CMA N. P. Viswanathan


There must have hardly been any piece of enactment in the Indian legislative history, other than perhaps the Indian Constitution, on which so much has been written by so many people. Over a period of fifteen years, since the introduction of the concept of GST in the Indian Parliament, no politician or economist worth their salt has failed to harp on this subject. So much so, every intellectual in the country, be it a tax expert or an economic analyst, why, even the common layman can talk on the subject unprompted.

A big ticket legislation, as it was proposed way back in 2000, the GST was to revolutionise the Indirect Tax system in the country. It reminds me of the prediction that is commonly made by the Indian Meteorological Department, especially on the North-East monsoon forecast – “A well-defined low pressure area lay centred in the Bay of Bengal adjoining the eastern coast of peninsular India, which may gain momentum into a cyclonic system or a deep depression resulting in heavy to very heavy rains in the coastal districts of Tamil Nadu, Puducherry and Andhra Pradesh. It may move in a west-north-westerly direction and cross the land at any place between Nagapattinam and Ongole during the next 72 hours.” In reality, it may never develop into a cyclonic storm, but remain stationary as a low pressure area and weaken over a period without crossing land thereby causing no rains.


Same seems to be the case with our GST legislation, though it is hoped that it really gains strength and turns into a revolutionary legislation in the history of Indian Economics. But sometimes the prediction does come true. And one of such instances is going to be the enactment of Indian GST Law. Be that as it may, I don’t wish to delve into the technical intricacies of the proposed Act, which, in fact, has already been done repeatedly over the past few years. Latest view on the subject is with regard to “Make­in-India” or “One-India” perspective. That is what I want to discuss here.

For records sake, the road map to GST, as and when it takes its real “avatar”, would read like this :

Initiated for debate in the Indian Parliament in the year 2000, during the then NDA Government it went into turbulence for a long time, finally attaining the character of a Bill by name “Constitution (122nd Amendment) Bill, 2014” which was introduced in the Lok Sabha on December 19, 2014. The Bill got passed in the Lok Sabha on 6th May, 2015 and forwarded to the Rajya Sabha. A Select Panel on the Constitution (122nd Amendment) Bill was constituted by the Rajya Sabha, who held detailed deliberations on the Bill as well as heard all the stake holders, experts, State & Central Governments and submitted its recommen­dation on 22nd July, 2015.

The Union Cabinet on 29th July, 2015 clears all the amendments proposed to the Bill by the Rajya Sabha Select Panel. The revised Bill was put up for adoption by Rajya Sabha. The bill was passed by the Rajya Sabha on 3 August 2016, and the amended bill was passed by the Lok Sabha on 8 August 2016. The bill, after ratification by the States, received assent from President Pranab Mukherjee on 8 September 2016, and was notified in the Gazette of India on the same date. Now the juggernaut is well on its way to be implemented all over India w.e.f. 1st April, 2017.

India’s trade bodies have come on a common platform with industry lobby groups to campaign for an early rollout of the Good and Services Tax (GST). Trade lobbies, including CII, FICCI, Assocham, PHD Chambers, and traders body, the Confederation of All India Traders (CAIT), have for the first time issued a joint appeal to the political fraternity “to give safe passage to the GST Bill,” in Parliament.”The industry is in favour of GST,” said Sumit Mazumder, President of industry chamber, Confederation of Indian Industry. “It will be good for the industry and all businesses will benefit. It will unify India into one country instead of a fragmented one with every state having its own tax rate… It will dramatically improve ease of doing business in India.”

The country has a historic opportunity with GST. It will strengthen the country’s tax institutions, get rid of barriers within States and create a common market. Implementing a new tax, encompassing both goods and services, to be implemented by the Centre, 29 States and 2 union territories, in a large and complex federal system, via a constitutional amendment requiring broad political consensus, affecting potentially 2-2.5 million tax entities, and marshalling the latest technology to use and improve tax implementation capability, is perhaps unprecedented in modern global tax history.

Instead of one fixed GST rate, the government is exploring the possibility of going for a “tax band,” which can start at a low of 18 per cent and a high of 24 per cent. The government feels that if there is a fixed rate in the constitutional amendment, any change in the future will be difficult. A tax band will ensure that any GST rate within it can be implemented.

Anyway with the all-powerful GST Council already constituted, these points are undergoing the evolution process by various brain-storming sessions, hopefully to be finalised soon and hopefully, the proposed draft GST Act will be placed on the tables of Parliament during the upcoming, advanced, Winter Session of the Parliament.

On the flipside to the GST, a loophole seems to have developed in the proposed GST Actthat could hurt the Government’s Make in India initiative to turn the country into a manufacturing hub to generate jobs and boost economic growth. Profit margins on imported goods are set to rise as GST would allow a larger share of input credit to importers compared with the current regulations.

If this is the case, who will manufacture in India? Indian manufacturers would be at the receiving end and the Indian market will be flooded with imported goods, which will be cheaper than made-in-India goods. This will strike at the root of the Make in India campaign. The GST Council will have to apply its mind to the matter. It is hoped, the government will find an amicable solution.

Currently, imports of most goods attract customs duty of 29.44 per cent at the standard rate. This includes basic customs duty (10 per cent), plus additional duty or countervailing duty (CVD) equal to excise duty at 12.5 per cent, plus 4 per cent special additional duty (SAD) and an education cess at 3 per cent.

Under the GST regime, only basic customs duty will remain. Additional duty and SAD will be abolished and IGST (integrated GST) is expected in their place.

If the value of goods imported is Rs 100, then currently the cost of import in the hands of the importer will be Rs 129 (approx.). Under GST, the cost will be Rs 132. The government gives a refund of about 5 per cent to traders who sell the goods; they in turn credit that to the importer. A trader who resells the goods is eligible for refund of SAD of about 5 per cent. So the cost of goods comes down by about 5 per cent under the current regulations. Hence, currently, the net cost of import in the hands of the importer isRs 124. (i.e. Rs 129 minus Rs 5).

If the same goods are imported after GST, the importer is eligible for refund or credit of full 22 per cent IGST, out of the total customs duty of 32 per cent. So the net cost of the goods imported in the hands of the importer post GST would be Rs 110 (i.e. Rs 132 minus Rs 22). Assuming that the imported goods are resold by the trader at Rs 150, the margin for the importer under the current regulations isRs 26 whereas under the GST regime it will widen to Rs 40.

Under the current regime, by design or default, the additional duty or CVD part of the customs duty on import of goods into India, was acting as a tariff protection to Indian manufacturers. One way of protecting the Indian manufacturing sector would be to deny IGST input credit to importers. Which means the cost of goods stays at Rs 132 (from the above example) against Rs 110 under GST.

The GST Bill is being touted as the ‘bramhastra’ for the Indian economy, especially the consumer oriented states like Bihar, Jharkhand, Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Rajasthan et al. where industry is not the main source of state GDP . Once implemented, GST would help contain inflation in these states and fiscal deficit.

Adi Godrej, Chairman of Godrej Group said, ‘Once GST is introduced, there should be a reduction in taxes on consumer products by around 5 percentage points. As consumer prices get lower, it will further contain inflation.’ According to a study by the National Council of Applied Economic Research (NCAER), full implementation of the GST could expand India’s GDP growth by 0.9-1.7 percentage points. GST reform has been lauded by the World Bank, International Monetary Fund and the Fitch Ratings Agency.

There are bound to be certain complexities in the initial stage in implementing the GST. It is the economic experience with majority of the countries that implemented GST Bill. There are loads of positives in GST, yet there is an inherent drawback that haunts GST. In the short-term i.e. the initial two to three years – GST would trigger inflation. Everything from groceries to entertainment would become expensive by 5 percent to 8 percent (assuming GST is at 18-22 percent). Why to go too far; Malaysiaimplemented GST from April 1, 2015 and has seen a huge jump of around 2.5 percent in inflation.

It is obvious that evading taxes would become difficult once the GST Bill is implemented. Under the GST legislation, manufacturers or those providing services (consultants, CMAs/CAs/CSsetc) can also pass on all costs to customers (as all indirect taxes could be charged) including simplest costs like furniture bought or electricity bill. This would make the cost of the goods and services increase. This could lead to increase in costs. Not just that, for the whole tax system to move from one form to another takes time. Companies have to calculate their costs differently, manage their warehouses differently among other things. This takes time and creates chaos.

Taking cue from Malaysia, where the country is witnessing slowdown in its economy as demand and production have also gone down in the country. Although the government claims that the GST would not hurt businesses due to GST claimable practice, in fact it will hurt the businesses too. This is because of the low demand in the market due to the high input cost of product passed on to the end consumers, the businesses have to decrease the supply to meet the current condition of lower demand, thus the businesses have to cut down the expenses such as labour cost due to the lower output needed and eventually there might occur high rate of unemployment. Besides, the business is not producing in the efficient conditions as they are not maximising the usage of the machines etc. and all these will lead them to downsize their businesses and eventually lead to the recession in a country.

This has been the experience of most of the global economies while implementing GST, though they have picked up subsequently. So the initial two years are crucial for the economy to gain out of GST implementation. One should not lose heart and be patient.

Credits : Wikipedia / Google / NCAER

Click Here to read more articles on GST

cma-harshad-deshpandeWe would like to thank CMA Harshad Deshpande, who is also the Chief Editor of WIRC Bulletin, ICAI, for his effort to make the content on GST available to larger section of people and for dissemination of knowledge on the topic , which is of prime importance  not only for the taxpayers but also for common man of the Country.

Article been published with permission from CMA Harshad Deshpande given on behalf of Western India Regional Council of India of The Institute of Cost Accountants of India.

Source- WIRC Bulletin Diwali Special Edition on GST

What is HSN Code under GST?

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