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Introduction to Indian GST

Introduction to Indian GST

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INTRODUCTION

GST is the biggest reform proposed in the Tax Regime of our country after Independence. It is something that each of us must understand as it is going to affect our lives in a very significant manner.

PRESENT INDIRECT TAX STRUCTURE

First we need to understand the present indirect tax system. There are endless taxes in the present system. Few of them have been levied by the Centre and rest levied by the States. Govt. draws the power to levy Tax from the constitution. There are many shortcomings in the Present Indirect Tax structure. We will be discussing them now:

Excise is levied on the manufacturing of products &its credit is not available against liability of VAT. VAT is charged on the value of Excise. Thus causing cascading effect i.e. Tax on Taxes.

Because of the multiple barriers our Logistics efficiency is very low as the trucks have to wait in long queues to get the permit to enter in different states. Our trucks travel on an average of just 260 kms in a day as compared to the average of 440 kms in a day in European nations and 660 kms in America.

There are multiple taxable events existing in our present system. As for excise it is manufacturing of Goods whereas for Sales Tax it is Sale of goods & Service Tax gets levied on the provision of Services.

Because of multiplicity of Taxes there is a high cost of compliance for both assesses as well as for the Govt.

Because of different legislations involved, there are different meanings assigned for the same term. All these shortcomings lead us to adapt a new system of Taxation for ease of doing the business and for the seamless flow of credit across the whole supply chain.

Introduction to Indian GST

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ROAD TO GST

To set the stage for the ambitious reform legislation, The Modi Government introduced the Constitution (122nd) Amendment Bill, 2014 in the Lok Sabha on 19th December, 2014 for amending the Constitution of India. This was necessary for empowering the govt. to facilitate the introduction of Goods and Services Tax (GST) in the country as in the proposed GST model both the Central and State govt. will levy tax on a common base.

The Bill contained 21 clauses and was passed in the Lok Sabha on 6th May, 2015. Then, when the Bill reached Rajya Sabha, on the note of further legislative scrutiny, a Select Committee was formed and the Bill was referred to this Committee. The Select Committee under the chairmanship of Shri Bhupender Yadav submitted its report on 22nd July, 2015 in the Parliament recommending various changes.

The cabinet accepted most of the changes in the GST legislation proposed by the Select Committee on 29th July, 2015.

Now the 122nd Amendment Bill, along with the changes approved by the Union Cabinet will be placed before Rajya Sabha for its approval where it is required to be passed by the 2/3rd of the members present and voting. If the bill gets passed in the Rajya Sabha, the government will have to again go back to the Lok Sabha for getting the Lower House approval for the proposed changes approved by the Cabinet. Then the bill needs to be passed in atleast 15 states legislatures by a way of simple majority. Then it will be sent to the President for his approval. Then the legislature bill will be put in the parliament and state legislatures and after its approval there, it will become a law. Its expected roll out date is 1st April, 2016.

There are a total of 245 members in the Upper House of Parliament of which 68 belong to Congress, 11 to AIADMK and 10 members to the left parties. This implies that out of 245 members, 89 belong to the parties opposing the bill finally approved by the Cabinet. Together, these parties make up a little more than one third of the seats in the Rajya Sabha (Approximately 7 surplus seats). The point to be noted over here is that a Joint Session of the Parliament cannot be called in the case of a Constitutional Amendment. Therefore it becomes necessary for the Government to get some of them on Board to get the required consent in the Upper House.

WHAT IS GST?

GST is going to be a destination based tax. It will be charged on the supply of Goods and Services. Since the word used is supply, hence the Branch t/f and Stock T/f will also be covered under the ambit of GST. Alcoholic liquor for human consumption is going to be kept outside the ambit of GST.

The Cabinet has just approved on 29th of July on the recommendation of Select Committee and said that the additional 1% tax on supply of goods proposed in the bill be restricted to the inter-state sale of goods and not stock transfers by a company from its one location to another.

TAXES THAT WON’T BE SUBSUMED IN GST

There will be no term like trader or provider of Service any more. Everything will get covered under the term “Supply”. Except these taxes. All indirect taxes will get subsumed under GST… 1) Customs duty 2) Excise duty on Tobacco products 2)specific cess 3)taxes on liquor 4)Electricity Cess 5)Property tax 6)Toll tax (7) Stamp Duty.

SALIENT FEATURES OF GST

The dual GST model shall have two components i.e. Central GST and State GST. There will be two parallel Statutes –one at the Centre and other under the respective State GST Act –governing the tax liability of the same transaction.

The existing CST will be discontinued. Instead, a new statute known as IGST will come into place. It will empower the CG to levy and collect the tax on the inter-state transfer of the Goods and Services. Rate of IGST will roughly be equal to the sum of CGST and SGST.

Taxable event will shift from Mfg. or Sale of Goods or Provision of services to “Supply of Goods and Services”.

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PROPOSED GST MODEL

The Dual GST model is proposed by the Empowered Committee and accepted by the Centre. Dual GST Model shall have two components i.e.

  • Central GST
  • State GST

Therefore, a dual structure in India would mean that there would be a Central GST and a State GST, each levied on a comprehensive base comprising both goods and services. Thus, every transaction would attract both taxes. It is also learned that under the proposed GST regime, the Centre will give input tax credit (set off) only for Central GST and the States will give input tax credit only for State GST. Cross-utilization of credit between Central GST and State GST will not be allowed. However, the dealers could claim set-off within the respective heads. After introduction of GST, all the traders will be paying both the types of taxes i.e. CGST and SGST.

Taxability of sale/service also determines the eligibility of input tax credit, as under:

S. NoNature of SupplyAvailability of Input Tax
1Taxable SupplyYes
2Zero Rated SupplyYes
3Exempted SupplyNo

 Moreover, only the registered dealers would be eligible for input tax credit.

LEVY OF GST ON INTRA-STATE TRANSACTIONS

The dual GST model shall have two components i.e. Central GST and State GST. Both will be charged on a common base at the rates decided by the GST Council. There will be two parallel Statutes – one at the Centre and other under the respective State GST Act – governing the tax liability of the same transaction.

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).

LEVY OF GST ON INTER-STATE TRANSACTIONS

The existing CST will be discontinued. Instead, a new statute known as IGST will come into place. It will empower the CG to levy and collect the tax on the inter-state transfer of the Goods and Services. Rate of IGST will roughly be equal to the sum of CGST and SGST. Revenue from interstate transactions will accrue to the destination state and not to the Origin state.

Supplier in the origin State will charge IGST on Inter State transactions, which will be aggregate of CGST & SGST, i.e., IGST = CGST+SGST. Inter-State Supplier shall use his input CGST and input SGST for payment of IGST, i.e., he shall pay net IGST.

Inter-State Buyer shall avail input tax credit on the basis of tax invoice for payment of his own IGST, CGST or SGST.

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 supplying the goods and services in state itself). Thereafter, the Centre will transfer to the importing State the credit of IGST used in payment of SGST.

IGST model permits cross-utilization of credit of IGST, CGST & SGST for paying IGST. IGST credit can be utilized for payment of IGST, CGST and SGST in sequence by Importing dealer for supplies made by him.

Input Tax Component                           Output Tax Liability
IGSTCGSTSGST
IGST
CGSTX
SGSTx

As per 122nd Constitutional Amendment Bill, it is proposed that Central Government would levy and collect an additional tax at the rate of not more than one percent, in respect of the supply of goods in course of inter-state trade or commerce. The tax is proposed to be levied for a period of 2 years. The additional tax would be collected by the Centre and would be apportioned to the state from where the supply originates. The additional tax would be non- vatable.

LEVY OF GST ON EXPORTS

GST on export would be zero rated.

LEVY OF GST ON IMPORTS

Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services.

Introduction to Indian GST

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TREATMENT OF FOLLOWING SPECIFIC GOODS UNDER GST

(i) TOBACCO PRODUCTS:

Tobacco and its products will be subjected to GST. Simultaneously, Centre will be allowed to levy excise duty on tobacco and its products in addition to i.e. over and above GST.

(ii) ALCOHOLIC LIQUOR FOR HUMAN CONSUMPTION:

It is kept outside the scope of GST. Sales Tax/VAT will continue to be levied on alcoholic liquor as per the existing practice. Excise duty, which is presently being levied by the states, will also not be affected. It would require another Constitutional Amendment whenever brought within ambit.

(iii) PETROLEUM PRODUCTS:

Specified petroleum goods will be brought within the GST ambit from a date recommended by GST Council. Until then, Union Excise Duty/VAT will continue to be levied on these goods in the present manner. However, it is stated that these goods will also be subject to GST but at Zero Rate. Following goods have been specified under this category:

(i) Petroleum products

(ii) High speed diesel

(iii) Motor spirit(commonly known as petrol)

(iv) Natural gas, and

(v) Aviation turbine fuel

SALIENT FEATURES OF 122ND CONSTITUTIONAL BILL

The Centre will compensate States for loss of revenue arising on account of implementation of the GST for a period of five years. A provision in this regard has been made in the Amendment Bill. Initially the compensation was supposed to be paid on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year but after the changes approved by the Cabinet there is a view that the Compensation can be full 100% for all the 5 years.

It is proposed that Central Government would levy and collect an additional tax at threat of not more than one percent, in respect of the supply of goods in course of inter-state trade or commerce made against consideration. The tax is proposed to believe for a period of 2years.

The additional tax would be collected by the Centre and would be apportioned to the state from where the supply originates. The additional tax would be non- vatable.

GST COUNCIL:

A new Article 279A is proposed for the creation of a Goods & Services Tax Council which will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister.2/3rd Representatives will be that of State & 1/3rd of the Centre. All decisions will require 75% of the votes. Thus, practically, any decision in GST Council cannot be taken without consent of Union Government

BENEFITS OF GST:

There are many benefits of GST. These can be categorised under the following categories.

1) For economy 2) Consumer 3) Govt. 4) Business and industry.

Industrialists and tax experts are very positive about GST. This we can make out from the following statements:

Crisil Agency claims that GST implementation will reduce logistics cost for companies by up to 30% over 3-4 years due to savings in warehousing cost and elimination of check posts.

Industrialist Adi Godrej said India’s GDP could grow over 10% if GST rolls out by April 2016. He added: “This will be extremely good for the economy and our businesses will benefit a lot.”

Mr Aulbur, the Managing Director of Mercedes Benz India, said: “If GST is properly implemented, then it will have a double positive impact on the industry.

Introduction to Indian GST

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DRAWBACKS OF CURRENT GST SYSTEM

The currently proposed GST system has some shortcomings as well. Modisarkar’s GST bill keeps taxes on alcohol, electricity and real estate outside the scope of GST. Taxes on petroleum also are out of GST’ scope to begin with, but here at least, the bill provides for their inclusion after approval of the GST Council. No such flexibility has been provided for taxes on alcohol, electricity and real-estate, which are important sources of revenue.

The GST bill provides for a 1% additional tax on interstate trade or commerce.

We still do not know what their venue-neutral GST rate will be Preliminary indications are that GST rate will be at around 27%.This is a recipe for economic disaster.

Incidentally, India will be the only country in the world to have a dual-GST system, comprising a central GST and a state GST. The best systems elsewhere are based on a single GST model.

CONCLUSION

All the shortcomings of the present taxation regime lead us to develop a new system of Taxation for the ease of doing business and for the seamless flow of credit across the whole supply chain. If we have been following some system that is now obsolete for years, it does not means that we need to continue with it in the fore coming years as well

There is a criticism today that the proposed model of GST is fractured due to the compromises. But the compromised model in any case would be better than no model at all. Also the bitter truth is that a compromise often becomes necessary in Federal democracies.

The dual model will be like a joint venture between centre and the 29+ states. In order to make this joint venture successful, one has to take all the states on the board with the compromise this entails. Some states might lose revenue after introduction of GST but you cannot hold entire country hostage because of one or two such states. One should keep in mind that an ideally perfect GST has never been practised in any federal democracy.

Every expert was once a beginner. No full proof can be developed in a single stroke. Over the years things may come out to be very positive and it’s quite possible that the estimate of 1-2% rise in GDP might be too low.

Introduction to Indian GST

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