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GST is a consumption based levy.
Destination principle would be applicable in normal course of business
to business [B2B] other than for few services and business to consumer.[
B2C] GST is proposed to be in place by April 2016- maybe a bit
optimitstic.
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. The principles of GST would be drawn form
the best practices internationally and some time tested principles which
have been working well in India.
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 12% (without
education cess).
The concepts of cenvat credit, dispute
resolution, removal and valuation on intrinsic value under this law may
find a place in GST. Also the principle of trusting the tax payer while
having the checks and balances of audit rather than suspecting all
businessmen would hopefully be adopted.
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 28 %
(subject to cenvat credits) on the value of goods imported.
Basic Customs duty would continue but the
additional duty of customs (CVD) and special additional duty (SAD)would
get subsumed into GST as an IGST. The Classification under customs which
is based on the harmonised System of Nomenclature would be adopted
under GST.
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 instalments,
works contract and sale of food and drink as a part of rendering of any
service.
The supplies of goods and importantly
services would now be available to the States as SGST. They would also
get apportioned part of the IGST.
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. Sales without C form would be at the rate as
applicable in State of origin.
The principles of inter state sales, sales
in the course of export/ import with required changes for supplies
would be a part of the GST. The aspects of valuation in some parts would
also be adopted.
e. Service Tax: Service
tax is levied all activities as defined other than those specified in
the negative list and those specifically exempted. Service tax is
presently taxed at 12% (without education cess). Ordinarily, service tax
is payable by the service provider, except in specified cases where a
reverse charge and joint charge has been put in place.
The principles of Place of Provision of
Services would be adapted from the place of supply rules. The point of
taxation philosophy could also be a viable option. The States are
expected to enjoy at least Rs.150,000/- Crores of revenue depending on
the intra state consumption of services.
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 would be liable to charge GST. The
States would be eligible for the SGST part of services consumed within
the State which would be an additional revenue for the State. The person
supplying the goods or services is allowed to take credit for taxes
paid on supply of goods or services, consequent to which, GST becomes a
tax on the value added at the next stage by the dealer. Further GST
would be levied by both the Central Government (CGST) and State
Government (SGST) on the same transaction, making GST a dual transaction
tax structure. For inter state transactions IGST ( total of SGST +
CGST) would be charged which would be apportioned to the Union as well
as the States. This would apply for the subsumed part of the customs
duties.
A 1% origin based tax to offset the CST
loss would be collected by the Union retained by the States. This tax
would not be vattable.
The definition of services being other
than goods raises the concern of whether it would also cover Immovable
property transactions.
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:
Basic value charged for supply of goods or services
|
10,000
|
Add: CGST @ 10%*
|
1,000
|
Add: SGST @ 10%*
|
1,000
|
Total price charged for local supply of goods or services
|
12,000
|
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 would 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:
Basic value charged for supply of goods or services
|
10,000
|
Add: IGST @ 20%*
|
2,000
|
Total price charged for interstate supply of goods or services
|
12,000
|
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 would be remitted by the seller into the
appropriate account of the Central Government. The CG would share the
same with the State of destination and itself.
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 would be allowed to export the
goods or services without charging any tax. This is explained with the
help of the following example:
Basic value charged for supply of goods or services
|
10,000
|
Add: GST
|
Nil
|
Total price charged for export of goods or services
|
10,000
|
From the above the following features of the GST emerge. The salient features of GST are given below:
Dual GST: Dual GST
signifies that GST would 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 would be vested in the hands of both, the State and the Centre.
In certain cases, such as the interstate transactions, the power to tax
would be vested with the Central Government, while the revenue would 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.
Subsuming many 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 sale of 5 specified
petroleum products would continue to be under sales tax and central
excise till the GST Council suggests its inclusion in the GST. Alcohol
is intended to be kept for state excise ONLY. The following taxes would
be absorbed/ subsumed into GST:
The following indirect taxes would be subsumed under GST:
Particulars
|
Levied By
|
Duty of excise on manufacture
|
Centre
|
CVD & SAD (component of customs duties)
|
Centre
|
Service tax
|
Centre
|
Central Sales Tax - Taxes when sale or purchase takes place in the course of inter-State trade
|
Centre
|
CST- Taxes on consignments that take place in the course of inter-State trade
|
Centre
|
Taxes on the entry of goods into a local area for consumption, use or sale therein ( Including octroi).
|
State
|
Taxes on sale/purchase of goods within state
|
State
|
Luxury Tax
|
State
|
Entertainment Tax
|
State
|
Rate Structure: It is
expected that GST would be levied on the transaction value i.e. price
actually paid or payable for supply of goods and services. The GST for
local supplies would 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.
However the rate now being discussed is in excess of 20%.
GST could have a 4 rate structure with
standard rate, concessional rate, special rate for bullion &
jewellery and exempted/ nil rated. It is presently the view that
services and goods would have the same rate.
The discussion paper mentions and the
Constitution Amendment bill 2014 indicates that the empowered committee
has decided to adopt the following rate structure for taxing goods and
services:
· Exempted goods: The short list [ Out of 91 items ] under the State VAT law-0%
· Special rate: Precious metals- could be 1 %
· Concessional rate: Necessities and goods
of basic importance [ the concept of declared goods would not longer be
relevant] -could be 10%
· Standard rate: For all other goods- could be 20% [ Maybe more is the indication]
Note: States maybe able to fix the SGCT based on a band say 9-11%. [ 1-2 %]
The recommend uniform State GST threshold
of INR 25 Lakhs for both goods and services and composition scheme for
those between Rs. 25 Lakhs to 75 Lakhs is being discussed.
A 1% tax would accrue to the originating States for a period of 2 years unless extended by the GST council.
GST Council would be put in place which
would consist of the FM of Union and States. The issue of veto power for
the Union still is to be resolved.
Credit Scheme: GST would be levied on
supply of goods and services and the supplier would be allowed credit
for the GST paid on purchases. The credit would be seamless except that
the credit of CGST paid would not be allowed for set-off against SGST
payable and vice versa.
The objective of seamless credit would be
met except for those below the threshold limit, those under special
composition schemes and the products which are exempted. Presently in
the central as well as the state tax laws a number of restrictions exist
on eligibility of goods and services used for business. It is hoped
that these anomalies would be taken care in the draft law which is
expected tobe in place by June 2015.
How would this work?
The assessee dealer would 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:
Type of purchase
|
Local
|
Interstate
|
Imported
|
GST incidence on purchase (taxes payable)
|
CGST
SGST
|
IGST
|
BCD
CGST
SGST
|
Credit entitled on (with respect to taxes paid)
|
CGST
SGST
|
IGST
|
CGST
SGST
|
The assessee is required to account for CGST, SGST and IGST separately.
Extent of Cross Utilisation:
Nature of tax paid on purchase
|
Can be utilized for payment of
|
CGST
|
CGST
IGST
|
SGST
|
SGST
IGST
|
IGST
|
CGST
SGST
IGST
|
IGST: Under this model
the Centre would levy the IGST which would be CGST plus SGST on all
inter-State transactions of taxable goods and services.[ This would also
include goods and services imports] Inter-State seller would pay the
IGST on value addition after adjusting of IGST, CGST and SGST on
purchases. The Exporting state would transfer to the Centre the credit
of SGST used on payment of IGST.
Compensation to States: In
the opinion of the paper writer though some States who are consumer
centric like Kerala would immensely benefit by GST most well to do
States like Gujrat, Maharastar, Haryana, Tamil Nadu & Karnataka
among others would get a share of the services consumed in the State
which is a much bigger proposition [ 59% of GDP]. They would also get a share of the Rs125,000/- of Additional Customs Duty as well as the Special Additional Duty] on imports.
The compensation for the first 3 years
would be 100% of the shortfall. Then 75 % and 50% in the 5th year.
States which over estimate the impact may find delayed disbursement a
possibility.
Administrative Mechanism: Both the Central Government and State Government would 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. Both
the State and Centre may also adjudicate jointly to avoid conflicting
decisions.
(iv) 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.
Challenges For GST Implementation: Some expected hurdles to be adequately overcome could be as under:
1. Standardization of systems and procedures all over India
2. Unfair dispute resolution- Equal powers
3. Training/ Equipping Tax administration
4. Adoption of huge capacity IT to improve
efficiency and credit states for input credit utilised as taxes
collected would be on account of destination state.
5. States not willing to give Veto to Union
6. Compensation disbursal doubts
The recent events and focus on making
India a powerful and respected country also needs tax reforms to be in
place for enhanced competitiveness. The view of the paper writer is that
in due course of time GST would be useful for the industry immediately
and for State / Central Government as well as general public over a
period of 2 years.
Acknowledgements to CA Roopa Nayak for base article prepared in 2012.
Madhukar N. Hiregange
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