INTRODUCTION
Government of India is very keen to introduce Goods and Service Tax in India from 1st April 2017 and the preparation for the same is in full swing. The Enrolment or Migration of the dealers from the existing Indirect taxes has started in various states. Several meeting of the GST council has taken place in last two or three months to sort out the differences on some of the matters. The Next meeting will be held on 22-23rd Dec 2016 to settle the dispute regarding “Dual Control” on dealers.
Goods and Service Tax is a very important topic these days. The GST constitution amendment Bill is now signed by the Hon. President of India and on 8th Sept 2016 it is published in the office Gazette of Government of India. Now both the Central and States have the constitutional power to introduce Goods and Service tax in the country.
Now both centre and State will pass their respective GST Acts to monitor the CGST (Centre’s GST) and SGST (States’ GST). Further the Centre will have to pass IGST Act also to monitor the Interstate Movement of Goods and Services.
VAT was introduced in all over country in 2006 onwards 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 Centre and State 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 and it is clearly a “Dual GST” in which both state and centre will collect Tax simultaneously on a single transaction of supply of Goods and Services in the form of SGST and SGST and further a mechanism is developed to monitor the interstate Inter-state movement of the Goods in the name of IGST.
First it was referred in 2006 in the Budget speech of the erstwhile Finance Minister Mr. P. Chidambaram 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 a easy task for the lawmakers to introduce GST in our country and now since 2017 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 1st. April 2017 deadline will be met.
As recently the Hon. Finance Minister Mr. Arun Jaitley said that GST is not a Income tax but it is a transaction tax hence it can be introduced on any day between 1st April 2017 to Sept. 16 2017 as stipulated by the Constitution. So the law makers are trying very hard to resolve the “Dual Control” issue to introduce GST within constitutional time Limit
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. Back.
Let us have a Look at the Indian Form GST and latest happenings on GST front in India.
1. ENROLEMENT TO GST STARTED
GSTN is ready for Dealers Migration
The Migration of Existing dealers to the GST portal has started and for this purpose the dates for each state has been declared. The dates for some of the states have already end and for some states the process is going on and other states are waiting. Previously it was declared that the Vat dealers data will be transferred to the GST but later it was decided to get the dealer to dealer individual data to the GST portal. Some of the basic data like Name of Dealer, trade name etc. are automatically transferred to the GSTN with a user ID and Pass word to the dealer and through this pass word and user ID the dealer will have to login to the GSTN to fill the further details and validate it through DSC of E-verification with the help of Aadhar linked Mobile. The dates of Migration of two of the big states Gujarat and Maharashtra is already end and at present the date for Rajasthan, Delhi, UP, Punjab and Haryana is going on.
The dates for other states are already end or going on or they have to wait for their turn to migrate but since no “data” are released for successful migration from any state hence we cannot say how simplified the scheme and process of migration is.
For Service tax dealers the Migration process will start on 1st Jan 2017 and will end on 31st Jan 2017.
2. GST NETWORK - A BIG STEP AD VERY BIG ORGANISATION
GST system and compliance and it’s further process of filing of returns etc. will be totally based on information technology system and this system will work centrally. A Non-profit Making Company in the name of GSTN has been established with the 49% Government holding (24.5% shares by Central and State each) and rest of the 51% shares are held by the Non Government Banking companies Like HDFC, ICICI, LIC Housing etc. The Government of India has sanctioned a Non returning grant of Rs. 321.00 Corers to this company and two of the biggest IT companies Infosys and Wipro are attached with this company to provide IT services.
The success of GST will largely depend on capacity, efficiency and speed of GST Network and certainly it will be a very big organization.
The GST Network Shareholding pattern
- Central Government 24.5%
- State Governments & EC 24.5%
- HDFC 10%
- HDFC Bank 10%
- ICICI Bank 10%
- NSE Strategic Investment Co 10%
- LIC Housing Finance Ltd 11%
3. GST COUNCIL
The GST council is established under the chairmanship of Hon. FM of India and includes the Finance Ministers from various states and Minister of State Department of Finance of Govt of India.
The Constitutional amendment bill on GST has the provision for creation of GST council within 60 days from the date of commencement of GST constitutional amendment bill. This council is considered to be a very powerful institution ever made in India after independence with respect to the decision making power on major economic and strategic policies with respect to Indirect taxation system of the country and it has to recommend on very vital issues on GST viz:-
The Tasks with the GST Council
1. The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax.
2. The goods and services that may be subjected to, or exempted from the goods and services tax.
3. Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply.
4. The threshold limit of turnover below which goods and services may be exempted from goods and services tax.
5. The rates including floor rates with bands of goods and services tax.
6. Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster.
7. Special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.
8. Any other matter relating to the goods and services tax, as the Council may decide.
Everything that is related to the Goods and Service tax including the rates, the exemption list, the threshold limit will be in the hands of GST council so it will be a very powerful body. Further the GST council will also recommend the date on which petroleum products will be brought into the ambit of GST.
Further the GST Council will have to decide about the modalities to resolve disputes arising out of its recommendation. This provision has strengthened the power of the GST council. The GST council yet to be set up hence the modalities will be decided later.
GST council is one of the most powerful bodies ever established in India after independence to monitor the indirect taxation system of the country and in one way experts are comparing this council with the European Union considering the size of our country.
In GST council, practically the centre has the Veto Power considering the system of voting in the GST council. In GST council the centre has 1/3rd voting power and the states have the 2/3rd voting power but the decision of the GST council will require 3/4th Majority and in other words the centre has 33% voting power, states have 67% voting power and the decisions will be taken at 75% votes.
In GST Council, practically the Centre has the Veto Power
Now if we combined all the votes of the states then they will not succeed in taking any decision since they will require the votes of centre to make it 75% hence on all the decisions the centre has the veto power.
Further the ruling party has Governments of their own in most of the states so they can take help of their states in making the centre’s proposed decisions hence in GST council the centre will have more say than states .
4. GST AND DUAL CONTROL: A VITAL QUESTION STILL UNRESOLVED
It is promised that the dealers will pay two taxes under GST i.e. SGST and CGST but their assessment will be done at single place and they will not be kept under dual control and this problem is still unresolved between states and the centre. In last some of the meeting of GST council, official or unofficial, the question of dual control is not resolved.
The centre wants to keep all the IGST dealers and Service Tax dealers and wants to share other dealers on the basis of turnover. It is proposed that dealers up to Rs. 150 Lakhs turnover will be kept by states and over this turnover centre will take care but still the final decision is not taken and a meeting is again called on 22 and 23rd Dec. 2016 to decide the matter.
IS THIS A SINGLE TAX
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 indirect Tax 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 supply of “Goods and Services”.
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 or in other words GST is the final Destination of the VAT. Vat and other state indirect Taxes 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 taxing the “sale of goods” was the sole right of the states and centre was not able to tax the sale of goods .To give power to Central Government to tax the sale of goods the much talked GST amendment bill was there which has given this power to centre. This bill has also given power to states to tax “services” which was the sole right of centre before it.
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. The other factor which is very widely described as reason of introducing the GST is removing the “Cascading effect” i.e. effect of Tax on tax.
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 Lakhs threshold.
Now all the big and small Industries have a pay the same tax so there will be a problem for the Small scale industries while competing with the big Industries.
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.20 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 1.30 crore is very big. At the time of final enactment it may be increased from Rs.20 Lakhs but How Much? It may be 25 Lakhs but there is a Limit of increasing because states will not agree on higher threshold since they are at present taxing at Rs.10 Lakhs and Centre will not agree on having separate threshold for CGST. At present as per the developments and News reports we cannot expect a higher Limit than Rs.20.00 Lakhs.
GST Threshold may be Rs.20 Lakhs Now.
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
There will be no CST in Goods and Service tax 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 last reduction of the CST rates was done w.e.f. 1st. June 2008 but after that the promised reduction and ultimate removal of CST was not done.
There will be no CST in GST
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- “Integrated 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 TRANSACTIONS
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. It is called integrated Goods and Service 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 IGST/CGST/SGST.
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.
Since the concept of Taxation is changed from the sales to Supply of Goods and Services under the GST hence 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 TAX RATE UNDER GST
The centre and states are agreed on four rates on GST 5%, 12%, 18% and 26% and these rates are based on essential character of the Goods. Food grains and related essential food items will be tax free but still the final list of rates and exempted goods is not released. Further it is still not declared that how these rates will be distributed between Centre and the States i.e. SGST and CGST.
The Law makers want to fix a rate or more than one 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% as additional tax for the Interstate sales (Later this 1% was dropped). 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 capita income.
Since the rate wise lists and Exemption Lists are not out yet hence we cannot calculate the average rate of tax and further average rate of tax in case of multiple rate regime can only be calculated by the Lawmakers after collecting the Data of collection of Tax on various commoditized under different rate List and it will not be a easy task now. So instead of Single or two rates we are going for Multiple rate of Tax under GST.
Whatever may be the rate trade industry and consumers will find it too high but even in that case Government will get same or more 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 and it will not be easy to ascertain whether the trade, industry and Consumers will be able to bear 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 will be kept out of GST also. It means state and centre will continue to tax these products which include diesel and petrol also as per the existing system of taxation. No input credit will be available 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 is a conscious and combined decision of centre and state because both are satisfied with the comfortable position of taxation of these goods on old system of taxation though it is widely publicized that states are 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 (In few states at later stage) 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.20 Lakhs (or may be to a slightly higher Limit) under GST.
One thing should be noted here that the Manufacturing states will lose their revenue in the form of CST and further it is said that all the state taxes will go to the consumer states but it should be noted here that the Consumer states are already charging the VAT on the goods which is consumed in their state. So the destination based tax theory will not give any practical gain to the consumer state but in absence of the CST the Manufacturing state will have negative effect on their indirect tax revenue.
11. WILL GST BE IN 2017
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 now the central and states are not agree on one point i.e. on “Dual Control on dealers” hence CGST and IGST bill was not presented in the winter session of Parliament. Further due to Demonetization the states are not sure about state of their economy with the short term effects of Demonetization so they may not be eager for the date 1st. April 2017.
Demonetization may delay the GST
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 by the GST council like dual control of the dealers. The winter session has gone without CGST and IGST bill hence it looks like that GST will take it’s own time.
The Revised Model GST Act, 2016 is now available but final enactment will certainly take time at centre and the state Level and further there is a wider spread news that Trade and Industry also needs some more time to prepare so 1st. April 2017 is not a feasible date hence we can presume 1st April 2018 may be a realistic date or if everything is going fine then GST may be introduced on 1st. Sept, 2017.
Note: The article is last updated on 17/12/2016 and open for correction, if informed any Mistake.
The author can also be reached at Sudhirhalakhandi@gmail.com
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