GOODS AND SERVICES TAX IN INDIA: FOLLOWING THE OLD ROAD OR PAVING A NEW PATH? A Comparison Of Indian Regime With Other Countries
Goods and Services Tax, abbreviated as the GST is an ambitious tax system implemented by the Government of India. It came into effect on 1st July 2017 but its genesis can be traced back to the year 2000 when the then Prime Minister of India introduced the concept of GST and set up a committee to oversee the design and development of a similar regime in India.
The GST system presently functioning is recognized widely for the concept of ‘One Nation, One Tax’. It is a multistage, destination-based, comprehensive indirect tax model which has been brought into force to regularize the indirect taxation system in India.
Before we go ahead, we need to first understand the concept of indirect taxes and GST in India.
The tax system all around the world has been mainly divided into two major heads: Direct Tax and Indirect Tax.
Direct Tax refers to the tax of which the incidence and impact falls on the same person. Indirect Tax refers to the tax in which the incidence and impact of the taxation does not fall on the same person.
Explaining with an example, in direct tax, the tax is to be born and paid, both, by the same person. Like in the case of income tax or corporate tax, the person required to pay the tax amount is collect it, file the tax return and pay the amount due by the prescribed date.
However, in the case of indirect tax, the amount of tax is born by one person and collected and paid by some other person. For instance, the taxes paid on the commodities that a consumer buys falls under the category of indirect tax. Thus, the tax paid by a person on the groceries is born by him and paid along with the minimum retail price of the good. However, once the same is paid by the consumer, the seller has to collect it on the behalf of the government, file the return by the stipulated date and then transfer the due amount to the government.
In indirect tax, the buyer bears the tax but the seller ultimately forwards it to the government. The seller or service provider acts as an intermediary between the government and the consumer.
When discussing the concept of Goods and Services Tax, we need to bother ourselves with just the indirect tax regime as GST’s advent hasn’t impacted the direct taxes regime.
GOODS AND SERVICES TAX
After discussing and understanding the definition of indirect taxes, let us focus our attention towards the elephant in the room.
Goods and Services Tax isn’t a new concept in the world economy. It has been in existence since the 1950s. It was first brought into effect by the French government. However, the system adopted by France is different from the one brought into effect by India and various countries.
Apart from India, Canada, New Zealand and Australia are some countries who have shifted their indirect tax system towards a unified taxation policy.
Goods and Services Tax, as we break down the term, refers to the tax which shall be applicable on the supply of goods, or services, or both. This definition can also be traced to the Article 366(12A) of the Constitution of India. However, alcoholic liquor for human consumption and petroleum products haven’t been included in the reforms.
Before the GST reform of 2017, indirect taxes were governed by the Value Added Taxes (VAT) regime. In VAT, the state governments had autonomy on imposition of the taxes and thus, every state had a different rate of tax for every product. This had made the taxation system immensely complex, hampering diversification for various companies. Also, it was acting as an hinderance for foreign investors who may not be comfortable with state-wise rates of taxes.
Thus, to get rid of these problems and to increase investment and ease of doing business in India, the government decided to implement the GST which had been in the developing stage for more than a decade.
TIMELINE OF DEVELOPMENT OF GOODS AND SERVICES TAX IN INDIA
The idea of a unified and comprehensive indirect taxation system in India came into picture in the year 2000 when the then Prime Minister Atal Bihari Vajpayee introduced the idea of GST and set up a committee for the designing and development of such a model for the Indian economy.
Later, in 2006, the then Finance Minister announced the implementation of GST from 2010 in his budget speech. The first discussion paper by the Empowered Committee on the topic came into existence in 2009 and thereafter, in 2011, the 115th Constitutional Amendment Bill was introduced but it subsequently lapsed. Another attempt was made in 2014 when the 122nd Constitutional Amendment Bill was presented before the Lok Sabha.
After multiple attempts, the GST was added to the Constitution of India by the 101st Amendment in August 2016. The GST council was formulated and in September 2016, the first meeting of the GST council was convened. In March 2017, GST council made recommendations regarding the Central GST, State GST, Integrated GST and Union Territory GST. Recommendations regarding the Compensation Cess Act were also made.
The CGST, SGST, IGST, UGST and Compensation Cess Act were, thereafter, passed in April 2017. In May 2017, the GST council further made recommendations regarding all rules.
The process of bringing the amendment into force started from 30th June 2017 when all states except the state of Jammu and Kashmir passed their SGST Acts. The state of Jammu and Kashmir passed its SGST Act on 8th July 2017. On the same day, the CGST and IGST ordinances promulgated to extend GST to the state of Jammu and Kashmir.
On 1st July 2017, GST was launched and on 1st February 2019, the amendments to the CGST, IGST, UTGST and Compensation Cess Act were enacted.
WHAT IS THE GST COUNCIL?
The GST council is a constitutional committee comprising of members of the industry, representatives of the parties affected by the new taxation regime and members of the government who are appointed to make recommendations to the Union and State governments on the issues related to Goods and Service Tax.
In accordance with the Article 279A(1) of the Constitution of India, the GST council was constituted within 60 days of the commencement of Article 279A. Article 279A came into effect on 12th September 2016.
The council is chaired by the Union Finance Minister, who presently is Mrs. Niramala Sitaraman. Other members of the council include Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation of all states.
As discussed already, VAT was in existence before GST. GST was launched in an effort to regularize and make the indirect tax regime uniform throughout India. It was done keeping in mine economic and accounting benefits. However, as we already are aware, GST is a borrowed concept.
We have already briefly discussed the various aspects regarding meaning, history and development of GST. Let us now compare it with the systems in the other countries and understand its operation in India.
GST was enforced in India by the way of a Constitutional amendment made in the year 2017. The present GST regime suggest that there are multiple slabs of GST rates. Each commodity finds a place in either of the slabs and tax is charged accordingly. The slabs are divided into 4, on the basis of the tax rate: 5%, 12%, 18% and 28%. Some commodities, which are tax free, are charged at a rate of 0% GST.
The commodities and services are allocated specific HSN (Harmonized System Nomenclature) codes which help the seller/service provider identify the slab in which the commodity or service falls.
There are three returns that need to be filed: GSTR-1 for sales, GSTR-2 for purchase (auto-populated) and GSTR-3 for final return and re-conciliation. All returns are to be filed quarterly and monthly, subject to the turnover of the registered enterprise. However, GSTR-3 is not in force. Instead of it, provisional GSTR-3B is applicable. Though tax is filed accordingly, but in the provisional GSTR-3B, detailed return is not filed.
GSTR-9 and GSTR-9C are annual returns. GSTR-9 is for those who are not covered under GST audit while GSTR-9 and GSTR-9C both are applicable for those registered enterprises who are covered under the GST audit.
These are the basic returns that need to be filed apart from the other returns which are required to be filed by the various enterprises.
We will analyze the effectiveness of the system later in the article.
GST is an indirect tax charged on purchase of goods and services in New Zealand. It came into existence in 1989 and since then, GST has been applicable on all the purchases.
The unique feature in the New Zealand’s tax system which attracts our attention is the uniformity in the tax rate. The GST rate has been single and consistent since the start of the system. The rate before October 2010 was 10% which was later raised to 15%.
The exceptions from GST are:-
Various activities in New Zealand are subject to zero-percent GST. These activities include export, certain supplies of fine metals, supplies of land where both the vendor and purchaser are registered for GST.
GST in New Zealand is applicable on all registered entities. To be registered in GST, the current or projected turnover in New Zealand is NZD 60,000 or more. For non-resident suppliers of low-value goods (below NZD 1,000) or remote services of more than NZD 60,000 in a 12-month period to consumers are also required to register for GST.
The frequency of returns filed under New Zealand’s GST regime varies, depending on the turnover. If Inland Revenue Department’s approval has been acquired and the value of total taxable supplies is less than NZD 5,00,000 in a 12-month period have to file the return ever 6 months. If the taxable supplies amount to NZD 24 million or less, the return has to be filed once every 2 months. If annual turnover (including group turnover) is above NZD 24 million, the return has to be filed monthly. Non-resident suppliers of low-value goods are required to file return quarterly.
Though this system may look very lucrative, however, this cannot be used in the Indian set-up because Indian economy is very diversified. Due to the plethora of goods and services offered in the Indian market, along with the various classes of people which live together in the country, differential tax rates on different items are a necessity.
The Goods and Services Tax system came into force in Singapore in the year 1994. The Singaporean GST system is borrowed from the UK and the New Zealand’s system. The Inland Revenue Department of Singapore acts as the administrative, executive and accessing authority for GST Singapore. The GST is applicable on the registered business entities in Singapore, just like the system which is prevailing in New Zealand and India.
The GST rate applicable in Singapore is commensurate to the New Zealand’s model. In Singapore, GST is applicable with a uniform rate of 7%. Similar to all indirect tax regimes, in Singapore, GST is charged from the ultimately consumer and is collected by the registered entity on behalf of the tax authority.
As far as registration is concerned, it is divided into voluntary and compulsory registration. Since GST is a self-accessed tax, business enterprises are required to continuously access their need to be registered.
Registration is compulsory in Singapore in two situations:-
Only businesses which deal in zero-rated supplies can apply for exemption, despite exceeding registration limits. This is done to avoid administrative hassles. The exemption is approved by the IRAS if more than 90% of business’ total tax supplies are zero-rated and its input tax is greater than output tax.
The Singaporean GST set-up requires the registered entities to file returns in electronic form. Generally, the returns are filed on quarterly basis. The GST F5 is required to submit the returns to tax authorities based on the accounting cycle. The GST is required to be paid within 1 month after the end of the business’ prescribed accounting period. Late submission attracts penalty and refunds are usually made within 30 days from the date of receipt of return.
The Singapore’s GST system overly resonates the New Zealand’s system and for similar reasons, the same shall not be aptly applicable in the Indian set-up.
The concept of Federal Goods and Services Tax was introduced in Canada on January 1, 1991 replacing the Manufacturer’s Sales Tax. The motive of bringing into force the new taxation system was to improve and streamline the tax system, specially keeping in mind the export businesses. Since not all provinces merged their existing provincial taxation system with the GST and thus, many business enterprises were forced to file both, GST and Provincial Sales Tax (PST) returns.
The provinces which chose to combine their provincial sales taxes with GST charge named it as Harmonized Sales Tax (HST).
The differential tax systems are where the confusion starts in the Canadian indirect tax system. The tax rates of PST and HST are varied. Also, some goods are exempted in the PST but not in HST and vice versa. This has created problems for business enterprises operating in multiple provinces of Canada.
Except for the provinces of British Columbia, Alberta, Saskatchewan and Manitoba, all other provinces have adopted HST. In the provinces of Alberta and Northwest territories, Nunavit and Yukon, no provincial taxes are applicable and thus, only GST is charged.
The registration requirements in Canada are based on the HST and PST. Those a business owner only provides HST/PST exempted good or service, which includes child-care services, music lessons and used rental housing. Also, business enterprises qualifying as small suppliers according to the Canada Revenue Agency are not required to get themselves registered, except for business owners operating in taxi and limousine rentals and non-resident performers, who sell admissions to seminars and other events. The business enterprises whose turnover limit crosses the one stipulated for small suppliers are required to get themselves registered within 29 days of crossing of the threshold limit.
Voluntary registration for small suppliers is available. The advantage of voluntary registration is the Input Tax Credit that is available to them on the amount paid out on business purchases.
The Input Tax Credit refers to the reduction of the taxes paid on input from taxes from the taxes paid on the output. In Canada, businesses can claim input tax credit on operating expenses, namely commercial rent, utilities, office supplies, meals and entertainment expenses. The expenses which do not qualify for input tax credit include taxable goods bought or services availed or imported to provide exempt goods and services, some capital property and membership fees or dues paid to any club whose main purpose is to provide recreation, dining, or sports facilities.
After registration, the Canada Revenue Agency allocates the GST/HST reporting period, which varies from monthly, quarterly and annually, based on the total annual sales of GST/HST taxable goods and services. Even if the enterprise hasn’t collected any GST/HST or hasn’t conducted any business activity, the business is required to report according to the period assigned to it.
The major drawback of this system is that it didn’t live up to its expectations. The motive behind the introduction of GST in Canada was simplification of the tax system however, it failed to do so. Rather, it created greater hardships for the business owners who now have to work on various models of GST, HST or PST based on the province in which they operate.
The Indian model of indirect tax system which is currently in force for most of the products, i.e. GST has been an aspirational project. The Indian government has worked on its framing for more than a decade however, we need to analyze whether the law is perfect or if the law has been able to achieve the goal it was brought into force for.
In the Indian GST setup, there are various tax rates and different items are allocated particular slabs in which they fall. Indirect tax is charged on them on the basis of the slab in which an item fall. This system has been brought into effect, contrary to the practice in other countries, because of the class divide in the Indian society and the plethora of goods and services offered. Apart from India, only five countries use four non-zero slabs. Also, out of 115 countries who have adopted GST, 28 countries use dual slab.
While various goods and services fall under essential commodities, there are luxury goods as well. It would have been prejudicial to charge the same rate of tax on items of necessity and luxury goods. Thus, 4 slabs have been made in which various items are placed. Gold and semi-precious stones are an exception to this rule. 3% GST is charged on gold whereas 0.25% tax is levied on semi-precious stones.
In the exempted rate i.e. 0%, about 1300 goods and 500 services have been included. Further, approximately 81% of goods and services covered under GST fall below or in 18% category. However, a matter of concern here is the regular shift of goods from one rate to another. The GST council keeps on updating the list of goods falling under particular tax slabs and this creates problems for tax payer and tax advocates.
Coming to the exemptions provided in the present system, various commodities are kept in the zero-percent slab. These goods and services include wood charcoal, handlooms, agricultural implements, condom and contraceptives. Earlier, sanitary pads were under the 12% slab however, after protests and deliberations, it was exempted from tax.
Similarly, another demand regarding tax exemption is relating to insurance services. The middle-class in India contributes heavily to the development of the country by way of direct and indirect tax. However, the social security schemes in India are limited and aren’t available to everyone at the expense of the government. Resultantly, a large number of people turn to private companies to buy medical and life insurance services. GST is charged on general insurances at the rate of 18%, which increases the premium amount to be paid by policyholders. Earlier it was covered under the 15% slab.
The policyholders choose these policies because they have no other option to ensure their security and their family’s financial well-being in situation of crisis. High rates of tax on these policies burdens the pockets of the middle-class families. It may further hamper people from buying such policies which will adversely affect the standard of living of Indian citizens.
The frequent changes in the tax rates are a big hinderance in the growth of this system as an effective alternative. Also, the author believes that the GST council should take into consideration the demands of the different sections of society for once and for all and decide accordingly with finality.
The Indian economy has become excessively globalized in the past two decades and this fact has accelerated the growth of the Indian economy. However, though GST was brought in force to ensure a simpler and comprehensive system of tax, abolishing all other local and central indirect taxes (except custom duty), the same goal is very difficult to achieve.
The GST system is divided into CGST, SGST/UTGST and IGST. Also, the various returns that need to be filed by the registered business enterprises have increased the paperwork for businesses and their advocates. Also, the technological barrier includes the non-accessibility of the portal during the last dates. This worries the tax payers who have to helplessly wait till the final date for extensions.
Also, since GST is filed only through online mode, it has created issues for registered business enterprises operating in remote areas of India where network availability and supply of electricity are not enough to access the GST portal. Due to this, such business enterprises have to suffer on a regular basis to file their regular returns.
Another aspect we need to consider is the additional burden of compliances under GST on business enterprises operating in multiple locations. State-wise registration poses an issue of increased cost of operation which may affect the performance of the organization.
While there are some deficiencies in the present GST system, it would be wrong to jump to conclusions. While analyzing GST, we need to keep in mind that there are thousands of business organizations which fall under GST and different states have their own reservations on the matter. To harmonize the needs and requirements of everyone in the world’s second largest country, we need to ensure that ample time is given to bring things into motion.
The central government and the GST council should revisit the GST Act and GST slabs to ensure that the loopholes which are existing in the system, which are further stopping the newly established system from achieving its goals are done away effectively and swiftly. The shift from GST and VAT was a big challenge not only for the government but for the business operators as well.
The need of the hour to ensure that the business enterprises are educated about the updated system so that they are able to overcome any difficulties that may arise before them while adapting to the new system. Also, their grievances and requests should be kept in mind by the GST council to ensure that maximum benefit can be supplied to the business owners, which will in-turn boost the Indian economy and ease of doing business in India.
Anjali Tripathi : Anjali Tripathi is an undergraduate law student in her 4th year of study at Amity Law School, Delhi (GGSIPU, Delhi, India). She has experience as a youth blogger with ED Times of 2 years and is currently serving as the editor and founder of Lex Jura Law Journal. She is also working as a research fellow for Kleros Fellowship of Justice.
Nikunj Bhatnagar : Nikunj Bhatnagar is an undergraduate law student in his 4th year of study at Amity Law School, Delhi (GGSIPU, Delhi, India). He has been working as the Trustee of Nishant NGO since long and is the editor and founder of Lex Jura Law Journal.