Basics of GST – Implementation In India

CA Ramandeep Singh Bhatia

Indirect Tax Structure in India

India currently has a dual system of taxation of goods and services, which is quite different from dual GST. Taxes on goods are described as “VAT” at both Central and State level. It has adopted value added tax principle with input tax credit mechanism for taxation of goods and services, respectively, with limited cross-levy set-off. The present tax structure can best be described by the following chart:

SHORTCOMINGS IN THE PRESENT STRUCTURE AND NEED OF GST

1. Tax Cascading: The most significant contributing factor to tax cascading is the partial coverage by Central and State taxes. The exempt sectors are not allowed to claim any credit for the Cenvat or the Service Tax paid on their inputs.
2. Levy of Excise Duty on manufacturing point : The CENVAT is levied on goods manufactured or produced in India. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax. Taxable event at manufacturing point itself forms a narrow base. For example, valuation as per excise valuation rules of a product, whose consumer price is Rs. 100/-, is, say, Rs. 70/-. In such a case, excise duty as per the present provisions is payable only on Rs.70/-, and not on Rs.100/-.
3. Complexity in determining the nature of transaction – Sale vs. Service
4. Inability of States to levy tax on services : With no powers to levy tax on incomes or the fastest growing components of consumer expenditures, the States have to rely almost exclusively on compliance improvements or rate increases for any buoyancy in their own-source revenues.
5. Lack of Uniformity in Provisions and Rates
6. Fixation of situs – Local Sale vs. Central Sale
7. Interpretational Issues: whether an activity is sale or works contract; sale or service, is not free from doubt in many cases.
8. Narrow Base
9. Complexities in Administration

GST (Goods and Service Tax)

GST means Goods and Service Tax. It is an indirect tax levied on sale of goods and services. The reformists believe that GST is one of the most awaited law which upon introduced will boost the economic growth in the country. This law if passed by the parliament may come into force from April 2016. As everyone is talking about it now, let’s get into the basics of the proposed law in this article.

Present system – This can be better explained through an example. Suppose you buy soap for Rs.50 per piece, it includes Excise Duty, VAT or CST, Customs duty on the imported raw materials, etc. So, currently you will have to pay multiple taxes on the same product. Let’s take another example; the food you buy at hotels will have VAT as well as Service Tax.

Complexities in the present system – The taxes are levied by central government as well as state governments. So, the businessman has to maintain accounts which will comply with all the applicable laws. It is perceived to be a complex system. Hence, worldwide over 150 countries have adopted GST,  a simple tax system. Though it is late, India is catching up with the global trends.

Is it easy to implement in India? Not really. Today states have autonomy in collecting state taxes. They have the feeling of losing their rights! They want liquor, fuel to be out of GST tax system. They are also worried about Central government sharing GST revenue with the states. If India becomes one common market, then the states will have to share their powers of taxing with the union government. (Which means states can’t increase the taxes as and when, as much as they want)

If the GST bill is passed; will it come into effect immediately? NO. The earliest day we can see GST in India will be in April 2016. Again implementation depends upon the initiative and involvement of state governments. Some of the states may act quickly and some of them may take time to implement.

GST Rate- Today, one pays Excise Duty of 12%, VAT of 14% on goods (totaling to 26%). 12% service tax on services. So, the rates may be anywhere between 12% and 26%. The average worldwide GST rate is around 18%.

FEATURES OF AN IDEAL GST

The main features of GST are as under:-

(a) GST is based on the principle of value added tax and either “input tax method” or “subtraction” method, with emphasis on voluntary compliance and accounts based system.

(b) It is a comprehensive levy and collection on both goods and services at the same rate with benefit of input tax credit or subtraction of value of penultimate transaction value.

(c) Minimum number of floor rates of tax, generally, not exceeding two rates.

(d) No scope for levy of cess, re-sale tax, additional tax, special tax, turnover tax etc.

(e) No scope for multiple levy of tax on goods and services, such as, sales tax, entry tax, octroi, entertainment tax, luxury tax, etc.

(f) Zero rating of exports and inter State sales of goods and supply of services.

(g) Taxing of capital goods and inputs whether goods or services relatable to manufacture at lower rate, so as to reduce inventory carrying cost and cost of production.

(h) A common law and procedures throughout the country under a single administration.

(i) GST is a destination based tax and levied at single point at the time of consumption of goods or services by the ultimate consumer.

MODELS OF GST

There are three prime models of GST:

• GST at Central (Union) Government Level only
• GST at State Government Level only
• GST at both, Union and State Government Levels

EXPECTED MODEL OF GST IN INDIA- DUAL GST

In India, the GST model will be “dual GST” having both Central and State GST component levied on the same base. All goods and services barring a few exceptions will be brought into the GST base. Importantly, there will be no distinction between goods and services for the purpose of the tax with common legislations applicable to both.

For Example, if a product have levy at a base price of Rs. 100 and rate of CGST and SGST are 8% then in such case both CGST and SGST will be charged on Rs 100 i.e. CGST will be Rs 8 and SGST will be Rs.8.

Interestingly, as per the recommendations of Joint Working Group (JWG) appointed by the Empowered Committee in May 2007, the GST in India may not have a dual VAT structure exactly but it will be a quadruple tax structure. It may have four components, namely – (a) a Central tax on goods extending up to the retail level; (b) a Central service tax; (c) a State-VAT on goods; and (d) a State-VAT on services.

The significant features of Dual GST recommended in India, in conjunction with the recommendations by the JWG, are as under:

1. There will be Central GST to be administered by the Central Government and there will be State GST to be administered by State Governments.

2. Central GST will replace existing CENVAT and service tax and the State GST will replace State VAT.

3. Central GST may subsume following indirect taxes on supplies of goods and services: Central Excise Duties (CENVAT)· Additional excise duties including those levied under Additional Duties· of Excise (Goods of Special Importance) Act, 1957. Additional customs duties in the nature of countervailing duties, i.e.,· CVD, SAD and other domestic taxes imposed on imports to achieve a level playing field between domestic and imported goods which are currently classified as customs duties. Cesses levied by the Union viz., cess on rubber, tea, coffee etc.· Service Tax· Central Sales Tax – To be completely phased out· Surcharges levied by the Union viz., National Calamity Contingent Duty,· Education Cess, Special Additional Duties of Excise on Motor-Spirit and High Speed Diesel (HSD).

4. State GST may subsume following State taxes: Value Added Tax· Purchase Tax· State Excise Duty (except on liquor)· Entertainment Tax (unless it is levied by the local bodies)· Luxury Tax· Octroi Entry Tax in lieu of Octroi· Taxes on Lottery, Betting and Gambling·

5. The proposed GST will have two components – Central GST and State GST – the rates of which will be prescribed separately keeping in view the revenue considerations, total tax burden and the acceptability of the tax.

6. Taxable event in case of goods would be ‘sale’ instead of ‘manufacture’.

7. Exports will be zero rated and will be relieved of all embedded taxes and levies at both Central and State level.

8. The JWG has also proposed a list of exempted goods, which includes items, such as, life saving drugs, fertilizers, agricultural implements, books and several food items.

9. Certain components of petroleum, liquor and tobacco are likely to be outside the GST structure. Further, State Excise on liquor may also be kept outside the GST.

10. Taxes collected by Local Bodies would not get subsumed in the proposed GST system.

As per the proposed GST regime, the input of Central GST can be utilized only for payment of CGST & the input of State GST can be utilized only for payment of SGST. Cross- Utilization of input of CGST in payment of SGST and vice-a- versa, will not be allowed. (Source:- Hindu Business Line, dated 30-06-2009)– Railways and Construction Sector might be included in GST

– Liquor, Petro Sector, Taxes of Local Bodies might be out of GST

– Stamp Duty – It has not yet been decided whether stamp duty will be part of the GST or not.

*Sources of the above information – Back Ground Material Issued by ICAI on GST.

(Author may be contacted at [email protected] or on  + 91 9827152729)