Vat was introduced in all over country in 2006 and GST is the logical conclusion of the successful introduction and imposition of Value added Tax in India. In its standard format GST is a single tax replacing all the indirect taxes and collected by a single authority but in our country the system of Governance is Federal and both centre and states have the power to collect indirect taxes in one form or another. Hence a formula is developed to introduce a compromised GST with the consent of the States hence we can call it Indian format of GST.
First it was referred in 2006 in the Budget speech of the FM that GST will be introduced in India from 1st. April 2010 but later for one or other reasons it was postponed from year to year and it is evident from this delay that it is not easy for the lawmakers to introduce GST in our country and now since 2016 is declared as GST introduction year, let us see what is Indian format of the GST and further what is the basic characteristics of India GST , the problems associated with it and further what is the possibility that the 2016 deadline will be met.
1. IS INDIAN GST IS DUAL TAX
The reference of GST was first made in Indian Budget in 2006 by Mr. P Chidambaram as a single centralized indirect Tax in which tax is to be collected by centre and then it is to be distributed between centre and States. This was the standard format of Goods and service Tax.
In our country states have also right to collect indirect taxes on sale of goods hence this “single centralized” form of GST was rejected by the states at the initial stage itself.
Hence a compromise is made on Dual GST in this respect in which both states and centre will impose and collect tax on a single transaction of sale and service in the form of State Goods and service tax “SGST” and Central Goods and service tax “CGST”.
Hence this Compromised format of Dual GST is going to be introduced in our country.
EXAMPLE OF DUAL FORMAT OF GST
If Y of Mumbai sells the same Goods to Z of Mumbai for Rs. 10.50 Lakhs then he will collect a sum of Rs. 1.26 Lakhs as SGST and Rs. 1.47 as the CGST. Now he will deposit Rs. 6000.00 as SGST (Rs. 1.26 collected from Z – Rs.1.20 input credit from his purchases from X) and Rs. 7000.00 as CGST (Rs.1.47 Collected from Z – Rs. 1.40 Lakhs input credit from his purchases from X).
Now you can cross check the total tax collected by State is Rs. 1.26 Lakhs i.e. 12% of Rs. 10.50 Lakhs and by centre is Rs. 1.47 Lakhs i.e. 14% of Rs. 10.50 Lakhs. Rs. 10.50 is the cost to the consumer and he has paid Rs.1.26 Lakhs as SGST and Rs. 1.47 as CGST which was collected and deposited by X and Y at different stage of sales. It is also clear from this example that the input credit of SGST can be taken against the SGST and input credit of CGST can be taken against the CGST.
2.GOODS AND SERVICE TAX AND CONSTITUTIONAL AMENDMENT
A constitutional amendment bill with respect to the GST is introduced and passed in Lok Sabha recently and this is the first concrete step form the Government side regarding introduction of the Goods and Service Tax. Let us fist see why this constitutional amendment is required and how it will finally be cleared.
Goods and Service Tax is practically an extension of the Existing VAT system in which both the central and state will charge indirect tax on Goods and Services. At present central has the power to tax services and further has the power to tax goods and manufacturing stage. States has the power to tax Goods up to the stage of sales but not have the power to tax services. Hence constitutional amendments is required to give powers to the central to tax goods up to the stage of sale and further to give powers to states to tax services.
Now see how this constitutional amendment will be cleared to make a way for sending it to the president for assent:-
- It has to be cleared from both the houses of the parliament by at least half of the members of the total strength of the members in each and further two third numbers of members present for the voting.
- Further this amendment has to be ratified by 50% of the total numbers of the state assemblies. This ratification by the state assemblies is required before sending the bill to the president for assent.
After this constitutional amendment the path for GST will be clear and then Central Government will have to prepare a Model draft of GST Act with the help empowered committee of states and then states will form their own act on this line.
That will be the basic foundation of GST in India.
3. GST AND VAT
Vat was introduced in our country in 2005 and 2006 in almost all the states and Goods and Service Tax is the logical extension of the VAT. Vat will be converted in SGST along with taxing the Services also at the state level and it will be called “State Goods and Service tax”.
Practically all the state indirect taxes will be covered by GST and will be merged with SGST but still there are some differences between states and centre about Entry tax. Some of the states are imposing entry tax in lieu of octroi and giving the revenue from entry tax to the Local bodies hence they are against this proposal. If this is accepted then it will certainly further distort the already compromised GST.
At present all the states are covered by VAT hence it they will not have any procedural problem in converting the VAT into SGST.
4. GST AND CENTRAL EXCISE
Central excise is a very important indirect tax in the country and it is a central tax .It is applicable on the manufacturing stage of the goods and in GST regime it will be scrapped and CGST will come into force which is destination based tax on selling stage.
Here at present taxing the sale of goods is sole right of the states and centre cannot tax the sale of goods .To give power to Central Government to tax the sale of goods the much talked GST amendment bill is there which we have already discussed above. This bill will also give power to states to tax services.
5.THRESHOLD LIMIT UNDER GST
Threshold Limit Under GST-The threshold limit under central excise is 1.50 Crore and in service tax it is Rs.10 Lakhs. Further in case of Vat the limit in most of the states is also Rs.10 Lakhs but in some of the states it is still Rs. 5 Lakhs. Now the question is what will be the minimum limit of turnover where dealers will start paying tax and this is called threshold limit and how much it has importance under GST At present the proposed threshold limit under GST is Rs.10 Lakhs under both the formats i.e. SGST and CGST though there was a demand of higher Threshold for CGST considering the present central excise limit of 1.50 Crores but accepting that will hamper the centre’s plan to generate expected revenue under GST since the gap of 1.40 crore is very big.
Generally it is called that GST will make a financially strong Centre than state and this is based on two reasons. First is threshold and second one is the fact that now centre will get the tax up to selling stage instead of manufacturing stage which it is getting under Central Excise.
6. GST AND CST- CENTRAL SALES TAX ACT
When Vat was introduced in India in 2006 the CST was considered as the biggest hurdle and it was promised that CST will be reduced by 1% every year and ultimately it will be abolished. After reducing from 4 to 3 and 3 to 2% this promise was not followed and since last several years it is there with 2%. The practical problems attached with C forms are the result of this broken promise.
Now what will happen with CST in GST may be a question. In GST there will be no place for CST hence manufacturing states which are generating huge revenue in this respect will lose the same. There will be a mechanism in GST to control the trade between two states and that mechanism will be called IGST- Interstate Goods and Service Tax and through this mechanism ultimate tax will go to the consumer state. IGST will not be a another (Third Tax) but it will be a complex mechanism that will ensure that one part of tax is received by Centre and other part of tax to consumer state and that will make GST a perfect destination based tax.
7. GST AND IGST MODEL TO MONITOR INTERSTATE TRANSACTIONS
A new model is developed under proposed GST to monitor the interstate trade of Goods and Services and this is called IGST. Let me clear first thing it will not replace the existing CST and there will be long awaited goodbye to Central Sales Tax in the GST regime.
Now it should also be noted that IGST will not be a Tax in addition to the SGST and CGST so one should not be presumed that IGST is a third tax but it is only a mechanism to monitor the interstate trade of Goods and services and further to ensure that the ultimate SGST is gone to the consumer state since the GST is a destination based tax.
Let us try to understand this IGST mechanism step by step:-
- Dealer of the selling state will collect IGST from the purchaser on Interstate Transaction and the rate of IGST will be the combined rate of SGST and CGST, Say if the rate of SGST is 12% and CGST is 14% then the rate of IGST will be 26%.
- While depositing the IGST the seller will take credit of SGST and CGST paid by him on purchase of such Goods or services within the state.
- The selling state will transfer the amount of input credit of SGST taken by the selling dealer against the IGST to the centre. This will ensure that selling state will not get any revenue out of this transaction.
- The interstate buyer shall take credit of IGST against his liability of SGST / CGST or IGST. For this purpose the total amount of IGST will be bifurcated in two parts SGST and CGST.
- Now come to the mechanism of transferring the SGST to the consumer state in which the central agency will transfer the amount of input credit of IGST used by selling dealer of consumer state while paying his liability of SGST. This will be clear from the example given below.
This whole mechanism will be known as a system of monitoring the interstate trade of Goods and services and will be called IGST. It is interstate Goods and service tax and also mentioned as integrated Goods and service tax in the discussion paper issued by the Empowered committee of the state Finance Ministers.
The Branch and stock transfer will also be governed with this model.
8.THE IMPORTANCE OF RNR- REVENUE NEUTRAL RATE
The basic question which generally asked in case of GST is that what will be the rate of tax. There will be two rates. One for states i.e. rate of SGST and second one is for centre i.e. rate of CGST.
The Law makers want to fix a rate where Government can get at least the same tax which both states and centre are getting under the present set up i.e. under VAT/CENTRAL EXCISE/SERVICE TAX etc.
This is called RNR and getting exact that rate is practically very difficult since multiplicity of taxes and cascading effect will not be there under GST.
At present there are news items about 27% rates but still not sure. Moderately if go for 12% for states and 12% for centre then it comes to 24%. It may be 24 or 27 but both rates are very much high compared to other GST countries.
Whatever may be the rate trade industry and consumers will find it too high but even in that case Government will get same revenue, it is uncertain.
The rate of tax will play a major role in the success of GST but it will not be easy task for lawmakers to ascertain and fix it.
9.GST AND PETROLEUM PRODUCTS
The petroleum products were kept out of the scheme of VAT and it is likely or you may take it sure that these were kept out of GST also. It means state and centre will continue to tax these products which includes diesel and petrol also as per the existing system of taxation. No input credit will be received on the tax paid on these products and further these products will not get any input credit for goods and services used by them The decision to keep petroleum products out of GST will be conscious and combined decision of centre and state though it is widely publicized that states are more keener on it.
The tax in form of Central excise and Vat form major part of indirect tax collections of centre and states and both of them don’t want to disturb this favorable equation and if this will happen then it will further distort the already compromised and distorted format of Indian Dual GST .
10.WHY CENTRE IS SO EAGER ON GST
State VAT was imposed throughout India in 2006 and at that time Centre and State were on the same side of the table under the leadership of Empowered Committee of State Finance Ministers. In terms of state revenue VAT was considered as Highly Successful.
GST is the next step and centre is very keen on it instead of states. Why? The reason is very clear but not widely discussed. States are not clear about revenue generation from GST but see there is one point which is sure that centre will certainly get higher revenue from the GST.
See at present the central indirect tax is collected in the form of Central excise and it is chargeable on manufacturing stage but in GST it will be replaced by CGST which will chargeable up to last selling stage. That will be a biggest boost to central revenue.
Further at present the threshold for central excise is Rs.150 Lakhs which will be reduced to Rs.10 Lakhs under GST.
These two points are the main reasons why centre is so keen on GST.
11.STATES STILL HAVE APPREHENSIONS
States are not sure about the revenue receipts from the GST so there first point is compensation from the loss of revenue from GST. The second point of disagreement on Entry tax and some of the states want Entry Tax to be kept out of the scope of GST. The third point of disagreement is taxation of petroleum products and it seems that there are still differences between the states and the centre with respect to the proposed GST.
The states and central will sort out these matters but this will also includes some more compromises on the standard form of the GST.
12.WILL GST BE IN 2016
We have been promised in 2006 that GST will be introduced in 2010 but after that GST was extended from year to year. Now it is declared that GST will be introduced in 2016 but till date the constitution bill is only cleared from only one house of the parliament and it is still to be cleared from the upper house (Rajya Sabha). After that it has to be ratified from the half of the state assemblies. This will be first step towards introduction of the GST in India.
After that Goods and service Tax acts and rules are to be framed by the centre and each of the states. Sometime will also be required for sorting out some of the issues still to be settled between the states and the centre.
At present we are running in 2015 hence practically almost one year is left and in my opinion it is not enough hence if we take that everything is going on very well then 1st April 2017 will be the suitable date for introduction of Goods and service tax in India.