Salient Features of GST

GST is a consumption based levy. Destination principle would be applicable in normal course. In an ideal GST, all the credit of taxes paid on purchase of inputs, input services and capital goods are seamlessly allowed for set-off against the tax payable on subsequent sale of goods that are either sold as such or sold upon conversion, or in the context of services, are supplied. 

Backdrop:

It is required to have a brief view of the existing indirect taxes regime, before proceeding to understanding GST. The excise duty, import duties of customs, VAT/CST and service tax are the main levies at present.

a. Excise duty: Central Excise Duty is levied by the Central Government under the Central Excise Act, 1944. The levy is on all goods manufactured and produced in India, which are specified in the schedule to the Central Excise Tariff Act subject to certain exemptions. The effective rate may vary from product to product though most goods are subject to excise duty at 10% (without education cess).

b. Import Duties: Customs duties are levied by the Central Government under the Customs Act, 1962.  The levy gets attracted on all specified goods imported into and exported from India, which are specified in the schedule to the Customs Tariff Act.  The customs duties are levied on assessable value and the total customs duty ordinarily would amount to an average of 24.42% (subject to cenvat credits) on the value of goods imported.

c. Value Added Tax (VAT): Value Added Tax (VAT) is levied by the State Governments on transfer of property in goods from one person to another, when such transfer is for cash, deferred payment or other valuable consideration.  VAT is also payable on certain transactions that are deemed to be sale such as transfer of right to use goods, hire purchase and sale by installments, works contract and sale of food and drink as a part of rendering of any service.

d. CST: The rate of CST is 2% against the declaration in Form C and in case the said declaration is not provided by the buyer, they are subject to tax at the rate specified in the local VAT law.  Form C is allowed to be issued by the buyer when he purchases the goods for use in manufacture or for resale or for use in telecommunication network or in mining or in generation or distribution of power.

e. Service Tax: Service tax is levied on specified services, referred to as taxable services, when rendered by a service provider.  Service tax is presently taxed at 10% (without education cess).  Ordinarily, service tax is payable by the service provider, except in specified cases.

What is meant by GST?

Goods & Service Tax (GST) as the name suggests, is a tax on supply of goods or services. Any person, providing or supplying goods or services will be liable to charge GST.  The person supplying the goods or services is allowed to take credit for taxes paid on purchases, consequent to which, GST becomes a tax on the value added by the supplier. Further GST would be levied by both the Central Government and State Government on the same transaction, making GST a dual transaction tax structure. 

What would be the Applicability of Levy?

Under GST, every specified transaction would be subject to tax. 

Supply within State: In case the supply of goods or services is done locally i.e. the place of consumption rules provide that local GST needs to be applied for the transaction, then the supplier would charge dual GST i.e. SGST and CGST at specified rates on the supply. This is explained with the following example:

Note:   In the above illustration, the rate of CGST and SGST is assumed to be 10% each.

The CGST & SGST charged on the customer for supply of goods or services will be remitted by the seller into the appropriate account of the State/ Central Government.

Supply from One State to Another

In case the supply of goods or services is done interstate i.e. the place of consumption rules provide that interstate GST (or integrated GST) needs to be applied for the transaction, then the supplier would charge IGST at specified rates on the supply.  This is illustrated with the help of the following example:

Note:   In the above example, the rate of IGST is assumed to be 20%.

The IGST charged on the customer for supply of goods or services will be remitted by the seller into the appropriate account of the Central Government.

Exports

In case the supply of goods or services are exported out of India i.e. the place of consumption rules provide that regard the transaction as ‘exported’, then the transaction would be zero rate.  In other words, the supplier will be allowed to export the goods or services without charging any tax. This is explained with the help of the following example:

From the above the following features of the GST emerge.

The salient features of GST are given below:

1. Dual GST: Dual GST signifies that GST will be levied by both, the Central Government and the State, on supply of goods or services.  Under the Constitution, presently the taxing powers are presently split between the State and the Centre.  In case of certain transactions, the power to tax is vested with the Centre and while in certain others, the power is vested with the State.  Under GST, the power to tax on supply of all goods and services will be vested in the hands of both, the State and the Centre.  In certain cases, such as the interstate transactions, the power to tax will be vested with the Central Government, while the revenue will in some appropriate manner, get distributed to the States. Considering the dual taxation power to tax transactions under GST, the structure is referred to as Dual GST. Considering the basic framework of the constitution and keeping its structure intact, Dual GST appears to be implementable solution for India scenario.

2. Subsuming all Taxes: GST should subsume all major indirect taxes levied by the Central Government i.e. central excise, customs and service tax and majority of the taxes levied by the State Government i.e. VAT, luxury tax, entertainment tax, etc.  In this regard, tax on petroleum products and alcohol are intended to be kept either outside or tax additionally under GST. The following taxes would be absorbed/ subsumed into GST:

The following indirect taxes would be subsumed under GST:

3. Rate Structure: It is expected that GST will be levied on the transaction value i.e. price actually paid or payable for supply of goods and services. The GST for local supplies will be split into SGST and CGST. The Task Force on GST of Thirteenth Finance Commission (TFC) has worked out a Revenue-Neutral Rate (RNR) of 12% (5% CGST and 7% SGST) assuming there is a single GST rate and stamp duty & electricity duty are also subsumed in the GST.

GST would have a 4 rate structure with standard rate, concessional rate, special rate for bullion & jewellery and exempted/ nil rated. It is not clear whether services and goods will have the same rate or be subjected to tax at different rates. Further, the Government is yet to specify the rate of taxes proposed for each of these categories.

The discussion paper mentions that the empowered committee has decided to adopt the following SGST rate structure for taxing goods and services:

1. Exempted goods: The current list under the State VAT law-0%

2. Special rate: Precious metals- could be 1-2%

3. Concessional rate: Necessities and goods of basic importance-could be 5%

4. Standard rate: For all other goods- could be 10%

5. Specified rate: Services- could be 10%

The discussion paper has recommend a uniform State GST threshold of INR 10 Lakhs for both goods and services and INR 150 Lakhs for Central GST threshold limit for goods.  The discussion paper has not recommended the threshold amount for taxing CGST on services, though it has recommended to be kept appropriately high.

The discussion paper has recommended for upper ceiling of gross annual turnover of INR 50 Lakhs with a floor tax rate of 0.50% across the States for composition scheme. 

4. Credit Scheme: GST will be levied on supply of goods and services and the supplier will be allowed credit for the GST paid on purchases.  The credit would be seamless except that the credit of CGST paid will not be allowed for set-off against SGST payable and vice versa.

How would this work?

The assessee dealer will be entitled to avail credit of GST paid on purchases. In this regard, the dealer may purchase the goods or services locally or interstate or as imported. The following taxes paid on purchases when made locally, interstate or imported, would be available as credit in the hands of the dealer:

The assessee is required to account for CGST, SGST and IGST separately.

Extent of Cross Utilisation:

5. IGST: Under this model the Centre will levy the IGST which will be CGST plus SGST on all inter-State transactions of taxable goods and services. Inter-State seller would pay the IGST on value addition after adjusting of IGST, CGST and SGST on purchases. The Exporting state will transfer to the Centre the credit of SGST used on payment of IGST.

6. Administrative Mechanism: Both the Central Government and State Government will have the authority and control over the assessee as follows.

(i) The administration of the Central GST would be with the Centre and for State GST with the States.

(ii) Each taxpayer could be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department.

(iii) Keeping in mind the need of tax payers convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.

(iv) Accordingly, the assessee dealer would be required to pay GST into the specified account of the State/ Centre and file periodic returns separately with the State/ Central Government.

The way events are happening, the ultimate GST may after being compromised and watered down, made tax gatherer friendly not have any of the best practices needed to make it a great tax of the future. Inspite of that fact, in due course of time when better sense prevails, the GST would be useful for the industry and general public.

Acknowledgements to CA Roopa Nayak for assisting in preparation of this article.

CA Madhukar N. Hiregange