- Jan 23 2017 05:38:01PM
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The Goods and Services Tax (GST) bill, 2014 (122th Constitutional amendment bill) has recently been passed by the Parliament and concurrently ratified by more than half of total number of state legislatures as per the constitutional requirement. The Constitution (One Hundred and Twenty-Second Amendment) Act, 2014, seeks to amend the Constitution of India in order to facilitate the introduction of Goods and Services Tax (GST) in the country. The incorporated amendments in the Constitution will confer powers both to the Parliament and the State legislatures to make laws for levying GST on the supply of goods and services on the same transaction.
What is Goods and Services Tax (GST)?
The GST is considered as single biggest tax reform in India’s indirect tax structure since independence and it was first mentioned in 2006-2007 Union Budget discussion in the Parliament. Subsequently, many efforts had been undertaken to materialize the tax regime on ground, however, the political consensus was hard to be reached on such a sensitive issue. After several years of constant discussions, multi-stakeholder engagement, consistent pursuance and deliberation, the consensus could be made among stakeholders and ultimately, the bill has been passed in the parliament.
The new taxation regime aims to subsume an array of central and state level indirect taxes in order to facilitate a uniform and reliable tax structure throughout the country. The bill essentially envisions the entire country as single economic market with having the provisions of uniform taxation throughout the territory of India.
Presently, the indirect tax structure of India is unconsolidated, crippled-with multi-level taxation system and varies to a great extent from one state to another in terms of output. This variation and uncertainty in taxation structure fragments Indian markets along State lines. The GST is expected to address all these concerns that have been damaging business due to inefficient and multi-level taxation regime in India.
Thus, we see the newly enacted GST Act seeks to introduce a kind of taxation system that facilitates uniform economy market, discourage tax evasion, broadens tax buoyancy and makes Indian market much more competitive.
Evolution of GST in India
How GST would work?
This could be better understood with the help of an illustration.
Imagine a manufacturer of, say, any article in business. We consider that the article goes through three stages of a normal business - manufacturing, wholesale and retail.
In stage one, the manufacturer buys raw material or inputs — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures the article. In the process of creating the said article, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).
In the next stage the article passes from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).
In the final stage, a retailer buys the article from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.
GST changes present system of Value Added Tax (VAT):
Currently, we have Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT or ‘CENVAT’ mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production. There are several limitations in present VAT system like CENVAT does not extend to value addition by the distributive trade below the stage of manufacturing; even manufacturers cannot claim set-off against other central taxes such as additional excise duty and surcharge.
Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes imposed within the states such as luxury and entertainment tax, etc.
Once GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components- a central GST and a state GST.
This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it, there will be tax only on value addition at each stage, with the producer at every stage able to set off his taxes against the central/state GST paid on his purchases. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
Central taxes that The GST will replace
- Central Excise Duty
- Duties of Excise (medicinal and toilet preparations)
- Additional Duties of Excise (goods of special importance)
- Additional Duties of Excise (textiles and textile products)
- Additional Duties of Customs (commonly known as CVD)
- Special Additional Duty of Customs (SAD)
- Service Tax
- Cesses and surcharges in so far as they relate to supply of goods or services
State taxes that the GST will subsume
- State VAT
- Central Sales Tax
- Purchase Tax
- Luxury Tax
- Entry Tax (all forms)
- Entertainment Tax (not levied by local bodies)
- Taxes on advertisements
- Taxes on lotteries, betting and gambling
- State cesses and surcharges
Salient features of GST Act, 2016
- Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services.
- Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
- The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.
Inter-State Transactions and the IGST Mechanism:
- The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services.
- The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order).
- The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State.
- The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
Destination-Based Consumption Tax:
- GST will be a destination-based tax. This implies that all SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides.
The GST Council
- GST Council: In the GST regime, a Goods and Services Tax Council is being created under the Constitution. The GST Council will be a joint forum of the Centre and the States.
- This Council would function under the Chairmanship of the Union Finance Minister and will have Minister in charge of Finance/Taxation or Minister nominated by each of the States & UTs with Legislatures, as members.
- The Council will make recommendations to the Union and the States on important issues like tax rates, exemption list, threshold limits, etc. The recommendations made by this Council will act as benchmark or guidance to Union as well as State Governments.
- One-half of the total number of Members of the Council will constitute the quorum of GST council.
- Every decision of the Council shall be taken 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:-
- The vote of the Central Government shall have a weightage of one-third of the total votes cast, and
- The votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
- This is to protect the interests of each State and the Centre when the Council takes a decision and is in the spirit of co-operative federalism.
- Mechanism for resolving disputes arising out of its recommendations may be decided by the Council itself.
Who can levy GST?
Both Parliament as well as state legislatures will have the power to make laws on the taxation of goods and services
Parliament’s laws will not override a state law on GST
Exclusive powers to Centre to levy, collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST)
Central law will prescribe manner of sharing of IGST between Centre and states, based on GST Council’s views
IT framework for successful implementation of GST:
- Goods and Services Tax Network (GSTN): A not-for-profit, Non-Government Company called Goods and Services Tax Network (GSTN), jointly set up by the Central and State Governments will provide shared IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders.
- Due to a shift from origin based to destination based indirect tax structure, some States might face drop in revenue in the initial years.
- To help the States in this transition phase, the Centre has committed to compensate all their losses for a period of 5 years.
- Accordingly, clause 19 has been inserted in the Constitution (122nd) Amendment Bill, 2014 to provide for compensation to States by law, on the recommendation of the Goods and Services Tax Council, for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.
Benefits of Goods and Services Tax (GST) system:
- TAX GAINS: The biggest benefit is that it will disincentives tax evasion. If someone doesn’t pay tax on what he sells, he won’t get credit for taxes on his inputs. Also, everyone would like to buy only from those who have already paid taxes on what they are supplying. Resulting bringing a lot of currently underground transactions to over ground. This tax gains could be used for poverty alleviation and development.
- More widened tax coverage: Lower tax rates will follow from GST covering all goods and services, with tax only on value addition and set-offs against taxes on inputs/previous purchases. Right now, we have more tax on fewer items; with GST, there will be less tax on more items. Ideally, no good or service should be tax-exempt, as this will break the input tax chain.
- Bringing equality: The GST is expected to increase resources of the poorer States — for example, Uttar Pradesh, Bihar, and Madhya Pradesh — who happen to be large consumers will increase substantially. This would essentially contribute in bringing inequality down.
- Facilitates a uniform market throughout the territory: The GST will facilitate ‘Make in India’ by making one India. The current tax structure fragments Indian markets along State lines resulting decreased competitiveness of the Indian market. This fragmentation of market is mainly caused by three features of the current tax system:
- The Central Sales Tax (CST) on inter-State sales of goods;
- Numerous intra-State taxes; and
- The extensive nature of countervailing duty exemptions that favours imports over domestic production.
The GST is expected to rectify all these distortion by eliminating CST; subsuming numerous taxes; and since the GST would be also applied on imports, the negative protection favouring imports and disfavouring domestic manufacturing would be eliminated.
- Improving tax administration: Since GST seeks to subsume a large number of taxes and replaces with dual system of taxation, one for each centre and states, the tax administration would be a lot easier than existing system. This would increase the efficiency of taxation system.
Thus, we see many benefits are expected from GST taxation system. However, the tax reform is yet to be implemented and we do not know the actual benefits that we may realize after rolling out GST system.
The likely impacts of GST over economy have been assessed as following:
GST Roll-Out: Likely impacts on the economy
- State-wise impacts: Being a destination-based tax regime, consuming states would get initially more revenues. Producing states would see moderation in revenue but they would get compensated by increased economic activities and taxation of services like service taxes. (Hitherto, states had no rights to tax services!)
- Inflationary-trend: First few years may be inflationary in nature; but the government has constantly been asserting that the new rates under GST would be revenue-neutral therefore; this inflationary trend would be reflected only on some particular goods and services.
- More Inclusion of items: Exemption of items would also set the extent of inflation because heavily taxed items such as petroleum and alcohol etc. are set to be exempted from GST. Presently, 75% of items of CPI are exempt from excise and 47% are from sales tax. These would be subjected to be taxed. Agricultural products, which are exempt from any tax currently, may attract GST if states decide to do so.
- Exemption: A Political Impact: Exemption list will have a major say on the extent of increased inflationary trend. Government can, for these, introduce differentiated tax for these essential yet politically sensitive items. (Exemption from excise tax currently incurs heavy revenue loss to government!). Alcoholic liquor for example has been kept out. Similarly, Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel have also been kept out of purview of GST for a time period until GST Council decides.
- Big boost to retailers and traders: Under GST, tax credits available would bring cost of business down for traders and retailers. Therefore, services may be cheaper if the traders and retailers choose to pas the benefits to the customers.
GST – Challenges for Success in India
GST will be the biggest reform in Indian taxation regime and expected to be a game changer, but there are many challenges for its successful implementation. These are as under:
- Revenue Neutral Rate (RNR): It is one of prominent factors for its success. We know that in GST regime, the government revenue would not be the same as compared to the current system. Hence, through RNR, government has to ensure that its revenue remains the same despite of giving tax credits. In the Act, the estimated Revenue Neutral Rate (RNR) has been kept at 27%. However, the some stakeholders are in favour of lowering it while on the other hand, government wants to scale it up.
- Threshold Limit in GST: While achieving broad based tax structure under GST, both empowered committee and Central Government must ensure that lowering of threshold limit should not be a “taxing” burden on small businessmen in the country
- Robust IT Network: Government has already incorporated Goods and service tax network (GSTN). GSTN has to develop GST portal which ensure technology support for registration, return filing, tax payments, IGST settlements etc. Thus there should be a robust IT backbone
- Extensive Training to Tax Administration Staff: GST is absolutely different from existing system. It, therefore, requires that tax administration staff at both Centre and state to be trained properly in terms of concept, legislation and Procedure.
- Additional Levy on GST: The purpose of additional levy is to compensate states for loss of revenue while moving to GST. We acknowledge that fundamental purpose of GST is to make “INDIA” as one state where inter-state movement of goods is common. In this situation, bringing additional levy would defeat the very purpose of GST in the country.
The Indian GST will be a leap forward in creating a much cleaner dual VAT which would minimise the disadvantages of completely independent and completely centralised systems. A common base and common rates (across goods and services) and very similar rates (across States and between Centre and States) will facilitate administration and improve compliance while also rendering manageable the collection of taxes on inter-State sales. At the same time, the exceptions — in the form of permissible additional excise taxes on special goods (petroleum and tobacco for the Centre, petroleum and alcohol for the States) — will provide the requisite fiscal autonomy to the States. Indeed, even if they are brought within the scope of the GST, the States will retain autonomy in being able to levy top-up taxes on these goods.
The time is ripe to collectively seize this historic opportunity; not just because the GST will decisively alter the Indian economy for the better but also because the GST symbolises Indian politics and democracy at its cooperative, consensual best.