Bird eye view of Goods and Services Tax (GST) in India

Introduction:

Presently under the existing taxation system for indirect taxes, number of indirect taxes are being levied and collected both from Central Government and State Governments on different activities undertaken.

Taking a cue from international best tax practices, and to ease out the complications and compliances under different indirect taxation laws and different statutory authorities, thought process was started to consolidate number of taxes into one system of taxation uniformly across the county.

In that direction reforms were thought of many times and partial reforms were being undertaken in the respective taxation laws. The move towards introduction of Goods and Services Tax (GST) was made by the then Finance Minister Mr. P. Chidambaram in 2007-08 budget to introduce GST from 2010.

Though lot of effort went into it, towards latter part of 2016, we are still in the first technical step in the implementation process i.e. amendment of Constitution of India.

This article discusses the proposed model for expected GST as is mooted by the GST Constitution Amendment Bill and proposed GST law released for public comments.

Present Taxes:

Presently State Government are levying and/or collecting taxes such as sales tax called as VAT, entry tax, Entertainment Tax, Luxury Tax etc. Similarly Union Government is levying and collecting taxes such as Central Excise Duty, Service Tax, Additional Customs Duty and various types of cesses in the nature of Excise duties. Among them the major types of taxes on business transactions can be tabulated as follows:

Proposed GST Model:

Now 122nd Constitution Amendment Bill, 2014 is passed in the parliament containing proposed changes in the Constitution related to GST implementation. The highlight of the changes considering, GST model is expected to be as follows:

a) There will be three types of Tax as follows:

b) In other words going by the types of transactions –

c) There will be mechanism between the State Government and Central Government for distribution of the IGST collected by Centre as per the recommendation by GST council (constitutional body to be created after amendment to constitution). From the business entity perspective this may not have direct implications.

d) Following are the Central tax/levies to be subsumed in GST –

i. Central Excise Duty;
ii. Additional Excise Duties;
iii. The excise Duty levied under the Medicinal and Toiletries Preparation Act;
iv. Service Tax;
v. Additional Customs Duty, commonly known as Countervailing Duty (CVD);
vi. Special Additional Duty of Customs – 4% (SAD);
vii. Central Sales Tax (Collected by States)
viii. Surcharges; and
ix. Cesses.

e) Similarly following State taxes and levies to be subsumed

i. VAT/Sales tax;
ii. Entertainment tax (unless it is levied by the local bodies);
iii. Luxury tax;
iv. Taxes on lottery, betting and gambling;
v. State Cesses and Surcharges in so far as they relate to supply of goods and services;
vi. Entry tax.

f) The levy of GST will be based on supply of goods, or of services, or both. This will replace the concept of sale of goods or provision of service by the concept of ‘Supply’.

GST related to Specific Products:

Though GST is to consolidate tax code on all products considering various political aspects of our country, certain specific products are dealt separately. The highlights of the same are as follows:

a) Manufacture of alcoholic beverages for human consumption are kept out of GST. State Excise duty would continued to be levied by the respective state Government.

b) On the other hand on Tobacco and Tobacco products Central Government would continue to levy Central Excise Duty (or under some other name) in addition to GST.

c) Levy of GST on Petroleum products are postponed till that time the GST council recommends for its inclusion in GST. Till then States would continue to levy Sales tax and Centre would continue to levy Central Excise duty. The products are as follows :–

i. Crude petroleum;
ii. Diesel;
iii. Petrol;
iv. Natural gas; and
v. aviation turbine fuel

Set off / Adjustment/ Credit:

Main objective of the GST scheme is to avoid double taxation and cascading effect of different taxes levied by states and centre. Therefore it becomes essential that set off / adjustment / credit of all taxes paid on both goods and services which are received is available to be used against the liability to be paid on goods and services supplied.

However such seamless credit set off/adjustment/credit does not seem to be envisaged. Detailing and restrictions may be given in the law framed in this regard. As per the present understanding it is proposed to be in following manner broadly.

Enactment of Laws Governing GST:

As per the proposed scheme law for levy of CGST and IGST will be formulated by Parliament for levy and collection of CGST and IGST respectively. The tax also will be levied and collected by the Central Government. There will be common enactment for entire country.

As regards to levy of SGST each state is going to enact law for the respective states based on the model law formulated by GST council. The levy and collection will be by the respective state Governments. This may create issues of disparities between transactions happening in different states.

Rate of GST and threshold exemption limit:

One of the essential aspect of GST is rate of GST. As per the present status this is not yet finalized and to be decided in GST Council and the rate (both SGST & CGST together or IGST as the case may be) is being expected to be following manner-

- General Rate - between 18% to 20%.
- Concessional Rate – around 12%
- Precious Metals – between 2% to 6%

As regards to threshold exemption limit, as per the model GST law it is stated to be 10Lakhs on all India basis.

Composition Scheme:

For the person who has taxable turnover equal or less than fifty lakhs is proposed to be given a Composition scheme wherein the composition tax rate as is fixed based on the recommendation of GST Council will have to be paid instead of regular rate of tax.

The rate is expected to be between 1% to 4%.

The scheme will be subject to conditions which the law will provide for the same.

Taxable person who effects any inter-state supplies of goods and /or services is not entitled for composition scheme. Further it is said that a person having business in different places and separately registered all of them should opt for composition scheme.

In other words a person cannot be in composition in one registration and outside in another registration.

A taxable person who pays tax under composition levy shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit

Registration:

Registration has to be obtained state-wise and not on all India basis. However within a state if there is separate business vertical option is given to register the same separately.

The taxability is determined based on registration treating them as separate entity for supply of goods/services.

Separate registration will be accorded by State Government and Central Government in each state, with mutual co-ordination among them.

Records and Returns:

The records though to be maintained as per the needs of the business, since GST is going to be technology based, all the transactions relating to GST is required to be uploaded into GST portal on periodical basis.

Further also there is requirement of matching of credits to the suppliers output tax to get the benefit of credit, otherwise of which the credit will be denied. Further also it is proposed that the credit will not be permissible unless the vendor deposits appropriate taxes into Government Exchequer. This will add difficulties in business since they have to ensure compliance of their vendor to get the benefit of credit.

Conclusion:

The implementation of GST is expected to be from April 2017. More important, from the businessman and consumer perspective, this change is going to have substantial impact on the business as well cost to consumers depending upon the structure of the business and location of business and consumer. Therefore it becomes essential to re-look into structure the business and location depending upon the assessment of implication of GST on each type of transactions.

The impact analysis and planning for restructuring can be done only after the rates are finalized.

Further, the manner in which the draft law is proposed it seems that only the interest of revenue has been taken care giving go bye to the concept of ‘ease of doing business’.

Click here to view an analysis on 'Roadmap to GST Implementation'