GOODS AND SERVICES TAX – A COLOSSAL TAX REFORM
INTRODUCTION OF GST/VAT:
The Goods and Services Tax and VAT have long past the latter having been first suggested in 1974 in the report tabled by L. K. Jha Committee recommending VAT. In 1986 it got introduced in the shape of MODVAT which term denoted modified value added tax. In 1991 it was Chelliah Committee which recommended VAT/GST. The onset of VAT after the Empowered Committee sate VAT was formed in 1999 started with twenty one states implementing VAT in 2005 followed by five more states in 2006 with Tamil Nadu and Uttar Pradesh following suit in 2007 and 2008 respectively. The Central Excise Rules 2002 laid the foundation of limited credit of inputs and later on it was Central Excise Rules, 2004 that allowed integration of goods and services. Kelkar Task Force mooted the concept of national GST in 2004.The service Tax was earlier introduced in 1994 by Finance Act IV. GST and DTC (Direct Tax Code) are considered to be major tax reforms in India happening.
There is as on date plethora of indirect laws which create multiplicity of taxation and in some cases it goes to tax same transaction under different enactments. The disputes relating to software whether services or goods or works contract, supply of food by caterers etc will get resolved under the GST regime which is levied on supply of goods and services. Compliance of multiple tax statutes by the trade and industry becomes cumbersome and makes doing business more difficult if viewed in globalised scenario thereby affecting the ranking given by the WTO in respect of ease of doing business in different countries. There are more than 140 countries that have already implemented GST with Canada and New Zealand having benefitted immensely. These countries have put in place an autonomous body for planning and implementation over a specified time frame. India is yet to formulate transition. Unlike China where experts are a part of the GST frame work with trade and industry actively involved in the process formulating GST laws the government of India with lone TFC (Thirteenth Finance Commission) without experts from profession being involved hopes to see the process quite convenient. It is well known that Parthasarthi Shome the man who was an expert in GST and its complexity is not there in the finance ministry as its advisor, there is now dearth of officers in the ministry who have deeper knowledge of the subject.
The government is committed to unify these indirect taxes acts into GST and therefore, excise duty, service tax at the Centre and VAT at the State level shall get merged and the earliest date slated was 1st of April, 2010 as initially postulated in 2006-07 budget. The task has become formidable with TFC (Thirteenth Finance Commission) and Empowered Committee yet to take cohesive and conclusive decision on certain matters. Empowered Committee released the first much awaited discussion paper of proposed framework of GST which details out the consensus reached by the states broadly though but it’s yet to be ratified by the government of the day. It is now clear that we have a dual system of GST one Central and the other is State GST. But interstate transaction shall also be taken care separately under IGST model.
GST RATES IN PROMINANT COUNTRIES:
Australia - 10%, China-17%, New Zealand-12.5%, UK-17.5%, Germany-19%, France-19.6%, Belgium-21%, Singapore-7%.EC has recommended dual GST though there is Single GST/VAT. A revenue neutral rate of 12% is most acceptable at CGST-5% and SGST-7% though unlikely.
IMPACT AND PRESENT GAMUT OF TAXATION
GST is primarily a tax on goods and services and aims at reducing the cascading effect of tax or tax on tax. It improves efficiency by protecting revenue throughout the production and supply chain till the retailers’ end with less chances of escapement. The most underlying principle under GST is that here the taxable event is the supply as against manufacture under excise or sales under VAT or provision of services under Service Tax. The disputes whether there is a manufacture or not in relation to excisable goods or process incidental or ancillary to such manufacture would not come in the way so far as taxability of an event is concerned. Also, double taxation under VAT and Service Tax would be avoided. On account of escapement from taxation under sales tax where the retailer obviates or dodges the tax net, entire amount is lost but it may not be so in case of GST where at best the value addition of the retailer shall be lost negligibly.
The aim of GST is to eliminate the cascading effect of input taxes and relieve taxes on export of goods and services fully. Bridging the gap in the matter of taxing is another issue as centre cannot levy tax on sales of goods within the state and states cannot do the same with respect to production of goods and services. Article 246(1) of Constitution of India empowers the Parliament to make laws with respect to matters in List-I of Seventh Schedule called the Union List. Likewise the State Government under Article 246(3) is empowered to make laws in respect of matters listed in List-II of Seventh Schedule of the Constitution. Constitutional amendment shall be needed to permit the Centre to levy GST on traders and the States to impose tax on services.
GST would merge multiple indirect taxes and emerge in neutrality, equity, enhanced revenue and transparency. Tax system need to be self regulatory and aim to generate required information. In this direction the role of information and technology shall be immensely replicated by networking and online transfer of credits to the states which too need to have technology in place. This feature needs to be dealt with utmost urgency and early implementation to make the operation of GST effective. It is said the best is the enemy of the good as centralised GST is sanctified best but it is not to be there looking to the federal structure in India. There is dual set up with two administrations, multiple statutes one for the centre and one for state and there shall be no cross utilisation of input tax credit (ITC) between CGST and SGST.
The present mechanism of CENVAT provides set off of input tax on goods and services up to production stage. Similarly VAT provides set off of input taxes and tax on previous purchases but does not provide relief of CENVAT loading on goods. The disruptive factor of CENVAT had been that it did not extend to distribution chain beyond the stage of production. The introduction of GST would ensure seamless credit of indirect taxes by integrating goods and services taxes for set off and shall extend to value addition in the supply chain. The CST though reduced to 2% would need to be phased out on introduction of GST. There would be continuous chain of set off from production or service stage to the retailer’s stage thereby doing away the cascading effect including the burden of CENVAT/Service Tax. Majority of Central and State taxes shall be subsumed. The GST will result in tax on value addition at each stage by providing set off of input tax against the output tax and it shall be the consumer who would bear the GST charged by the last dealer in the supply chain.
The real advantage to the trade and industry and agriculture is implicit with integration of goods and services and subsuming of CST and other taxes under Central and State level too. The cost of goods shall also be lower due to elimination of tax on tax, the exports too shall become globally competitive for Indian manufacturers and exporters.
The small traders and small scale industries are also protected as threshold limit conceived under CGST for goods is set to be kept at Rs.1.5 crore and for services at possibly higher level. The EC has laid out a threshold limit for SGST/UT at Rs.10 lakh both in respect of goods and services.
Salient features of GST under the present federal structure is dual and to be implemented by statue for the CGST and another for SGST with rules there-under. However the basic criteria for chargeability shall be practically the same under both in respect of taxable event, valuation, classification and taxable entities. The CGST/SGST shall be payable on all transactions of goods and services except the exempted categories and those transactions that are below the threshold limit. Taxes under both shall be payable separately and cross utilisation of ITC is not allowed between CGST/SGST. There shall be two administrative set up at centre and state for CGST and SGST respectively, and periodic returns need to be submitted under both enactments. There would be a levy of CGST and GST simultaneously on every transaction of supply of goods and services excluding the exempted and one below the threshold limit on the same price/value. SGST would be charged only when supplier and the recipient both are located in the same state. In the case of CGST the location of supplier and the recipient within the country is immaterial. Therefore, a transaction taking place in MP in respect of TV sets sales, the distributor selling it to a dealer in MP would charge both CGST and SGST at specified rates say, 12% under both the statutes and shall be required to deposit separately under CGST and SGST the requisite component of taxes though he can take ITC separately under different Acts as ITC of CGST inputs can be availed against liability under CGST and so shall be the case with SGST. There is no cross subsidization or utilisation under these two enactments for ITC therefore, CGST credit cannot be utilised for payment of SGST.
The taxes principally indirect taxes or levies that will be subsumed shall be the ones which fall in the supply chain of transaction commencing from import, manufacture, or provision of goods and services at one end and consumption of such goods and services at the other so as to result in uninterrupted flow of tax credit in intra and inter-state levels what is called seamless credit. The EC (Empowered Committee) considers that the following central taxes shall be subsumed under GST regime:
1.Central Excise Duty 2. Additional Excise Duty 3. Excise Duty under Medicinal & Toiletries Preparation Act 4. Service Tax 5. ACD known as Countervailing Duty 6. SAD (Special Additional Duty of Customs) 7. Surcharge 8. Cesses.
The duty of customs may continue to be levied on imports in India as GST unlike in Singapore which is on imports and supply of goods and services in Singapore, is not so stated in the first discussion paper that has been presented.
At Sate level the taxes and levies to be subsumed would be:
1.VAT/Sales Tax 2. Entertainment Tax, excepting one that is levied by local bodies 3.Luxury Tax 4. Taxes on Lottery/Betting/Gambling 5. State Cesses/Surcharge in respect of supply of goods/services 6. Entry Tax which is not in lieu of Octroi.
Purchase tax is still the area for consideration as the same is for the government to decide. States earning substantial revenue from it desist such subsuming. The tax on alcohol items would be kept out of GST though States could continue to charge VAT/Sales Tax. Tax on tobacco products may be exigible to GST with ITC and Centre could levy excise duty on it additionally. Tax on petroleum products excepting natural gases (a decision on this is left for discussions) would be kept out of GST. States may continue to levy tax on these products and centre also to continue its levies.
It is the mandate of the GST that both Centre and the States shall have concurrent powers to levy tax on goods and services and the Working Group of Principal Secretaries and Commissioner of Trade Taxes with due involvement of Finance Secretaries have already formulated principles for taxation of intra and interstate in consultation with the representatives of Department of Revenue, Government of India. It is yet another piece of legislation for interstate transactions that would be followed which shall be IGST model (Integrated GST) aligning CGST and IGST.
A single SGST and CGST rate is contemplated for taxing the services. EC has kept two rate structures with lower rate for necessary items and standard rate for goods in general. There shall also be a list of exempted goods and a special rate for precious metals. The wisdom suggests that the number of exempted goods should be kept at the bare minimum. The GST has unique feature of compounding scheme to protect the interest of small traders with likely gross turnover of Rs.50 lakhs as cut-off to be taxable at floor rate of 0.5% with option for GST registration even if the turnover is below the compounding cut-off. There is room for escapement of taxation in such composition schemes and manipulation of split up of enterprise’s sales.
IGST which is imposable on inter-state transaction shall be sum total of CGST and SGST rates and shall be collectible by Centre. If CGST is 5% and SGST is 7% then the IGST shall be chargeable at 12%.ITC shall be allowed to be utilised by the dealer in importing state in respect of IGST paid. The credit of IGST shall be utilised for payment of IGST or CGST or SGST in that order. The State utilising ITC of such credit for payment of SGST shall be reimbursed by the Centre based on e-returns filed on monthly basis by the registered dealer of the importing State. The dealer of inter-state transaction shall be registered with a Central authority and allotted TIN number. The TIN number of a selling dealer shall be matched on the basis of e-returns filed with that of the purchasing dealer before allowing ITC.
A dealer buys goods worth Rs.100000 and pays 5% as CGST (Rs.5000/-) and 5% SGST (Rs.5000/-). He sells in inter- state goods worth Rs.20000/- (IGST-Rs.2000/-), sells to government in inter-state Rs.30000/-and (IGST-Rs.3000) and makes a stock transfer of Rs. 25000/- (IGST-Rs.2500/-).He sells within the State Rs.50000/-(CGST@5%-Rs.2500
).The utilisation of input tax credit shall be in the following manner:
Particulars of Turnover Value CGST Payable SGST Payable IGST Payable
Sales within the state 50000 2500 2500 NIL
Goods on stock transfer 25000 nil nil 2500
Sale of goods inter-state 20000 nil nil 2000
Sale of goods to Govt.
In inter-state sale 30000 nil nil 3000
Total/Rs. 125000 2500 2500 7500
1. IGST-Rs.2500/-(Rs.7500 payable-Rs.5000/-(Balance Left under CGST Rs.2500/-& SGST Rs.2500)
2. CGST- Rs.2500 payable less Rs.2500 input on purchases utilised. Balance left Rs.2500/-
3. SGST-Rs.2500 payable less Rs.2500 input on purchases utilised. Balance left Rs.2500/-
Since SGST credit of Rs.2500/- has been utilised in the payment of IGST therefore, the State will get a debit of Rs.2500/-from Central Government.
There is need to hasten the progress of bringing up of the GST legislation to usher in an era of global competitiveness as constitutional amendments need the bill to be passed by not less than two third majority of the members present and voting in each house of the Parliament and after bill being passed by one house it is sent to the other house for concurrence. The States too have to pass the amendment in like manner. The legislative process is of great importance to the implementation of the GST regime as at present the Constitution does not empower either the Central or State Government to levy a tax on the “supply of goods and services” besides the Constitution does not empower the States to impose tax on imports. The JWG (Joint Working Group) constituted in September, 2009 is already on the job for formulating draft legislation for Constitutional Amendment.
The task of the JWG is to prepare draft legislation for: 1. CGST 2. SGST 3. IGST , formulation of rules and procedures. It has the daunting task besides framing of the legislations, to address to the Dispute Resolution and Advance Ruling Mechanism.
The GST coupled with DTC when introduced shall change the structure of taxation indirect and direct taxes once for all. The professionals are ultimately responsible for the due performance of dealers’ obligation under these laws even though not directly involved in the formulation of the respective legislations. Their task is becoming most onerous and at the same time exciting too as they are expected to be abreast of all applicable laws with their inherent intricacies. The real advantage appears to be there for all sections of the society. Government shall see the tax to GDP ratio raising and set to cover the entities throughout the value chain and there would be less tax escapement. The consumer which includes all weaker section of the society who bear the brunt of indirect taxes shall also be benefitting as he shall be paying lesser on account of cascading effect being eliminated. The amendment in the constitution and the framing of legislations within time bound framework only shall help the cause of its final implementation at an early date.