Brief Overview of Goods and Service Tax (GST)

It is destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as set off. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer.

The tax would accrue to the taxing authority which has jurisdiction over the place of consumption which is also termed as place of supply.

The GST would replace the following taxes namely:

I. Taxes currently levied and collected by the Center

1. Central Excise duty

2. Duties of Excise (Medicinal & Toilet Preparations)

3. Additional Duties of Excise (Goods of Special Importance)

4. Additional Duties of Excise (Textiles and Textile products)

5. Additional Duties of Customs (Commonly known as CVD)

6. Special Additional Duty of Customs (SAD)

7. Service Tax

8. Central Surcharges and Cesses so far as they relate to supply of goods and services.

II. Taxes currently levied and collected by the States

1. State VAT

2. Central Sales Tax

3. Luxury Tax

4. Entry Tax in all forms

5. Entertainment and Amusement Tax (Except when levied by the local bodies)

6. Taxes on advertisements

7. Purchase Tax

8. Taxes on Lotteries, Betting and Gambling

9. State surcharges and cesses so far as they relate to supply of goods and services.

The GST Council shall make recommendations to the Union and States on the taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be subsumed in the GST.

The various Central, State and Local levies were examined to identify their possibility of being subsumed under GST. While identifying, the following principles were kept in mind.

1. Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services.

2. Taxes or levies to be subsumed should be part of the transaction chain which commences with import or manufacture or production of goods or provision of services at one end and the consumption of goods and services at the other.

3. The subsume ratio should result in free flow of tax credit in intra and inter-State levels. The taxes, levies and fees that are not specifically related to supply of goods and services should not be subsumed under GST.

4. Revenue fairness for both the union and the States individually would need to be attempted.

The commodities proposed to be kept outside the purview of GST are:

1. Alcohol for human consumption

2. Petroleum proudcts like petroleum crude, motor sprit (Petrol)

3. High speed diesel

4. Natural Gas and

5. Aviation turbine fuel and Electricity

The existing taxation system (VAT, Central Excise) will continue in respect of the above commodities.

Tobacco and tobacco products would be subject to GST. In addition, the Center would have the power to levy Central Excise duty on these products.

It would be a dual GST with the Center and States simultaneously levying it on a common tax base. The GST to be levied by the entre on intra-State supply of goods and or services would be called the Central GST (CGST) and that to be levied by the States would be called the State GST (SGST), Similarly Integrated GST (IGST) will be levied and administered by the Centre on every inter-State supply of goods and services.

India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of Government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will, therefore, be in keeping with the Constitutional requirement of fiscal federation.

Centre will levy and administer CGST and IGST while respective states will levy and administer SGST.

Presently, the fiscal powers between the Centre and the States are clearly demarcated in the Constitution with almost no overlap between the respective domains. The Centre has the powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics etc., ) while the States have the powers to levy tax on the sale of goods. In the case of inter State sales, the Centre has the power to levy a tax (Central Sales Tax) but, the tax is collected and retained entirely by the States. As for services, it is the Center alone that is empowered to levy service tax.

Introduction of the GST required amendments in the Constitution so as to simultaneously empower the Centre and the States to levy and collect the tax. The Constitution of India has been amended by the Constitution (101 amendment) Act, 2016 recently for this purpose Article 246A of the Constitution empowers the Centre and the States to levy and collect GST.

The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted gods 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 CENVAT. While the location of the supplier and the recipent 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.

For example: 1. Suppose hypothetically that the rate of CGST is 15% and that of SGST is 15%. When a wholesale dealer of steel in Andhra Pradesh supplies steel bars and rods to a construction company which is also located within the same State for (Let us assume) Rs. 100/-, the dealer would charge CGST of Rs. 15/- and SGST of Rs. 15/- in addtion to the basic price of the goods. He would be required to deposit the CGST component into a Central Government account while the SGST portion into the account of concerned State Government. Off couse, he need not actually pay Rs. 30/- (Rs. 15/- + Rs. 15/-) in cash as he would be entitled to set-off this liability against the CGST or SGST paid on his purchases (Let us say inputs). But for paying CGST he would be allowed to use only the credit of CGST paid on his purchases while for SGST he can utilise the credit of SGST alone. In other words, CGST credit cannot, in general be used for the payment of SGST. Nor can SGST credit be used for the payment of CGST.

Let us see another Example 2:- Suppose, again hypothetically, that the rate of CGST is 15% and that of SGST is 15% . When an printing company localed in Hyderabad supplies printing services to a company manufacturing consumer products also located within the State of Andhra Pradesh for (let us assume) Rs. 100/-, the printing company would charge CGST of Rs. 15/- as well as SGST of Rs. 15/- to the basic value of the service. He would be required to deposit the CGST component into a Central Government account while the SGST portion into the account of concerned State Government. However he need not again actually pay Rs. 30/- (Rs. 15/- + Rs. 15/-) in cash as it would be entitled to set off this liability against CGST or SGST paid on his purchases (Let us say inputs such as paper, ink, packing material etc.,) But for paying CGST he would be allowed to use only the credit of CGST paid on its purchases while for SGST he can utilise the credit of SGST alone. In other words, CGST credit cannot be in general, be used for payment of SGST, nor can SGST credit be used for the payment of CGST.

Introduction of GST would be a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax and allowing set off of prior stage taxes. It would mitigate the ill effects of cascading and pave the way for a common national market. For the consumers, the biggest gain would be in terms of a reduction in the overall tax burden on goods, which is currently estimated to 30% to 35%. Introudction of GST would also make our products competitive in the domestic and international markets. Investigations reveals that this would instantly spur economic growth. There may also be revenue gain for the Centre and the States due to widening of the tax base, increase in trade volumes and improve tax compliance. Last but not the least, this tax because of its transparent character, would be easier to administer.

Under the GST regime, an Integrated GST called IGST would be levied and collected by the Centre on inter-State supply of goods and services. 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 on the recommendations of the Goods and Services Tax Council.

The CGST and SGST would be levied at the rates to be jointly decided by the Centre and States. The rates would be notified on the recommendations of the GST Council.

The GST Council would be constituted comprising of the Union Finance Minister who will be the Chairman of the Council, the Minister of State (Revenue) and the State Finance or Taxation Ministers to make recommendations to the Union and the States on :

1. The taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be subsumed under GST.

2. The goods and services that may be subjected to or exempted from the GST.

3. The date on which the GST shall be levied on petroleum crude, high speed diesel, motor sprit (commonly known as petrol), natural gas and aviation turbine fuel;

4. Model GST laws. Principles of levy, apportionment of IGST and the principles that govern the place of supply.

5. The threshold limit of turnover below which the goods and services may be exempted from GST.

6. The rates including floor rates with bands of GST.

7. Any special rate or rates for a specified period to raise additional resources during any natural calamity or disaster.

8. Special provision with respect to the North – East States, J & K, Himachal Pradesh and Uttarakhand and

9. Any other matter relating to the GST. As the Council may decide.

The mechanism of GST Council will ensure hormonisation on different aspects of GST between the Centre and the States as well as among States. It has been provided in the Constitution (101 amendment) Act, 2016 that the GST Council, in its discharge of various functions, shall be guided by the need for a hormonised structure of GST and for the development of a harmonised national market for goods and services.

The Constitution (101 amendment) Act, 2016 provides that every decision of the GST Council shall be taken at a meeting by a majority of not less than 3/4th of the votes of the Members present and voting. The vote of the Central Government shall have a weightage of 1/3rd of the votes cast and the votes of all the State Governments taken together shall have a weightage of 2/3rd of the total votes cast in that meeting. One half of the total number of members of the GST Council shall constitute the quorum at its meeting.

Under the GST regime, tax is payable by the taxable person on the supply of goods and or services. Liability to pay tax arises when the taxable person crosses the threshold exemption, i.e. Rs. 10 lakhs. Rs. 5 Lakhs in the case of North Eastern States except in certain specified cases where the taxable person is liable to pay GST even though he has not crossed the threshold limit. The CGST and SGST is payable on all intra State supply of goods and or services and IGST is payable on all inter State supply of goods and or services. The CGST, SGST and IGST are payable at the rates specified in the Schedules to the respective Acts.

Tax payers with an aggregate turnover in a financial year upto 10 lakhs would be exempt from tax. Aggregate turnvoer shall include the aggregate value of all taxable and non taxable supplies, exempt supplies and exports of goods and or services and exclude taxes like GST. Aggregate turnover shall be computed on all India basis. For North Eastern States and Sikkim, the exemption threshold shall be five lakhs. All tax payers eligible for threshold exemption will have the option of paying tax with input tax credit benefits. Tax payers making inter State supplies or paying tax on reverse charge basis shall not be eligible for threshold exemption.

Harmonised System of Nomenclature commonly known as HSN Code shall be used for classifying the goods under the GST regime. Taxpayers whose turnover is above Rs. 1.5 Crores but below Rs. 5 Crores shall use 2 digit code and the taxpayers whose turnover is Rs. 5 crores and above shall use 4 digit code. Taxpayer whose turnover is below Rs. 1.5 crores are not required to mention HSN Code in their invoices. Service will be classified as per the Services Accounting Code commonly known as SAC.

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 input on goods and services.

Exports will be treated as Zero rated supplies. No tax will be payable on exports of goods or services. However credit of input tax credit will be available and the same will be available as refund to the exporters.

Small tax payers with an aggregate turnover in a financial year upto 50 lakhs shall be eligible for composition levy. Under the scheme, a taxpayer shall pay tax as a percentage of his turnover during the year without the benefit of input tax credit. The floor rate of tax for CGST and SGST shall not be less than one percent. A tax payer opting for composition levy shall not collect any tax from his customers. Tax payers making inter State supplies or paying tax on reverse charge basis shall not be eligible for composition scheme. Composition scheme will be at the option of the tax payer.

GSTN stands for Goods and Service Tax Network. A Special purpose vehicle called GSTN which has been set up to cater the needs of GST. The GSTN shall provide a shared Information Technology infrastructure and services to Central and State Governments, tax payers and other stakeholders for implementation of GST. The functions of the GSTN would, inter alia, include :

1. Facilitating registrations

2. Forwarding the returns to Central and State Government authorities

3. Computation and settlement of IGST

4. Matching of tax payment details with banking network

5. Providing various MIS reports to the Central and the State Governments based on the tax payer return information.

6. Providing analysis of tax payers profile and

7. Running the matching engine for matching, reversal and reclaim of input tax credit.

The GSTN is developing a common GST portal and applications for registration, payment, return and monthly information system reports. The GSTN would also be integrating the common GST portal with the existing tax administration. IT systems and would be building interfaces for tax payers. Further the GSTN is developing back end modules like assessment, audit, refund, appeal etc., for 19 States and UTs (Model II States). The CBEC and Model I States 15 in number are themselves developing their GST back end systems. Integration of GST front end system with back end systems will have to be completed and tested well in advance for making the transition smooth.

The Constitution (101 Amendment) Act, 2016 provides that the Goods and Services Tax Council shall establish a mechanism to adjudicate any dispute.

1. Between the Government of India and one or more States or

2. Between the Government of India and any State or States on one side and one or more other States on the other side or

3. Between two or more States

Arising out of the recommendations of the Council or implementation thereof.