Understanding GST

Goods and Service Tax

INTRODUCTION TO GST

The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on the supply of goods or services. It is levied and collected on value addition at each stage on sale or purchase of goods or supply of services based on input tax credit method but without state boundaries. There is no distinction between goods or services and they are taxed at a single rate in a supply chain of goods and services till the goods or services reach the ultimate consumer. Its main objective is to combine all indirect tax levies into a single tax thereby replacing multiple tax levies, overcoming the limitation of current indirect tax structure and creating efficiencies in tax administration.

GST is levied at every stage of production-distribution chain. It will facilitate seamless credit flowing across the entire supply chain and across all States under a common tax base. Internationally, comprehensive Goods & Services tax has already been introduced in more than 100 countries across the world. France was the first country to introduce this value added tax system in 1954 devised by a public servant. In India, due to non consensus between Central and State government, the proposal is to introduce a Dual GST regime i.e. Central and State GST. Many countries in the world have a single unified GST system i.e. a single tax applicable throughout the country. However, in federal countries like Brazil and Canada, a dual GST system is prevalent whereby GST is levied by both the federal and State or Provincial governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services.

The current system of taxation on goods and services is characterized by multiplicity of taxes on goods and services. Excise duty on manufacture, customs duty on imports and exports, service tax on services are levied by the Central Government. On the other hand, VAT, Entry Tax, Purchase Tax, Octroi and duty on liquor are levied by the State Governments. Apart from this, there are various other taxes /levies such as cesses, surcharges, entertainment tax, luxury tax, stamp duty and road tax.

This burden of multiple taxation in the pre-existing Central excise duty and the State sales tax systems had huge tax cascading effects. Before any commodity was produced, inputs were first taxed, and then after the commodity got produced with input tax load, output was taxed again. This was causing a burden of multiple taxation (i.e. “tax on tax”) with a cascading effect. Moreover, in the Sales tax structure, there was also a system of multi-point sales taxation at subsequent levels of distributive trade, then along with input tax load, burden of sales tax paid on purchase at each level was also added, thus aggravating the cascading effect further.

Such multiplicity of taxes distorts the tax structure and brings in complexities; in order to avoid the cascading effect of duties/ taxes the government has introduced the scheme of CENVAT in Central Excise and VAT in states.

When CENVAT was introduced in place of Central excise duty, a set-off is given, i.e., a deduction is made from the overall tax burden for input tax. In the case of VAT in place of Sales tax system, a set-off is given from tax burden not only for input tax paid but also for tax paid on previous purchases. With VAT, the problem of “tax on tax” and related burden of cascading effect is thus removed.

ISSUES WITH CURRENT INDIRECT TAX

The current system of taxation on goods and services is characterized by multiplicity of taxes on goods and services. Excise duty on manufacture, customs duty on imports and exports, service tax on services are levied by the Central Government. On the other hand, VAT, Entry Tax, Purchase Tax, Octroi and duty on liquor are levied by the State Governments. Apart from this, there are various other taxes /levies such as cesses, surcharges, entertainment tax, luxury tax, stamp duty and road tax.

This burden of multiple taxation in the pre-existing Central excise duty and the State sales tax systems had huge tax cascading effects. Before any commodity was produced, inputs were first taxed, and then after the commodity got produced with input tax load, output was taxed again. This was causing a burden of multiple taxation (i.e. “tax on tax”) with a cascading effect. Moreover, in the Sales tax structure, there was also a system of multi-point sales taxation at subsequent levels of distributive trade, then along with input tax load, burden of sales tax paid on purchase at each level was also added, thus aggravating the cascading effect further.

Such multiplicity of taxes distorts the tax structure and brings in complexities; in order to avoid the cascading effect of duties/ taxes the government has introduced the scheme of CENVAT in Central Excise and VAT in states.

When CENVAT was introduced in place of Central excise duty, a set-off is given, i.e., a deduction is made from the overall tax burden for input tax. In the case of VAT in place of Sales tax system, a set-off is given from tax burden not only for input tax paid but also for tax paid on previous purchases. With VAT, the problem of “tax on tax” and related burden of cascading effect is thus removed.

A. MULTIPLICITY OF DUTIES / TAXES

There are multiplicity of taxes on goods and services. Excise duty on manufacture, customs duty on imports and exports, service tax on services are levied by the Central Government. On the other hand, VAT, Entry Tax, Purchase Tax, Octroi and duty on liquor are levied by the State governments. Apart from this, there are various other taxes /levies such as cesses, surcharges, entertainment tax, luxury tax, stamp duty and road tax. Such multiplicity of taxes distorts the tax structure and brings in complexities

B. LACK OF UNIFORMITY OF PROVISIONS IN STATE VAT STATUTES

Present structures of VAT across states lacks uniformity. The differences are there with respect to definition of goods, capital goods, threshold limits, classification, exemptions, and procedures. This leads to increased complexities for corporate having operations in multiple States.

As regards to classification, the complexities exists relate primarily to application of different tax rates on various goods. Theoretically, one might expect that the lower tax rates would be applied to basic necessities that are consumed largely by the poor. However, this is not the case under the State VAT. The lowest rate of 1% applies to precious metals and jewellery, and related products. The middle rate of 4% applies to selected basic necessities and also a range of industrial inputs and IT products. In fact, basic necessities fall into three categories – exempted from tax, taxable at 4%, and taxable at the standard rate of 12.5%. The classification would appear to be arbitrary, with no well accepted theoretical underpinning. Whatever is the political merits of this approach, it is not conducive to lower compliance costs. Most retailers find it difficult to determine the tax rate applicable to a given item without referring to the legislative schedules. Consumers are even less aware of the tax applicable to various items. This gives rise to leakages and rent seeking (technical term for corruption). More so in the rate schedules, where there are large numbers of items/ descriptions and even a minor change in product description can shift the product from taxable category to exempt category.

C. SALE OF GOODS VS PROVISION OF SERVICES

Another source of complexity under the State VAT is determining whether a particular transaction constitutes a sale of goods or supply of services. This problem is most acute in the case of software products and intangibles such as the right to distribute/exhibit movies or time slots for broadcasting advertisements. The distinction becomes important as the sales of goods are governed by the State Vat and the sale of services are governed by Centre Government.

Composite Contracts

The traditional distinctions between goods and services found in the Indian Constitution have become archaic. In markets today, goods, services, and other types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements. For Example, Installation of air-conditioner, paint job in factory etc. Under the current division of taxation powers, neither the Centre nor the States can apply the tax to such bundles in a seamless manner. Each can tax only parts of the bundle, creating the possibility of gaps or overlaps in taxation.

As per Entry No. 54 in list II (State List) of the Seventh Schedule read with Article 246(3) of the Constitution of India, the States can impose “tax on the sale or purchase of goods other than newspapers, subject to the provisions of Entry No. 92A of the List-I (Tax on Inter-State Sales). Further, the Central Government is empowered to levy Service tax vide Entry No. 92C / 97 of the Union List (List-I) under seventh schedule of the Constitution of India. This has become a major cause of litigations in recent times.

D. INABILITY OF STATE TO LEVY TAX ON SERVICES

The States are precluded from taxing services. This arrangement has posed difficulties in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts, which entail a transfer of the right to use goods without any transfer of their ownership. While these problems have been addressed by amending the Constitution to bring such transactions within the ambit of the State taxation (by deeming a tax on them to be a tax on the sale or purchase of goods), services per se remain outside the scope of state taxation powers. This limitation is unsatisfactory from two perspectives.

First, the advancements in information technology and digitization have blurred the distinction between goods and services. Under Indian jurisprudence, goods are defined to include intangibles, e.g., copyright, and software, bringing them within the purview of State taxation. However, intangibles are often supplied under arrangements which have the appearance of a service contract. The examples are as follows:

Software upgrades (which are goods) can be supplied as part of a contract for software repair and maintenance services.

Software development contracts could take the character of contracts for manufacturing and sale of software goods or for rendering software development services, depending on the roles and responsibilities of the parties.

Value-added services (VAS) provided as part of telecommunication services include supplies (e.g., wallpaper for mobile phones, ring tones, jokes, cricket scores and weather reports), some of which could be considered goods.

An on-line subscription to newspapers could be viewed as a service, but online purchase and download of a magazine or a book could constitute a purchase of goods.

This blurring also clouds the application of tax to transactions relating to tangible property. For example, disputes have arisen whether leasing of equipment without transfer of possession and control to the lessee would be taxable as a service or as a deemed sale of goods.

The second major concern with the exclusion of services from the State taxation powers is its negative impact on the buoyancy of State tax revenues. With the growth in per capita incomes, services account for a growing fraction of the total consumer basket, which the States cannot tax. With no powers to levy tax on incomes or the fastest growing components of consumer expenditures, the States have to rely almost exclusively on compliance improvements or rate increases for any buoyancy in their own-source revenues. One of the suggested alternatives of assigning power of levy of tax on services to States include allocation of a certain portion of revenue accruing from collection of Central VAT to States as under the Australian model. However this solution also comes with a practical problem of designing of suitable base for allocation of revenue between different States.

E. DISTORTION OF TAX BASE WITH MULTITUDE OF EXEMPTIONS

The starting base for the CENVAT is narrow, and is being further eroded by a variety of area-specific, and conditional and unconditional exemptions. A few years ago the Government attempted to rationalize the CENVAT rates by reducing their multiplicity but has not adhered to this policy and has reintroduced concessions for several sectors/products.

F. CASCADING EFEECT OF TAXES

Despite that certain degree of success has been achieved with the introduction of VAT, there are still certain shortcomings in the structure of VAT both at the Central and at the State level.

Tax Cascading occurs under both Central and State taxes. The most significant contributing factor to Tax Cascading is the partial overage of Central and State taxes on account of various exemptions, for instance, Oil and gas production, mining, agriculture, wholesale and retail trade, real estate construction, and range of services remain outside the ambit of both the CENVAT and the Service tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits are allowed for the inputs of the exempt sectors, which include the entire service sector, real property sector, agriculture, oil and gas production and mining.

Another major contributing factor to tax cascading is the Central Sales Tax (CST) on Inter-State sales, collected by the origin state and for which no credit is allowed by any level of government. This gets embedded in the total cost of the product.

While no recent estimates are available for the extent of tax cascading under the Indian tax system, it is likely to be significant, judging by the experience of other countries which had a similar tax structure. For example, as per working paper no. 1 /2009 –DEA on Goods and Service Tax by Satya Poddar and Ehtisham Ahmad, under the Canadian manufacturers’ sales tax, which was similar to the CENVAT, the non-creditable tax on business inputs and machinery and equipment accounted for approximately one-third of total revenues from the tax. The extent of cascading under the provincial retail sales taxes in Canada, which are similar to the State VAT, is estimated to be 35-40% of total revenue collections. At priori, one would expect the magnitude of cascading under the CENVAT, Service tax, and the State VAT to be even higher, given the more restricted input credits and wider exemptions under these taxes.

Tax cascading remains the most serious flaw of the current system .It increases the cost of production and puts Indian suppliers at a competitive disadvantage in the international markets. It creates a bias in favor of imports, which do not bear the hidden burden of taxes on production inputs. It also detracts from a neutral application of tax to competing products. Even if the statutory rate is uniform, the effective tax rate (which consists of the statutory rate on finished products and the implicit or hidden tax on production inputs) can vary from product to product depending on the magnitude of the hidden tax on inputs used in their production and distribution. The intended impact of government policy towards sectors or households may be negated by the indirect or hidden taxation in a cascading system of taxes.

G. LACKLUSTRE INDIGENEOUS PRODUCTION DUE TO CENVAT

The CENVAT is levied on goods manufactured or produced in India. This gives rise to definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied. While these concepts have evolved through judicial rulings, it is recognized that limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax. Manufacturing itself forms a narrow base.

Moreover, in the present State-levy VAT scheme, CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and contributing to that extent a cascading effect on account of CENVAT element. It is for this reason that virtually all countries have abandoned this form of taxation and replaced it by multi-point taxation system extending to the retail level.

It increases the cost of production and puts Indian suppliers at a competitive disadvantage in the international markets. It creates a bias in favor of imports, which do not bear the hidden burden of taxes on production inputs.

Australia is the most recent example of an industrialized country replacing a tax at the manufacturing or wholesale level by the GST extending to the retail level. The previous tax was found to be unworkable, in spite of the high degree of sophistication in administration in Australia. It simply could not deal with the variety of supply chain arrangements in a satisfactory manner.

H. COMPLEXITIES IN TAX ADMINISTRATION

In spite of the improvements made in the tax design and administration over the past few years, the systems at both Central and State levels remain complex. Their administration leaves a lot to be desired. Further, the process for resolution of disputes is slow and expensive. At the same time, the systems suffer from substantial compliance gaps, except in the highly organized sectors of the economy. There are several factors contributing to this unsatisfactory state of affairs. For instance, under the present VAT regime, each State has it own State Vat Act. The procedures, returns, forms, assessments, date of payment of tax etc are different under State Vat Acts. This makes the life much more complicated for multi-location corporate.


KEY FEATURES OF GST

1. DUAL GOODS AND SERVICE TAX

The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.

2. APPLICABILITY OF GST TO ALL TRANSACTIONS

The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. The Central GST and State GST should be levied on common and identical tax base. The tax base should comprehensively extend over all goods and services ( with no distinction being made between treatment of goods and services) up to the final consumer point.

3. DESTINATION BASED MULTI POINT LEVY

It is recommended that the Centre and States should adopt a consumption based GST with no distinction being made between raw materials and capital goods , in avaliment of Input tax credit. GST is based on destination principle, thus tax base will shift from production to consumption of goods. The taxable event is Consumption of goods or services. As a result, revenue will accrue to the state in which consumption takes place or deemed to take place.

4. COMPUTATION OF GST ON THE BASIS OF INVOICE CREDIT METHOD

The liability of CGST and SGST is computed the basis of Invoice Credit method i.e. allow credit for tax paid on all intermediate purchases of goods and services on the basis of invoice issued by the supplier. As a result, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax will effectively stick on final consumption within the taxing jurisdiction. This will facilitate elimination of the cascading effect at various stages of production and distribution. In an Invoice based VAT system, the issue of invoices in the proper form is an essential part of the procedure for imposing and enforcing the VAT. Therefore, it should be mandatory for a supplier making a taxable supply to another taxable entity to provide a VAT invoice.

5. PAYMENT OF GST

The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited).

6. UNIFORM PROCEDURE FOR COLLECTION OF GST

To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.

7. THRESHOLD LIMIT

The present threshold limits prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is desirable and, therefore, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.

8. COMPOSITION SCHEME UNDER GST

The States are also of the view that Composition/ Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. The first discussion paper suggests that there would be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for dealers with turnover below the compounding cut-off.

In reference to Composition scheme, the task force has recommended rate of 1% each on account of CGST and SGST for dealers with the turnover between Rs 10 lacs to Rs 40 lacs.No credit for the same will be available if the dealer opts for the compounding scheme.

9. REGISTRATION & TAX PAYER IDENTIFICATION NUMBER

All the taxable entities with turnover above the threshold limit will be required to register and obtain GST registration number. The taxable entities with lower turnover will also have the option to register. As per First Discussion paper, each taxpayer would 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. However, the Task force report has recommended that the GST Registration number should be twelve digit alphanumeric numbers. The first ten digits should be the alpha-numeric Permanent Account Number (PAN) followed by a space and two more digits indicating the state code. This number scheme should be publicised widely and should be self-generated after obtaining a PAN . There will be single GST registration number for all branches in a State. Therefore, a dealer having branches across States will have as many GST registration numbers as the number of States in which he operates. The registrant dealer should be required to furnish a form, only by way of information, indicating the registration number for every State in which he operates. He should not be allowed to use the registration number, though self-generated, unless he has furnished the form. Since the number is PAN based, it is not necessary to have any pre- registration verification. However, the states may, if necessary, undertake post-registration verification to eliminate any potential abuse. To begin with, on the eve of the introduction of GST, the dealer must furnish a consolidated form for all States in which he operates. If, at a later stage, the dealer extends his operation to a new State, he should be required to furnish a form for extension of activities and register the self- generated number for the new State.

10.INPUT TAX CREDIT (ITC) SET OFF

Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

11.CROSS UTILIZATION OF ITC

Cross utilization of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services under the integrated goods and service tax (IGST) model.

12.CREDIT ACCUMULATION ON ACCOUNT OF REFUND

Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment should be completed in a time bound manner.

13. ZERO RATING OF EXPORTS

The first discussion paper has suggested that the exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.

14. GST ON IMPORTS

Imports will be brought under the scope of GST with necessary Constitutional Amendments. They will treated at par with inter-state transactions and Integrated goods and service tax (IGST) will be levied on imports. The incidence of tax will follow the destination principle and the tax revenue will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the IGST paid on import on goods and services.

15. SPECIAL INDUSTRIAL AREA SCHEME

After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives should be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. Regarding Special Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would continue up to legitimate expiry time both for the Centre and the States. Any new exemption, remission etc. would not be allowed. In such cases, the Central and the State Governments could provide reimbursement after collecting GST. The Task force also recommends doing away with any area based exemptions (at present provided in CENVAT) and to provide direct investment linked cash Subsidy, in case it is considered necessary to provide support to industry for balanced regional development.

16. MAINTENANCE OF RECORDS

A taxpayer or exporter would have to maintain separate details in books of account for availment, utilization or refund of Input Tax credit of CGST, SGST and IGST.

17. PERIODICAL RETURNS

The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.

18. ADMINISTRATION OF GST

The administration of the Central GST to the Centre and for State GST to the States would be given. This implies that the Centre and the States will have concurrent jurisdiction on the entire value chain and on all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre. As per the recommendation of Task force report on GST, The Central Board of Excise and Customs(CBEC) shall be responsible for implementation of CGST and state tax administrations will be separately responsible for implementation for SGST. for the purposes of CGST and SGST.

TAXES TO BE SUBSUMED IN GST

GST is commonly described as indirect, comprehensive, broad based consumption Tax. The Dual GST which would be implemented in India will subsume many consumption taxes. The objective is to remove the multiplicity of tax levies thereby reducing the complexity and remove the effect of Tax Cascading. The objective is to subsume all those taxes that are currently levied on the sale of goods or provision of services by either Central or State Government. Subsumation of large number of taxes and other levies will allow free flow of larger pool of tax credits at both Central and State level.

A. CENTRAL TAXES TO BE SUBSUMED IN GST

On application of the above principles and various papers which have been released in this regard, it is deduced that the following Central Taxes should be, to begin with, subsumed under the Goods and Services Tax:

  • Central Excise Duty (CENVAT)

  • Additional Excise Duties

  • The Excise Duty levied under the Medicinal and Toiletries Preparatios (Excise Duties) Act 1955

  • Service Tax

  • Additional Customs Duty, commonly known as Countervailing Duty (CVD)

  • Special Additional Duty of Customs – 4% (SAD)

  • Surcharges and Cesses levied by Centre are also likely to be subsumed wherever they are in the nature of taxes on goods or services. This may include cess on rubber, tea, coffee, national calamity contingent duty etc.

  • Central Sales Tax to be phased out.

B. STATE TAXES TO BE SUBSUMED IN GST

Following State taxes and levies would be, to begin with, subsumed under GST:

  • VAT / Sales tax

  • Entertainment tax (unless it is levied by the local bodies)

  • Luxury tax

  • Taxes on lottery, betting and gambling

  • State Cesses and Surcharges in so far as they relate to supply of goods and services

  • Octroi and Entry Tax

  • Purchase Tax

4. TREATMENT OF SEPCIFIC GOODS

The Central Government tabled the 122nd Constitution Amendment Bill, 2014 (‘Bill’) on the introduction of Goods and Services Tax (‘GST’) before the lower house of Parliament on December 19, 2014. On analysis of the Bill, the Bill contains the following treatment for the following specific goods:

A. TAX ON SUPPLY OF THE ALCOHOLIC LIQUOR FOR HUMAN CONSUMPTION

As per the proposed amendment to Constitution by the Constitution (122nd Amendment) Bill, 2014, supply of the alcoholic liquor for human consumption has been excluded from the definition of goods and service tax.

B.TAX ON TOBACCO PRODUCTS

Tobacco and tobacco products would be subjected to GST. However, it can be subjected to a separate excise duty by the Centre.

C.TAX ON PETROLEUM CRUDE/ HIGH SPEED DIESEL/ MOTOR SPIRIT/ NATURAL GAS/ AVIATION TURBINE FUEL

The States would continue as per the current laws to impose Value Added Tax (VAT) on Petroleum Crude/ High Speed Diesel/ Motor Spirit/ Natural Gas/ Aviation Turbine Fuel on intra-state sales while inter-state sales would continue to attract Central Sales Tax (CST). These products would be transitioned into the GST regime from a future date to be notified by the GST Council.

D. TAX ON NEWSPAPERS AND ADVERTISEMENT THEREIN

GST would be capable of being levied on the sale of newspapers and advertisements therein. This would give the governments the access to substantial incremental revenues since this industry has historically been tax free in its entirety.

E. TAXES WHICH ARE NOT TO BE SUBSUMED

GST may not subsume the following taxes within its ambit:

  • Basic Customs Duty: These are protective duties levied at the time of Import of goods into India.

  • Exports Duty: This duty is imposed at the time of export of certain goods which are not available in India in abundance.

  • Road & Passenger Tax: These are in the nature of fees and not in the nature of taxes on goods and services.

  • Toll Tax: These are in the nature of user fees and not in the nature of taxes on goods and services.

  • Property Tax

  • Stamp Duty

  • Electricity Duty

CHALLENGES BEFORE GOVERNMENT AND TRANSITIONAL ISSUES IN GST

The broad framework of GST is now clear. 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 he 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 as under:

1. CONSTITUTIONAL AMENDMENT

The proposed GST model requires Constitutional amendments. Amongst other, significant are:

  • To shift the taxable event in case of excise duty from ‘manufacture’ to ‘sale’.

  • To allow the States to levy tax on services.

  • To authorize the Union Government to impose tax on sale of goods which take place within the State.

The Government introduced the 122nd Constitution Amendment Bill, 2014 (“Bill”) on 19th December 2014 in parliament but before the Bill becomes the law it will have to pass through the arduous process of approval. The procedure for passage of the Bill:

  • Approval of the Bill by more than half of total strength of each house of Parliament and with 2/3rd of members present and voting;

  • Approval of the Bill by simple majority of State Legislatures (at least 50% of the States to approve) and

  • The Bill to get Presidential assent.

2. ONE CENTRAL GST AND 29 STATES GST

There will be separate enactments for Central, State and Integrated GST. The CGST will be a common code throughout India. Further, each State will legislate its own enactment to levy and collect the SGST. However, as per the 122nd Constitutional Amendment Bill 2014, GST Council will make recommendations with respect to model GST laws, principles of levy, place of supply etc. The expectation is therefore is that a majority of the provisions will be uniform across the States.

3. UNIFORMITY IN PROVISIONS – A NECESSITY

A present structure of VAT across states lacks uniformity. The differences are there with respect to definition of goods, capital goods, threshold limits, classification, exemptions, and procedures. This leads to increased complexities and unnecessary litigations for corporate having operations in multiple states. Thus, there is an urgent need to have uniformity in definitions, classification and procedures.

4. DETERMINATION OF TAXABLE EVENT

Under the present system of indirect taxation like Central Excise Act, a lot of unnecessary litigation has arisen in respect of basic issues such as determination of “taxable event”. It is hoped that the GST regime would put the controversy to rest by properly defining the term “taxable event” and other related issues such as “supply of goods” and “rendition of services”. In GST regime, the “Taxable event” will be the “supply of goods” or the “supply of services” or both. It is, therefore, imperative for the Centre and States to clearly define the place of supply rules so as to avoid any future confusion which can become a potential source of litigation.

5. GST RATES

Determination of GST rates is one of the thorniest issue which needs to be taken care. All the stakeholders are waiting impatiently for getting the clarity on the same. The issues include;

  • Finalising the rate structure — separate RNR for Central GST and State GST.

  • Which tax/duty/cess will finally be subsumed in CGST and SGST respectively.

  • How many rates of tax would be there in GST.

  • Finalization of goods and services that will enjoy exemption, such as, foodgrains, education, health, etc.

The wish list of industry, economists, tax professionals include uniform rate of CGST and SGST for all goods and services, subsumation of all indirect taxes within the gamut of CGST and SGST and relatively smaller list of exempted goods and services

However, this issue is still under discussion and no consensus is reached till date.

6. REGISTRATION ISSUES

The first discussion paper issued by the Empowered committee is silent on this aspect. However, it states that the GST will be implemented through multiple statues (one for CGST and SGST statutes for every State).Having said this, it not certain whether facility for centralized registration will be available or not. The position in this regard is not clear at present.

7. DETERMINATION OF THRESHOLD LIMITS

Presently, there are different thresholds applicable in State VAT as well as in Central Vat. Thus, for smooth implementation of GST, another challenge is to determine a uniform applicable threshold for both Central GST and State GST. The Discussion paper released by Empowered Committee and task force report of the Thirteenth Finance Commission on GST are giving contradicting views with respect to threshold exemptions. Further implementation of Composition/ Compounding scheme will also pose practical implementation issues.

However, this issue is still under discussion and no consensus is reached till date.

8. INPUT TAX CREDIT – AVAILMENT AND UTILIZATION

Under the present structure, the way the CENVAT credit provisions are drafted has led to a lot of litigation concerning availability of CENVAT credit. The provisions related to denial of CENVAT credit for exempted goods and exempted services have also contributed to such litigation. It is hoped that the proposed GST regime would simplify the provisions regarding availability of input tax credit.

The Proposed GST will allow seamless flow of credit across each stage of supply chain from point of manufacture or import to the point of final consumption. The dual GST has two components CGST which is administered by Central government and SGST, which is administered by State government. Since the Central GST and State GST are to be treated separately, in general, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. Cross utilisation of ITC between the Central GST and the State GST would, in general, not be allowed except under IGST model with respect to inter state transaction. The essence of GST is seamless uninterrupted flow of credit across various levels of supply chain. Thus, the clarity of rules of availment and utilization will have significant impact on making GST an assessee-friendly consumption tax.

9. REFUND OF TAXES TO EXPORTERS/ 100% EOU’S / SEZ

In order to ensure that the exporters of goods and services do not export taxes, the current taxation regime provides for a refund of taxes. However, in majority of the cases, such refunds are disputed or granted very late, causing financial hardship to exporters. Thus, it is expected that the proposed GST regime would handle the issues in terms of refund of taxes appropriately.

In the GST regime, the exports are considered as zero rated thus exporters are not liable to pay GST.

10. TREATMENT OF STOCK TRANSFERS

Stock Transfers are basically of two types:

  1. Stock transfers from one State to another: Under the current system of Indirect Taxation, Inter branch transfers from one branch to another branch in another state is not liable to tax provided the recipient branch furnishes “F Form” to the sending branch. The sending branch is required to furnish these “F Forms” to the concerned Sales Tax Authority. Under the GST regime, Inter-Branch transfers are treated at par with Inter-State Sales. The taxable event will be the supply of goods and therefore the stock transfers will be taxable. An Additional tax of 1 percent (for two years from the date of implementation of GST or such period as recommended by GST Council) is also proposed on inter-state supply of goods to address the concern of manufacturing States (this tax would accrue to the State of Origin

(b) Stock transfers to branches/consignment agents within the State: Presently, treatment of these transactions varies from State to State. However, under GST, these transfers might also be subject to tax, unless TIN of transferor and transferee is same.

The provisions of Stock transfer will have significant impact on the industry. It will require them to revisit their supply chain models.

11. TAXATION OF INTER STATE SUPPLY OF SERVICES

Detailed place of supply rules need to be framed for such transactions. Taxation of such supplies will however continue to pose a challenge. Practices currently being followed in the European Union, Canada and Brazil are being studied. Policymakers are also looking at different options of taxing inter State supplies of services based on whether they are Business to Business (B2B) or Business to Customer (B2C).

12. TREATMENT OF HIGH SEA SALES / E-I/ E-II SALES

No tax is payable under Central Sales Tax on High Sea / E-I / E-II sales provided certain stipulated conditions are satisfied. The fate of these sales transactions is not clear at this point.

13. REQUIREMENT OF TRAINING AT ALL LEVELS

Since the dual GST is considerably different from the present indirect tax regime, a massive training initiative would he required at both federal and State levels to familiarise 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.

14. 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 system 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. The success of GST is highly dependant on availability of technically advanced but user friendly IT infrastructure. The Government has incorporated a company called “Goods and Services Tax Network” (GSTN), which is a quasi-government company. The GSTN has been incorporated to build, set-up and operationalize the GST common portal.

15. DECISION ON ELIMINATION OF CHECK POSTS

IGST is designed to avoid check post at State Borders. However, many States have such check posts which results in enormous delays, harassment and corruption. The border check post should be abolished to ensure smooth flow of goods movement.

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