Implementation of GST is set to be the biggest tax reform hitherto ushered in the country.
GST will be a Destination based Consumption Tax & will cover both intra State and Inter State trade & Commerce. Inter State Sales will be subjected to IGST which is combination of CGST & SGST.
With the original date for its introduction in April 1, 2010, missed due to various reasons, business community is eagerly looking forward to its promised new date of April 1, 2016 & is therefore monitoring all major GST developments that are taking place under new regime.
Of these developments one very important development that has happened is 122nd Constitution Amendment Bill, 2014, which has been tabled by the Central Government before the lower house of Parliament on December 19, 2014. This Bill replaces an earlier bill introduced in 2011 by the erstwhile government which had since lapsed.
This Article discusses scenarios under GST regime in the light of recent developments under following 3 major headings.
A. Broad Features of GST as reflected in the Constitution Amendment Bill and other announcements.
B. Macro Level Implications for Government & Policy makers
C. Implications at Micro Level of an Individual Business Enterprise
Part A Broad Features of GST as reflected in the Constitution Amendment Bill and other announcements.
1. The Bill proposes to replace the current Indirect tax regime consisting of multiplicity of taxes with a single tax. At present the Constitution does not provide for any concurrent taxation powers to the Centre as well as the States for the same subject matter of tax.
2. The Constitution is therefore proposed to be amended for conferring concurrent taxing powers on the Centre & States for levying GST on every transaction of supply of goods or services or both. The GST shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State GST will be levied on all transactions involving supply of goods and services, except for few goods which are kept out of the purview of the GST. Once the new tax system comes into place, there will be three indirect taxes namely Central GST (CGST), State GST (SGST) and Integrated GST (IGST) apart from the customs duty which is levied only on imported goods.
3. The proposed Bill, provides for
A. Subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services.
B. Subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services.
C. Dispensing with the concept of ‘declared goods of special importance’
D. Levy of Integrated GST on inter-State transactions of goods and services.
In the existing system, inter-State transactions of goods are taxable under the Central Sales Tax Act, 1956 with the revenue being collected and retained by the originating State. The tax on CST purchases is not allowed as an input tax credit and hence it distorts the supply chain, cost structure and product pricing.
In the existing system there is no separate levy of service tax on inter-State transactions of services since services are taxed only by the Centre through Finance Act, 1994.
The proposed IGST model involves the following:
i. Centre would levy IGST which would be the aggregate of CGST and SGST rates.
ii. IGST would be levied on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services .
iii. Inter-State dealer will pay IGST after adjusting available, IGST, CGST and SGST on his purchases.
iv, The seller in State-A will pay the IGST to the Centre.
v. While paying IGST the seller will adjust against available credit of IGST, CGST and SGST.
vi. State Government-A will have to transfer the credit of SGST used by the seller for payment of IGST to the Centre.
vii. Buyer in State-B can avail credit of the IGST charged.
viii. Buyer in State-B can use the IGST to discharge output tax liability in his own State.
ix. Centre has to transfer credit of IGST used for payment of SGST to State Government-B.
The model broadly is based on the philosophy that if a State tax (SGST) credit has been used to pay a Central tax (IGST) then the said State will have to transfer the amount of SGST used to the Centre. Similarly, if a Central tax (IGST) credit has been used to pay a State tax (SGST) then the Centre has to transfer the amount of IGST used to the State.
The entire process would be facilitated through a clearing house mechanism.
Every State would be both selling and purchasing State and therefore there would be netting of funds through the clearing house.
The input tax credit chain is uninterrupted and the buyer in another State is in a position to avail credit of the IGST charged by the seller in one State.
The possibility of unutilized credit in a seller State is minimized since the seller would have used the credits available to pay the IGST.
E. Levy of an additional tax on supply of goods, not exceeding one per cent. In the course of inter-State trade or commerce to be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates
F. Conferring concurrent power upon Parliament and the State Legislatures to make laws governing GST
G. Coverage of all goods and services, except alcoholic liquor for human consumption, under GST. In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of GST till a date notified on the recommendation of the GST Council.
H. Compensation to the States for loss of revenue arising on account of implementation of the GST upto a period of five years;
I. Creation of GST Council to examine issues relating to GST and make recommendations to the Union and the States on parameters like rates, exemption list and threshold limits. The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government. It is further provided that every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present wherein the vote of the Central Government shall have a weightage of one-third of the total votes cast, and the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
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