goods and services found in the Indian Constitution was really complex. Today, goods, services, and other types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements. Under the earlier division of taxation powers in the Constitution, neither the Centre nor the States could apply the tax to such bundles in a seamless manner.
- Complexities in Administration: Compounding the structural or design deficiencies of each of the taxes was the poor or archaic infrastructure for their administration. Taxpayer services, which are a lynchpin of a successful self-assessment system, were virtually nonexistent or grossly inadequate under both Central and State administrations.
Why did India need GST:
The GST is introduced not only to get rid of the earlier patchwork of indirect taxes that were partial and suffer from infirmities, mainly exemptions and multiple rates, but also to improve tax compliance.
The spread of GST in different countries has been one of the most important developments in taxation over the last six decades. Owing to its capacity to raise revenue in the most transparent and neutral manner, more than 150 countries have adopted the GST.
Features of GST:
The features of proposed GST are as follows:
- Dual GST: Dual GST signifies that GST will be levied by both the centre and states, on supply of goods and services. Under the constitution, presently the taxing powers are split between the centre and states. Under GST, the power to tax on supply of all goods and services is vested in the hands of both the centre and the states. Considering the dual taxation power to tax transaction under GST, the structure is referred to as dual GST.
- Subsuming almost all indirect taxes: GST will subsume all major indirect taxes levied by the Central Government i.e. central excise, customs and service tax and majority of taxes levied by the State Government i.e. VAT, luxury tax, entertainment tax, etc. The following taxes are subsumed within GST:
||State VAT/Sales Tax
|Additional duties of Excise
||Central Sales Tax
|Excise Duty levied under Medicinal and Toiletries Preparation Act
||Entertainment Tax (not levied by local bodies)
|Additional duties of custom (CVD & SAD)
|Surcharges and cesses on central taxes
||Surcharges and cesses on state taxes
- IGST: Under this model the Centre would levy the IGST which would be approximately CGST plus SGST on all inter-state transactions of taxable goods & services and imports. Inter-state seller would pay IGST on value addition after adjusting IGST, CGST and SGST on purchases. The exporting state would transfer to the state the credit of SGST used on payment of IGST.
- Credit Scheme: GST will be levied on supply of goods and services and the dealer will be allowed credit for the GST paid on purchases. The credit would be seamless except that the credit of CGST paid will not be allowed for set-off against SGST payable and vice-versa.
How would this work?
|Types of purchases
|GST incidence on purchase (taxes payable)
|Credit entitled on (with respect to taxes paid)
The assessee is required to account for CGST, SGST and IGST separately.
Extent of cross utilization:
|Nature of tax paid on purchase
||Can be utilized for payment of
- Compensation to states: Due to application of GST some states which are consumer centric like Kerala, Gujarat, Maharashtra, Haryana, Tamil Nadu & Karnataka would get immense benefit. For the states which will be incurring losses due to implementation of GST, the Centre has promised to compensate the loss for 5 years from its initiation.
The compensation for the first 3 years would be 100% of the revenue shortfall, for the 4th year, it will be 75% and for the fifth year it will be 50% of the revenue losses incurred by states.
Imapct of GST:
Here an attempt is made to illustrate the general impact and also specific sector-wise analysis. Firstly discussing the general impact of GST on Indian economy which can be listed as follows:
- Competitiveness in exports: Under GST, exports will become competitive due to elimination of cascading effect of taxes. A study done by National Council of Applied Economic Research suggested that GST could boost India’s GDP by 1%-2%. GST is like key “Brahmastra” for India’s GDP in times of challenging global environment.
- Creation of a common national market: The motto of GST is “one nation one tax one market”. GST will turn the nation into a common national market, due to which there will be seamless flow of credit across the nation and also it will lead to seamless movement of goods across states and reduce the transaction cost of businesses. A study found that truck drivers in India spend almost 60% of their time off roads negotiating check posts and toll plazas because of 11 categories of tax are levied on the road transport sector. The GST will help bring down logistical costs.
- Restructured indirect tax system: The GST will reshape the indirect tax structure by subsuming almost all the indirect taxes e.g. Excise, Service Tax, VAT etc. This will do away with the complex indirect tax structure of the country, thus improving the ease of doing business in the country and hence giving positive vibes for multi-national companies to work in India.
- Increase in revenue for Government: Under GST, dealers will get credit for all the taxes paid earlier in goods/services chain, thus incentivizing firm to source inputs from other registered dealers. This could bring in additional revenues to the Government as the unorganized sector, which is not part of the value chain, would be drawn into the tax net.
- Reduction in corruption: To claim input tax credit, dealers have an incentive to ask for documentation from the dealer behind him in the value added chain. Thus, new tax regime is seen as less intrusive, more self polishing and hence more effective way of reducing corruption.
- Push to “Make in India” programme: A Finance Ministry report said that the GST regime will boost the “Make in India” programme as dealers will get input tax credits for capital goods also.
- Rise in inflation: The service tax rate will shoot up from the current level of 15% to 18% in GST regime. This has led to fears that inflation could rise in short term, which can probably last a year. Inflation in second year after GST implementation will benefit favourably as the numbers would be compared to already-high figures of first year of implementation.
- Removal of cascading effect: As GST is based on single taxation regime, it will reduce the cascading effect of multiple taxes.
- Reduction in cost for industry: As the industry will have to pay a single tax, it will make their goods and services relatively cheaper, ultimately resulting in increased demand and consumption.
- Reduction in administration cost for Govt.: Earlier indirect taxes department were administered by the union and state governments. But, after the implementation of GST, there is no need of having so many departments and this will ultimately result in reduction of administration cost for Govt.
- Increase in voluntary compliance and revenue collections: GST regime will be much simpler than as of now, so it will encourage voluntary compliance and thus resulting increased revenue collections for government.
- Economic Growth: As it is neutral to business processes, business models, organization structure, geographic location, product substitutes, it promotes economic efficiency and sustainable long term economic growth.
Now, moving to analyze the impact of GST on sectoral basis:
||GST will help free movement and supply of goods in every part of the country. It will also eliminate the cascading effect of taxes on customers which will bring efficiency in product costs.
||The tax collection at source (TCS) guidelines in GST regime will increase administration, documentation workload and other costs for ecommerce firms.
||For handset makers, GST will bring in ease of doing business as they may no longer need to setup state specific entities and transfer stocks to them. Dealers are also likely to pass on to consumers cost benefits they will get from consolidating their warehouses and efficiently managing inventory.
||Call charges, data rates will go up since normal tax rate will be 18%. Tower firms will be able to set off their input duty liabilities as petro-products are likely to be included in GST purview later on.
||On road price of vehicles could drop by 8%, as per a report. Lower prices can be construed as indirect stimulus to boost volumes.
||Demand for commercial vehicles may get a hit in the medium term. With fleet productivity increasing, operators may not feel the need to expand in mid-term.
||GST will eliminate multiple levies. It will also allow deeper penetration of digital services.
||With GST, companies might require each centre to generate a separate invoice to every contracting party.
||Taxes can go down by 2%-4% resulting in lower average ticket prices and increase the footfalls in multiplexes.
||No negative could be figured out as of now.
||No positive could be figured out as of now.
||Insurance policies (life, health and motor) will cost more from July 2017 as taxes will go up by 300 basis points.
||No positive could be figured out as of now.
||Flying to become expensive. Service tax on fares currently ranges between 6%-9%. With GST, the tax rate will get almost doubled.
||Effective rate of tax for cement companies was 25% earlier as compared to 18% in GST. So, it will lead to savings in transportation cost. One common market will bring down the number of depots in the country.
||No negative could be figured out as of now.
GST is indeed the need of hour for Indian economy. The people are sick of complying with multiple laws, and many times they are penalized for not complying the laws they are not even aware of. GST will ensure broader tax base, and hence covering most of the dealers into its ambit. This will create a unified market and credit flow chain will work properly without any hindrances. It will also add up to the revenue generation for the Government as many unorganized sector will get organized once GST is implemented.
GST will also motivate foreign direct investors to invest and setup industry here in India. This will create job opportunities, and for a developing economy like India it’s always a favorable situation. It will make the supplies being priced competitively so benefitting the ultimate consumers.
After analyzing all the pros and cons, we as an Indian citizen should welcome the upcoming change with open arms, after all we want to see India being entered down in the list of super powerful economies, and GST is one of the biggest measure of making that happen.