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All About GST Regime

Kunal R. Sarpal 
on 16 June 2016

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(A)  Introduction

 The introduction of Goods and Services Tax (GST) would be a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax, it would mitigate cascading or double taxation in a major way and pave the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%. Introduction of GST would also make Indian products competitive in the domestic and international markets. Studies show that this would instantly spur economic growth. Last but not the least, this tax, because of its transparent character, would be easier to administer.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.

(B) BACKGROUND

i)  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.

At Present

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 effects i.e. Tax on Taxes.

Even today, a manufacturer’s commercial invoice reflects both central excise duty and state VAT on the same goods. This is because both are indirect taxes and are collected from the customer. Conceptually, however, at present the centre taxes ‘manufacture’, and thereafter the state taxes ‘sale’ of the goods. The result is that the central excise duty is imposed first on the goods, and the state tax comes after that, on a value that is price plus central excise duty. If the goods are priced at Rs 100, and excise duty is 10% and VAT is 14%, the present scenario is that the invoice will read as follows:

Goods

Rs. 100.00

C. Excise duty @ 10%

Rs. 10.00

Sub-total

Rs. 110.00

   

VAT @ 14%

Rs. 15.40

In future (during GST regime)

When the same transaction of ‘supply’ is being taxed by both centre and states, the taxes are levied simultaneously on the same value. The rate of GST in the above transaction will be 24%, split as 10% central GST and 14% state GST. The transaction will then be taxed as follows:

Goods

Rs. 100.00

C.GST @ 10%

Rs. 10.00

   

S.GST @ 14%

Rs. 14.00

Thus there will be a reduction in the amount of VAT (to be known as SGST) payable if the rate remains the same. (The same result could have been achieved by changing the method of valuation in VAT / CST law, but there was no incentive for the states to do this or agree to it, as it involves reduction in their revenue.)

GST will provide input tax relief in inter-state transactions

The major gain from GST will be extension of input tax relief to inter-state sale of goods

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.[1]

ii) ROAD TO GST

As we have discussed just before, that the Govt. draws the power to levy the tax from the constitution. Hence govt. has amended constitution for empowering the govt. to levy the Tax on concurrent basis as in the proposed GST model, Both the Central and State govt. will levy tax on a common base.

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 up to five years. A provision in this regard has been made in the Amendment Bill. The compensation will be on at appearing basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year. 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. 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.

Constitution of GST Council –

1) This Council would function under the Chairmanship of the Union Finance Minister.
2) 2/3rd Representatives will be that of State &
3) 1/3rd Representatives 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. It will have statutory powers only in following situations:

  • (a) When petroleum products should be brought in the GST net
  • (b) Distribution of revenue of IGST and CGST among Union and States
  • (c) Continuation of 1% tax on supply of goods inter-state
  • (d) Compensation to States for loss of revenue for period up to five years.

The Council will make recommendations to the Union and the States on important issues like tax rates, exemptions, threshold limits, dispute resolution modalities etc. Thus in nutshell, we can say Excise and Service Tax will be known as CGST. CST will be known as IGST. In case of imports from outside India, in place of CVD and SAD, IGST will be charged.[2]

(C) 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 transfer and Stock transfer will also be covered under the ambit of GST. Alcoholic liquor for human consumption is going to be kept outside the ambit of GST.

What is GST: how the levy will be different?

GST is Goods and Services Tax:

·  a dual tax to be levied on the same taxable event by both the states and the union government

·  The taxable event will be ‘supply’ of goods or services

·  The states will levy the tax on such supplies of goods / services made within the state, while the union will levy the tax on inter-state supplies, but the state will collect it as in the present case of CST.

·  Thus on each ‘supply’ of goods / services, there will be a state tax as well as a central tax. These will be called state GST and central GST respectively.

·  There will be a single document for tax purposes, and a single return filed with a central registry, from which the information will be split between the centre and the relevant states.[3]

Definition of SUPPLY

It will get the power to tax such transactions though on account of a ‘supply'. To a layman, supply would be to make something available to another, or to fulfill a want of another - something very different from sale.

Sale does involve supply of a thing, service, or a transfer of right, and is not a mere supply in the plain sense of the term. ‘Supply' as compared to sale may be satisfied by merely facilitating use/possession of a good or rendering of service. Will supply include transfer of property, can there be a supply of rights, are interesting questions. The legislations to come - Central GST and State GSTs and before that model legislations, will hopefully provide clarity.

Supply as defined by the developed world

A look at the definition of supply or taxable supply in certain jurisdictions will assist us in arriving at reasonable assumptions on the shape of the impending definition of supply in the Indian GST statutes.

1)  Sixth Directive on VAT of EU defines supply as [under Article 5(1)] “a supply of goods is the transfer of the right to dispose of tangible property as owner”. 

2)  The VAT Act, 1994 of United Kingdom indirectly seeks to include concepts of transfer of property and ownership when it defines supply of goods as ‘any transfer of the whole property in goods', with the exception that the transfer ‘of any undivided share of property' or ‘of the possession of goods' is a supply of services. The transfer of possession of goods will be a supply of goods if possession is transferred under an agreement for sale or an agreement that provides that at some future point ownership will transfer.

3) Indian GST law as it evolves seeks to draw heavily from Canadian GST law in view of commonality of the federal structure of both countries. According to this statute, “supply” means the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. It is significant to note that Canadian law does not use the word ‘goods' but ‘property' and property is defined to include both movable and immovable property while the Indian GST appears to keep immovable property out of the new tax system.[4]

(D) SALIENT FEATURES OF GST

The salient features of the proposed model are as follows: 

· Consistent with the federal structure of the country, the GST will have 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). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.

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

· The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.

· Since the Central GST and State GST are to be treated separately, in general, 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.

· Cross utilization of ITC between the Central GST and the State GST would, in general, not be allowed.

·  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 administration of the Central GST would be with the Centre and for State GST with the States.

·  The taxpayer would need to submit periodical returns 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 a total of 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. The exact design would be worked out in consultation with the Income-Tax Department.

·  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.[5]

(E) WHO ARE COVERED UNDER GST.

1. CENTRAL TAXES TO BE SUBSUMED IN GST

On application of the above principles and various papers which have been released in this regard, it is deduced that the following Central Taxes should be, to begin with, subsumed under the Goods and Services Tax:

·  Central Excise Duty (CENVAT)

·  Additional Excise Duties

·  The Excise Duty levied under the Medicinal and Toiletries Preparations (Excise Duties) Act 1955

·  Service Tax

·  Additional Customs Duty, commonly known as Countervailing Duty (CVD)

·  Special Additional Duty of Customs – 4% (SAD)

· Surcharges and Cesses levied by Centre are also likely to be subsumed wherever they are in the nature of  taxes on goods or services. This may include cess on rubber, tea, coffee, national calamity contingent duty etc.

· Central Sales Tax to be phased out.

2. STATE TAXES TO BE SUBSUMED IN GST

Following State taxes and levies would be, to begin with, subsumed under GST:

  • VAT / Sales tax
  • Entertainment tax (unless it is levied by the local bodies)
  • Luxury tax
  • Taxes on lottery, betting and gambling
  • State Cesses and Surcharges in so far as they relate to supply of goods and services
  • Octroi and Entry Tax
  • Purchase Tax[6]

(F) WHO ARE NOT COVERED UNDER GST?

Differential treatment for alcohol, tobacco and petroleum products

(i) Alcoholic liquor for human consumption has been excluded from the purview of GST. The definition of goods and services tax in the proposed clause (12A) to be inserted in Article 366 of the Constitution is “tax on the supply of goods or services or both (except tax on the supply of alcoholic liquor for human consumption).” The manufacture and sale of the product will continue to be taxed by states.

(ii) Tobacco and tobacco products will be subject to central excise duty in addition to GST. While not excluded from GST, it is retained in entry 84 of List I (union list) also.

(iii) Petroleum products are excluded from GST for the present, and will continue to be taxed in the present mode – central excise duty on manufacture and VAT / CST on sale. However, the proposed Constitutional amendment requires the GST Council to fix the date by which these products will be brought into the purview of GST. This is in clause (5) of the proposed Article 279A.

Additional 1% for originating state on interstate supply of goods – non-VATable In addition to GST, an amount of 1% on inter-state supply of goods will be charged by the centre and assigned to the originating state, as per section 18 of the Constitution amendment bill. What is the originating state will be determined in terms of the rules for place of supply, which will be framed by Parliament in terms of the same section. This tax of 1% on inter-state supply of goods will not be available as input tax credit. The tax will be levied for an initial period of two years and may be extended on the recommendation of the GST Council

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

  • Customs duty
  • Excise duty on Tobacco products
  • Specific cess
  • Taxes on liquor
  • Electricity Cess
  • Property tax
  • Toll tax
  • Stamp Duty.[7]

(G) WHAT ARE THE COMPLIANCES TO BE DONE?

As we know this bill is yet to be passed in the parliament, there is no any specific procedure we can discuss about. But it is presumed that the procedure we are following now will be followed in future as well.

(H)  DUE DATES.

It is presumed that due date could be 21st of every month as it is followed till the date in the case of other taxes. But as this bill is not passed yet, we can’t surely comment on it, as of now.

(I) HOW GST WILLAFFECT THE BUSINESSES?

Once GST comes into picture, it is expected that the businesses will get affected in a significant way. The costing of the products, thus their prices and margins will get affected significantly. Since the multiple state barriers will be eliminated, hence Supply-chain management will get affected very positively. Time taken to transfer the goods from one state to the others will get reduced and thus affect the way logistics are planned currently. We would be requiring change in the IT infrastructure and the software’s for computing GST and complying with the same.[8]

(J) WHAT WILL HAPPEN TO THE EXISTING VAT/ST/CST REGISTRATIONS?

When BST (Bombay Sales Tax) converted into VAT, all BST registrants were converted into VAT registrants. By changing their BST registration numbers into VAT registration numbers. It is presumed that same system will be followed in the case of GST as well.

Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 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. The exact design would be worked out in consultation with the Income-Tax Department

(K) HOW CAN PROFESSIONALS LIKE CA/CS HELP? WHAT SERVICES CAN WE GIVE?

Role of CA will remain the same like auditing, filing returns, etc. Although the role of CS could be discussed. Here is the definition and scope of service of CS

"Practicing Company Secretary" means a person who is a member of the Institute of company Secretaries of India and is holding a certificate of practice granted under the provisions of the Company Secretaries Act, 1980 (56 of 1980) and includes any concern engaged in rendering services in the field of company secretaryship;

(Section 65(85) of the Finance Act, 1994)

"Taxable Service" means any service provided or to be provided [to any person], by a practising company secretary in his professional capacity, in any manner;

(Section 65 (105) (u) of the Finance Act, 1994)[9]

This means a CS professional can also provide Taxable Services. And for that they may follow the procedure prescribed by the GST.

(L)  DRAWBACKS OF CURRENT GST SYSTEM

The currently proposed GST system has some shortcomings as well. Modi sarkar’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.[10]


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