The Goods and Services Tax (GST) promises to bring a single unified tax regime for India. But what exactly does a single unified tax regime mean and why is this better than what exists today.
The current situation is there are different taxes for different activities:
Figure 1 Different tax for different activities
Each of these taxes will apply to different items sold and purchased, at different points in the supply chain and be paid by different parties. This leads to a situation where you can have certain items taxed under two taxes which increases the cost. An example of this is off the shelf software which can attract value added tax and service tax, which can push up the cost of the software. Also, as the rules are not clear on how to apply the taxes to the sale of software this leads difficulties for businesses because there is not a standard rule to apply, and in an abundance of caution businesses will apply VAT and Service Tax.
Now let’s consider how this would work under the GST. Under the proposed Model Law, if the service purchased over the internet and is supplied to a business located in Madhya Pradesh from a software company located in Karnataka then the treatment of the supply would be IGST.
The word ‘supply’ is the next big change because it is a concept which integrates goods and services together and helps to paint the picture of how broad the GST, which is a very long section and includes two schedules of the GST law. But what comes from this is that now any type of item will be taxed under the GST, there is not a concern like above with the software if it should be VAT or Service Tax. Rather it will always be subject to the GST or it won’t be subject to the GST.
The impact on an enterprise with the GST can be quite significant because GST will make it easier for enterprises to figure out what tax it will pay and collect for its transactions. Once GST comes in place, a business will worry about tracking how much GST it pays and how much GST it collects rather than how much VAT, Excise, Service Tax and other taxes it looks at.
India’s GST will be different than other GST regimes globally. If we compare the GST in India to other countries some major differences appear.
First, in terms of rates, India will have items that will be exempt, zero-rated, 5%, 12%, 18% and 28%. Finally some of the items at 28% will have a cess placed on them as well. In contrast, most countries which have VAT or GST have items which are exempt, zero-rated, a reduced rate and then a standard rate. This means an enterprise must do more in terms of tracking and validation for supplies they provide and receive to ensure the correct rate is charged.
Second, there will be multiple components to the GST: CGST, SGST and IGST. Each of these components represents different portions of the GST. CGST is the portion reserved for the Central Government, SGST is the portion reserved for the State Government and IGST will apply to imports, exports and all interstate transactions. When a business makes a sale, it will need to figure out which of these components applies. The components will be tracked separately because the input tax credits can only be utilized against certain components, for example, CGST can be offset against CGST and then IGST not SGST.
Figure 2 Input tax Credit
Is it SGST and CGST or is it IGST? The way this works is to figure out of the transaction is interstate or intrastate.
Third, understanding how the components are determined requires a business understanding of a concept called place of supply. Place of supply rules tell a business where an item is to be taxed. One advantage under GST is that the place of supply rules for goods and services are now the same across the country but this means that every business needs to understand how place of supply can impact their business. So, depending on your business you need to understand what the place of supply rules are so you can charge the correct components of the GST. Sometimes the place of supply rules change if the transactions is to a consumer or if it is to a business. This means that enterprises need to keep up to date with the status of their customers, for example, who is a consumer and who is a business because the data requirements are different between the two types of businesses.
Figure 3 Interstate & Intrastate transactions
Fourth, compliance will dramatically differ under the GST because all businesses file returns electronically and upload transactional data. After the data is uploaded businesses will reconcile the uploaded data against data they have generated and collected from counter-parties. This activity will be the basis of allowing the input credits for purchases to be claimed so businesses. Remember from above there are specific rules for tax credits can be utilized, so it is not as in other countries where output tax can be offset against input tax.
The GST is a change for enterprises because it introduces a complete overhaul of the tax rules and returns. Overall, this is a net benefit for businesses because it creates a single set of rules for the sale of goods and services and creates a single tax regime. Also, it removes the cascading impacts of tax on the sale of interstate goods which will simplify distribution chains nationally. Businesses which report data on a timely and accurate basis will see their net costs decrease and they will gain customers. Businesses which attempt to avoid the taxes will see their costs rise and eventually this will transform many sectors and improve transparency across the country. As more businesses pay taxes on time there will be a lower incidence of tax fraud and rates could decrease more.
GST is a positive change and to realize the full potential of the GST, a business must make tax part of its sales and purchases. Using tax compliance and determination solutions will improve the quality of your tax data which will speed up compliance, saving you time and money.
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