GST – Get Set To Implement………..
- Neha Limaye, Practicing Company Secretary
As a step towards indirect tax reforms in India, Finance Minister, while presenting Budget 2006, had proposed introduction of Goods and Services Tax [GST] by April 1, 2010 and entrusted the responsibility of preparing the road map for introduction of GST to the Empowered Committee .
Accordingly, the Empowered Committee [EC] in consultation with the Central Government constituted a Joint Working Group (JWG) in May 2007 to lay out the road map for the GST. JWG was responsible for studying GST Models across the world and then come out with the best model for introduction of GST in India.
Within seven months of its constitution, the JWG presented its report on the GST to the EC in November 2007, recommending a dual GST model for India. The EC has accepted the recommendations of the JWG and is now giving final touches to its recommendations. Finance Minister while presenting Budget 2008, has expressed his satisfaction with the progress made in preparing the road map for introduction of GST and has reinforced the target date viz. April 1, 2010.
What is GST?
It is a comprehensive, broad-based consumption tax on goods and services, collected at each stage of value added in the supply chain. While levying GST, no differentiation is made between goods and services. GST paid for inputs is eligible for ‘input tax credit’. The final GST is ultimately borne by the final consumer.
Business A Business B End Consumer
Imports Raw Material
Rs. 100 Pays GST @say, 20% for imports =Rs. 20
Claims Input Tax Credit = Rs 20 NA NA
Sells to B
Rs. 100Cost +Rs. 20GST + Rs. 30 Value Added = Rs. 150
Charges GST to B for sale of Product A
@20% of Value Added Rs. 30 = Rs. 6
Reports and pays GST =Rs. 6
Pays GST to A while purchasing product ‘A’
Claims Input Tax Credit =Rs. 6 NA
Sells to End Consumer
Rs. 150 Cost + Rs. 6 GST + Rs. 4 Value Added = Rs. 160 NA Charges GST for sale of Product A @20% of Value Added Rs. 4 = Rs. 0.80
Reports and Pays GST =Rs. 0.80
GST Borne = Rs. 0.80
Thus, Total Value added at each stage = Rs. 100+Rs. 30 + 4 = Rs. 134.
Total GST = Rs. 20 + Rs.6 +Rs. 0.80 = Rs. 26.80 i.e. 20% of 134.
GST ultimately borne by consumer = GST Paid Rs. 26.80 (-)Input Tax Credit Rs. 26 = Rs. 0.80
• Uniformity in tax regime with only one or two tax rates across the supply chain as against multiple tax structure as of present
• Production and sale many products require inputs of both goods and services. Hence it is not economically viable to have separate tax for goods and services.
• Lower transaction cost for final consumers
• Replacing the cascading effect [‘tax on tax’] created by existing indirect taxes
• Increased tax collections due to wide coverage of goods and services
• Efficiency in tax administration
• Improvement in cost competitiveness of goods and services in the international market
GST in International Scenario:
More than 140 countries across the world follow GST or National VAT. Let’s have a look at comparative analysis of GST prevalent in some of the countries:-
Particulars Australia Canada Singapore New Zealand
GST in force from year
2000 1991 1994 1986
Why GST? To replace federal wholesale sales tax system
To phase out various state and territory taxes like banking taxes, stamp duty, land value tax, etc.
To replace Manufacturer’s Sales Tax [MST]
To improve ‘export ability’ of manufacturers which got hampered due to MST To shift reliance of Revenue Department from direct taxes to indirect taxes
To sustain a lower income tax rate
To ensure uniform tax structure and replace multi-point tax structure by having a single tax point for goods and services
Rate of GST at present 10% 5% 7% 12.5%
Taxable Goods and Services Almost all goods and services except under exempted category Almost all goods and services except under exempted category Local Sales of goods and provision of services including import of goods and services.
Supply of goods and services falling in above category are known as ‘standard rated supplies’ which carry GST at prevalent rate.
Goods include all types of personal and real property, except money.
Services cover everything other than goods or money, eg TV repairs, doctor's services and gardening services.
Taxable goods and services are part of the business or taxable activity.
This means supply or receipt of taxable goods and services for a consideration (money, compensation, reward) but not necessarily for profit.
Goods and Services Not covered/ Exempt Supply of goods or services related to Food, Education, health, child care, religious works, activities of charitable institutions, water, sewage, drainage systems, residential rent, financial supplies provided the services rendered are not of ‘professional’ nature or do not satisfy conditions mentioned in the respective sections of Goods and Services Tax Act, 1999.
Essentials like groceries, residential rent,
Medical services and financial services
Certain exports of goods and services carry 0% GST Zero Rated Supplies- Goods exported and international services
Exempted Supplies – Sales and lease of residential properties and most financial services
Out-of-scope supplies – Goods which are sold but which never enter Singapore Goods and services supplied by businesses that aren't registered for GST, and
exempt supplies such as:
letting or renting a dwelling for use as a private home
interest you receive
donated goods and services sold by a non-profit body, and
certain financial services.
GST IN INDIAN SCENARIO:
Though the details of GST Model suggested by JWG are not known today, following facts are indicative of expected GST Model –
• A ‘Dual structure’ consisting of ‘Federal GST’ and ‘State GST’ which will operate in a parallel fashion.
• Both, Federal and State GST will further be bifurcated into ‘Goods Tax’ and ‘Services Tax’.
• There may be multiple tax rates for goods and single rate for services.
• A consensus between Centre and State would be arrived at for deciding GST rate, which Tax Experts expect to be at 20% approx. Though the rate of 20% GST is high in the International Market compared to other countries, it is lower than the present cumulative rate of indirect taxes viz. almost 25%
• Input Tax Credits will be available for federal as well as state GST.
• GST would be introduced in a phased manner. Budget 2008 is looked upon as a step towards it as it featured reduction in CENVAT rate from 16% to 14% and drop in CST rate by 1%.
GST will replace the multiple indirect taxes prevalent today as shown below:-
GST @20% by integration of Central and State Taxes
Challenges Ahead :
Replacing the existing Indirect Tax Structure by entirely a new model would pose a series of challenges like –
• Ensuring smooth process of phasing out CST, CENVAT, etc. and entry of GST by target date
• Classification of taxable and exempt goods and services and deciding GST rate in line with the International Standards
• Preparing the administrative machinery for levy and collection of GST
• Simplified tax structures with clarity of Points of Tax’ and ‘Tax Credits’
• Creating consumer and supplier awareness before introduction of the new system
• Attaining high technical standards for implementation of GST model with the help of information technology and thereby reducing transaction cost.
Though there are several gray areas of GST Model which will come out in due course, it is a welcome step for having a uniform tax structure and increase India’s global cost competitiveness. The movement towards GST will in no doubt get momentum in coming years. It’s just a matter of time for Government as it needs to Get, Set To implement GST.