Goods and Service Tax is a very important topic these days. The GST constitution amendment Bill is Now passed by both the Houses of Parliament. Now it will be presented in the State Legislative Assemblies for its approval by simple majority since it is required that before sending it to the President of India it has to be ratified by at least half of the state assemblies. After that Both centre and State will pass their respective GST Acts to monitor the CGST (Centre’s GST) and SGST (States’ GST).
Vat was introduced in all over country in 2006 and GST is the logical conclusion of the successful introduction and imposition of Value added Tax in India. In its standard format GST is a single tax replacing all the indirect taxes and collected by a single authority but in our country the system of Governance is Federal and both centre and states have the power to collect indirect taxes in one form or another. Hence a formula is developed to introduce a compromised GST with the consent of the States hence we can call it Indian format of GST.
First it was referred in 2006 in the Budget speech of the FM that GST will be introduced in India from 1st. April 2010 but later for one or other reasons it was postponed from year to year and it is evident from this delay that it is not easy for the lawmakers to introduce GST in our country and now since 2016 is declared as GST introduction year, let us see what is Indian format of the GST and further what is the basic characteristics of India GST , the problems associated with it and further what is the possibility that the 2016 deadline will be met.
We are not sure whether Success of GST will boost the Indian economy or not but certainly a failure of GST will make a very big dent in the Indian Economy. So lawmakers should be cautious about this fact because once GST is imposed it will be very difficult to roll it back.
1. IS THIS A SINGLE TAX
The Answer is No.
The proposed GST in India is a dual tax.
The reference of GST was first made in Indian Budget in 2006 by Mr. P Chidambaram as a single centralized indirectTax in which tax is to be collected by centre and then it is to be distributed between centre and States. This was the standard format of Goods and service Tax.
In our country states have also right to collect indirect taxes on sale of goods hence this “single centralized” form of GST was rejected by the states at the initial stage itself.
Hence a compromise is made on Dual GST in this respect in which both states and centre will impose and collect tax on a single transaction of sale and service in the form of State Goods and service tax "SGST" and Central Goods and service tax "CGST".
Hence this Compromised format of Dual GST is going to be introduced in our country.
EXAMPLE OF DUAL FORMAT OF GST
If X of Mumbai sells Goods to Y of Mumbai for Rs. 10 Lakhs and suppose the rate of Tax under SGST is 8% and CGST is also 10% then X will collect and deposit Rs. 80000.00 Lakhs as SGCT and Rs.1.00 Lakhs as CGST from Y.
If Y of Mumbai sells the same Goods to Z of Mumbai for Rs. 10.50 Lakhs then he will collect a sum of Rs. 84000.00 as SGST and Rs. 1.05 as the CGST. Now he will deposit Rs. 4000.00 as SGST (Rs. 84000.00 collected from Z – Rs.80000.00 input credit from his purchases from X) and Rs. 5000.00 as CGST (Rs.1.05 Collected from Z – Rs. 1.00 Lakhs input credit from his purchases from X).
Now you can cross check the total tax collected by State is Rs. 84000.00 i.e. 8% of Rs. 10.50 Lakhs and by centre is Rs. 1.05 Lakhs i.e. 10% of Rs. 10.50 Lakhs because Rs. 10.50 Lakhs is the cost to the consumer and he has paid Rs.84000.00 as SGST and Rs. 1.05 as CGST which was collected and deposited by X and Y at different stages of sales. It is also clear from this example that the input credit of SGST can be taken against the SGST and input credit of CGST can be taken against the CGST and total tax burden on the consumer is Rs. 189000.00 even though the sale is within the state. Inter-head adjustment is not permissible.
The system will be applicable on all the sales and supply of Goods and Services.
2. CONSTITUTIONAL AMENDMENT AND GST
A constitutional amendment bill with respect to the GST is introduced and Passed in both the Houses of Parliament i.e. in Lok Sabha and Rajya Sabha recently and this is the first concrete step form the Government side regarding introduction of the Goods and Service Tax in India. Let us fist see why this constitutional amendment is required and how it will finally be cleared and it will give power to centre and States to impose GST in India.
Goods and Service Tax is practically an extension of the Existing VAT system in which both the centre and state will charge indirect tax on Goods and Services. At present central Government has the power to tax goods up to the stage of manufacturing in the form of Central Excise and further has the power to tax services in the form of Service Tax.
States have the power to tax Goods up to the stage of sales but do not have the power to tax the services hence constitutional amendments is required to give powers to the central Government to tax goods up to the stage of sale and further to give powers to states to tax services.
It is cleared from both the Houses of Parliament as mentioned above and this amendment has to be ratified by 50% of the total numbers of the state assemblies. This ratification by the state assemblies is required before sending the bill to the president for assent.
After clearance of GST constitutional amendment bill both centre and states will pass their GST Acts respectively. All the states have to pass their own GST Acts for which a Model Draft of GST Act have been prepared by the Empowered committee of the state finance Ministers and getting suggestions from respective stakeholders the final Acts will be enacted.
3. STATE VAT AND GST
What will be effect of GST on the State VAT because in all the states VAT as a state tax is in operation .VAT was introduced in our country in 2005 and 2006 in almost all the states and Goods and Service Tax is the logical extension of the VAT. Vat will be converted in SGST along with taxing the Services at the state level and it will be called “State Goods and Service tax”-SGST.
Practically all the state indirect taxes will be covered by GST and will be merged with SGST. At present all the states are covered by VAT hence it they will not have any procedural problem in converting the VAT into SGST including the tax on services by the states. Practically the State VAT Departments will be changed to “State Goods and Service Tax Department”.
4. CENTRAL EXICISE AND GST
Central excise is a very important indirect tax in the country and it is a central tax .It is applicable on the manufacturing stage of the goods and in GST regime it will be scrapped and CGST will come into force which is destination based tax on selling stage. It means all the dealers (not involved in Manufacturing activities ) will have to pay this central tax in the name of CGST.
Here at present taxing the “sale of goods” is sole right of the states and centre cannot tax the sale of goods .To give power to Central Government to tax the sale of goods the much talked GST amendment bill is there which we have already discussed above. This bill will also give power to states to tax services which at present are taxed by the centre only.
Here One point should be kept in mind that there was a certain question in the mind of our Lawmakers since inception of Central Excise that why central Government is taxing the Goods up to the stage of Manufacturing instead of Stage of sale hence they have selected GST to tax the “Sale of Goods” in the form of CGST by the Central Government as the answer of this question.
Since the Central Excise is payable up to the stage of Manufacturing hence Traders are not liable to pay it but since CGST will be payable up to the stage of Sale hence now all the traders will be covered by Central Indirect system. At present the dealers who are only paying VAT will now have to pay central Tax i.e. CGST the “Central Goods and Service Tax”.
Further there is a threshold limit of Rs.150 Lakhs in Central Excise but in GST it will be reduced drastically so it will also give boost to the Central Government’s revenue from the Central Indirect tax system but it will create a problem to Small scale Industries who are at present not paying Central Excise due to this Rs.150.00 Lakh threshold.
Now all the big and small Industries have a pay the same tax.
5. THRESHOLD LIMIT UNDER GST
Threshold Limit Under GST-The threshold limit under central excise is 1.50 Crore and in service tax it is Rs.10 Lakhs. Further in case of Vat the limit in most of the states is also Rs.10 Lakhs but in some of the states it is still Rs. 5 Lakhs. Now the question is what will be the minimum limit of turnover where dealers will start paying tax and this is called threshold limit and how much it has importance under GST At present, as per News reports, the proposed threshold limit under GST is Rs.10 Lakhs under both the formats i.e. SGST and CGST though there was a demand of higher Threshold for CGST considering the present central excise limit of 1.50 Crores but accepting that will hamper the centre's plan to generate expected revenue under GST since the gap of 1.40 crore is very big. At the time of final enactment It may be increased from Rs.10 Lakhs but How Much? It may be 15 Lakhs or 20 Lakhs but there is a Limit of increasing because states will not agree on higher threshold because they are at present taxing at Rs.10 Lakhs and Centre will not agree on having separate threshold for CGST.
Generally it is called that GST will make a financially strong Centre than state and this is based on two reasons. First is threshold and second one is the fact that now centre will get the tax up to selling stage instead of manufacturing stage which it is getting under Central Excise.
6. CENTRAL SALES TAX ACT AND GST
When Vat was introduced in India in 2006 the CST was considered as the biggest hurdle and it was promised that CST will be reduced by 1% every year and ultimately it will be abolished. After reducing from 4 to 3 and 3 to 2% this promise was not followed and since last several years it is there with 2%. The practical problems attached with “C forms” are the result of this broken promise. Here it should be noted that the collection from CST i.e. tax on interstate sales is the part of revenue of the supplier stage or Manufacturer stage.
Now what will happen with CST in GST may be a question. In GST there will be no place for CST hence manufacturing states which are generating huge revenue in this respect will lose the same. There will be a mechanism in GST to control the trade between two states and that mechanism will be called IGST- Interstate Goods and Service Tax and through this mechanism ultimate tax will go to the consumer state. IGST will not be a another (Third Tax) but it will be a complex mechanism that will ensure that one part of tax is received by Centre and other part of tax to consumer state and that will make GST a perfect destination based tax.
Now the revenue loss of the states will have to be compensated by the Central Government.
7. IGST MODEL TO MONITOR INTERSTATE TRANACTIONS
A new model is developed under proposed GST to monitor the interstate trade of Goods and Services and this is called IGST. Let me clear first thing it will not replace the existing CST and there will be long awaited goodbye to Central Sales Tax in the GST regime.
Now it should also be noted that IGST will not be a Tax in addition to the SGST and CGST so one should not be presumed that IGST is a third tax on the consumers but it is only a mechanism to monitor the interstate trade of Goods and services and further to ensure that the ultimate SGST is gone to the consumer state since the GST is a destination based tax.
Let us try to understand this IGST mechanism step by step:-
1. Dealer of the selling state will collect IGST from the purchaser on Interstate Transaction and the rate of IGST will be the combined rate of SGST and CGST, Say if the rate of SGST is 8% and CGST is 10% then the rate of IGST will be 18%.
2. While depositing the IGST the seller will take credit of SGST and CGST paid by him on purchase of such Goods or services within the state.
3. The selling state will transfer the amount of input credit of SGST taken by the selling dealer against the IGST to the centre. This will ensure that selling state will not get any revenue out of this transaction.
4. The interstate buyer shall take credit of IGST against his liability of SGST / CGST or IGST. For this purpose the total amount of IGST will be bifurcated in two parts SGST and CGST.
5. Now come to the mechanism of transferring the SGST to the consumer state in which the central agency will transfer the amount of input credit of IGST used by selling dealer of consumer state while paying his liability of SGST.
This whole mechanism will be known as a system of monitoring the interstate trade of Goods and services and will be called IGST. It is interstate Goods and service tax and also mentioned as integrated Goods and service tax in the discussion paper issued by the Empowered committee of the state Finance Ministers.
The Branch and stock transfer will also be governed with this model.
The IGST will not increase the taxation cost since it is only a Mechanism to monitor the Interstate movement of Goods but certainly it will increase the compliance cost of the dealers.
8. THE INPORTANCE OF RNR- REVENUE NEUTRAL RATE
The basic question which generally asked in case of GST is that what will be the rate of tax. There will be two rates. One for states i.e. rate of SGST and second one is for centre i.e. rate of CGST.
The Law makers want to fix a rate where Government can get at least the same tax which both states and centre are getting under the present set up i.e. under VAT/CENTRAL EXCISE/SERVICE TAX etc.
This is called RNR and getting exact that rate is practically very difficult since multiplicity of taxes and cascading effect will not be there under GST.
At the initial stage of discussion on RNR there was a talk of about 27% and it was for 12% for states and 14% for centre then it comes to 24% and 1% for the CST. It was 27% and was very much high compared to other GST countries. The average rate of GST/VAT worldwide is 16% to 17%. Further the nations having 20% or more GST rate have 30 Times more per capita income than Indian per capital income.
Now the Hon. Finance Minister is saying that the rate will be 18% or less so it is clear that our lawmakers have very vague idea about the rate of GST and continuously changing their stand on it. The GST council which will be established as per the provisions of the GST constitution Bill will decide the final rate of tax as per their discussion and decision power. .
Whatever may be the rate trade industry and consumers will find it too high but even in that case Government will get same revenue, it is uncertain. The rate of tax will play a major role in the success of GST but it will not be easy task for lawmakers to ascertain and fix it.
9. GST AND PETROLEUM PRODUCTS
The petroleum products were kept out of the scheme of VAT and it is likely or you may take it sure that these were kept out of GST also. It means state and centre will continue to tax these products which includes diesel and petrol also as per the existing system of taxation .No input credit will be received on the tax paid on these products and further these products will not get any input credit for goods and services used by them The decision to keep petroleum products out of GST will be conscious and combined decision of centre and state though it is widely publicized that states are more keener on it.
In GST constitutional amendment bill it is mentioned that Petroleum products will be taken under GST as per the recommendations of the GST Council but this is a very remote possibility that GST council comprising of Central Finance Minister and Finance Ministers of various states will ever recommend these product to be taxed under GST.
The tax in form petroleum products in the form of Central excise and Vat constitute a major part of indirect tax collections of centre and states and both of them don't want to disturb this favorable equation and if this will happen then it will further distort the already compromised and distorted format of Indian Dual GST .
10. WHY CENTRE IS SO EAGER ON GST
State VAT was imposed throughout India in 2006 and at that time Centre and State were on the same side of the table under the leadership of Empowered Committee of State Finance Ministers. In terms of state revenue VAT was considered as Highly Successful. GST is the next step and centre is very keen on it instead of states. Why? The reason is very clear but not widely discussed. States are not clear about revenue generation from GST but see there is one point which is sure that centre will certainly get higher revenue from the GST.See at present the central indirect tax is collected in the form of Central excise and it is chargeable on manufacturing stage but in GST it will be replaced by CGST which will chargeable up to last selling stage. That will be a biggest boost to central revenue.Further at present the threshold for central excise is Rs.150 Lakhs which will be reduced to Rs.10 Lakhs (or may be to a slightly higher Limit) under GST.
These two points are the main reasons why centre is so keen on GST.
11. WILL GST BE IN 2017
No, the probable date may be 1st April 2018.
We have been promised in 2006 that GST will be introduced in 2010 but after that GST was extended from year to year. Now it is declared that GST will be introduced in 2017 but till date the constitution bill is only cleared from the parliament and it is still to be ratified from the half of the state assemblies. This will be first step towards introduction of the GST in India.
After that Goods and service Tax acts and rules are to be framed by the centre and each of the states. Some time will also be required for sorting out some of the issues still to be settled between the states and the centre. GST council whatever may be the mechanism has to settle some important matter like rate of Tax, Exemption List, dual jurisdiction on the dealers etc.
The Model GST Act, 2016 is now available but final enactment will certainly take time at centre and the state Level so 1st. April 2017 is not a feasible date hence we can presume 1st April 2018 may be a realistic date.
The author can also be reached at Sudhirhalakhandi@gmail.com