Rohan N. Popat
- The Constitution (122nd Amendment) Bill, 2014 was introduced in the Lok Sabha on December 19, 2014 by the MoF which seeks to amend the Constitution to introduce GST.
- GST is a simplified indirect tax structure, wherein tax paid on goods/services procured by one person at one stage can be availed as credit while passing on the goods/services to the next stage, until they reach the final consumer who bears incidence of tax.
- It is in line with the destination principle.
- Mulling over the very soul, it is a classic example of the tax credit method under the VAT mechanism. This will transform the very conduct of indirect taxation in India by dismantling fiscal barriers amongst the states.
Need for a change
- India is one of such intriguing countries where one would find a multi-layered levy of indirect taxes viz. excise, customs, service tax, VAT/CST, entertainment tax, luxury tax, octroi, entry tax, taxes on lottery, betting and gambling, Different provisions exist for different states [e.g. VAT], resulting in high cost of goods/services to the ultimate consumer and a hassled executive framework plus intricate compliances.
- As everyone knows, the states are not empowered to collect tax on services.
- There is no all-inclusive credit mechanism for taxes levied by both the centre and the states and there is no provision for allowability of credit for taxes paid at post-manufacturing stage.
- ‘Goods’ and ‘Services’ no longer tend to be fairly distinct [e.g. works contract].
- Charging VAT on excise results in cascading effect. Credit of CST cannot be availed leading to additional burden on the dealers.
- Replacement of the state sales tax by VAT in 2005 was an encouraging move after the revolutionary economic reforms that took place in 1991. In recommending a state VAT, the Bagchi Report years back recognized that VAT won’t be the solution in a multi-govt. framework.
- Cases involving interpretation/classification disagreements are on a roll these days.
- To spin with the pace of the 21st century, it has thus become vital to have a unified system that is efficient in running, neutral in its application, cozily attractive and not unjustly
- Our Hon’ble FM, Mr. Arun Jaitley, rightly has said that it is the most important tax reform initiative in India since independence.
- Article 246A has been added to our Constitution empowering the states to levy GST; it will thus enable to avoid cascading effect by tax credit method..
- Dual GST system will have 2 components: one to be levied by the centre [CGST] and the other one by the states [SGST].
- However, in view of the Joint Working Group [JWG] appointed by the empowering committee in year 2007, there shall be a quadruple system comprising of: central tax on goods, central service tax, state-VAT on goods, state-VAT on services.
- A gist of indirect taxes that may get subsumed under GST framework:
|Taxes that may get subsumed under CGST
||Taxes that may get subsumed under SGST
|Central excise & additional excise duty.
Addl. customs duty.
Cesses [levied by the Union].
Surcharges [levied by the Union].
State excise duty [except on liquor].
Tax on lottery, betting & gambling.
- Taxes collected by local bodies won’t as well as shall not be encapsulated in the GST regime. Specific components of petroleum [till the time it is otherwise notified], liquor and tobacco may also be kept outside its purview, along with state excise duty on liquor. In the daily of 22nd June itself, this particular issue was brought up. Stamp duty may continue to be levied by the states.
- The JWG has proposed a list of exempted goods which inter alia includes life saving drugs, fertilizers, agricultural tools, books and food items. The concept of ‘declared goods of special importance’ has been deleted.
- The term ‘services’ to be exhaustively defined as ‘anything other than goods’.
- Integrated GST [IGST] may be levied upto a term of 2 years on inter-state transactions which shall be transferred to the importing state. Additional 1% origin based non-creditable tax may be levied on inter-state supply of goods.
- In case of intra-state transactions, the seller shall collect both CGST & SGST and deposit with the respective govts.
- Stock transfers to be subject to IGST.
- GST may be levied on sale of newspapers and advertisements. As one can fairly realize, such a meager change would not affect these industries anyway.
- Composition scheme for small scaled dealers/manufacturers/service providers shall be provided for, as found in other legislations too.
♣ Tax rate:
- Based on revenue neutrality, it may lie around 24-27%.
- Hiking service tax rate to 14% is a step towards GST. Our Hon’ble FM has thus said that the govt. is not interested in imposing a rate that could hurt people, indicating about a lower rate.
- Provision of tax band over and above the floor rates may be provided for along with differential rates for basic necessities.
♣ Exports & Imports:
- Based on the destination principle, exports to be zero-rated.
- Both CGST and SGST shall be levied on imports which shall go to the respective govts. Set-off of the same available.
♣ Input tax credit system:
- Under the credit mechanism of GST, a vendor can net off his input tax credit against his output tax liability. Set off of credits internally shall be allowed as under:
|| To be adjusted against
||IGST, CGST & SGST
||IGST & CGST
||IGST & SGST *
* Note: While paying SGST in a particular state, the credit of SGST paid in that very state only to be allowed as set off.
- Cross utilization of credit between CGST and SGST may not be permitted except in the case of inter-state supply of goods and services (i.e. IGST), the reason being the infeasibility caused by separate jurisdictions of the centre and the states.
- No refunds shall be required to be processed, as credit can be utilized while making payment resulting in uninterrupted credit chain and hence no substantial blockage of funds.
- Let us take an example:
|GST on output [say 20%]
|Less: Tax credit
|Net GST payable
♣ Registration apparatus:
- Uniform e-registration facility with threshold limit for mandating registration shall be introduced as a common phenomenon.
- Registration number shall be linked with PAN.
♣ Filing of returns:
- Uniform cut-off date for filing of return and common e-returns for CGST, SGST and IGST shall be provided for, with one copy to be given to the central authority and the other one to the relevant state authority.
- Reporting, maintenance and retention of invoices prior to/along with filing of returns, shall be mandated, as normally prevalent.
- Returns shall be processed and credits shall be validated for consistency electronically.
- The centre and the states shall have concurrent jurisdiction.
♣ GST Council:
- It shall be the Apex body for GST.
- Registration and other technicalities shall be administered by the Council. It shall be formed within 60 days of the Act coming into force to develop a harmonized national marketplace of goods and services.
- Functions of the Council: Making recommendations on taxes/cesses/surcharges, rates, exemptions, place of supply, threshold limit, administrative & penal provisions, etc.
- Credit shall also be allowed to be utilized for capital goods instantly.
- Service providers like web developers shall now be able to take the credit of VAT paid on infrastructure cost.
- With seamless availability of credit and composition scheme, the real out of pocket outflow shall decrease to some extent.
- GDP may rise by 1-2%, which is a need of the hour.
- Exports may rise by 3-6% and hence, a favorable foreign reserves scenario shall be developed, as anticipated.
- Prices may drop by approx. 2%, with a less adverse inflation rate and also logistics costs shall reduce by as much as 20%.
- It would alleviate business processes of doing business leading to a higher yield and more opportunities, thus creating a better environment for the common man to live in.
- There shall be uniformity across the states and hence increased transparency and a corruption free environment.
- This paradigm shift will enable the govt. to eliminate multiplicity of taxes, align central and state level procedures, smoothly integrate with direct taxation system, abridge compliances and thereby decrease disputes. Addition to the existing tax base would be an icing on the cake!
Why taking so long and the current status
- When the GST Bill was put to vote, the states took a step back seeing it as a threat to their fiscal freedom.
- Abolition of CST also was not acceptable to the states. Further, there were disputes regarding inclusion of purchase tax, oxtroi and duties on petroleum and alcohol.
- They asked for a constitutional framework for the revenue they fear they would lose. Thus, the Constitution(122nd Amendment) Bill 2014 provides for an extra 1% tax on inter-state supply of goods for a term upto 2 years which Gujarat and Maharashtra want to be extended beyond 2 years; that too at 2%. The centre may also reimburse the states a certain percentage of their revenue losses as a sunset clause.
- Besides, the civic bodies [e.g. BMC] have lately also raised concerns over loss of revenue.
- Towards GST initiative, the govt. has adopted the negative list for taxing services and also come out with the POPS Rules 2012.
- The GST Bill needs to be first ratified in the upper house of the Parliament [as it has already been passed in the lower house with 2/3rd majority in this May], then in atleast half of the state assemblies and only then the President would give his assent. The NDA govt. does not have majority in the upper house and the UPA govt. desires the Bill to be referred to a Select committee for review [which is likely to submit its report in July this year] which may face even stiffer resistance. It is therefore unlikely that it is passed in all the state assemblies with such majority in the very form it is presented.
- According to very recent media reports, the UPA Govt. offered a proposal to back GST if Sushma Swaraj and Vasundhra Raje are axed over Lalit Modi scandal, but the NDA Govt. has rejected the same saying that they won’t cut a deal with UPA – be it on GST or the Land Acquisition Bill.
- J&K Govt. has expressed concerns on implementation of GST.
- GST Council will then be formed and GST legislation and the Place of Supply Rules will be framed and put in the Public Domain for comments. GST network, an IT backbone of GST will be launched. Thus implementing GST by April, 2016 would not be a walk in the park!
- NSDL has been appointed as the IT partner and a pilot IT project has been rolled out in many states.
- Recently, the committee members visited various European countries to study their comprehensive VAT system which has been taken as a benchmark.
- Our Hon’ble FM has formed 2 steering committees on 17th June 2015 to enable implementation of GST which shall be responsible for all the mechanics of GST.
Challenges likely to be faced
- High tax rate:
- The estimated rate of 24-27% is way too high. For instance, GST rate in Sweden is 25% but free education for the age group 6-19 years is stipulated. Which such benefits does our govt. provide by charging so high duties?
- Let us see an extract of the report provided by the IMF in 2014:
||Per capita income [US $]
Considering so low earning capacity, such a high rate cannot be justified!
- Besides, inclusion or otherwise of petroleum in the GST regime is likely to bring about 2-3% increase/decrease in the estimated rate.
♣ Place of supply & service:
- The place of supply of goods is generally based on the delivery/location of goods.
- Whereas a service is intangible; it can be provided continuously over a period of time; also at multiple locations. Thus rules covering all such issues will have to be carved out.
♣ Other notable issues:
- At present, excise is payable upto the point of manufacture but GST shall be payable upto the point of sale, ultimately to be borne by the consumer. Thus the centre shall benefit at the cost of loss to people.
- Majority dealers paying VAT are not covered under excise, who shall get covered under GST and then be required to pay CGST.
- A flawless credit mechanism is called for so as to timely detect the real point of tax leakage when tax absconding takes place.
- It is feared that many tax officers at various levels would lose their jobs. Besides, extensive training at all levels is a must, from adapting their mindsets to acclimatizing them to the new methods.
- Providing for a convincing framework for compensation to the states for the likely losses and hence getting assent of atleast half the states within the stipulated time would be a sturdy task.
- Evaluation of the potential impact of GST on different business operations of various sectors such as real estate, IT, rail, etc.
- While widening the tax net, it should be ensured that the lowering of the threshold does not over burden small businessmen.
- Success of GST largely depends upon the robustness and flawlessness of the GST network in the areas of mapping of database with PANs, back end processing, integration with banks, etc.
GST – around the globe
- Around 150 countries have already implemented GST. France was the first country to introduce GST in 1954. Most of the countries have opted unified GST system. Brazil and Canada follow a dual system.
- GST rates of a few countries are as below:
- As per a report submitted by the World Bank last year, India ranks 147th out of 183 countries in terms of tax organization.
A bird’s eye view
- Wiping the indirect tax slate clean
- Destination principle
- Dual system
- Unjustifiable estimated rate
- Threshold limit and composition scheme
- Input tax credit
- Place of Supply Rules
- Tax free exports
- 2/3rd majority in the lower house
- Concurrent jurisdiction, single administration
- GST network
- GST Council and 2 steering committees
Summing up and the Roadmap
- An all inclusive tax system is a neat method of eliminating deformations and taxing based on utilization, treating different business processes as a mere tax transit.
- Various business operations will be redesigned with a superior setup in an efficient and classy manner. Due to global financial anxiety, it has become highly essential to cut down the cost of running businesses. Thus it is imperative not to delay the execution of the same – that too over political duress.
- Post GST, our economy will take an upward swing by easing the trade and industry. However, there are certain aspects which need to considered, such as:
- The way India is perceived globally has changed with recent developments.
- What if other indirect taxes not already subsumed are also included?
- How will disparities amongst the centre and the states be resolved?
- A balance between a fair rise in the govt. revenue and the burden in hands of the tax payers?
- However, the true impact of GST shall depend on the final shape that law takes. Let us hope that it enlightens on the issues as aforesaid and delivers the benefits as envisaged, leading towards a bold and strengthened economy.
- Let us greet the era of economic renaissance!