GST – What? Why? When?
CA. Pradeep Jain
India is a Country of varied traditions and customs; same is the case in its Tax regime structure. Recently the Government has initiated its efforts towards introduction of a new tax regime GST. In this article an attempt has been made to analyze and highlight the key features of GST (Goods and Service Tax). Further an endeavor has been made with the help of this article to bring to light the problems likely to be faced by Central Government in successfully implementing this tax in India.
GST is a part of the proposed tax reforms in India having a broad base that instigate the applicability of an efficient and harmonized consumption tax system. This system is basically structured to simplify current indirect tax system in India. It integrates the union excise duties, customs duties, service tax and state VAT into a single point levy i.e. GST. It may be rightly termed as a national level VAT on goods and services with one of the differences that it also covers Service under its scope.
Basically, Goods and Service Tax is that tax credit mechanism wherein the tax is levied on goods and services at each point of sale or provision of service. Under this tax regime the seller of goods or the service provider can claim the input credit of tax paid by him (i.e. input GST) for purchasing the goods or procuring the service. Thereafter he can utilize that credit of GST to set off against the amount payable on the supply of goods or services (i.e. output GST). Precisely, it can be termed as a consumption tax collected on the value-addition made in the goods and services at each stage of the supply chain.
Further the peculiarity of this tax structure is that the end consumer, being the last person in the supply chain, has to bear this tax and so, in many respects, GST may also be referred to as a last-point retail tax. It is basically a tax on final consumption.
France was the first country which introduced a comprehensive goods and service tax Regime in 1954. 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. The GST rate in various countries ranges from 5 per cent in Taiwan to 25 per cent in Denmark.
In the late 1980s, the federal government of Canada replaced its MST (Manufacturer’s Sale Tax) with a new value-added sales tax called the Goods and Services Tax (GST). The basic motive behind this reform was to introduce a new nationally harmonized sales tax which would replace individual provincial sales taxes (PST), and both the levels of government would share the revenues generated there from.
Subsequent negotiations to harmonize the provincial and national sales taxes proved unsuccessful for the Canadian Government. Various provinces challenged the introduction of national sales tax on the ground that the federal government was exceeding its constitutional powers by operating in a taxation field historically reserved for the provinces. But as a result of constructive efforts by the Canadian Government National Sales Tax was implemented in 1989-90.
In Australia It was introduced by the Howard Government on 1 July 2000, replacing the previous Federal wholesale sales tax system and designed to phase out a number of various State and Territory Government taxes, duties and levies such as banking taxes and stamp duty. This proved a milestone in the taxonomy of Australia.
Today, it has spread to about 150 countries.
èSeeds of GST in India: -
The effort to introduce the GST was reflected, for the first time, in Union Budget Speech 2006-07. The then Finance Minister Mr. P. Chidambaram remarked that there is a large consensus that the country must move towards a national level GST that must be shared between the center and the states. He proposed 1 April 2010 as the date for introducing GST. The relevant part of his speech is as under: -
“It is my sense that there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate. I propose to take one step this year and increase the service tax rate from 10 per cent to 12 per cent. Let me hasten to add that since service tax paid can be credited against service tax payable or excise duty payable, the net impact will be very small.”
Thereafter the Empowered Committee of State Finance Ministers agreed to work with the Central Government to prepare a roadmap for introducing a national level GST. In May 2007 Empowered Committee (EC) of State Finance Ministers in consultation with the Central Government, constituted a Joint Working Group (JWG), to recommend the GST model. Within 7 months of its constitution that is in November 2007, JWG presented its report on the GST to the EC. The EC has accepted the report on GST submitted by the JWG.
The JWG of EC laid down various recommendations. A brief list of them is produced as under:
· The committee suggested that GST must have two components a Central tax and a single uniform state tax across the country;
· A tax over and above GST may be allowed to be levied by the states on tobacco, petroleum and liquor;
· The GST may have a quadruple tax structure comprising: -
§ a central tax on goods extending up to the retail level;
§ a central service tax;
§ a state-VAT on goods, and
§ a state-VAT on services.
· Given the four-fold structure, there may be at least four-rate categories- one for each of the components given above. In this system the taxpayer may be required to calculate tax liability separately for the different rates of tax;
· The states must tax intra-state services while inter-state services must remain with the Centre.
· Petroleum products, including crude, high-speed diesel and petrol, may remain outside the ambit of GST.
· Central cess like education and oil cess may be kept outside the dual GST structure to be introduced from April 2010;
· The report has also recommended keeping stamp duty, which is a good source of revenue for states, out of the purview of the GST. Stamp duty is levied on transfer of assets like houses and land;
· It has also suggested keeping levies like the toll tax, environment tax and road tax outside the GST ambit, as these are user charges; and
· The draft report has recommended that if the levies are in the nature of user chargers and royalty for use of minerals, and then they must be kept out of the purview of the proposed tax.
In addition to the above mentioned recommendations, one of the major recommendations given by Kelkar Task Force (KTF) was the implementation of a single union GST. It was contradictory to the recommendations given by most of the scholars and that given by the JWG. KTF recommendation may pose a lot of constitutional hurdles as it demands many amendments to the existing articles of our constitution.
The present rates for service tax and CENVAT, that is most proximate to the global GST rate, and the continuous steps towards phasing out of Central Sales Tax (CST), clearly hints at the endeavor on the part of Government of India towards successful implementation of GST. Its implementation will completely eliminate revenue deficit as per the goals set out in the Fiscal Responsibility and Budget Management Act, 2003 (FRBM). Meeting with the FRBM target, may help in proper introduction of the new tax regime that is GST.
All these developments in the Indian tax Scenario, is quite evident of the governments incessant effort towards the successful introduction and implementation of the GST regime.
Presently, there are parallel systems of indirect taxation at the Central and State levels. Each of the systems needs to be reformed to eventually harmonize them.
For its implementation the Finance Ministry resorted to a constitutional amendment to allow States to tax services as recommended by the G.C. Srivastava Committee. Earlier G.C. Srivastava Committee on service tax had recommended either bringing services in the concurrent list or allowing States to tax services on the lines of the Central Sales Tax Act. Before the amendment, the power to levy tax on services is not mentioned either in the Union List or State List contained in the Schedule VII of the Constitution. With the then constitutional framework the only option is to invoke entry 97 of the Union List which has been vested with residuary powers to levy any tax not mentioned in the State List or the Concurrent List. The Central Government had invoked the entry 97 and taxed various services. Entry 97 which reads as ‘Any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists.’
The 95th Constitutional Amendment Bill for the inclusion of services for levying service tax has been approved by the Cabinet and passed by both Houses of the Parliament. By this amendment, the Bill proposed to insert a new entry 92C, and a new article 268A to enable the levy by the Union, but collected and appropriated by the States and to frame a law to determine how the proceeds of tax would be shared with the States.
The Empowered Committee has reached an agreement on the basic structure of GST in keeping with the principle of fiscal federalism enshrined in the Constitution of India.
è Why GST
When we have VAT in almost the whole country and the system of central excise and service tax is well equipped with the Cenvat credit, then why is there a need of GST? Well, this is needed to match the international phenomenon. It is needed to reduce the burden of Central excise.
The introduction of GST will certainly change the Federal system of Governance in our country in which states also have the right to collect taxes on goods.
Integration of goods and services taxation would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatments of manufacturing and service sector.
GST will facilitate seamless credit across the entire supply chain and across all States under a common tax base. The various advantages that will come along with the introduction of GST can be summed up as under: -
· It will boost up economic unification of India;
· It will assist in better conformity and revenue resilience;
· It will evade the cascading effect in Indirect tax regime. For instance, when a paper making company produces registers, the Central Government charges an excise duty on them as they leave the factory. Whereas on the lower end of the supply chain i.e. at the retail level, VAT is charged, without giving credit of the excise duty levied earlier. But in GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.
· It will certainly reduce the tax burden for consumers;
· It will result in a simple, transparent and easy tax structure; merging all levies on goods and services into one GST;
· It will bring uniformity in tax rates with only one or two tax rates across the supply chain;
· It will result in a good administration of tax structure;
· It may broaden the tax base;
· It will increased tax collections due to wide coverage of goods and services; and
· It will result in cost competitiveness of goods and services in Global market.
· It will reduce transaction costs for taxpayers through simplified tax compliance.
· It will result in increased tax collections due to wider tax base and better conformity.
è Hurdles in Implementation of GST in India
Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is not a babyish job. The Constitution of India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and international imports are with the Union and post- production levies rest with the states.
The Centre levies duties of excise on manufactures and import/countervailing duties on international imports apart from levying a tax on services under various taxing and the residuary entry in the Union List. The states levy VAT on goods sold or entering in the state under various entries of the state list. A harmonised, integrated and full fledged GST calls for the following hurdles in its successful implementation in India:
· Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. In the current scenario it is difficult to visualise constitutional amendments of such far reaching implications going through, more so in view of the fact that sharing of legislative powers is such an essential element of our federal polity and it may be perceived to be a basic feature of the Constitution;
· services have to be appropriately integrated in the tax network;
· One of the other major issue concerned is the appropriate designing and structuring of GST in India. The issues involved includes, how the issue of inter-state movement of goods and services may be addressed, taxes on services originating in one state and being consumed in other state etc.;
· Another contentious issue that is bound to crop up in this regard is the manner of sharing of resources between the Centre and the states and among the states inter se as also the basis of their devolution;
· Finally, apart from all these, there has to be a robust and integrated MIS dedicated to the task of tracking flow of goods and services across the country and rendering accurate accounting of levies associated with such flow of goods and services.
è Systems of GST
Internationally, there are three systems:
(a) Invoice System
(b) Payment System
(c) Hybrid System
(a) Invoice System: In this type of system, the GST (Input) is claimed on the basis of invoice and it is claimed when the invoice is received. Under this system there is no concern whether payment has been made or not. Further the GST (Output) is accounted for when invoice is raised. Here also the time of receipt of payment is immaterial. In other words we can treat it as mercantile system of accounting.
The advantage of invoice system is that the input credit can be claimed without making the payment. The disadvantage of the invoice system is that the GST has to be paid without receiving the payment.
(b) Payment System: In the payment system of GST, the GST (Input) is claimed when the payment for purchases is made and the GST (Output) is accounted for when the payment is made. Under this system, it is immaterial whether the assessee is maintaining the accounts on cash basis or not. This is similar to the system adopted as regards Service Tax in India.
The advantage of cash invoice system is that the Tax (output) need not be deposited until the payment for the goods and/or services is received. The disadvantage of the payment system is that the GST (input) cannot be claimed without making the payment.
(c) Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and GST (Output) is accounted for on the basis of payment, if allowed by the law. This system is adopted in some countries around the world. Under this system the dealers have to put their option for this system or for a reversal of this system before adopting the same.
It always depends on the law of the country, which decides the system of GST to be followed by the dealers.
Presently, in India the system of sales tax on goods is an invoice system of VAT, whereas the system of Service Tax is a Payment system. Thus, this issue is yet to be unveiled whether the Payment system or Invoice system will be adopted under GST. Moreover it may be stated that Government may issue a Hybrid system wherein the choice of system is left on the dealer himself.
è GST model around the World and in India: -
There are several models of GST, each with its own merit and demerit. A look at some of the models in circulation around the world is as under:
Australian Model: In Australia GST is a federal tax, collected by the Centre and distributed to the states. But India is a heterogeneous country and there is no chance that states may allow the Centre to collect all the taxes while they become just spending institutions;
Canadian Model: The GST in Canada is dual between the Centre and the states and has three varieties:
· Federal GST and provincial retail sales taxes (PST) administered separately - followed by the largest majority;
· Joint federal and provincial VATs administered federally (Harmonious Sales Tax - HST); and
· Separate federal and provincial VAT administered provincially (QST) - only for Quebec as it is like a breakaway province.
Kelkar-Shah Model: This model of a unified GST model, which is based on a grand bargain to merge central excise, service tax and state VAT into one common base. Two different rates of tax are to be levied by the Centre and the states. The collection may be by the Centre. This is like the HST model in Canada;
Bagchi-Poddar Model: This model, just like Kelker-Shahs, envisages a combination of central excise, service tax and VAT to make it a common base of GST to be levied both by the Centre and the states separately. This means that the Central Excise Act 1944 may be abolished and the goods tax may be only on the sale of goods. It may merge in it the service tax.
Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both Federal and State or provincial Governments. In India, a dual GST is being proposed wherein a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction. The Centre and the State will each legislate, levy and administer the Centre and State GST separately.
However it was recently indicated by the Government that the tax rates will be triplicate in nature as regards the goods are concerned. Lower rates will be charged on necessary and mass consumed goods and services, on the contrary a higher rate of GST will be charged for goods of luxurious nature and in between the two there will exist a normal rate structure for the goods not falling among the two.
è Various Question which are yet to be unveiled?
Will GST be levied in addition to the existing taxes?
No, the introduction of GST will replace the various taxes presently being levied by Central & State Government(s). The CGST will subsume following taxes levied by Central government: -
· Central excise duty (Cenvat),
· Service tax,
· Additional duties of customs;
· Central sales tax
And SGST will subsume following taxes levied by State Government: -
· Value-added tax (VAT),
· Entertainment tax,
· Luxury tax,
· Lottery taxes,
· Electricity duty,
· State surcharges related to supply of goods and services &
· Purchase tax.
What will be the rate of GST?
The rate of GST is yet to be announced, and is currently being discussed in length by the Centre and the EC. The rate is expected to be in the range of 14-16 %. Once the total GST rate is determined, the states and the Centre have to agree on the CGST and SGST rates. Today, services are taxed at 10% and the combined incidence of indirect taxes on most goods is around 20%.
Will prices go up after the implementation of GST?
In fact, the prices of commodities are expected to come down in the long run as dealers will be allowed to avail the CENVAT credit of Excise duty paid by Manufacturers and more over he will be allowed to avail the CENVAT credit of tax paid on services also. This passing of the benefits of reduced tax incidence to consumers by slashing the prices of goods will definitely reduce the prices.
What are the implications of GST on imports and exports?
Imports would be subject to GST. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded as similar to the present scenario.
In a GST regime, how and what type of goods and services would be subject to GST?
All goods and services are subject to GST, unless specifically exempt. Companies providing exempt supply will not be able to recover as input tax of the GST incurred on purchases made.
The GST incurred will become part of the cost of doing business. It is anticipated that the number of exemptions under the present sales tax regime would be significantly reduced. Goods and services that are subject to GST can be taxed at standard rate, which is at a fixed rate of, for example 5% or 10%, and at zero rate. Zero rating is a concept only found under the GST framework. Suppliers of zero rated supplies do not collect GST because the GST rate is zero. Export of goods is one of the zero rated supplies in many countries under the GST type regime. The following table gives a summary of the types of supply under a GST regime.
GST incurred on purchases is recoverable
GST incurred on purchases is NOT recoverable
Who is required to be registered for GST?
Under a GST regime, any person who provides supply of taxable goods and services in the course or furtherance of any business will be required to be registered for GST. However it may be possible that the Government may exempt small businesses from the registration requirements. This is to ensure that the low-income group will not be burdened by the implementation of GST.
It is anticipated that a person who carries on a business of providing taxable supply of goods and services need only be registered for GST purposes if his annual sales turnover reaches a certain threshold. A person who is not registered for GST purpose will not be able to claim the GST incurred on purchases made for the supply of his goods and services.
Are imported services will be subject to GST?
Imported services will be subjected to GST by way of a reverse charge. Under the reverse charge mechanism, the recipient of the imported services has to account for the GST on the imported services as if he is providing the services himself. He will then claim the GST accounted for on the imported services as his input tax to be credited against his output tax.
Before parting and to bring an end to this article we summarize that GST is a harmonized consumption tax system, whose introduction will bring an end to a varied number of Indirect taxes presently being levied by Central Government and State Government. The proposed date of Introduction of GST has been announced by the Government to be 1st April, 2010. Till now Government has not yet issued any Draft of GST model or various provisions to be applied, all we can do is to wait for the Draft to release. Till then we can only predict the outlook of the GST model in India and nothing can be said with utmost certainty.
Further we would bring in light that the Finance Ministers categorical statement in Parliament regarding GST implementation on April 1, 2010 clearly indicates the Governments clear and incessant intention towards bringing this tax regime by its due date. Accordingly, based on indications, as also on the basis of our subsequent interactions with senior Government Officials, we believe that the April 1, 2010 timeline for introduction of the dual GST will be duly met and we must welcome this new levy as this is the future of forthcoming India.