Helicopter view of GST Model Law - June 2016

​Introduction

The present system of indirect taxation has multiplicity of taxes levied by the Centre and State. This has led to a complex / conflicting principles in indirect tax structure, adding to the multiple compliance and administrative costs. There is no uniformity of tax rates and structure across States. There is cascading of taxes due to ‘tax on tax’. There are too many restrictions on seamless credit available, i.e., No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States.

Goods and Service Tax, which subsumes a large number of Central and State taxes into a single tax, is expected to mitigate the cascading effect of taxes, provide seamless credit and make way for a common market.

Why GST is necessary for India

• GDP Growth Go Up by about 1%
• International Competitiveness by about 5%
• Increased FDI- Already seen
• Common Market- Tax distorted locations
• All those who gain to be part of tax payment
• Lower transaction cost – reduced corruption
• Increased IDT + Direct Tax Revenue

History and Milestone

In 2000, The Vajpayee government set up a committee headed by Mr.Asim Dasgupta, to design a model for GST and oversee IT preparations. It is considered to be a major improvement over the pre-existing central excise duty at the national level and the sales tax system at the state level, the new tax will be a further significant breakthrough and the next logical step towards a comprehensive indirect tax reform in the country.

The Kelkar Task Force on implementation of the FRBM Act, 2003 had pointed out that although the indirect tax policy in India has been steadily progressing in the direction of VAT principle since 1986, the existing system of taxation of goods and services still suffers from many problems and had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle.

GST Concepts

Power to tax GST

Under Article 246A (in the proposed Constitution Amendment Bill), the Parliament has exclusive power to make laws with respect to GST where the supply of goods or services or both take place in the course of inter-state trade or commerce. Subject to the above, every State would have powers to make laws with regard to GST imposed by the Union or that State.

What is GST (Goods and Service Tax)?

GST is a destination based tax and levied at a single point at the time of consumption of goods or services by the ultimate consumer. GST is based on the principle of value added tax. GST law would emphasize on voluntary compliance and on accounts based reporting and monitoring system. It is a comprehensive levy and envisages tax collection on both goods and services at the same rate.

Internationally, GST was first introduced in France and now more than 150 countries have introduced GST. Most of the countries, depending on their own socio-economic formation, have introduced National level GST or Dual GST.

Definition of Good and Service Tax (GST) - The term GST is defined in Article 366 (12A) to mean “any tax on supply of goods or services or both except taxes on supply of the alcoholic liquor for human consumption".   

Thus, all supply of goods or services or both will attract CGST (to be levied by Centre) and SGST (to be levied by State) unless kept out of purview of GST.

There is no requirement of actual sale of goods under GST. The alternative methods of supply of goods could be in the form of:

• sale of goods,
• stock transfer,
• captive consumption in another location,
• supply done on consignment basis,
• supply on job work basis, ( if working under returnable basis- no tax need be paid)
• any other supply such as donation, sample etc.

Structure and type of taxes:

India is proposing to implement dual GST‘. In dual GST regime, all the transactions of goods and services made for a consideration would attract two levies i.e. CGST (Central GST) and SGST (State GST).  

Central Goods and Service Tax (CGST)

The Central GST (CGST) is expected to replace the existing central excise duty and service tax. CGST would also cover sale transaction as all supplies would be liable. The Constitutional Amendment Bill, 2014 contains suitable proposals to enable center to tax sales. CGST would be administered by the Central Government. The Cenvat credit balance available under Cenvat Credit Rules with the manufacture or service provider, as on the date of transition into GST, could be carried forward. The tax paid goods in stock as on date of transition not availed in the past or not eligible at that point of time, available under GST could also be availed and used towards disbursing CGST (Central GST) liability. There could be a time bound transition for carry forward of credit availed prior to GST introduction. The declaration of closing stock as on the date of transition to claim credits, which were not earlier captured, would also be time bound.

State Goods and Service Tax (SGST)

State GST would replace State VAT, Entry tax, Octroi, Luxury tax, Entertainment tax etc. SGST would be levied on services as well. To enable taxing of services by the State, the Constitutional Amendment Bill, 2014 contains suitable proposals. SGST is to be administered by the State Governments. SGST could be at a bit higher rate than CGST as per press reports. The SGST payable could be set off from the SGST credit or the IGST credit available. The closing input VAT balance available under VAT Act would also be made available to the dealer, as on the date of transition into GST, and could be set off towards SGST (State GST) liability. Further it is expected that the duty and tax paid on closing stock would also be available as credit, which may not have been claimed as set off in the VAT regime.

Inter-State Goods and Service Tax (IGST)

IGST (expected to be equal to CGST + SGST) would be levied on all inter-State supplies of goods or services in India where the goods or services are sold or transferred. IGST would be applicable to import of goods or services from outside country as well, which is indicated in the Constitutional Amendment Bill, 2014. Further it is expected that the duty and tax paid on closing stock would also be available as credit, which may not have been claimed as set-off.

Additional Tax at 1%

The 1% additional tax sought to be imposed is a fall out of demands by manufacturing States to be compensated (as a political move) for withdrawal of entry tax/ octroi. This tax is expected to have a short life of couple of years. This tax is only applicable to supply of goods and is origin based similar to erstwhile CST. The State of origin is expected to get such revenue. This tax is not eligible for taking credit i.e. no credit is available on the same. However there should be clarity in law that it would be chargeable only once.

The issue as to whether a transaction is one of goods or service may therefore continue to a limited extent for some more time till this levy is abolished. The Economists have expressed serious concerns about this levy and whether in fact it sullies the effect of GST levy.

May not be there in the law which is passed.

What are the taxes expected to be subsumed and NOT subsumed into GST

State taxes

Central taxes

Broad Principles of GST

Levy and Collection of CGST/SGST (Section 7):

Section 7 sets out that Central/State Goods and Services Tax (CGST/SGST) shall be levied on all intra-State supplies of goods and/or services at the rate specified in the Schedule . . . to this Act and collected in such manner as may be prescribed.(sub-section -1)

It shall be paid by every taxable person in accordance with the provisions of this Act. (Sub-section - 2)

Notwithstanding anything contained in sub-section (2), the Central or a State Government may, on the recommendation of the Council, by notification, specify categories of supply of goods and/or services the tax on which is payable on reverse charge basis and the tax thereon shall be paid by the person receiving such goods and/or services and all the provisions of this Act shall apply to such person as if he is the person liable for paying the tax in relation to such goods and/or services.(sub-section -3)

Composition Levy

On the recommendation of the Council, the proper officer of the Central or a State Government may, subject to such conditions and restrictions as may be prescribed, permit a registered taxable person to pay not less than 1% of the turnover during the year, whose taxable turnover in a financial year does not exceed [fifty lakh of rupees], in lieu of the tax payable by him.

The above mentioned composition levy shall not be granted to a taxable person

• who effects any inter-state supplies of goods and /or services.
• unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.

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 of input tax.

Taxable person

Taxable Person means a person who carries on any business at any place in India /State of ____ and who is registered or required to be registered under Schedule III of this Act:

Following persons are not taxable persons:

• an agriculturist
• a person who is required to be registered under paragraph 1 of Schedule III of this Act is not taxable person until his aggregate turnover in a financial year exceeds [Rs ten lakh]
• a person who is required to be registered under paragraph 1 of Schedule III of this Act shall not be considered as a taxable person until his aggregate turnover in a financial year exceeds [Rs five lakh] [This threshold of 5 lacs will apply only if a taxable person conducts his business in any of the NE States including Sikkim.]
• any person who provides services as an employee to his employer or by any other legal ties creating the relationship of employer and employee as regards working conditions, remunerations and employer’s liability;
•  any person engaged in the business of exclusively supplying goods and/or services that are not liable to tax under this Act;
• any person, liable to pay tax under sub-section (3) of section 7, receiving services of value not exceeding ______ rupees in a year for personal use, other than for use in the course or furtherance of his business.

Meaning and scope of supply (Section 3)

1. Supply includes

a. all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

b. importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

c. a supply specified in Schedule I, made or agreed to be made without a consideration.

2. Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

2A. Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

3. Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—

• (i) a supply of goods and not as a supply of services; or
• (ii) a supply of services and not as a supply of goods; or
• (iii) neither a supply of goods nor a supply of services.

4. Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.

What is movement of goods?

The movement of goods, which are supplied determines the nature of transaction, i.e. whether it is in the nature of inter-state supply or intra-state supply of goods. If the buyer and supplier of goods are in the same State, even then the transaction would be considered as inter-State supply of goods, if the goods move from one State to another as a consequence of contract.

Thus, even if buyer and seller are within the same State, the sale would be considered as inter-State sale, if such sale occasions the movement of goods from one State to another. To illustrate, the buyer may have construction site in another State and may ask the seller to dispatch the goods directly to the site in another State.

What is inter-state and intra-state supply?

When the goods/ services get supplied from one State (say, Pune in Maharashtra) to another (say, Mysore in Karnataka), it is called inter-state supply. When the goods/ services get supplied by a supplier in Karnataka to a customer in Karnataka, it falls under intra-state supply of goods or services. Under GST, the place of supply of goods or services would be determined by applying the Place of Supply Rules.

Classification under GST

The classification of goods is to be done with reference to the broad category as per the GST Tariff Act. In case there is a doubt then the specific coverage within the alternative entries is to be chosen. The Harmonized System of Nomenclature (HSN), issued by the World Customs Organization, Brussels, could be adopted for classification of goods and with respect to services it would be in line with WTO classification. This would integrate Indian trade and industry with global trade even at each State level. Further it would ensure that there is uniformity amongst Union and the States in the matter of classification of goods. Where the entry is not clear or more than one classification appears to be relevant, then reference could be made to the rules of interpretation contained in the HSN to resolve such a conflict.

Where there are still some doubts the decisions of the Courts laying down certain principles (like trade parlance theory, function based classification, ISI glossary etc.) could be referred. Classification of service would probably be based on the service tax definitions as they exist presently as also the provisions as they existed prior to 2012.

Exemptions under GST

The exemptions available to a supplier would depend on the type of product/customer, the way in which orders for goods/services are given, nature of process etc. If the final product/service is being supplied to the end consumer, then exemption should be claimed as the possibility of taking credit is remote.

If the supply were to be to an intermediate product supplier or intermediate service supplier, then availing credit on the inputs and paying duty on the finished goods would be preferable as long as the customer is eligible for credit.

A comparative analysis of the two situations (opting for registration and opting for exemption) would highlight the benefit to the assessee. Even the supplier making very low value addition may find that opting for registration and paying tax is preferable.

 The exemption notification should be interpreted keeping in mind the object and policy of the Government and legislative intent. Further, normally conditions are attached to the exemption notification and these conditions are required to be strictly followed in order to avail the benefit. If there are no conditions specified, then there is no option to avoid availing the exemption, as in the present CE law it is mandatory to avail an unconditional exemption.

As it is there may be very few exemptions under GST law and hence the supplier of goods and services should review their contracts to ensure that taxes are mentioned separately over and above the consideration payable. While participating in Government Tenders (where prices are all inclusive) tax costs (including GST) should be borne in mind to avoid erosion of profits or loss situations. A clause for recovery of differential tax, if any, under GST should be specifically included.

Location based Exemptions

The product or services supplied by a supplier may be so competitive that it cannot bear any duty of excise. In the GST regime, the existing exemptions may be converted into normal payment with cash refunds and no new exemptions would be allowed to ensure that the GST chain continues without a break.

This would avoid the cascading effect of taxes and uphold the true spirit of the legislation. In this regard, it is understood that the Government would take a note of the concerns expressed by such units, so that the specified products are exempt or duty/tax paid is reimbursed. Presently, Income tax and CST benefits are also available in such areas but may not continue for a long time in view of the built in sunset clauses in the relevant legal provisions/notifications.

Registration Decision

The decision for registration as a supplier of goods or service would be made when GST is payable. Then the supplier would have to necessarily register and he would have no other option. For the intermediate goods supplier, it is preferable not to claim the exemption and take the registration from the start of the enterprise to ensure competitiveness due to availability of input credit set off.

The supplier [whether an importer, distributor or retailer] who wishes to pass on the input tax credit in respect of the GST paid on goods traded/imported by him to customers, would be required to register under the GST law. The prescribed accounts and records would have to be maintained by them and they have to issue a proper invoice for the supply of goods and services.

Place of Supply

The place of supply would determine first as to whether the transaction is in India or outside India. If it is outside India it would not be liable to GST.

It would also determine the place of levy. Most transactions are expected to be liable at the rate in the destination. There would be some exceptions in regard to services and a few in regard to goods. We still await the place of supply rules, which has been agreed upon by the States.

Time / Point of Taxation

The point of taxation is the point of supply of goods. In case of service, if the GST levy is coming for the first time, it could be based on the point of taxation rules of service tax. These rules specify that the time or receipt of advance, completion of service or raising of the bill. If overlapping transactions exist then if 2 out the above 3 criterion are in pre GST then earlier law would apply. If 2 out of the 3 post date of GST implementation then GST would be applicable.

Rate of GST – Not prescribed yet

The National Institute of Public Finance and Policy (NIPFP) on the recommendations of Central Board of Excise and Customs (CBEC) has suggested the following rates for goods as well as services:

1. Revenue Neutral Rate (RNR) – 27%
2. Products/ service which are basic necessities – 12%
3. Gold Bullion/ Jewelry – 1%

The opposition has sought an 18% rate cap, which does not appear to be feasible. The Finance Minister has indicated that it may be in between. It is expected that finally it could be in the region of 18- 20 %.

Valuation

GST would be payable on the ‘transaction value’. Transaction value is the price actually paid or payable for the said supply of goods and/or services between un-related parties. The transaction value is also said to include all expenses in relation to sale such as packing, commission etc. Even subsidies linked to supply will be includable. As regards discounts/ incentives, it will form part of ‘transaction value‘, if it is allowed after supply is effected. However, discounts/ incentives given before or at the time of supply will be permissible as deduction from transaction value.

MRP based valuation may not be there.  

The law also provides for Valuation Rules to help determine value in certain cases. The Valuation Rules appear to be drafted by taking few provisions from current Valuation provisions in vague in Excise (for e.g. concept of transaction value‘), Service Tax (for e.g. concept of pure agent‘) and Customs (for e.g. concept of goods of like kind and quality).

Input Tax Credit

Current CENVAT Credit regime disallows CENVAT Credit on various services such as motor vehicle related services, catering services, employee insurance, construction of civil structure etc. Similarly, State VAT laws restrict input tax credit in respect of construction, motor vehicle etc. Current, this denial of credits leads to un-necessary cost burden on assessee.  

It was expected that in GST regime, seamless credit will be allowed to business houses without any denial or any restrictions except say goods / services which are availed for personal use than official use (something similar to Unite Kingdom VAT law).  

However, surprisingly, inter-alia, aforesaid credit would continue to be not available (in respect of both goods or services). Further, credit is proposed to be denied on goods and/or services used for private or personal consumption, to the extent they are so consumed. This continuation of denial will lead to substantial tax cascading (as rate of GST will be higher than the current rate of service tax). Also, another round of litigation as interpretation issues will crop up while determining eligibility or otherwise of GST paid on personal consumptions such as business lunch with clients.  

The credit on the inputs and the input services, pertaining to Central GST, Integrated GST and State GST should be accounted separately. There is likely to be a restriction on cross utilization i.e. credit pertaining to CGST would not be allowed for set-off against SGST and vice versa.  However this restriction would not be applicable to inter-State transactions. Further, the rules for taking and utilization of CGST, IGST and SGST credit would be aligned.  The credit on the capital goods could be aligned with inputs and services and would be available for set off 100% in the first year itself.

Set off of input Credit

The input tax credit could be eligible for set off as under:

1. There should be no restrictions on availment of credit under the GST scheme.
2. The CGST and SGST paid on supply of service to be set off against the output CGST and SGST respectively.
3. When an item is procured for resale, then credit of CGST and SGST is available for all items.
4. When inputs and consumables are procured for the manufacture of goods on which CGST/SGST is paid, then credit of CGST and SGST is available for all items.
5. The IGST should be allowed to be discharged first out of IGST credit, next CGST credit and lastly SGST credit.
6. There would be 33 GST laws in India In GST regime, there will be one CGST law and 31 SGST law for each of the States including two Union Territories and one IGST law governing inter-State supplies of goods and services.

Whether branch transfer liable?

At present, the transfer of goods without payment of CST is permissible when one transfers it to self or agent. This could also be by way of transfer to branch/depot, consignment agent or clearing and forwarding agent.

Under GST, the movement of goods or services from one State to another on  transfer basis would be leviable to IGST [total of CGST+SGST].

The transfer of goods or services within a State would be leviable to SGST and CGST. In both the cases the branch/ consignment agent could avail the credit. A new concept of business vertical within an organisation within a State getting separate registration also exist.

Whether it is Supply in the course of Import?

At present import of goods is leviable to Customs Duties comprising of Basic Customs duty [BCD], Additional duty of customs equal to Excise duty on like goods manufactured in India [CVD], Special Additional duty (SAD). Service tax is leviable on services which are provided from outside India and received in India and payable by the service receiver under reverse charge mechanism.

The import of goods or services would be deemed as inter-State supply of goods or service and be subjected to the levy of Inter-state GST (IGST). The import of goods would continue to attract Basic Customs Duty (BCD) and also IGST.

Whether it is Supply in course of export?

GST would not be charged on goods or services exported from India. In case, the supply of goods or supply of services qualifies as export out of India as per the place of supply rules, the transaction would be zero rated. The supplier would be allowed to export the goods or services without charging any tax, but can avail the CGST/SGST and IGST credits. If they are unable to utilise the credit then they can go for refund of credits.

Return of Supplies of goods/ services:

There could be a provision for permitting to deduct the sale price of all supplies of goods returned by the buyers within the specified period of say 6 months [similar to what is presently available under state VAT laws]. In case of services the provision for re-negotiation of the invoices raised is quite common. GST may allow one to raise such renegotiated invoices.

There could be a similar provision for permitting to adjust the taxes paid on the services against future liabilities in the following circumstances:

1. Where an assessee has issued an invoice, or
2. received any payment,
3. against a service to be provided which is not provided wholly or partially, or
4. where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract,

Alternatively, the assessee should be allowed to take the credit of such excess service tax paid by him, if the assessee.-

a) has refunded the payment or part thereof, so received for the service provided to the person from whom it was received; or

b) has issued a credit note for the value of the service not so provided to the person to whom such an invoice has been issued.

There could also be provision under GST to adjust the excess tax paid on supply of service due to bad debts.

Impact of GST on Trade, manufacture, service:

The GST law in India would be a Dual GST. The Central Government and the State Governments will levy GST concurrently on a common base value. All goods and services, except for a few, would be brought into the GST base. There will be no distinction between goods and services for the purpose of imposition of tax.

• Impact on Traders
• Impact on Manufacturer
• Impact on Service provider
• Impact on consumers
• Impact on Central Government
• Impact on State Government

Impact on Traders:

Tax on value addition: The impact of tax on the wholesaler or retailer would be limited to the value addition. The tax paid at earlier stages (except SGST of other states) would be available as set off for payment of GST on supplies. Therefore traders would prefer to buy/receive supplies with invoice.

Reduce cascading: Cost of products and services would reduce due to the cascading effect of tax being reduced.

SGST levy: SGST would be levied on the local supply of goods within State. IGST (comprised of CGST and SGST) would be levied on interstate supply of goods. CST Act could be abolished in course of time and as a preliminary step the rate of CST could be brought down to 1%. Form C would be abolished under GST law.

No subsequent sale or sale in transit under the CST Act against Forms E-1/2: This exemption as per section 6(2) of the CST Act may not be continued under GST levy.

Stock transfers: Presently, stock transfer is done without charging CST against Form F. Under GST law, stock transfers from one State to other to one’s branch or consignment agent might be treated as inter-State sale and tax levied thereon.

Stock transfers to branches/consignment agents within the State: Under GST, these transfers could also be levied to tax, unless the BIN number of transferor and transferee is same.

Impact on Manufacturers

Competitive in market: There would be a saving in taxes due to less or no restrictions in taking setoff of taxes paid at various stages of manufactures reducing the cost of goods sold. This would make them more competitive both in domestic and international markets.

Valuation of the supply of goods: At present, excise duty is paid on the event of manufacture of excisable goods and VAT on the sale of goods. VAT/CST is computed on sale price+ excise duty paid. With the shift of taxable event from manufacture to supply of goods, the valuation of goods could be simplified. Under GST, actual value received as a consideration for the supply of goods would be subject to GST.

Cheaper exports: The exports would be cheaper as taxes paid at earlier stages could be refunded to higher extent. [ credit restrictions can lead to tax sticking]  

Corruption: The corruption faced by the manufacturers would substantially reduce over a period of time.

Transaction costs: The transaction costs of compliance could reduce due to widespread computerization and online filling and filing of forms/payment of taxes and returns. However the huge need to upload all transactions may lead to the compliance cost for medium sector to rise and for small sector it may not be bearable.

Manufacturers under administration of State VAT officials: Manufacturers having a value of clearances of less than Rs 150 Lakhs are exempted under present Excise law. The States could administer the Central GST of dealers having gross turnover of less than Rs. 1.5 crores.

Impact on Service Providers

Present destination based to consumption based levy: Presently, service tax is levied at origin and is a destination based levy, the burden of which is borne by the end customer. Under GST, they would be taxed at the place of consumption.

Service tax-SGST levied by States: Under GST law, the service tax would be levied not just by Centre but also by the States who would be empowered to levy SGST by amendment to the Constitution of India.

Taxes received by consuming State: If services are rendered from one State to another, then tax would ultimately go to the consuming State.

Impact on the Consumers:

Reduction in price: Generally the purchase price would reduce as tax content of most products would come down. But if a product has evaded tax completely then it may find increase. Further those items which are now taxable where tax rate earlier was zero may be more expensive as exemption and zero rated list of items may come down in the GST regime.

Transparency: The tax paid would be clearly mentioned in the invoice given to the customer.

Options to customer: There would be free trade and commerce between states and throughout the country which would provide more options to the consumer.

Central Government:

Increased collection of CGST and IGST: The collection of taxes-CGST and IGST would increase when more and more assesses register and pay taxes due to simplified tax laws under GST regime.

Loss of CST revenues: The CST which would be reduced to 1% and then gradually removed (may be within 2 years of GST implementation). This maybe dropped in the final law.

Refunds under GST: The refunds which under Central excise and service tax law take long time in coming, could come faster.

Reduce corruption: When the laws are simplified, then the chances of multiple interpretations would reduce, leading to fall in disputes and consequent litigation. Also the automation of the payments/returns filing and other compliances could mean that the interaction between the assessee and the department officers would come down to minimum. This would reduce corruption and increase ethics gradually.

Compensation for loss of revenues to States:  The compensation of loss of tax revenues to the States on account of implementation of GST would be an outgo.

State Government

Proliferation of computerization leading to fall in transaction costs: Due to increase in computerization due to GSTN, the tax administration would be easier and cost of collection would be reduced.

Impact on the country

Increased FDI: The Foreign Direct Investments may flow in an increased manner once GST is implemented as tax laws are one of the reasons foreign Cos are wary of coming to India in addition to high corruption levels. 

Growth in overall revenues: It is estimated that India could get revenues $15 billion pa by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. Over period the dilution of the principles may see that only part of this is accruing actually.

Single point taxation: Uniformity in tax laws leading to single point taxation for supply of goods or services all over India. This increases the tax compliance and more assesses come into tax net.

Simplified tax laws: This reduces litigation and waste of time of the judiciary and the assessee due to frivolous proceedings at various levels of adjudication and appellate authorities. Present law appears ot be much worse and an amalgam of the bad parts of VAT/ ST/ CE.

Increase in exports and employment- GST could also bring raise in employment, promotion of exports and consequently a significant boost in overall economic growth and factors of production-land labour and capital.

Overall Impact

Change in law and procedure: Since it is a major indirect tax reform in India, there would be new legislations and procedures. The entire indirect tax code will be a new one.

Change in tax-rates: The standard rate of 12% for central excise, Service tax, along with residuary rate of VAT at 12.5-14.5% brings the overall rate to 25%-30%. But, post GST, it is likely to be in the range of 22%-27%; a net gain of almost 6%-10%. Most of the dealers and consumers would experience the change in tax rates, either significantly or marginally. When the tax rates are increased it could lead to tax evasion as well.

GST based on HSN: The central excise tariff based classification would no longer be applicable. It will reduce the interpretational issues in respect of class of commodities.

Availment of tax credit: GST will facilitate seamless credit across the entire supply chain and across all States under a common tax base. At present no cross credits are available across central excise/service tax to local VAT/sales tax. Under the GST law, the input tax credit (ITC) (set off) would be given for Central GST against CGST and the States will give input tax credit (ITC) SGST to SGST. Cross-utilization of credit between Central GST and State GST will not be allowed.

Credits availment based on vendors invoices: The credit of excise duty paid is available based on the excise invoice raised by manufacturer or service provider. The credit is available under the Service Tax law when the payment of invoice is made within 3 months of invoice date. In respect of joint charge and reverse charge, based on receipt of payment basis on basis of payment challans of the assessee. Under State VAT law, it is allowable on the basis of tax invoice. Under GST the credits could be availed based on the invoices of vendors under CGST and SGST. But the onus may shift onto the assessee to ensure that the amount of the CGST/SGST has been deposited to the respective Government treasury by the vendor. This is not a legal provision and would be challneged.

Avoidance of Double Taxation: Presently, several transactions suffer VAT as well as Service Tax such as in case of works contract or licensing of software. This could be resolved in GST by redefining what is goods and service.

Changes in the Accounting Software: Dealers and service providers need to modify/replace the accounting and taxation software. Though initially there could be investment costs, costs of training in GST of people at each level starting from junior/mid to higher level managerial staff, management group/stakeholders.

Training: Comprehensive training will be required to the staff members of the business community, both at senior level and also at junior level. Further, the scope of such training should be extended to the marketing personnel, apart from accountants and legal department.

Competent Professionals: There are specialized consultants for Excise Duty, Service Tax and VAT. With the GST, only a single consultant maybe required who can handle all GST matters. Compliance for the SME may necessitate competent tax preparers who are semi qualified.

Amending existing contracts: Assessee has to put a clause to collect CGST and SGST extra as applicable in respect of existing contracts.

Impact on Specific Sector

Impact on Agriculture

1. In India, food items are generally exempt from central excise duty. But many food items, including food grains and cereals, attract State VAT at 4-5%.
2. The exemption under the State VAT laws is restricted to unprocessed food, e.g., fresh fruits and vegetables, meat and eggs, and coarse grains.
3. These items could be subject to tax in GST at a lower rate, which is likely to be 8% (combined GST rate), which, if so, will certainly make these items dearer by 4%.

Impact on Works Contract

Works contracts are composite contracts involving material and labour. The material portion involving the supply of goods is taxable to Value Added Tax (VAT).While the service portion is taxable to service tax. If a new commodity comes into existence, in the process of executing a works contract, then, Central Excise duty may be levied.

Under GST law, works contract could be taxed on gross value with ITC on goods and services being available. It would be considered as a service. More clarity expected.

Impact on Leasing Companies

1. At present, if there is transfer of right to use goods involving transfer of effective control and possession, then it is subject to VAT; otherwise, it is subject to service tax.
2. Under GST it would be a service.

Impact on International Trade

Importers of goods and services may be affected under the GST regime due to -

1. Change in tax rates leading to higher tax incidence when the goods or services are imported into India from outside India.
2. Exports of goods and services shall continue to be zero rated and eligible to claim refund of input tax credit which could be fast tracked.

Impact on Pure sale Land or building

As they already attract stamp duty maybe kept out of GST purview.

Other Impact:

1. There are indications that certain components of petroleum, liquor and tobacco shall be kept outside the GST.
2. At present these products are known as sin goods and are taxable not only at higher rate of tax but also subject to multiple taxes.
3. By excluding these products from GST, its manufacturers would be adversely affected by cascading effect since they could not claim full input tax credit.

Challenges before the Government

Most concerns expressed about the implementation of GST can broadly be divided into three categories –

1. Design issues
2. Operational issues
3. Infrastructure issues.

Design issues

The broad framework of GST is now clear. This is on the lines of the model approved by the Empowered Committee of the State Finance Ministers in much diluted form. The GST law in terms of quality is analysed hereunder;

Is it simple? – No, amalgam of CST, VAT, CE, Customs, stringent rules expected.

Is it certain? – No. Increased uncertainty as drafted by tax officers

Is it fair ? – No. Revenue augmentation/ safety has been focused and business needs have not been addressed

It is transparent? Yes – due to adoption of information technology- process maybe able to keep distance between the tax payer and officers.

The GST will be a dual tax with both Central and State GST component levied on the same base. Thus, all goods and services barring a few exceptions will be brought into the GST base. Importantly, there will be no distinction between goods and services for the purpose of the tax with a common legislation applicable to both.

However, a number of issues remain to be resolved, which are under the consideration of the Empowered Committee. These issues include: -

Constitutional Amendments. Amongst other, significant are:

1. To shift the taxable event in case of excise duty from ‘manufacture’ to ‘sale’.
2. To allow the States to levy tax on services.
3. To authorize the Union Government to impose tax on sale of goods which take place within the State?
4. To authorize States to impose tax on sales of goods which take place in the course of inter-State trade or commerce.

Enactment of Legislations - It has been stated by the Hon’ble Finance Minister in his Budget speech for 2009-10 that the Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively.

GST Rates:

1. Finalizing the rate structure – Separate RNR for Central GST and State GST.
2. Which tax/duty/cess will finally be subsumed in CGST and SGST respectively?
3. How many rates of tax would be there in GST.
4. Finalization of goods and services that will enjoy exemption, such as, food grains, education, health, etc.

Activities which will be exempted and zero rated.

1. Extensive definition of ‘goods’ and ‘services’.
2. Rules of supply for goods and services.
3. Seamless input tax credit removing all cascading effects.
4. Treatment of inter-State transaction of goods and services, determining the taxable event thereof and model of payment and collection of tax.
5. How to broaden the tax base.
6. To determine the threshold limit (basic exemption).
7. Non-Vatable goods and services; and other circumstances when input tax credit would be denied.
8. The framework for exemptions and composition.
9. Future of various existing exemptions under CENVAT and State VAT.
10. Taxation on the sale or purchase of goods declared by Parliament to be of special importance in inter-State trade or commerce, (declared goods) under Article 286(3) of the Constitution of India read with Sections 14 and 15 of the Central Sales Tax Act.
11. The taxes to be charged on Long Duration Projects, say for three-four years.
12. To make Points of Taxation and place of Provision rules, etc.
13. Taxation of imports under GST.

Operational issues

1. Common approach of the States, i.e., a common law, a common assessment procedure and even a common return.
2. Monitoring of inter-State trade, whether to abolish check-posts.
3. Sharing of information using comprehensive IT network.
4. Improving relations between the Centre and the States.

Infrastructural Issues

IT infrastructure - A simple system for inter-State transactions and verification of dealers is essential to ensure tax compliance and check avoidance. Given the volume of such transactions, this system necessarily has to be IT based. The present Tax Information Exchange System (TINXSYS) does not appear to be fully operational across all States. There are asymmetric benefits to States in putting in place such infrastructure and this appears to be affecting their incentives to do so.

Decision on elimination of Check Posts to avoid enormous delays in road traffic, and reducing delivery times for goods.

Impact on Small Enterprises - The impact of GST on small enterprises is often cited a concern. On the State GST component, the position will be exactly the same as under the present VAT regime. There may be three categories of small enterprises in the GST regime:

1. Those below the threshold need not register for the GST.
2. Those between the threshold and composition turnovers might have the option to pay a turnover based tax or opt to join the GST regime. Given the possibilities of input tax credit, not all small enterprise may seek the turnover tax option.
3. The third category of small enterprises above the turnover threshold will need to be within the GST framework.
4. Possible downward changes in the threshold in some States consequent to the introduction of GST may result in obligations being created for some dealers. In such cases suitable provisions could be made to provide direct assistance to the affected small enterprises, if considered desirable.
5. In respect of Central GST, the position is slightly more complex. Small scale units manufacturing specified goods are allowed exemption of excise up to a turnover of Rs 1.5 crore presently. These units, which may be required to register for payment of State GST, may see this as an additional cost.

Harmonization - For GST to be effective there should be identical GST laws across States as well as at the Centre. Moreover, not only the law but also the procedures relating to levy, assessment, collection and appropriation of the GST should be similar across States and the Centre.

There should be a thorough re-engineering of the departments of SGST and the CGST. This is to clearly define the responsibility, accountability and authority of both departments. The day-to-day operations should be assigned to the States. That is the dealers would register and submit their return to the State department where they are located. The dealers should interact with a single tax authority only.

Cross-verification of documents must be strengthened - In the absence of proper cross-verification; the dealers avoid tax payment and claim undue credit for taxable sales. Tax evasion can be prevented by setting up departments similar to centralized and regional anti-evasion organisation in France.

Common procedure for Levy, assessment, collection and appropriation - For industry to reduce the transaction and compliance costs, it is necessary that apart from a common law, implementation of the law be also similar across States. All stages of the taxation chain from the levy of the tax to its assessment, collection and appropriation should be similar. This would involve similar rules across the States dealing not only with assessments, audit, refunds, but also more basic issues, like registration, filing of returns, treatment of transportation of goods etc.

A common dispute resolution mechanism as well as a mechanism for giving advance rulings would further facilitate trade and industry.

Persuasions of the State Government - Few State Governments have recently indicated their opposition to the implementation of GST at the present juncture. While their objections need to be carefully examined, it must also be recognized that while implementation of the GST is aimed at being revenue neutral to the States, it will be budget positive for the Government. This is because Governments are large purchasers in the market for their own consumption and their cost of procurement will come down significantly with the implementation of GST.

Role of the Finance Commission - It is possible that some States may want assurances that existing revenues will be protected when they implement GST. The Commission is willing to consider providing for compensation in order to advance the implementation of a “flawless” GST.

Training - Since the dual GST is considerably different from the present indirect tax regime, a massive training initiative would be required at both federal and State levels to familiarize the respective administrations with the concepts and procedures of the dual GST. However, the task is not limited to technical training but also extends to a similar effort to re-orient the attitude and approach of the tax administration in order to achieve a fundamental change in mindset.

Compensation Package to the States for Losses

Another major challenge before the Government is to finalize the compensation package for the States in case of loss due to implementation of the GST.

State Finance Ministers, at a pre-budget meeting with the then Finance Minister Sh. Pranab Mukherjee, demanded that the Center should compensate States for any loss of revenue following implementation of the GST. Although the Centre is mulling a five -year compensation programme, States are of the view that there should not be any time-frame for compensation scheme.

Under the GST structure, the tax would be collected by the States where the goods or services are consumed, and hence losses could be heavy for the producer States and the Centre would be required to compensate them for loss of revenue.

The Centre had earlier come out with a similar scheme to compensate States for loss of revenue following implementation of value added tax (VAT), which came into effect from April 1, 2005. The compensation structure was 100% in the first year, 75% in the second year and 50% in the third year. Compensation was also provided to the States for loss of revenue due reduction in CST rate from 4% to 2%.

Therefore, it is now universally acknowledged and recognized that the GST, in whatever form, should be introduced at the earliest as a fundamental fiscal reform measure. If we are really serious about the early introduction policy makers, as also the tax administrations at the Federal and State levels, need to be immediately galvanised into action under a clearly laid-out timetable for introduction and implementation.

GST preparedness –The Way Forward

Though, the Government was able to pass the 122nd Constitutional Amendment Bill, 2014 (GST Bill) in Lok Sabha, which will eventually pave the way for Goods and Services Tax (GST) in India, currently the GST Bill is awaiting passage in Rajya Sabha.  

However, the Government‘s determination to introduce GST is palpable from the fact that in the month of October 2015, the Government has placed in the public domain Draft model GST law and four reports on key business processes i.e. registration, payment, refunds and returns in GST regime. From these four reports one can fairly gauge the a broad structure and process in GST regime.

The essence of a GST regime is that it removes the cascading effects of CENVAT and Service tax with set-offs.  Although a transparent and corruption-free tax administration is yet another purpose of this new Act, its implementation may not be without administrative challenges and legal hurdles. It is just   important that in order to accomplish the objectives of such a regime, business entities be prepared. Along with having to comprehend, analyze and comply with the perplexing laws of CGST and IGST, greater challenge could come when each state has its own SGST enactment, which would lead to a multiplicity of the SGST laws and procedures unless all states agree on basic commonalities in the SGST law.

Business entities need to take many actions as part of their preparation. Some of the main actions are listed below: 

Sensitise the business eco-system - It is an accepted fact that GST is not merely a tax change but a business change as it will impact all functions of an organisation such as finance, product pricing, supply chain, information technology, contracts, commercials etc. Thus, it’s imperative that all these functional teams should be aware about the GST. But the underlying question is what should these team members read/ refer for GST? 

In this regard, it’s pertinent to note that most of the key aspects of the proposed GST regime are already in public domain through various such as 

• Draft GST law 
• 122nd Constitutional Amendment Bill, 2014 (‗GST Bill‘) 
• Rajya Sabha Select Committee Report on GST Bill 
• First Discussion Paper (issued by the Empowered Committee) 
• Task Force Report on GST (issued by the 13th Finance Commission)
• Reports on registration, payment, refunds and returns etc.  

Thus, based on the aforesaid knowledge available in public domain the organisation may consider sensitizing its employees.  

The organisation can consider sensitizing its entire business eco-system i.e. not only the employees but also vendors (such as Tier-1, Tier-2 vendors etc.) and key customers of the organisation. An early initiation of training will give the concerned employees, vendors and customers a sense of involvement in discussion much before GST legislation it is put in public domain.  

Understand GST Impact on operations GST may provide opportunities but at the same time it could bring threats. Given this, an organisation may consider carrying out an exercise to identify how its operations will get impacted because of GST.  For GST Impact Analysis exercise, the respective department heads such as finance, supply chain, product pricing, human resource etc. should be involved to ensure that they provide their inputs and suggestions. 

Going one step forward, organisations can also identify possible cost savings which key suppliers / vendors could be entitled to in the proposed GST regime. Based on the possible cost savings to suppliers / vendors, the organisations can have discussion with its vendors for passing of benefits by way of cost reduction in the coming years (i.e. after GST is introduced). Early discussion and engaging with vendors for GST will ensure maximum possible benefit to be passed on to the organisation. 

Organisations will also have to take into consideration the increase (most likely!) or decrease (least likely!) in tax compliances. For most of the organisations, in GST regime, compliances are expected to increase dramatically. Take example of a service tax assessee, who currently files 2 returns on an annual basis. Now, in GST regime, Service tax assessee could be required to file as many as 61 returns (5 returns per month plus 1 annual return)!!! Thus, in human resource department will have to be informed about the GST regime so that they can anticipate the increase (and decrease in certain cases) in the manpower.  

Gear up for transition of Information Technology (IT) systems Information Technology is a key area for business organisations as irrespective of the fact whether the organisation is ready or not, on the very first day GST is introduced, the information technology system of an organisation has to be ready and running else it will bring the entire business to standstill. 

Design Alternate Business Strategies To gear up for GST regime, the organisation may identify alternate efficient business strategies to ensure smooth transition to GST. Even, supply chain strategies is expected to undergo a major change as entire India will become one market and there may not be any tax cost involved for intra-State vis-à-vis inter-State procurement of goods. An organisation will have to re-visit their pricing strategies as business competitors may well reduce prices of their product to pass on the GST benefits.  

However, while forming alternate business strategies, it goes without saying that the organisation should take into consideration the commercial feasibility of alternate business strategies before these strategies are recommended. 

Make representation before the Government

Introduction of GST regime could affect negatively (than positively!) to few industries/ sectors.  Thus, efforts should be made by the organisation to identify the possible issues for which appropriate representation could be made before the Government though various trade chambers and forums. 

Given this, while current economic situation is characterised by volatile economic conditions, introduction of GST remains a ray of hope, thus early initiation of aforesaid steps can surely help the organisations gain most of the proposed GST regime. 

1. Thorough reading of the GST law draft to pre-empt the possible consequences on one’s business
2. Assessing the manner and quantum of input credit as available under law.
3. Evaluation of the competitiveness and the demand for the products in the backdrop of the new GST rate structure to ensure that products are neither overpriced nor under priced
4. Preparation of procedures/SOPs to be followed in the organization
5. Special attention to :

• Registrations – existing migrants as well as new applicants
• Records to be updated up to the authorized date and necessary amendments/additions/deletions to be made in records for meeting the requirements of the new law
• Transition requirements
• Returns to correctly reflect the details of business e.g. Cenvat credit as reflected in the return for the period ending 31 March, 2017, would only be allowed to be carried forward post the authorized date
• Inventory check and proper recording
• Development of IT infrastructure to support the GST requirements
• Analysing the MIS reports that would be required post GST implementation
• Analyzing impact of other laws and integration with customs and FTP

Spreading of GST awareness / Trainings:

To ensure that the transition is smooth and effected in a timely and effective manner, spreading of adequate awareness of GST is a must. Regular workshops and training programs need to be conducted in order to understand the applicability of GST provisions vis-a-vis the existing business of a person/organization. The following steps could be taken in this case:

• Start focused reading/ practice in CST/ VAT, Central Excise or Service Tax now!!
• Use online resources – Google GST, caclubindia, yahoo CA groups, taxindiaonline, linked in.
• Form a small group for GST in your area, meet regularly to understand the latest developments.
• Make yourself ready before GST is implemented to add value to your organization / clients.
• Read books/ attend workshops/ seminars on topic

Conclusion:

This article has looked at the GST Model Law as it is on a broad basis without getting into the details. It is not an in depth analysis of the model law. It is expected that the many rough edges of this law would be addressed based on representations being made from trade industry and professional bodies. It is the view of the paper writer that unless major amendments moving towards Simplicity( clarity), Certainty, Fairness and Transparencies are introduced- this GST law will fail and there would be widespread non compliance and dis content other than dozens of legal challenges which would not be in the interest of the Government or the tax payer. If GST fails it would be disastrous for India as a country and a major set back for tax reforms process.

The author can also be reached at  madhukar@hiregange.com.

We have adapted this article from the CCH Publication Goods & Service Tax – A Primer – 2015. Authored by CA Madhukar N Hiregange & Adv .Naveen Kumar K.S. Acknowledgements to CA Prakash N for the collation.