SALIENT FEATURES OF PROPOSED GST
CA Madhukar N. Hiregange
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:
Þ
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.
Þ
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
|
Þ
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.
Þ
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.
Þ
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
|
Þ
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.
Þ 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.
Þ
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.
Þ
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.
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