CA Pradeep Jain, CA Preeti Parihar, CA Vaibhav Bothra
The Goods and Services Tax (GST) is the most awaited reformation in the indirect tax structure of India which is planned to be implemented w.e.f. April 1, 2016. It has been the most happening topic in the parliament since December 19, 2014 when The Constitution (122nd Amendment) (GST) Bill, 2014 was first presented by the Finance Minister, Mr. Arun Jaitley in the Lok Sabha. In this piece of writing, the authors have made an attempt to give an insight of merits and probable threats in GST proposals.
GST is a Value Added Tax proposed to be levied in lieu of manufacture, sale and consumption of goods and services. It will replace all indirect taxes whether levied on goods and services by the Central and State governments including Central Excise Duty, Countervailing Duty, Service Tax, Value added tax, Octroi and entry tax, luxury tax, etc. It will be implemented concurrently by the central and state governments as the Central GST (CGST) and the State GST (SGST) respectively. Exports will be zero-rated and imports will be levied the same taxes as domestic goods and services adhering to the destination principle.
Benefits of GST:-
A number of countries in the world have already switched to GST. There are a number of advantages of GST over the existing indirect tax structure due to which India is looking forward to implement the same. Some of the key advantages of GST are as follows:-
Currently, a no. of taxes and duties are being imposed on the same item right from the stage of manufacture until the same is consumed. These are levied in form of import duty, excise duty, octroi, luxury tax, service tax, VAT, etc. The total of these taxes is around 35%-40%; while rate of GST is to be kept around 16%-18%. This is one of the key rationales of introducing GST.
The foundation of an indirect tax is kept keeping in view the cascading effect and due provisions are framed to lower down the same. However, more the no. of taxes, more the cascading effect. When we talk of excise duty, service tax or VAT, there are Cenvat credit rules which allow the credit of input tax/duty suffered by the material or service so used. Still there are cases where the cascading effect is clearly visible but there is no mechanism in the law to deal with it. For eg. entry tax, octroi, etc. Almost every goods are subject to these taxes but no credit is allowable as these are collected normally by local bodies. Thus, ultimately these taxes form part of the cost of product which is further subject to excise duty or service tax or VAT. Thus, cascading effect do exists. This particularly happens when the same goods or service suffers a no. of taxes and no set off facility is available. Implementation of GST will bring drastic reduction in the cascading effect as most of the indirect taxes prevailing at present will get subsumed in GST and credit will be allowed on the inward taxes .
One major area of dispute is the “classification of goods and/or services”. It would be interesting to know that there have been cases where the litigation arose on the fact whether a particular item/activity is goods (i.e. excise duty will be levied) or service (i.e. service tax will be levied). More interestingly, the said litigation was settled down by the Supreme Court decisions. One such case was of Software. Sales tax department issued notices treating the same as sale of goods while service tax department issued notices treating the same as provision of services. This issue was settled down by Supreme Court in year 2004 in the case of M/s Tata Consultancy Service. In this case, it was held that if a property is capable of being abstracted or consumed or used or transmitted, it is leviable to tax as sale of goods. There was another case of sim cards. In the year 2006, Supreme Court gave a landmark judgment in the case of M/s BSNL and others wherein it was held that if the sale of the SIM card is merely incidental to the service being provided and facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax. While giving this decision, Supreme Court held that both the taxes cannot be levied on single transaction. But interestingly, even after this judgment there are several transactions which are subject to both service tax and excise duty. Further, there is a concept of works contract, both in the VAT law as well as in service tax. Though in both the laws, there is a provision of abatement or composite scheme, still there is part of total value which is subject to both VAT and service tax. All these problems will come to an end after implementation of GST.
At present, there are multiple indirect taxes which are levied by different bodies, Central Government, State Government, Local bodies, etc. All these governing bodies have their separate offices, rules and regulations. An assessee has to move from one office to another for procedural formalities. Also, there are cases where for complying the rules of one governing body, the assessee fails to comply with rules of another governing body. Implementation of GST will bring substantial reduction in these formalities as there would be only two governing bodies namely Centre for CGST & State for SGST. This will save time, money and energy of assessees.
In the present structure, same information is to be filed at several places for the same goods/service. This increases cost of assessee and also the duplicity of information. Not only assessees, overall cost of government; is also increased as the same information is being stored at several places which has to be maintained by employing man, money and energy. This ultimately leads to inefficient utilization of nation’s resources.
With the implementation of GST, in long run, there will be reduction in overall cost of products manufactured in India. This will make Indian products more competitive in International market. It is worth mentioning here that many of our top competitors in the international market have already switched to GST. Implementing GST in India will be a step forward in making our product more cost effective in international market.
PROBABLE THREATS IN GST PROPOSAL:-
Lots of publicity has been made about the benefits of implementing GST. However, on going through the GST proposal, it is found that there are some grey areas which sighs that it is nothing but a carry forward of VAT, excise duty and service tax in new name and fame. Let’s have a look on these areas of negativity of GST:-
Earlier GST was proposed to be implemented with a rate of 27%. However, later on it has been clarified that the rate will be around 16-18%. Perhaps it has been done to bring GST rates at par with those prevailing in the international market. Normally, GST rate varies from 16% to 20% in international market. However, it is worth noting here that Malaysia has recently adopted GST in year 2015 only with the rate of 6%. Also, there is example of Australia which has GST rate of 10%. Thus, keeping the latest international trend in mind, the rate of GST still needs revision on lower side.
In the proposed GST Bill, one vote has been assigned to each State in the GST Council. As per Government, this has been done to ensure that small states should not lag behind in the GST Council. However, if we look into the decision making process at GSTC, we find that there is possibility that the role of small states will be negligible in the vital decisions. It has been proposed that “Decision in GSTC shall be taken at a meeting, by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles, namely:-
(a) The vote of the Central Government shall have a weightage of one fourth of the total votes cast, and
(b) The votes of all the State Governments taken together shall have a weightage of three-fourth of the total votes cast, in that meeting.
And the vote of each state shall have a weightage proportionate to the population of that State. [emphasis supplied]
Thus, while assigning the weightage to vote, the population has been made the prime criteria. It is worthwhile to mention here that there are certain states which have very less population but their share in taxes is on much higher side. Such states, though contributing more, will lag behind in the decision making process taking place at GST Council.
It has been proposed to levy an Additional Tax not exceeding 1% on supply of goods in course of inter-state trade or commerce would be levied and collected by the Central Government. This tax would be assigned to the States in which the supply originates for two years or as recommended by the GST Council. This will be a non-vatable tax. Thus, this tax itself seems to be against the very basic vision of GST which says that there will be no-cascading effect in GST. This 1% tax will ultimately become cost of goods as no Credit of this tax would be allowed.
It has been proposed that the Central Government will compensate the loss arising out to States on implementation of GST for a period of five years. The compensation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year. This has been done to make the States affirmative towards the implementation of GST. However, there is a possibility that States may not take effective steps for smooth run of GST as they are being compensated for the losses. It is also possible that the actual loss is much lower than that shown on records in order to get higher compensation. The Central Government will have to take steps to ensure that this proposal in the GST bill is not misused by the States.
It is much hyped that GST will bring Indian goods a step forward in the International market. The reasons so given are that the GST will make Indian products cheaper in long run and thus will promote exports. In this regard, it is to be noted that the banking sector pays an important role in the exports. Whether it is export of service or export of goods, the role of banks is vital. It is worthwhile to mention here that at present service tax @ 14% is being levied on the banking transactions. On introduction of GST, this rate will be on much higher side as predicted. This will ultimately increase the cost of transaction, particularly, in case of imports and exports where huge amount is transacted. It is also interesting to note that in most of the countries, banking sector is excluded from the purview of GST. The cost of transaction there is obviously on the lower side. On the other hand, the cost of banking transaction, which ultimately becomes the cost of product, will increase after implementation of GST. Similar is the case with other important services like advertisement and sales promotion which play a crucial role in exports of a country.
It has been proposed that the GST Council will lay down criteria as to how the disputes arising out of its recommendations will be resolved. In other words, the disputes arising out of recommendations of GSTC will be resolved by GSTC itself. This is like a party to dispute has been given authority to make the judgment. It is against the principles of natural justice. A question was raised on this proposal which was explained by the Government that if any separate body is constituted for dispute resolution, it will hamper the working of GSTC in general and of legislature in particular. However, even after this explanation, there are possibilities that the decision taken on the disputes are not true and fair, particularly when they relate to small states which possess lower voting power (since voting weightage is based upon population). If any separate body is not constituted, the task of laying down the dispute resolution mechanism will be the toughest one.
The introduction of GST along with other government initiatives like the ‘make in India’ programme have the potential to drastically bring down costs, re-define and re-shape the economy of India. The benefits of implementing GST have been much talked but the probable threats have only been popularized as opposition party’s publicity stunts to hamper the implementation of GST. Whatever be the case, the fact is that these probable threats in GST should be taken care of before the bill turns into Act; else the GST will only carry forward the demerits of existing indirect tax structure, thereby becoming an old wine in new bottle.