Goods & Services Tax (GST) - One Nation One Tax

Why was GST in the News?

In order to correct the inverted duty structure and remove some exemptions, the Goods and Services Tax (GST) Council made a number of rate changes at its 47th meeting, which was held on 29 June, 2022. These rate changes could serve as a precursor to a general adjustment to tax slabs and rate rationalisation in the future. The rate changes will be effective from July 18, 2022.

An overview of the recent changes is given below:

• The “pre-packaged and labelled” retail packs that contain food items such as puffed rice, jaggery, lassi, curd, wheat flour, and buttermilk no longer qualify for the GST exemption. However, items sold loose or unlabelled will still be exempt. These items will now be taxed at 5 per cent, same as the branded items.
• There is a rate hike from 12 % to 18 % for household goods like Tetra Pak, LED lamps, printing/drawing ink and power driven pumps.
• For items like solar water heaters, finished leather, etc., the rate has been increased from 5 per cent to 12 per cent.
• The issuance of cheques will be subject to an 18% GST, among other services..
• The GST rate has been reduced from 12 percent to 5 per cent for ostomy and orthopaedic appliances.
• From now on, hotel rooms with daily rates up to Rs 1,000 will be subject to a GST of 12 percent.

What is GST?

The GST (122nd Constitutional Amendment) Bill, 2014 was passed in May 2015. It was enacted as Constitution (101st Amendment) Act, 2016, with effect from, 16th September, 2016. It heralds the first significant step towards the indirect tax reform in India in the last thirty years. The GST was launched on 1st July 2017. Below are some additional details about the GST.

• It is a tax levied when a consumer buys a good or service. It is meant to be a single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc.
• It subsumed 17 large taxes and 13 cesses.
• It is a single tax on the supply of goods and services, right from the manufacturer to the end consumer
• This is how it is done in most developed countries. More than 160 countries have implemented this system of taxation.
• GST does not tax or get into specific commodities.

Mechanism of GST Stage 1

• Let’s consider a manufacturer of gears.
• Let’s say he buys raw material worth Rs 100, a sum that includes a tax of Rs 10.
• With the raw materials, he manufactures a gear
• In the process of creating the gear, 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 (the gear) 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). This setoff is also called as input credit. This forms the crux of GST.
• Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).

  Stage 2 The next stage is that of the good passing 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.
• 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).

  Stage 3

• In the final stage, a retailer buys the gear 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 cannot claim any tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer are Rs 10 + 3 +2 + 1, or Rs 16.
• 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.

Brief chronology of the evolution of taxation regime in India:

• GST was first recommended by the Kelkar committee task force.
• A brief chronology outlining the major milestones on the proposal for introduction of GST in India is as follows:

Current Indirect Taxation Structure that GST will Subsume:

Table representing taxation under different regimes

SHORTCOMINGS IN THE PRESENT TAX STRUCTURE AND NEED FOR GST Tax Cascading:

• The most significant contributing factor to tax cascading is the partial coverage by Central and State taxes.
• The exempt sectors are not allowed to claim any credit for the Cenvat or the Service Tax paid on their inputs.

Levy of Excise Duty on manufacturing point:

• The CENVAT is levied on goods manufactured or produced in India. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax. Taxable event at manufacturing point itself forms a narrow base.
• For example, valuation as per excise valuation rules of a product, whose consumer price is Rs. 100/-, is, say, Rs. 70/-. In such a case, excise duty as per the present provisions is payable only on Rs.70/-, and not on Rs.100/-.

Complexity in determining the nature of transaction:

• Goods and services are currently taxed separately.
• Inability of States to levy tax on services  With no powers to levy tax on incomes or the fastest growing components of consumer expenditures, the States have to rely almost exclusively on compliance improvements or rate increases for any buoyancy in their own-source revenues
• VAT applies at manufacturing stage (CENVAT) as well as Sales stage (State level VAT). Therefore, there is a duality of taxation
• Input credit set-off is not available against different taxes. For eg: set off not available for CENVAT against state VAT
• Different tax rates are levied across different states. Hence, it can sometimes increase the cost of production and lead to uncompetitive prices.
• The intrastate transaction gets input credit set off but not inters state transaction. Therefore, a retailer or whole sole merchant is subject to the duality of taxes
• Likewise, as CENVAT, State VAT covers only sales. Sellers can claim credit only against VAT paid on previous purchase.
• Centre cannot impose taxes on goods beyond manufacturing (excise) or primary import (customs) stage. Centre only can tax services. State has no powers to tax services. State has exclusive domain of taxes on consumption.

Procedure for adopting GST Constitution Amendment bill

Salient features of the GST Bill:

• No differentiation between good and services tax. One rate for both goods and services
• Simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax;
• Tax will be levied on every supply of goods and services.
• Subsumes most of the Indirect taxes at state and central level (barring few exceptions listed below)
• Keeping in mind the federal structure of India, there will be two major components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain.

• 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 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.

• Cross utilization of credit of CGST between goods and services would be allowed. Similarly, the facility of cross utilization of credit will be available in case of SGST.
•  However, the cross utilization of CGST and SGST would not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained below
• In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services under Article 269A (1) of the Constitution.
• The IGST would roughly be equal to CGST plus SGST. 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 dealer who imports would 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. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.
• Producing versus consuming states.
  • Major manufacturing states like Gujarat and Maharashtra will lose a substantial amount of tax revenue, earlier accruing from interstate taxes (like Central sales tax), due to implementation of a destination based GST.
  • Such states will be completely compensated (100% of the losses) for the loss of revenue up to 5 years.
  • 1% additional tax for Integrated Goods and service tax (IGST) tax for 2 years was proposed However this provision was deleted in the amended bill passed in Rajya Sabha.
  • Similarly, the demand for constitutional cap on the rate of GST has also been done away with.

• 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.
• Centre & State to have concurrent powers to make laws on goods and services. Only centre can levy IGST (Intersect Supply of Goods and Services) and imports.
• Law made by parliament in relation to GST will not override state laws on GST.
• Input tax credit set off will be accessible across Intra and Inter-state transactions as GST will be one single tax at central and state level.
• 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
• Alcohol for human consumption has been exempted from purview of GST.

Taxing the imports under GST:

• The Additional Duty of Excise or CVD and the Special Additional Duty or SAD presently being levied on imports will be subsumed under GST.
•  IGST will be levied on all imports into the territory of India.
• Unlike in the present regime, the States where imported goods are consumed will now gain their share from this IGST paid on imported goods. 

Major features of the proposed registration procedures under GST:

• Existing dealers: Existing VAT/Central excise/Service Tax payers will not have to apply afresh for registration under GST.
• New dealers: Single application to be filed online for registration under GST.
• The registration number will be PAN based and will serve the purpose for Centre and State.
• Unified application to both tax authorities.
• Each dealer to be given unique ID GSTIN.
• Deemed approval within three days.
• Post registration verification in risk based cases only.

Major features of the proposed returns filing procedures under GST:

• Common return would serve the purpose of both Centre and State Government.
• There are eight forms provided for in the GST business processes for filing for returns. Most of the average tax payers would be using only four forms for filing their returns.
•  These are:
  • Return for supplies
  • Return for purchases
  • Monthly returns and
  • Annual return
• Small taxpayers: Small taxpayers who have opted composition scheme shall have to file return on quarterly basis.
• Filing of returns shall be completely online. All taxes can also be paid online.

Major features of the proposed payment procedures under GST:

• Electronic payment process- no generation of paper at any stage
• Single point interface for challan generation- GSTN
• Ease of payment – payment can be made through online banking, Credit Card/Debit Card, NEFT/RTGS and through cheque/cash at the bank
• Common challan form with auto-population features
• Use of single challan and single payment instrument
• Common set of authorized banks
• Common Accounting Codes

  THE GST COUNCIL:                            

                    The Federalism debate:

• The most discussed consequence of the passage of GST bill is the fiscal federalism.
• The proponents of the GST bill are positive about the centre-state relations in this context of passage of the GST bill.
• It actually accelerates the reconfiguration of centre-state fiscal relations already underway.
• The experts argue that, States would become key stakeholders in the national economy, which was quite rare in the present scheme of things.
• An important feature of the new tax framework is the creation of the GST Council. The way it has been designed, the Union government has only one-third say in decisions taken by the GST Council, while the rest is accounted for by the states; and all decisions have to be carried by a three-fourth majority.
• Hence, this clearly indicates that centre and states need to co-operate with each other to ensure a smooth functioning of the tax administration. This, clearly is a double whammy for the states, which have their fiscal autonomy enhanced due to the increase in untied funds from net indivisible pool of taxes ( from 32percent to 42percent), as a result of the 14^th Finance Commission.
• However, the opponents of the GST argue that, the voting pattern in GST council is not completely based on economics. The purpose of the GST Bill is to concentrate on manufacturing and achieve excellence so that the same product is not manufactured locally with sub-optimal efficiency in every state for tax reasons.
• That being the case, it is natural there are going to be only a few manufacturing states while the rest will be consuming states.
• To have a council where the manufacturing state has one vote whereas all other states, likely consumers, also have a vote each is unfair.
• Of course consumers will vote in their own interests.
• “Make in India” Programme is focused for strengthening and protecting the domestic industry from foreign import. Likewise, state governments have to protect local industry and employment. For this objective lesser sales tax and other incentives is needed for helping local producers. But the right of state governments for variable taxation will end with the introduction of GST regime.
• Further, economists argue that taxation powers are not only a measure of resource mobilisation. It could be used as a tool to control and restrict the consumption of some goods for social good.
• ( For example, Tobacco products generally attracts huge tax rate as a measure to control the consumption on health grounds. Here tobacco producing States argue for lesser taxes for maximum sales and the Consumer States will demand for a leverage for fixing higher taxes.)
• Health concerns ratify the higher rate of tax on tobacco. Now, this can be a tricky situation for the centre as to whose interests it should protect.
• Likewise, if a state government needs an additional resource mobilisation for facing a natural calamity, it cannot decide for any special levy.
• Swachh bharat and other Central schemes can only be decided and used by the Central Government.
• The GST will take away the rights of states to decide taxes according to their socio-economic situations. The situation in Kerala is quite different than the situation in Tamil Nadu or Assam or Bihar or West Bengal. Each state has its own socio-economic-political reasons to decide the type of tax to be levied.
• Therefore, the experts argue that the veto power given to centre in the GST council is undemocratic. They opine for a more flexible weights based voting pattern and reduction in the weightage of the centre’s vote.
• Hence, there has to be more consensus on the structure, pattern and working of the GST council.
• The term ‘Cooperative Federalism’, sums up the ideology that would successfully define this evolution: Together they stand and divided they will fail.
• In this, the recommendations of FFC, GST and other policies on the anvil are only stepping stones. Evolving institutions such as the GST Council and the revived Inter-State Council will be critical in overseeing this transition with minimal hindrances; state chief ministers are already equal partners in the governing council of NITI (National Institution for Transforming India) Aayog, which has replaced the Planning Commission.

  Advantages of GST For business and industry

Easy compliance:

• A robust and comprehensive IT system would be the backbone 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:

• Indirect tax rates and structures would be uniform 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.
• Further, due abolition of multiple taxation, the warehousing practices adopted by large industrial houses are expected to come down. This would boost ancillary units, especially in manufacturing, as the large industrial houses will freely contract out the fabrication to vendors due to reduction in operational cost as a result of GST.
• This will provide the adequate thrust and driving force for the success of Make in India and Skill India.

  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 rate:

• Although a GST council is expected to work towards fixing a GST rate, it will be quite challenging to reach a consensus on the uniform rate of taxation. The challenge is further compounded by the lack of precedent on this front earlier.
• Producing and consuming states might have different viewpoints regarding rate of taxation.

(For example producing states like Gujarat and Maharashtra might want low taxation on manufacturing of cotton textiles related goods, and consumption states like Haryana, Uttar Pradesh might want high rate of taxation on retail sales of these goods leading to conflict).   Compensation to States:

• The revenue foregone by the states as a result of transition to GST will be compensated by the Union government. However, there is no fixed formula or method on reaching an exact figure.
• The negotiations may have political overtones and could be a challenging task for the union government.

  Accounting Systems:

• The cadre of Chartered accountants, Tax consultants, Tax bureaucracy and the like need to be trained on a new accounting system. This will require a lot of technological and institutional capacity building

• The retailers, whole sale merchants, small general store owners and the various stakeholders also need to transit towards a new system of accounting. This system may pose significant challenges specifically to small traders as they generally are not used to a robust account keeping system.

  Other challenges:

• Cess ( education, Krishi Kalyan, Swatch Bharat) and surcharges charged by centre are currently not part of GST. States might have an issue over this.
• Further, GST will not apply to Petroleum crude, High speed diesel, Motor spirit (petrol), Natural gas, Aviation turbine fuel. These have a very high inter-connectivity with both manufacturing and service costs which might hinder seamless application of GST across sectors.  

  Approach to the Civil Services Examination: In mains focus will be on effect of GST on Indian economy, federal structure (centre-state relations) and analysis of the new Indirect taxation structure.   GS Paper II:

• Indian Constitutional amendments
• Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.
• Parliament and State Legislatures – structure, functioning, conduct of business, powers & privileges and issues arising out of these.

  GS Paper III:

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• Government Budgeting.

Practice Question:

• GST represents a paradigm shift in the federal relations between centre and states. Critically discuss.  (250 words)

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