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Introduction:

The Goods and Services Tax (GST) is a value added tax that will replace all indirect taxes levied on goods and services by the Government, both Central and States, once it is implemented. The GST is all set to consolidate all State economies. This will be biggest taxation reform since independence that will take place in India. The basic idea is to create a single, cooperative and undivided Indian market to make the economy stronger and powerful. The GST will see a significant breakthrough towards an all-inclusive indirect tax reform in the country.

The most prominent hurdle in introducing this new tax structure has been the struggle between the states and the centre on the loss of revenue. It's taken years to resolve, but even now it is an issue that isn't completely fixed. Nonetheless, the introduction of the Revised Model GST Law seems like the stepping stone towards bringing in the belated GST reform.

Flaws in present structure of indirect taxes in India:

Some major flaws of present structure of indirect taxes in India are listed as follows:

Tax Cascading: Tax cascading occurs under both Centre and State taxes. The most significant contributing factor to tax cascading is the partial coverage by Central and State taxes.

Lack of Uniformity and Rates: Present VAT structure across the States lacks uniformity, which is not restricted only to the rates of tax, but also extends to procedures and, sometimes, to the definitions, computation and exemptions.

Interpretational Issues: Another problem arises in respect of interpretation of various provisions and determining the category of the commodities. We find a significant number of litigation surrounding this issue only. To decide whether an activity is sale or works contract; sale or service, is not free from doubt in many cases.

Complexity in determining the nature of transaction - Sale vs. Service: The distinctions between goods and services found in the Indian Constitution have become more complex. Today, goods, services, and other types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements. Under the current division of taxation powers in the Constitution, neither the Centre nor the States can apply the tax to such bundles in a seamless manner.

Complexities in Administration: Compounding the structural or design deficiencies of each of the taxes is the poor or archaic infrastructure for their administration. Taxpayer services, which are a lynchpin of a successful self-assessment system, are virtually nonexistent or grossly inadequate under both Central and State administrations.

Why does India need GST:

The GST is being introduced not only to get rid of the current patchwork of indirect taxes that are partial and suffer from infirmities, mainly exemptions and multiple rates, but also to improve tax compliance.

The spread of GST in different countries has been one of the most important developments in taxation over the last six decades. Owing to its capacity to raise revenue in the most transparent and neutral manner, more than 150 countries have adopted the GST.

Features of proposed GST:

The features of proposed GST are as follows:

Dual GST: Dual GST signifies that GST will be levied by both the centre and states, on supply of goods and services. Under the constitution, presently the taxing powers are split between the centre and states. Under GST, the power to tax on supply of all goods and services will be vested in the hands of both the centre and the states. Considering the dual taxation power to tax transaction under GST, the structure is referred to as dual GST.

Subsuming almost all indirect taxes: GST should subsume all major indirect taxes levied by the Central Government i.e. central excise, customs and service tax and majority of taxes levied by the State Government i.e. VAT, luxury tax, entertainment tax, etc. The following taxes are subsumed within GST:


Centre Taxes

State Taxes

Excise Duty

State VAT/Sales Tax

Additional duties of Excise

Central Sales Tax

Excise Duty levied under Medicinal and Toiletries Preparation Act

Entertainment Tax (not levied by local bodies)

Additional duties of custom (CVD & SAD)

Luxury Tax

Service Tax

Entry Tax

Surcharges and cesses on central taxes

Surcharges and cesses on state taxes


IGST: Under this model the Centre would levy the IGST which would be approximately CGST plus SGST on all inter-state transactions of taxable goods & services and imports. Inter-state seller would pay IGST on value addition after adjusting IGST, CGST and SGST on purchases. The exporting state would transfer to the state the credit of SGST used on payment of IGST.

Credit Scheme: GST will be levied on supply of goods and services and the dealer will be allowed credit for the GST paid on purchases. The credit would be seamless except that the credit of CGST paid will not be allowed for set-off against SGST payable and vice-versa.

How would this work?


Types of purchases

Local

Interstate

Imported

GST incidence on purchase (taxes payable)

CGST
SGST

IGST

BCD
CGST
SGST

Credit entitled on (with respect to taxes paid)

CGST
SGST

IGST

CGST
SGST


The assessee is required to account for CGST, SGST and IGST separately.

Extent of cross utilization:


Nature of tax paid on purchase

Can be utilized for payment of

CGST

CGST
IGST

SGST

SGST
IGST

IGST

CGST
SGST
IGST


Compensation to states: Due to application of GST some states which are consumer centric like Kerala, Gujarat, Maharashtra, Haryana, Tamil Nadu & Karnataka would get immense benefit.  For the states which will be incurring losses due to implementation of GST, the Centre has promised to compensate the loss for 5 years from its initiation.

The compensation for the first 3 years would be 100% of the revenue shortfall, for the 4th year, it will be 75% and for the fifth year it will be 50% of the revenue losses incurred by states.

Operational Mechanism: At the level of centre-state coordination on policy and implementation, the proposed Article 279A in the Constitutional amendments provides for the creation of a GST Council consisting of Union and State Finance Ministers and other designated functionaries, who will take decisions by majority vote in the manner provided. The role of the Council will be to make recommendations to the centre and the states on, inter alia, exemptions including threshold exemption, rates of tax, date of tax to be levied on petroleum products, special provisions for specified states.

Benefits of GST:

The proposed GST has various benefits which are as follows:

Removes cascading effect: As GST is based on single taxation regime, it will reduce the cascading effect of multiple taxes.

Simpler tax regime: Assessee need not have knowledge of various indirect taxes and therefore it will make tax regime quite simpler.

Development of common national market: When a dealer will get credit for the inter-state purchases, then this system will facilitate the development of common national market and seamless flow of credit across the country.

Abolition of multiple taxes: Presently, a tax is levied on when a finished product moves out from a factory, which is paid by the manufacturer, and it is again levied at the retail outlet when sold.

Increase in GDP: According to the economists, the implementation of GST will boost GDP by 1-2%, which is always a benefit for a developing economy like India.

Reduction in cost for industry: As the industry will have to pay a single tax, it will make their goods and services relatively cheaper, ultimately resulting in increased demand and consumption.

Reduction in administration cost for Govt.: Presently, various indirect taxes department are administered by the union and state governments. But, after the implementation of GST, there will be no need of having so many departments and this will ultimately result in reduction of administration cost for Govt.

Increase in voluntary compliance and revenue collections: GST regime will be much simpler than as of now, so it will encourage voluntary compliance and thus resulting increased revenue collections for government.

Increase in exports: It gives competitive edge in international market for goods and services produced in a country, leading to increased growth.

Economic Growth: As it is neutral to business processes, business models, organization structure, geographic location, product substitutes, it promotes economic efficiency and sustainable long term economic growth.

Issues in implementing GST:

GST Rates: Arriving at appropriate GST rates is the fundamental challenge. According to the revised GST model law, the aggregate rates would likely be 18%.

Threshold levels: A key decision needs to be taken with respect to the threshold of turnover of dealers which would determine the cut-off for inclusion within ambit of GST. AT present various indirect taxes have different threshold levels for exemption, so coming to a common threshold level is still an issue which is to be addressed.

IT Readiness: It is, by now, quite clear that a successful implementation of the dual GST is based on substantive IT capability both at the tax administration level and at the taxpayer level. While efforts are going on to implement an all-India VAT data exchange and validation model called the TINSYS, significant additional investment required in either scaling up this system to cater to the GST or, alternatively, to put in place an entirely independent IT infrastructure to administer the tax.

Constitutional changes: Another fundamental challenge is with regard to the Statute. Evidently, the GST law needs to be written from first principles and the present myriad indirect tax laws such as the Central Excise Act, 1944, the Finance Act, 1994 as well as various State VAT Acts need to be replaced by a new legislation relating to the GST. In addition, various amendments/ modifications to the Constitution would also be required, based on the particular dual GST model that will be finally adopted. This challenge is a formidable one. It is unclear whether enough preparatory work has been done and how soon it can be completed.

Training: Since the dual GST is considerably different from the present indirect tax regime, a massive training initiative would be required at both federal and State levels to familiarize the respective administrations with the concepts and procedures of the dual GST. However, the task is not limited to technical training but also extends to a similar effort made to re-orient the attitude and approach of the tax administration in order to achieve a fundamental change in mindset.

Recent Developments:

  • The GST enrolment process for state VAT dealers has been completed in most of the states.
  • The GST enrolment process for Central Excise and Service Tax registrants has been commenced.
  • The government has set 01/07/2017 as a deadline for the implementation of GST in the country.

Conclusion:

GST is the most logical steps towards the comprehensive indirect tax reform in our country since independence. GST is leviable on all supply of goods and provision of services as well combination thereof. All sectors of economy whether the industry, business including Govt. departments and service sector shall have to bear impact of GST. All sections of economy viz., big, medium, small scale units, intermediaries, importers, exporters, traders, professionals and consumers shall be directly affected by GST. One of the biggest taxation reforms in India - the Goods and Service Tax (GST) is all set to integrate State economies and boost overall growth. GST will create a single, unified Indian market to make the economy stronger. As Finance Minister Mr. Arun Jaitely has said that GST coupled with demonetization's effect can boost economic growth rate of the country. GST is likely to improve tax collections by breaking tax barriers between States and integrating India through a uniform tax rate. Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.

The author can also be reached at diwakarjha4@gmail.com


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Category GST, Other Articles by - CA Diwakar Jha 



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