Goods And Services Tax
The Goods and Services Tax (GST) is a revolutionizing tax reform in the Indian taxation history. Sound tax policies of a nation are an indication of strong governance and sustainable development. Tax apart from being a source of revenue and growth, also plays a key role in making the state accountable to its tax payers. Effective taxation ensures that the public finances are sustainable in the longer term to support social objectives and promote economic development. Complexity of Indian tax system has however perplexed the best of minds in the taxation world. With the centre, states and local bodies having the power to levy a plethora of taxes, all the stakeholders have felt the burden of multiplicity of taxes.
The GST regime aims to transform the tax scenario in the country by streamlining the system through a single tax for supply of all goods and services across the country.
- GST was launched in India on the 1st of July 2017 at the Central Hall of parliament by the Prime Minister, in the presence of the President of India.
- It is based on the principle of destination based consumption taxation as against the erstwhile principle of origin based taxation.
- There are 4 tax slabs namely 5%, 12%, 18% and 28%. The highest layer GST of 28% on luxury goods is the highest in the world.
- There will be no GST on the sale and purchase of securities. That will continue to be governed by Securities Transaction Tax (STT).
- Exports and supplies to SEZ are zero-rated.
- The Countervailing Duty and Special Addition Duty have been subsumed under GST, while the taxes imposed by local bodies like Municipalities, Gram Panchayats have been excluded.
- It is based on the principle of value added tax and either “input tax method” or “subtraction” method, with emphasis on voluntary compliance and accounts based system.
- Taxing of capital goods and inputs whether goods or services relatable to manufacture at low rate, so as to reduce inventory carrying cost and cost of production.
- GST covers entire gamut of goods and services except Alcohol for human consumption which is constitutionally out of GST.
- Agriculture and food products like food grains, pulses, fruits, vegetables and milk have been exempted along with education and health care. All of these combined together contribute close to 40-45% of expenses of an average household, as measured in the consumer price index. While other necessary items like coal, sugar, edible oil, coffee are placed at 5%.
GST Regime – A Fillip To Make In India
With GST in place, the central and the state government will witness tax buoyancy and the tax collection costs will reduce significantly. Exports will become more competitive as goods and services will be exported without any taxes embedded in them. Hence, “MAKE IN INDIA” programme will get a major fillip due to increased ease of doing business and protection from cheap imports as all imports will be subject to Integrated GST in addition to the basic customs duty.
Need for Constitutional Amendment:
As both the levels of government have distinct responsibilities to perform, according to the division of powers prescribed in the constitution, both the state and the centre needed resources to be raised. Hence, an amendment to the constitution was required to concurrently empower the centre and the states to levy and collect GST.
The dual GST introduced in India is keeping with the Constitutional requirement of fiscal federalism.
Journey to launch of GST in India:
- 2000: The Idea of GST was first mooted during the Prime Ministership of Atal Bihari Vajpayeeand a committee was set up by the then West Bengal Finance Minister Asim Dasgupta to design the GST model
- 2003: Vijay Kelkar task force was set up to recommend tax reforms.
- 2006: During the Budget Speech 2006-07 GST was proposed to be introduced from 1 of April 2010.
- 2009: the first discussion paper on GST was released. It spelt out the features of the GST that is in place at present
- 2014: 122nd Constitution Amendment Bill was introduced in LokSabha.
- 2015: The bill was passed by Rajya Sabha and was referred to a Joint Select committee of Lok Sabha and Rajya Sabha.
- 2016: The revised constitutional amendment bill was passed by Rajya Sabha and Lok Sabha, subsequently ratified by the required number of state assemblies. Presidential assent was obtained and Constitutional amendment was notified as the 101st Constitutional Amendment.
The GST Council:
The council comprises of the Union Finance Minister (Chairman), Union Minister of state (Revenue) and the state finance/ taxation ministers of 29 states and 2 Union Territories with legislatures. The council is tasked to make recommendations on the following:
- The taxes, cesses and surcharges levied by the centre, the states and local bodies which maybe subsumed under GST.
- The goods and services that may be subject to or exempt from GST.
- The date from which GST shall be applicable on petroleum crude, high speed diesel, petrol, natural gas and aviation turbine fuel.
- Principles of levy, apportionment of Integrated Goods and Services Tax (IGST).
- Special provisions with respect to the North Eastern states, J&K, Himachal Pradesh and Uttarakhand.
Every decision of the Council shall be taken at a meeting by a majority of not less than 3/4th of the weighted votes of the members present and voting. One half of the total members of the council shall constitute the quorum at its meetings. Central Government shall have a weightage of 1/3rd of votes and State Governments put together shall have a weightage of 2/3rd of votes cast in the meeting.
The newly created constitutional body has emerged as a new model of cooperative federalism where the centre and the states are willing to share and pool in their sovereignty and give fiscal space to each other.
Compensation to states:
The 122nd Constitution Amendment provides for compensation to the states for loss of revenue arising out of the implementation of GST, for a period of 5 years. Based on this, GST Compensation to States Act 2017 is enacted. The act provides for levy of cess to be used for compensation to states in case of loss of revenue.
Creating a Unified Taxation Regime
GST is a 2nd major surgical strike on tax evaders after demonetization, It brings most traders into the tax net, makes movement of commodities freer in the country, attracts foreign investors with a unified market with a single tax. Though it has inconvenienced the citizens with inflated bills on wining, dining, travelling etc, 81% of commodities are expected to be cheaper. A long term benefit with short term suffering as the country shifts to a new regime.
GST will subsume various indirect taxes including central excise duty, service tax, additional customs duty, surcharges, state-level value added tax, octroi in order to unify markets pan India and make goods uniformly priced across the country, albeit some goods become costly and some become cheaper. Other levies which are currently applicable on inter-state transportation of goods are likely to be done away with. India will adopt a dual GST model ie, taxation administered by both the Union and State Governments.
GST – Dawn of a New Era
GST has the potential to forge India into one economic state or a common national market where the trade is really done without fear or favour in any state of the country.
- CGST, SGST/UTGST AND IGST is levied at rates mutually agreed upon by the Centre and the States under the aegis of the GST Council (GSTC)
- Credit of CGST, SGST/ UTGST paid on inputs maybe used only for paying CGST, SGST/ UTGST on the output respectively. The two streams of Input Tax Credit cannot be cross utilized, except in specified circumstances of inter-state supplies for payment of IGST. The credit would be permitted to be utilized in the following manner:
- ITC of CGST allowed for payment of CGST and IGST in that order.
- ITC of SGST allowed for payment of SGST and IGST in that order
- ITC of UTGST allowed for payment of UTGST and IGST in that order
- ITC of IGST allowed for payment of IGST, CGST and SGST/UTGST in that order. ITC of CGST cannot be used for payment of SGST/UTGST and vice versa.
- The states would adopt Advance Ruling Authority in the states in order to enable the tax payers to seek a binding clarity on taxation matters from the department. Centre would adopt such a body under CGST Act.
Benefits of GST
- Make in India
- Help in creating a unified common national market, giving a boost to Foreign investment and “Make in India” campaign.
- Will mitigate cascading of taxes as Input Tax Credit will be available at every stage of supply.
- Harmonization of laws, procedures and rates of tax
- More efficient neutralization of taxes especially for exports thereby making our products thereby making our products more competitive in the international market and give boost to Indian exports.
- Average tax burden on companies is likely to come down which is expected to reduce prices and lower prices would result in more consumption which in turn means more production thereby helping in the growth of industries. This will create India as a “Manufacturing Hub”.
- Ease of Doing Business
- Simpler tax regime with fewer exemptions.
- Reductions in the multiplicity of taxes that are at present governing our indirect tax system leading to simplification and uniformity.
- Reduction in compliance costs.
- Simplified and automated procedures for processes such as registration, returns, refunds, tax payments etc.
- Minimal public interface between tax payers and tax administration as all interactions are through GSTN. Only in case where a taxpayer is picked up for scrutiny or audit, he will interface with the respective tax authority.
- Common procedures for registration of tax payers, refund of taxes, uniform format of tax return, common tax base, common system of classification of goods and services will lend greater certainty to taxation system.
- Businesses dealing only in exempted goods or with a turnover of below Rs. 20 lakh annually but not engaged in interstate supplies are also exempted from filing the returns of GST.
- The possibility of a business being at a disadvantage due to higher taxes in a state is ruled out, due to the introduction of one tax rate throughout the country.
- By reforming the ease of paying taxes alone, we can significantly improve upon India’s rankings on the global scale on Ease of Doing Business.
- It will also help in sharply improving the country’s global ranking in ‘Paying Taxes’ in the World Bank’s Doing Business Report where it currently ranks poorly at 172 out of 190 economies.
- Common market throughout the country.
- Benefits to Consumers
- Final price of goods is expected to be lower due to seamless flow of input tax credit between the manufacturer, retailer and supplier of services.
- Average tax burden on companies is likely to come down which is expected to reduce prices and lower prices would result in more consumption. This is due to the elimination of cascading effect of taxation.
- Benefits to manufacturers
- GST has removed the tax barrier on interstate transactions. This is expected to reduce the transaction costs by saving time taken by trucks to negotiate check posts at the state borders with according to an estimate consumed around 60% of the truck transit time.
- It would bring down logistics costs.
- Manufacturers will be able to take more rational decisions regarding sourcing of raw materials, location of manufacturing and warehousing facilities and sale of output, as India becomes one big common market post implementation of GST.
- Uniformity in process and centralized registration will make expansion of businesses across states much simpler.
- Enhances export competitiveness.
- Tax exemption and exemption from registration for manufacturers with an aggregate annual turnover upto Rs. 20 lakh.
- If the annual turnover is upto Rs. 75 lakh, one can opt for composition scheme where the tax rates will be
- Traders – 1%
- Manufacturers – 2%
- Restaurants – 5%
- In the service sector, composition scheme is available only for Restaurants.
- Other benefits
- GST, by helping doing business in the country tax neutral, irrespective of the location of the business, addresses this issue by minimizing the sector and state variation in compliance as well as rates.
- Reduced administration costs to the government as GST is expected to reduce errors and litigations.
Challenges under GST:
- If states were to give away their freedom to increase the taxes in respect of at least some goods, their ability to raise resources to address the problems unique to them would be compromised.
- In some ways it is a disadvantage with respect to subordinate bodies like Municipal bodies etc., who now have more power to increase the quantum of their taxes. They can now increase or decrease stamp duties, entertainment tax (by local bodies) etc and build financial independence from the state governments.
- Centre not only enjoys sole rights over direct taxes, a portion of which it may give to the states, but it also now enjoys the exclusive rights to nearly half of the GST proceeds.
- GST is an IT driven law and it cannot be assured whether all the States and Union Territories in India are currently equipped with infrastructure and requisite manpower to embrace this law.
- The unlearning of old law and learning GST provisions is imperative. Proper training has to be given to the departmental officers for effective usage and implementation.
- Transition of existing registered assesses and registration of new assesses and resolving of migration issues is a big challenge.
- Both the Centre and State level officers are expected to work under one roof and in tandem by giving up their differences and non-alignment in the old regime. Cadre differences may arise.
Creating a Strong IT Backbone
GST envisages credit of ITC of 80 lakh taxpayers to be processed within 10 days after the filing of monthly returns which is expected to contain 2.6 to 3.0 billion business to business invoice data. This feat is impossible without a strong IT backbone. Hence, GSTN was conceived.
A special purpose vehicle, non-profit, non-government organization -”Goods and Services Tax Network”(GSTN) has been formed to create a platform for all the concerned stakeholders to collaborate on a single portal and to enable the transition of multiple indirect taxation systems to a single one. It functions as the front end of the overall GST IT ecosystem. Its known authorized capital is Rs. 10 crore in which the Central government holds 24.5% of shares, the State government holds 24.5% and the rest is with private banking firms. This structure brings flexibility of private sector while ensuring that strategic control remains with the government.
GSTN has partnered with Infosys as its Managed Service Provider (MSP) for the next five years to develop the application software. An offline tool and a simple excel based template has been designed to make it easier for the taxpayers preparing and filing their monthly returns with maximum ease and minimal costs. 34 GST Suvidha Providers have been appointed.
Removing Cascading Effect of Taxes
The tax on tax incidences (cascading effect) ultimately increase the final price paidby the consumer. Under GST regime, a particular good/service will attract only one tax rate, and it will be same in all the states. Also, each manufacturer, seller, business will be able to benefit from the ‘Input Tax Credit’. This mechanism reduces the total tax incidence and hence overall cost for business.
There are two different ways in which GST can have impact on the consumers. The direct and immediate impact of GST would be a new ‘effective’ tax rate on each of the goods and services. Depending on how different the new ‘effective’ tax rates are, due to different tax slabs as compared to the pre-GST period, prices will increase/ decrease accordingly. Secondly, an indirect impact of GST, which is likely to be visible only in the medium to long term, can come through changes in production and supply chain processes.
GST and inflation:
Notwithstanding the potentially lower or same effective tax rates, there are a number of economists and commentators who see an increase in the inflation in the immediate future. There can be two possible reasons for this prediction. Experiences from other countries such as Japan, Australia, Canada and others show that there is an increase in the inflation post GST implementation. While it is tempting to compare with other countries who have implemented GST before, none of them are as diverse and multi layered as India, not to mention the complexity of system being replaced by GST.The other potential increase in prices is possible due to increased compliance cost, especially for small and medium enterprises.
Currently, a large number of business entities in India operate under the informal economy. They escape the regulatory and taxation obligations which help them keep their overall costs low. Under the Input Tax Credit system, however, an entity can avail benefits only if it buys from the entity registered with the GST network and has paid taxes regularly. This could lead to an increase in the regulatory and taxation costs as entities would want to buy only from the registered entities, in order to avail benefits. While on the upside this could lead to enhance the tax base and overall revenue for the government. Depending on how it affects the overall tax structure associated, it can also increase prices accordingly.
Balancing Federal Fiscal Relations
By giving away their constitutional ability to tax, the states have bet big time on the success of GST. However, to guard the states against GST failing to deliver its promised increase in revenue, the centre decided to bring in a cess which is expected to raise about 50000 crores to be divided among the states to compensate for any loss in revenues. Luxury and demerit goods attract the additional cess. The problem with GST is that the tax, like all taxes, is dependent on the economy doing well. Conceptually the tax base must broaden. The tax GDP ratio could increase to 16% from the current 10%. But whether or not this can be achieved is still uncertain.
Without going into the issue of weightage of voting powers with the GST council, the fact remains that this Council now will be the Supreme legislative body in determining tax rate on all the goods and services across the country and not the directly or indirectly elected members of the Parliament and State Legislatures. In essence it will be like an educated super-body elected by Electors without any direct responsibility to citizen-voters.
Profiteering, a GST Implementation Challenge
India’s shift to GST regime is sure to make life easy for businesses and investors. But the policy makers biggest concern is to make sure that the consumers get the benefit of reduced tax burden on goods and services that the new indirect tax code offers. Unlike the convoluted and opaque indirect system that existed before, GST is transparent and lets the final consumer know the actual tax incidence on a commodity or service, which gives the impression that the tax rate has gone up.
The idea of rolling out GST along with an anti-profiteering clause is to prevent the possibility of businesses and traders retaining the benefits of tax reduction to themselves rather than passing them on to consumers, which is against the intent of the government of the day. The act specifies that “Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices”.
The Central government, for this purpose can set up a body to ensure that the anti-profiteering clause is being implemented in word and deed. Therefore, a National Anti-profiteering Authority (NAA) would be constituted as per the ‘anti-profiteering rules’. The intention is to ensure that all the stakeholders yield equal benefits of GST and to bolster consumer confidence.
The Anti-Profiteering rules, 2017 contains provisions for the selection of members of NAA, powers vested with the authority, the committees that would assist NAA in investigating complaints and the procedure to be followed in the investigations. Once the application to invoke Anti-profiteering measures is examined by the standing committee (State level standing committee for the businesses in one state only) and recommendation for consideration is received by NAA, it can:
- Summon the representatives of the business against which the anti-profiteering clause has been invoked. It can also initiate investigation through the government wings like Directorate General of GST, Directorate of Data Analytics, Directorate general of Safeguards (CBEC)
- Order the business to reduce the prices, so that the benefits accrue to the customers as well.
- Return the undue benefit availed, along with 18% from the date on which a higher sum was collected.
- Order the business to deposit the benefits in the Consumer Welfare Fund, when it is impossible to identify and return such benefits to the consumers.
- Impose penalty on the profiteer or cancel its registration.
The NAA is empowered to take Suo Motu action apart from acting on the recommendations of standing committee. The authority is to be headed by a Secretary level officer and assisted by four technical members. Additional Directorate General of Safeguards shall hold the office of secretary to the authority. It has a three tier structure with a standing committee on Anti-profiteering, State level screening committee and the apex body being the NAA. The standing committee is empowered to refer those cases which require a detailed enquiry, to the Directorate General of Safeguards who gives his recommendations to the NAA, post investigation. The authority is entitled to give its verdict within 3 months from the date of receipt of report from the Directorate General of Safeguards. The authority takes up the cases of mass importance only. The orders of the NAA can be appealed against, only in the high court.
Constitution of NAA is also to ensure that there is a check on inflation likely to be caused due to the implementation of GST as a replacement for all the indirect taxes, similar to that experienced by Singapore, Australia and Malaysia soon after the adoption of GST regime.
Transitional Challenges Ahead
Having completed the long journey of implementation of GST, the immediate need is to start a quick journey to ensure its most effective implementation at par with the best in the world.
- Having implemented such a comprehensive reform successfully, efforts should now be made to evolve the GST continually to the next level. Now, the efforts must be directed in ensuring that GST lives up to the credo of “One Nation, One Tax” in the truest sense of the term, doing away with the existing situation of multiple rates and numerous avoidable exemptions. Creating a platform for feedback from the stakeholders will be helpful
- State governments and local bodies must be convinced to resist from levy of additional duties in the form of various indirect taxation in the interest of realizing greater benefits out of GST.
- Broadening the GST net and encouraging the unorganized sector to join the platform should continue to be another important goal.
- A model must be created such that separate registrations and tax filing in all states of operation for businesses that work in different states is done away with.
Measures such as these will be vital for further unshackling the potential for improvement in the ease of doing business in India and enhancing the overall competitiveness in the global arena, which is crucial for the success of “Make In India” programme of the government.