A Roadmap to GST


A roadmap to GST:

GST or the Goods and Services Tax is an indirect tax that brings together most of the taxes that are imposed on all goods and services (except a few) under a single banner. This is in contrast to the current system, where taxes are levied separately on goods and services. The GST, is however, is a comprehensive form of tax based on a uniform rate of tax for both goods and services. However, the GST is payable only at the final point of consumption.

        A tax may be defined as ‘’ pecuniary burden laid upon individuals or property owners to support the government, a payment exacted by legislative authority. A tax is not a voluntary payment or donation , but an enforced contribution, exacted pursuant to legislative authority.”

        The Article 246 of the constitution of India read with VII th schedule distributes legislative powers including taxation, between the Parliament and State legislature.

        Schedule VII enumerates the power of Central Government to levy tax on services where as is constitutes the States to levy tax on Goods.

        Goods and Services Tax (GST) is a part of the proposed tax reforms that centre round evolving an efficient and harmonized consumption tax system in the country. The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level.

        A proposal to introduce a national level Goods and Service 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). In April, 2008, the EC a report to the titled “A Model and Roadmap for Goods and Service Tax (GST) in India “containing broad recommendations about the structure and design of GST. In response to the report, the Department of Revenue made some suggestions to be incorporated in the design and structure of proposed GST. Based on inputs from GoI and States, The EC released its First Discussion Paper on Goods and Services in India on 10th November, 2009 with the objective of generating a debate and obtaining inputs from all stakeholders.

        According to the First Discussion Paper on Goods and Services Tax in India by the Empowered Committee of the State Finance Ministers dated Nov. 10th 2009 , the five key features of the proposed plan of the Goods and Services Tax for the Indian economy, approved by the Government of India and Empowered Committee of State  Finance Ministers comprises:

        Two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST), rates for which would be prescribed appropriately, reflecting revenue considerations and acceptability.

        The Central GST and the State GST would be applicable to all transaction of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST.

        The Empowered Committee has decided to adopt a two- rate structure - a lower rate for necessary items and goods of basic importance and a standard rate for goods in general.  There will also be a special rate for precious metals and a list of exempted items.

        The GST will be levied on import of goods and services into the country

        The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply a reduction in unhealthy competition among the centre and the states over tax revenue that was prevalent earlier and an increase in harmonious functioning between them.

                   A National Institute of Public Finance and Policy (NIPFP) team tasked with recommending a revenue neutral level for the goods and service tax (GST) has suggested as many as 16 rates, corresponding to different scenarios. The final decision on the tax rate will be taken by the GST council, to be constituted after the passage of a Constitutional Amendment Bill.

        The constitution amendment bill to implement the Goods and Services Tax (GST) would be introduced in the forthcoming winter session of parliament, Finance Minister Arun Jaitely said.

        The basic principal governing behind GST is to have single Taxation system for Goods and Services across the country. Currently Indian economy has various taxes on Goods and Services such as Vat, Service Tax, Excise, Entertainment Tax, Luxury Tax etc. now in the new proposal of GST, we will be having only two taxes on all goods and services as follows:

  1. State Level GST (SGST)
  2. Central Level GST (CGST)

In case of Central GST, following Taxes will be subsumed with CGST which are at presently levied separately on goods and services by Central Government:

  1. Central Excise Duty
  2. Additional Excise Duty
  3. The Excise Duty levied under Medicinal and toiletries preparation Act.
  4. Service Tax
  5. Additional Custom Duty (CVD)
  6. Special  Additional Duty
  7. Surcharge
  8. Education Cess and Secondary and Higher Secondary Education Cess

        In case of State GST, the following taxes will be subsumed with SGST, which are priestly levied on goods and services by State Government:

  1. Vat/ Sales Tax
  2. Entertainment Tax ( unless it is levied by local bodies)
  3. Luxury Tax
  4. Tax on lottery
  5. State Cess and Surcharge to the extent related to supply of goods and services.

        The basic principal for subsuming of taxes in GST is provided as follows:

  1. Those taxes which commences with import/ manufacture/ production of goods or provision of services at one end and the consumption of goods and services on the other end.
  2. The taxes, levies and fees which are not related to supply of goods and services should not be subsumed under GST.

                 Input Tax Credit (ITC) : Taxes paid against CGST allowed as ITC against CGST. Taxes paid against SGST allowed as ITC against SGST.

                Cross utilization of ITC between the Central GST and State GST would not be allowed. Exception: Inter State supply of goods and services.

                Pan based identification number will be allowed to each taxpayer to have integration of GST with Direct Tax

        IGST Model and ITC:

  1. Centre would levy IGST levy ( CGST+SGST)
  2. The ITC will be allowed in this transaction will be SGST, IGST, CGST as applicable.
  3. Appropriate provision will be provided for consignment or stock transfer.

Exports are fully exempted with zero rates.

                The Central GST and the State GST would be applicable to all transaction of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

                Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

                Ideally, the problem related to credit to accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc. Where again refund / adjustment should be completed in a time bound manner.

                To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.

                The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from state to state. A uniform State GST threshold across states is desirable and, therefore, it is considered that a threshold of gross annual turnover of Rs. 10 Lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the states in North – Eastern region and Special Category States) where lower threshold had prevailed in the Vat regime. Keeping in view the interest of small traders and small scale industries and to dual control, the states also considered that the threshold for Central GST for goods may be kept at RS 1.5 crore and the threshold for Central GST for services may be also appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.

                The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities .

        Each taxpayer would be allotted a PAN- linked taxpayer identification number with total 13/15 digits. This would bring the GST PAN- linked system in line with the prevailing PAN-based system for income tax, facilitating data exchange and taxpayer compliance.

                Keeping in mind the need of tax payer’s convenience, functions such as assessment, enforcement, scrutiny and audit would be    undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.

Taxation of Services: As indicated earlier, both the Centre and the States will have concurrent power to levy tax on all goods and services. In the case of States, the principle for taxation intra-state and inter-state has already been formulated by the working group of Principal Secretaries/Secretaries of Finance/ Taxation and commissioner of trade taxes with senior representatives of Department of Revenue, Government of India. For inter-state transactions an innovative model of Integrated GST will be adopted by appropriately aligning and integrating CGST and SGST. The working of this model is elaborated below.

                Inter-State Transactions of Goods and Services: The empowered committee has accepted the recommendations of the working group of concerned officials of Central and State Govts. For adoption of IGST model for taxation of inter-state transaction of goods and services. The scope of IGST model is that Centre would levy IGST which would be CGST plus SGST on all inter-state transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. The inter-state seller will pay IGST on value addition after adjusting available credit of IGST, CGST and SGST on his purchases. The exporting state will transfer to the centre the credit of SGST used in payment of IGST. The centre will transfer

to the importing state the credit of IGST used in payment SGST. The relevant information will also be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective govts. To transfer the funds

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

                Constitutional Amendments, legislation and rules for administration of CGST and SGST: It is essential to have constitutional amendments for empowering the states for levy of service tax, GST on imports and consequential issues as well as corresponding Central and State legislation with associated rules and procedures. With these specific task in view, a Joint Working Group has recently been constituted (Sep 30, 2009) comprising of the officials of the central and state govt. to prepare in time bound manner draft legislation for constitutional amendment, draft legislation for CGST, suitable model legislation for SGST and rules and procedures for CGST and SGST. Simultaneous steps have also been initiated for drafting of legislation for IGST and rules and procedures. As a part of this s exercise, the working Group will also address the issues of dispute resolution and advance ruling.

Dispute Resolution and Advance Ruling: As a part of the exercise on drafting of legislation, rules and procedures for the administration of CGST and SGST, specific provision would also be made to the issues of dispute resolution and advance ruling.

                Taxable person: It will cover all types of person carrying on business activities, i.e. manufacturer, job-worker, trader, importer, exporter, all types of services providers etc.

                If a company is having four branches in four different states, all the four branches will be considered as TP under each jurisdiction of SGs.

                All the dealers / business entities will have to pay both types of taxes on all the transactions.

                A dealer must get registered under CGST as it will make him entitle to claim ITC of CGST thereby attracting buyers under B2B transactions.

                Importers have to register under both CGST and SGST as well.

                Taxes that may or may not be subsumed: There are few other indirect taxes that may or may not be subsumed under the GST regime as there is no consensus among States and Centre & States –

  1. Purchase Tax
  2. Stamp Duty
  3. Vehicle Tax
  4. Electricity duty
  5. Other Entry taxes and Octroi

What will be out of GST?

        Levies on petroleum products

        Levies on alcoholic products

        Taxes on lottery and betting

        Basic custom duty and safeguard duties on import of goods into India

        Entry taxes levied by Municipalities or Panchayats

        Entertainment and Luxury taxes.

        Electricity duties / taxes

        Stamp duties on immovable properties.

        Taxes on vehicles.

                Latest updates on GST

        Parliament panel might propose optional GST for states

        The panel , to consider its draft report on the Constitution (115th Amendment) Bill on the GST, feel states should be given enough fiscal space if the success of Value Added Tax (VAT) is to be replicated.

        To address concerns of the states on revenue loss, the panel might recommend an automatic compensation mechanism, wherein a fund is created under the proposed GST Council. It also wants a study to evaluate the impact of GST on the revenue of states. It could suggest a floor rate with a narrow band, decision by voting and not consensus in the GST Council, omitting the provision on setting up a Dispute Settlement Authority, subsuming entry tax in GST and giving powers to states to levy tax in the event of a natural calamity, among other things.

        The report of the standing committee could be adopted in its next meeting and the finance ministry, after incorporating the panel’s views, would approach the cabinet to present the Bill in Parliament with the changes.

                Emerging Issues

        What preparations are required at the level of CG and SG for implementing GST?

        Whether the Government machinery is in place for such a mammoth change?

        Whether the tax-payer are ready for such a change?

        What impact it can have on the revenue of the government?

        How can the burden of tax, in general, fall under the GST?

        In what respect, it will affect the manufacturers, traders and ultimate consumers?

        How will GST benefit the small entrepreneurs and small traders?

        Which type of administrative work will be involved in complying  with the GST requirements?

                               The Govt of India is serious to enact Goods and Service tax Act from 1st April 2016. It would make borderless India internally. Under sales tax act the tax was levied at starting point. Under VAT system the tax was levied at every stage of movement of goods considering value addition but under GST ACT it is proposed to tax at end point of final movement of goods or supply. However value addition will be taxed at relevant states to generate the revenue for the state .It has been learnt that the place of supply rules, which is the backbone of GST have been framed.

                        Friends -we hope that GST will be smooth, short and sweet and it will solve all our difficulties. But in present scenario it seems to be difficult because each state and the centre are worried about the share of its revenue under GST regime. The disagreement between the states and centre is right from the rates of taxes or minimum exemption to enroll the dealer / assessee under the Act etc. Above all the rates prescribed under the Act may could go up to 16% and above. When the Govt is expecting to raise much more revenue under the GST regime rather than the present system of VAT and excise taxation, then how could be a dealer or assessee can be at comfirt. A little hope could be about works contractors who has to pay at present both vat and service tax simultaneously because he will be paying only GST on transactions. Let hope for Aache Din or otherwise it could be /old wine in new bottle.

        Disclaimer:- This article has been written for the general interest of our clients and professional colleagues and is subject to change. It is not intended to be exhaustive or a substitute for legal advice. We cannot assume legal liability for any errors or omissions. Specific advice must be sought before taking any action pursuant to this article.