GOODS AND SERVICES TAX

Author:Anchal Agarwal

 

GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. The One Hundred and Twenty Second Amendment Bill of the Constitution of India, officially known as The Constitution (One Hundred and First Amendment) Act, 2016, introduced a national Goods and Services Tax in India from 1 July 2017. The Goods and Services Tax (GST) is one of the biggest economic and taxation reforms undertaken in India. The present structure of Indirect Taxes is very complex in India. There are so many types of taxes that are levied by the Central and State Governments on Goods & Services.

India’s biggest tax reform is now a reality. A comprehensive dual Goods and Services Tax (GST) has replaced the complex multiple indirect tax structure from 1 July 2017.

The concept of GST was visualized for the first time in 1999. On 8 August 2016, the Constitutional Amendment Bill for roll out of GST was passed by the Parliament, followed by ratification of the bill by more than 15 states and enactment of the bill in early September.

GST is one indirect tax for thewhole nation, which willmake India one unified common market. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

It has been long pending issue to streamline all the different types of indirect taxes and implement a “single taxation” system. This system is called as GST (GST is the abbreviated form of Goods & Services Tax). The main expectation from this system is to abolish all indirect taxes and only GST would be levied. As the name suggests, the GST will be levied both on Goods and Services.

GST was first introduced during 2007-08 budget session. On 17th December 2014, the current Union Cabinet ministry approved the proposal for introduction GST Constitutional Amendment Bill. On 19th of December 2014, the bill was presented on GST in LokSabha. The Bill will be tabled and taken up for discussion during the coming Budget session. The current central government is very determined to implement GST Constitutional Amendment Bill. GST is a tax that we need to pay on supply of goods & services. Any person, who is providing or supplying goods and servicesis liable to charge GST.

GST is essentially a consumption tax and is levied at the final consumption point. The principle used in GST taxation is Destination Principle. It is levied on the value addition and provides set offs. As a result, it avoids the cascading effect or tax on tax which increases the tax burden on the end consumer. It is collected on goods and services at each point of sale in the supply line. The GST that a merchant pays to procure goods or services can be set off later against the tax applicable on supply of goods and services.

Therefore, manufactures, wholesalers and retail merchants can avail tax credit mechanism under GST regime. They would pay the applicable GST but it can be reclaimed by the tax credit mechanism. It will be charged at the point of sale according to its destination tax/point-of-sale tax nature. A person who supplies goods and services would be liable to charge GST from the consumer.

The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the customer of the goods and services who bears the tax. This is the case even today for all indirect taxes but the difference under the GST is that with streamlining of the multiple taxes the final cost to the customer will come out to be lower on the elimination of double charging in the system.

The benefits of GST can be summarized as under:

For business and industry

  • Easy compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
  • Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
  • Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
  • Improved competitiveness:Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
  • Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

For Central and State Governments

  • Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.
  • Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
  • Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.

For the consumer

  • Single and transparent tax proportionate to the value of goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
  • Relief in overall tax burden:Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.

GST is being introduced in the country after a 13 year long journey since it was first discussed in the report of the Kelkar Task Force on indirect taxes. A brief chronology outlining the major milestones on the proposal for introduction of GST in India is as follows:

  • In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle.
  • A proposal to introduce a National level Goods and Services Tax (GST) by April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07.
  • Since the proposal involved reform/ restructuring of not only indirect taxes levied by the Centre but also the States, the responsibility of preparing a Design and Road Map for the implementation of GST was assigned to the Empowered Committee of State Finance Ministers (EC).
  • Based on inputs from Govt of India and States, the EC released its First Discussion Paper on Goods and Services Tax in India in November, 2009.
  • In order to take the GST related work further, a Joint Working Group consisting of officers from Central as well as State Government was constituted in September, 2009.
  • In order to amend the Constitution to enable introduction of GST, the Constitution (115th Amendment) Bill was introduced in the LokSabha in March 2011. As per the prescribed procedure, the Bill was referred to the Standing Committee on Finance of the Parliament for examination and report.
  • Meanwhile, in pursuance of the decision taken in a meeting between the Union Finance Minister and the Empowered Committee of State Finance Ministers on 8th November, 2012, a ‘Committee on GST Design’, consisting of the officials of the Government of India, State Governments and the Empowered Committee was constituted.
  • This Committee did a detailed discussion on GST design including the Constitution (115th) Amendment Bill and submitted its report in January, 2013. Based on this Report, the EC recommended certain changes in the Constitution Amendment Bill in their meeting at Bhubaneswar in January 2013.

The Empowered Committee in the Bhubaneswar meeting also decided to constitute three committees of officers to discuss and report on various aspects of GST as follows:

  • Committee on Place of Supply Rules and Revenue Neutral Rates.
  • Committee on dual control, threshold and exemption.
  • Committee on IGST and GST on imports

The Parliamentary Standing Committee submitted its Report in August, 2013 to the LokSabha. The recommendations of the Empowered Committee and the recommendations of the Parliamentary Standing Committee were examined in the Ministry in consultation with the Legislative Department. Most of the recommendations made by the Empowered Committee and the Parliamentary Standing Committee were accepted and the draft Amendment Bill was suitably revised.

  1. The final draft Constitutional Amendment Bill incorporating the above stated changes were sent to the Empowered Committee for consideration in September 2013.
  2. The EC once again made certain recommendations on the Bill after its meeting in Shillong in November 2013. Certain recommendations of the Empowered Committee were incorporated in the draft Constitution (115th Amendment) Bill. The revised draft was sent for consideration of the Empowered Committee in March, 2014.
  3. The 115th Constitutional (Amendment) Bill, 2011, for the introduction of GST introduced in the LokSabha in March 2011 lapsed with the dissolution of the 15th LokSabha.
  4. In June 2014, the draft Constitution Amendment Bill was sent to the Empowered Committee after approval of the new Government.
  5. Based on a broad consensus reached with the Empowered Committee on the contours of the Bill, the Cabinet on 17.12.2014 approved the proposal for introduction of a Bill in the Parliament for amending the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the country. The Bill was introduced in the LokSabha on 19.12.2014, and was passed by the LokSabha on 06.05.2015. It was then referred to the Select Committee of RajyaSabha, which submitted its report on 22.07.2015.

GST be administered in India by keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). 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.

The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of Central Excise.

GST also known as the Goods and Services Tax is defined as the giant indirect tax structure designed to support and enhance the economic growth of a country. More than 150 countries have implemented GST so far. However, the idea of GST in India was mooted by Vajpayee government in 2000 and the constitutional amendment for the same was passed by the LokSabha on 6th May 2015 but is yet to be ratified by the RajyaSabha. However, there is a huge hue and cry against its implementation. It would be interesting to understand why this proposed GST regime may hamper the growth and development of the country.

The Goods and Services Tax (GST) is a vast concept that simplifies the giant tax structure by supporting and enhancing the economic growth of a country. GST is a comprehensive tax levy on manufacturing, sale and consumption of goods and services at a national level. The Goods and ServicesTax Bill or GST Bill, also referred to as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, initiates a Value added Tax to be implemented on a national level in India. GST will be an indirect tax at all the stages of production to bring about uniformity in the system.On bringing GST into practice, there would be amalgamation of Central and State taxes into a single tax payment. It would also enhance the position of India in both, domestic as well as international market. At the consumer level, GST would reduce the overall tax burden, which is currently estimated at 25-30%.

Under this system, the consumer pays the final tax but an efficient input tax credit system ensures that there is no cascading of taxes- tax on tax paid on inputs that go into manufacture of goods.

In order to avoid the payment of multiple taxes such as excise duty and service tax at Central level and VAT at the State level, GST would unify these taxes and create a uniform market throughout the country. Integration of various taxes into a GST system will bring about an effective cross-utilization of credits. The current system taxes production, whereas the GST will aim to tax consumption.

India has adopted dual GST instead of national GST. It has made the entire structure of GST fairly complicated in India. The centre will have to coordinate with 29 states and 7 union territories to implement such tax regime. Such regime is likely to create economic as well as political issues. The states are likely to lose the say in determining rates once GST is implemented. The sharing of revenues between the states and the centre is still a matter of contention with no consensus arrived regarding revenue neutral rate.

Chief Economic Advisor Arvind Subramanian on 4 December 2015 suggested GST rates of 12% for concessional goods, 17-18% for standard goods and 40% for luxury goods which is much higher than the present maximum service tax rate of 14%. Such initiative is likely to push inflation.

The proposed GST structure is likely to succeed only if the country has a strong IT network. It is a well-known fact that India is still in the budding state as far as internet connectivity is concerned. Moreover, the proposed regime seems to ignore the emerging sector of e-commerce. E-commerce does not leave signs of the transaction outside the internet and has anonymity associated with it. As a result, it becomes almost impossible to track the business transaction taking place through internet which can be business to business, business to customer or customer to customer. Again, there appears to be no clarity as to whether a product should be considered a service or a product under the concept of E-commerce. New techniques can be developed to track such transactions but until such technologies become readily accessible, generation of tax revenue from this sector would continue to be uncertain and much below the expectation. Again E-commerce has been insulated against taxation under custom duty moratorium on electronic transmissions by the WTO Bali Ministerial Conference held in 2014.

Communication is considered to be necessity and one cannot do without communication. In modern times, communication has assumed the dimension of telecommunication.

“One of the major drawbacks of the GST regime could be the direct spike in the service tax rate from 14% to 20-22%” (GST: Impact on theTelecommunications Sector in India). The proposed GST appears to be silent on whether telecommunication can be considered under the category of goods or services. The entire issue of telecommunication sector assumes a serious proportion when India’s rural teledensity is not even 50%.

It is a well-known fact that petroleum products have been a major contributor to inflation in India. Inflation in India depends on how the government intends to include petroleum products under GST in future.

Electricity is essential for the growth and development of India. If electricity is included under standard or luxury goods in future then it would badly affect the development of India. It is said that GST would impact negatively on the real estate market. It would add up to 8% to the cost of new homes and reduce demand by about 12%.

The proposed GST regime would be capable of being levied on sale of newspapers and advertisements thereinwhich would give the governments the access to substantial incremental revenues since this industry has historically been tax free in its entirety” [6]. It sounds ridiculous but the provision of GST is likely to make the supervision of operations by its Board/senior managers across the company’s offices in different parts of the country a taxable service by allowing each state to raise a GST demand on the company.

Again there appears to be lack of consensus over fixing the revenue rate as well as threshold limit. One thing is for sure, services in India are going to be steeply costly if GST is fixed above the present service tax rate of 14% which in turn will spiral up inflation in India. “Asian countries which implemented GST all had witnessed retail inflation in the year of implementation.”

The proposed GST regime is a half-hearted attempt to rationalize indirect tax structure. More than 150 countries have implemented GST. The government of India should study the GST regime set up by various countries and also their fallouts before implementing it. At the same time, the government should make an attempt to insulate the vast poor population of India against the likely inflation due to implementation of GST. No doubt, GST will simplify existing indirect tax system and will help to remove inefficiencies created by the existing current heterogeneous taxation system only if there is a clear consensus over issues of threshold limit, revenue rate, and inclusion of petroleum products, electricity, liquor and real estate. Until the consensus is reached, the government should resist from implementing such regime.

The most significant change brought about by the GST is that supply of goods, Services or both is the basis of taxation as opposed to the removal of manufactured goods under the excise regime.

The exporter whether manufacturer or merchant exporter can export under LUT/Bond or on payment of IGST & claim refund. Bond/letter of Undertaking is required to be furnished by the exporter to the jurisdictional Deputy/Assistant Commissioner having control over the principal place of business of the exporter. The principal place of business is your Head/Office/registered office shown in the GST registration. However, the manufactures should execute LUT with the jurisdictional authority of the manufacturing facility as explained later.

The status holders recognized as such by the director general of foreign trade regional offices can submit LUT. Further exporter, who has received the due foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than one crore rupees, in the preceding final year, can also execute LUT subject to conditions.

If the exporters is not eligible for the execution of the LUT then a bond in lieu of the LUT needs to be executed. The bond shall be furnished on non-judicial stamp paper of the value as applicable in the state in which bond is being furnished. The bond will be a running bond with debit/credit facility & the bond should cover the estimated tax liability as assessed by the exporter. The exporter is required to give a bank guarantee as per the decision of the Commissioner concerned but the BG amount should not be more than 15%.

The existing practice of sealing the container with a bottle seal under Central Excise (should read as GST official) supervision or otherwise of the officer having physical jurisdiction over the place of business where the sealing is being done. Subsequently sealing methods will change.

The Jammu and Kashmir Legislative Assembly on 7th July passed the state GST Bill 2017 amidst opposition boycott, making it the last state of the country to join the new tax regime.

The bill entitled the Jammu and Kashmir Goods and Services Tax (GST) Bill 2017 moved by Finance Minister HaseebDrabu was adopted by a voice vote as all opposition members decided to boycott the proceedings, accusing the government of undermining the special status of the state by seeking a presidential order for extending the GST regime.
Mr.Drabu said the GST regime will roll out in the state at midnight tonight, making Jammu and Kashmir the last state to join the new tax regime.

Before moving the bill for consideration and passing by the state assembly, Mr.Drabu read out the contents of the presidential order pertaining to the special status of the state and its exclusive taxation powers.

“Although there is no tradition of tabling a presidential order in the assembly, we are starting a new tradition in the democracy of the state by tabling this presidential order in the House.

“Notwithstanding anything contained in this order, the powers of the state of Jammu and Kashmir as per Section 5 of the Constitution of Jammu and Kashmir, shall remain intact,” Mr. Drabu said.

“The legislature of the state of Jammu and Kashmir shall have the powers to make laws with respect to goods and services tax levied by the state,” MrDrabu read from the excerpts of the order pertaining to the special status and exclusive taxation powers of the state.
The legislature of the state of Jammu and Kashmir shall have exclusive powers to make laws in respect of imposition of any taxes enabled by section 5 of the Constitution of Jammu and Kashmir, he added.
Notwithstanding anything contained in clause 4 to clause 11 for the purpose of any decision impinging on constitutional provisions relating to the state of Jammu and Kashmir, the concurrence of the representative of the state of Jammu and Kashmir in the Goods and Services Tax Council shall be mandatory and the procedure provided under Article 370 shall be followed, the presidential order reads.

In New Delhi theBJP government has a penchant for catchy slogans, taglines and acronyms but it turns to UPA schemes to lend some credibility to itself with the GST being a clear example of this, theCongress on 9th July claimed.

Dubbing GST as “Goods and Services Tamasha”, the party in an article on its website said lack of preparation around the rollout of the tax reform seems very similar to the decision of demonetization by Prime Minister NarendraModi

Constitutional Amendment: While the Centre is empowered to tax services and goods upto the production stage, the States have the power to tax sale of goods. The States do not have the powers to levy a tax on supply of services while the Centre does not have power to levy tax on the sale of goods. Thus, the Constitution does not vest express power either in the Central or State Government to levy a tax on the ‘supply of goods and services’. Moreover, the Constitution also does not empower the States to impose tax on imports. Therefore, it is essential to have Constitutional Amendments for empowering the Centre to levy tax on sale of goods and States for levy of service tax and tax on imports and other consequential issue.

One of the main objective of Goods & Service Tax(GST) would be to eliminate the doubly taxation i.e. cascading effects of taxes on production and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle.

France was the first country to introduce GST in 1954. Worldwide, Almost 150 countries have introduced GST in one or the other form since now. Most of the countries have a unified GST system. Brazil and Canada follow a dual system vis-à-vis India is going to introduce. In China, GST applies only to goods and the provision of repairs, replacement and processing services.

Model of GST with example:

  • The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST). Ratesfor Central GST and State GST would beapproved appropriately, reflecting revenue considerations and acceptability.
  • The CGST and the SGST would be applicable to all transactions of goods and servicesmade for a consideration exceptthe exempted goods and services.
  • Cross utilization of ITC both in case of Inputs and capital goods between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services (i.e. IGST).
  • The Centre and the States would have concurrent jurisdictionfor the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.

IGST Model (Inter-State Transactions of Goods & Services) and Input tax credit (ITC) with example:

  • Existing CST (Central state tax, tax on interstate movement of goods) shall be discontinued.
  • Center would levy IGST (cumulative rate for CGST and SGST)on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.
  • The ITC of SGST, CGSTshall be allowed as applicable.
  • Since ITC of SGST shall be allowed, 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 SGST liability (while selling the goods in state itself). Thereafter, the Centre will transfer to the importing State the credit of IGST used in payment of SGST.
  • The relevant information shall be submitted to the Central Agencywhich will act as a clearing house mechanism, verify the claims and inform the respective state governments or central government to transfer the funds.

Advantage of IGST:

  • No refund claim in exporting State, as ITC is used up while paying the tax.
  • Maintenance of uninterrupted ITC chain on inter-State transactions.
  • No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.

General points on Various Business Sectors that arise after GST implementation:

  • Real Estate Industry: Construction and Housing sector need to be included in the GST tax base being high tax revenue generating sector and for reduction in no. of tax legislations involved.
  • FMCG Sector: Implementation of proposed GST and opening of Foreign Direct Investment (F.D.I.) are expected to fuel the growth and raise industry’s size.
  • Rail Sector: There have been suggestions for including the rail sector under the GST umbrella to bring about significant tax gains and widen the tax netso as to keep overall GST rate low. This will have the added benefit of ensuring that all inter–state transportation of goods can be tracked through the proposed Information technology (IT) network.
  • Information Technology enabled services:At present, if the software is transferred through electronic form, it should be considered as Intellectual Property and regarded as a service and if the software is transmitted on media or any other tangible property, then it should be treated as goods and this classification is full of litigation. As GST will have uniform rate for Goods and Services and no concept of state revenue being VAT or central revenue being service tax and hence, thereduction in litigation.
  • Transport Sector: Truck drivers spend more than half of their time while negotiating check post and tolls. At present there are more than 600 check points and more than ton types of taxes in road sector.

After the introduction of GST, the time spend by the road transport industry in complaining with laws will reduce and service is going to be better which will boost the goods industry and thus the taxes also.

  • Impact on Small Enterprises:There will be three categories of Small Enterprises in the GST regime.
  • Those below threshold limit of Rs.1.5 Croreswould not be covered.
  • Those between the threshold and composition turnovers will have the option to pay a turnover based tax i.e.composite tax or opt to join the GST regime.
  • Those above threshold limit will need to be within framework of GST. Possible downward changes in the threshold in some States consequent to the introduction of GST may result in obligation being created for some dealers.

CONCLUSION

GST is being referred as a single taxation system but in reality it is a dual tax in which state and centre both collects separate tax on a single transaction of sale and service.Improvement in the Manufacturing and distribution of Goods and service, increase in exports, various reforms, check on corruption, less Government control are some of the factors which are responsible for the economic growth of the country. A tax system can make a revolution in the economy of the country is “rarest of the rare” thing.

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