Goods and Service Tax (GST)

Collaborate between enterprise and professional practices or even connect with government services seamlessly to process tax reporting while managing change effortlessly

Author, Columnist and Analyst, State level Indirect Taxes,

Sri Vinod Vashisht is a Punjab VAT Analyst & Author. He has authored books on Punjab and Chandigarh VAT Act , Punjab Entry Tax Act and Punjab Taxes on Entertainment and Cine Shows. He is also a Columnist for the Hindustan Times

             enGST will help you seamlessly transition to the new Tax Regime

The whole world is moving towards dismantling barriers to trade. The largest barriers to Indian trade have been its tax systems. Harmonization of the taxation systems through initiatives like value added tax is a crucial step in the unification of domestic markets and boosting trade and commerce. The “value added tax” (VAT) has been adopted across the world in various forms. Forty years ago, no more than ten countries had VAT, whereas now, the global spread of VAT has reached to more than 150 countries.

India too has modified its tax regime from Sales Tax/Central Excise to VAT models. The first phase of reform of indirect taxation occurred when the Modified Value Added Tax (MODVAT) was introduced for selected commodities at the central level in 1986, and then gradually it was extended to all commodities through Central Value Added Tax (CENVAT). Reforms at the State levels started through introduction of Value Added Tax (VAT). Haryana being the first Indian State to implement VAT in 2003 and Uttar Pradesh switched to VAT in January 2008 to complete the Indian experiment for a nation-wide State-level VAT.The VAT experience so far has been positive throughout India. Despite this success, there are still certain shortcomings in the prevailing VAT system in India such as non-inclusion of several level indirect taxes in the main VAT fold; b) cascading of taxes due to absence of seamless tax supply chain; and c) destination level taxation across board not incorporated.During the budget session of 2007-2008, the Finance Minister of India, declared that the journey of tax reforms won't end with just VAT implementation, but, this would go beyond - towards implementation of an integrated “goods and services tax” (GST)  effective from April 01, 2010. Though, the set target for GST has been missed, now, there is a likelihood that it would be implemented from 2011.

What is GST?

Goods and Services Tax (GST) is a comprehensive multi-stage value added tax on goods and services.It is collected on value added at each stage of sale or purchase.No differentiation between Goods and Services as GST is levied at each stage in the supply chain.Seamless input tax credit and tax on transactions is framed in such a way that only the end customers who consume the goods or services bear the final cost of the tax.

Generally, same rate of GST applies on goods and services. The application of the destination principle (required by international trading norms) ensures the external neutrality of VAT and tax is charged on the consumption of goods and services within the jurisdiction where the consumption takes place. Exports are zero-rated and imports are taxed on the same basis and at the same rate as local production.

Gains from GST:

1. Emergence of a single common market in the whole country.

2. A simple tax structure with only few tax rates.

3. Increased tax revenues due to wider tax base and better compliance.

4. Do away ambiguity that comes due to the overlapping nature of goods and services.

5. Removal of the inter-state tax irritants that hamper the free flow of goods.

6. Reduce manufacturing cost as setoff available right from production to consumption.

7. Tax on imports result in a level playing field for local manufacturers and traders.

                                                           The Indian story so far:

Phase-I, Sales Tax (ST):

A tax on the sale and purchase of goods was not unknown even five thousand years before when Manu compiled his xe "Manu-Smriti"Manu-Smriti - the Code of Laws of Manu. Modern sales tax, however, is said to be a product of First Great War - when the Governments, per force, had to reinforce their exchequers on account of the financial exigencies of the war.  France introduced it in 1914, followed by Germany (1916), Canada (1920), Russia (1921); Italy (1923), Australia (1930), New Zealand and America (1933).

The Government of India Act, 1935, made ‘Tax on the sales of goods' a provincial subject and provincial autonomy was introduced in India in 1937. States had to think of new avenues for balancing their budgets and it was the State of Madras that firstly enforced a general sales tax in the year 1939.  One by one, other Indian States followed suit.

Chronology of indirect taxation on Goods & Services in India
Year	Milestone
1935	Govt of India Act, 1935 made tax on sales of goods a provincial subject
1939	Sales Tax introduced in India in the State of Madras
1941	Sales tax introduced in the State of Punjab
1974	LK Jha Committee suggests VAT
1986	MODVAT introduced in India from 1st of March on select commodities
1991	Chelliah Committee recommends VAT
1994	Introduction of Service tax in India
1999	FM announces decision to introduce VAT in India. Formation of Empowered Committee on VAT
2002	Task Force on Indirect Taxes report headed by Kelkar. CENVAT introduced on all commodities at central level
2003	VAT introduced in first Indian State of Haryana
2005	VAT in 24 States/UTs including Punjab, Chandigarh, HP, J&K and Delhi.
2006	VAT implemented in 5 more States including Rajasthan.
2007	FM announces GST introduction in India from April 01, 2010. VAT implemented in Tamil Nadu & Puducherry. Central Sales Tax (CST) phase out starts, CST cut to 3%. Joint Working Group set up for proposing GST roadmap and structure.
2008	VAT introduced in the last Indian State of UP from January 01, 2008. CST reduced to 2%
2009	Empowered Committee released First Discussion Paper on GST on November 10. Report of Task Force on GST of 13th Finance Commission on December 15. Report of 13th Finance Commission (TFC) on December 29 - Chapter 5 on GST.
2010	Proposed date to introduce GST in India postponed to April 01, 2011.

Phase-II, Value Added Tax (VAT):

In 1986, MODVAT – a restricted form of VAT for select commodities was introduced at central level. In 1994, Service Tax came into existence. CenVAT was implemented for all commodities in 2002-03. In a meeting of all State CMs November 16, 1999 by the then union Finance Minister, it was decided to take steps for introduction of State level harmonized VAT and Empowered Committee of State Finance Ministers (EC) was formed in this regard. In a meeting of EC on 18th June 2004 a broad consensus was arrived to introduce State level VAT starting from 1st of April 2005. Following this, 22 States/UTs (Maharashtra, West Bengal, Karnataka, Kerala, Andhra Pradesh, Goa, Delhi, Punjab, Orissa, Assam, Sikkim, Meghalaya, Tripura, Arunachal Pradesh, Manipur, Jammu & Kashmir, Mizoram, Nagaland, Bihar, Himachal Pradesh, Dadar & Nagar Haveli and Daman & Diu) introduced VAT from April 1, 2005. Uttaranchal adopted VAT from October 1, 2005. Chandigarh introduced VAT from December 15, 2005. Haryana implemented VAT way back on April 1, 2003 and its structure is slightly different from others.  Andaman & Nicobar and Lakshadweep do not levy VAT. Five States of Chattisgarh, Gujarat, Jharkhand, Madhya Pradesh and Rajasthan implemented VAT from 1st of April 2006. Effective from first January 2007, VAT was introduced in Tamil Nadu. Puducherry also followed from July 01, 2007. Finally, the last Indian State, Uttar Pradesh, switched to VAT fold from January 2008. Despite the initial transitional problems, the implementation of VAT had been smooth and encouraging. The rate of growth of tax revenue has nearly doubled from the average annual rate of growth in the pre-VAT five year period after the introduction of VAT. Industry and trade has also responded to VAT regime positively.

Phase-III, Goods and Services Tax (GST):

The next significant step of India's indirect tax reforms is to introduce an integrated VAT on Goods and Services or in other words Goods and Services Tax (GST). On these lines, an announcement was made by the Union Finance Minister in the Budget session of 2007-08 that GST in India would be introduced from April 01, 2010. The Taxation Law (Amendment) Act, 2007 started the process of phasing out in stages the Central Sales Tax (CST) and eventually abolish it. The Empowered Committee of State Finance Ministers (EC) further constituted a Joint Working Group (JWG) comprising of Finance & Revenue Secretaries, which submitted its report on November 19, 2007. Based upon this report and comments received from various State Governments and Government of India, a working group of officials was constituted by the EC so as to prepare a road map and model on GST. The EC has taken a detailed view on the recommendations of this working group and has released First Discussion Paper on GST on November 10, 2009, for discussion with industry, trade and people at large. The Thirteenth Finance Commission has also given its report on GST on December 29, 2009. Though, the set target for GST has been missed, now, there is a likelihood that it would be implemented from April 01, 2011.

Brazil was the first country to adopt VAT system in the year 1967. In 1970's it was introduced in the European countries. In Asia, it was adopted by Pakistan in 1990, Bangladesh in 1991, China in 1994, and Nepal in 1997. In Europe, adoption of VAT was made a condition for membership of EC, due to this Europe could create a single market by abolishing fiscal frontiers. In SAARC countries, only Afghanistan and Myanmar has still sales tax laws. All the OECD (organisation for economic cooperation and development) member countries except the United States has implemented VAT.

Standard GST rate in most of the countries ranges between 15 to 20%. Taxation is on all  sectors with very few exceptions. There is full tax credits on inputs. Countries like Australia, New Zealand and European Union have adopted a single unified GST as a common tax on goods and services, while, countries like Canada and Brazil have adopted a dual GST where the tax is levied by both the central and the provincial governments. In Canada, GST (known as HST-Harmonized Sales Tax) varies from 12-15%. Average national GST in Brazil is 20%.  Average GST rate of European Countries is around 19% and the average GST of OECD countries is around 18%. India has preferred the Canadian to the Brazilian model.

Expected GST model in India:

 Dual GST model:  The proposed Goods and Services Tax will be a destination based tax measure, with tax set offs available across the production value-chain. GST structure is expected to have two components: one levied by the Centre, Central GST (CGST) and the other levied by the State, State GST (SGST). Both components would be applicable on all taxable transactions of goods and services. The Centre and the States would have concurrent jurisdiction for the entire value chain for all tax-payers on the basis of thresholds for goods and services prescribed for the States and the Centre. There would be separate statutes for Centre GST and States GST.

 Taxability:  A person will be liable to GST if his annual gross turnover is beyond a prescribed threshold level. Two tier rates on goods at both CGST and the SGST – standard rates and lower rate for essential commodities. In addition to these, it is expected that there would be a special rate for precious metals and a common exemption list.

 Set-off of tax credit: Input taxes paid against the CGST would be allowed to be taken as Input tax credit (ITC) for the CGST only and similarly, input taxes paid against the SGST would be allowed to be taken as ITC for the SGST only.

 Taxes to be subsumed: It is proposed that the taxes to be subsumed under CGST will include Central Excise Duty, Additional Excise Duty, Service Tax and Additional/Special Customs Duties (CVD/SAD) and the taxes to be subsumed under SGST will include VAT, Entry Tax, Entertainment Tax, Luxury Tax, Purchase Tax and Lottery Tax.

Exceptions: Basic Customs Duty, Octroi, Stamp Duty and Electricity duty may be kept outside the GST. Levies like the toll tax, environment tax and road tax will be outside the GST ambit, as these are user charges. A basket of petroleum products and natural gas likely to be charged GST and an additional levy by both the Central and States. No input credit would be available against on the additional levy. A similar treatment might be provided to alcohol and tobacco.

Inter-State trade: Centre would levy Integrated GST (IGST) which would be CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provisions for consignment or stock transfers. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. There will be a Central IGST authority for facilitating this. The existing CST will be abrogated.

Compounding Scheme: There would be a compounding/composition scheme for the small tax payers similar to the one under VAT system. As per the First Discussion Paper, there would be a compounding cut-off at Rs. 50 lakh of gross annual turn over and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for persons with turnover below the compounding cut-off. 

Assessment: Assessment, enforcement, scrutiny and audit would be undertaken by the same authority which is collecting the tax. The Central Board of Excise & Customs (CBEC) will be responsible for implementing the CGST and the State Tax administrations will be separately responsible for implementing the SGST. How IGST would be administered is still open.

Imports & Exports: The Centre will collect GST on imports and pass on the SGST component of it to concerned State on destination principle. Import of services will be subject to GST on a reverse charge mechanism. Taxes so paid will be available as Input Tax Credit. Exports will be zero rated.

Special Industrial Schemes: Industrial schemes, exemptions, remissions etc. would continue up to legitimate expiry time or converted into cash refunds schemes both for the Centre and the States. It is expected that the benefits presently availed by the EOUs and SEZ would continue to be available in the GST regime as well.

Compensation and Dispute mechanism: GST structure would include a compensation package for states in lieu of any possible revenue loss. Also there would a mechanism for dispute resolution and advance ruling.

Open Issues:

In a federal country like India, where each State, in terms of Constitutional provision, is sovereign in levying and collecting State taxes, introduction of a harmonized tax system for all the States is a big challenge.

1. GST Rates: First discussion paper on GST did not specify any GST rate. Currently, the standard CenVAT, VAT, CST and Service Tax rates are 8%, 12.5 %, 2% and 10% respectively. 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. With dual GST in place, this RNR is going to change. The applicable GST rates still need to be decided depending upon the finalized tax base.

2. Tax Base and Threshold limits: A dual threshold is proposed by EC for CGST and SGST. For CGST, the basic exemption for goods would remain at rupees 1.5 crores and for services a similar exemption would be provided later. For SGST, the basic exemption for goods and services would be rupees 10 lakhs. Department of Revenue has expressed concerns in having two different thresholds and has proposed a uniform threshold for goods and services for both SGST and CGST. Also, a threshold of rupees 50 lakhs has been proposed under the composition scheme for small taxpayers. The threshold exemption might not apply to persons engaged in inter-State business. 

3. Constitutional Amendment: ‘Taxes on sale of goods' is a State Subject (entry 54 under List-II State List, 7th Schedule of the Constitution of India), whereas, ‘taxes on inter-State sale of goods', ‘taxes on services' and ‘duty on goods manufactured' are Union Subjects (entry 92A, entry 92C and entry 84 respectively, under Union List). Bringing these all together requires broad consensus leading to constitutional amendment which is a prerequisite to introduction of GST and the government is considering various options to deal with the issue. In this context, the Thirteenth Finance Commission (TFC) has suggested the possibility of levying the GST pursuant to a tax agreement among the Centre and the states akin to the erstwhile Article 278 of the Constitution. The power of the states and the Union to make laws to impose the tax shall be subject to the terms of this agreement. Other alternatives under consideration are -amending the Constitution to bring in a Fourth List, which would grant concurrent powers to the Centre and the states for levy and collection of GST or changing the existing Article 246, which empowers the three lists, or introducing a new article in Chapter 11 of the Constitution.

4. IGST model:  For inter-State trade, an integrated model has been proposed by EC. The shortcoming of this model is that this will require creation of another Central IGST Authority which would add pain to the taxpayers. The Task Force for GST constituted by TFC has recommended another modified bank model. A final workable model still needs to be decided. Also, in the existing tax regime, place of supply is not a big issue because service is taxed by the Centre and the place of levy does not affect revenue receipts. In GST, however, the place of supply will have to be clearly defined to avoid disputes among states. There is need to clarify intra-State and inter-State service transactions.

5. Fiscal autonomy of States: The GST requires a commitment to a stable rate structure. This will compromise the fiscal autonomy of States and deprive them of the only lever of macro-economic policy available to them. Also, it is apprehended that the GST would accentuate the vertical imbalance towards Centre through larger tax revenues by allowing access to huge consumption base, hitherto, unavailable to the Centre.

Remarks:

1. The primarily objective of GST is

a) bringing together goods and services under same enactment

b) availability of set-off of tax credit in the whole supply chain

c) introducing destination principle at all levels. If all these primary objectives are met and there is agreement of dual GST floor rates with a provision of States levying supplementary tax, if the need arises - that should be taken as a good GST beginning in India. Even in Canada, which has very recently introduced GST (known as Harmonized Sales Tax, HST), the rates of GST are not same among its various States.

2. It seems there are going to be three Tax Administrators as against one currently for most of the cases –

1) State SGST Authority,

2) Central CGST Authority, and

3) Central IGST Authority. It seems clearly that Government is in no mood for simplification, rather, wants to impose additional burden on tax-payers and to encourage Inspector Raj. It is suggested that the jurisdiction between the CBEC and the State Administration may be divided (between the two only) in such manner that the interface of the taxpayer is confined to one tax administration only. The basis for division could be turnover or any other reasonable criteria. Otherwise, bureaucratic nightmare is going to increase for the tax payers.

3. It's not the first time when a Central Tax is to be administered by the States on behalf of the Centre. For instance, the Central Sales Tax (CST), a central levy, is being successfully administered by the States of India for the last fifty years.

4. A very strong infrastructure network backed by IT would be required for effective GST administration. This is to be backed by intensive GST awareness drivel.

5. VAT implementation is just been completed in whole of the country in 2008 and still not fully stabilized. Malaysia is trying to implement GST for the last three years. Going by the public pulse, Malaysian government has deferred GST introduction bill by another year. Adequate preparation for the changeover, rather than an arbitrary fixed schedule, should be the sole criterion for deciding the timing for introduction of GST.

6. Whatever is the final GST model, it should manifest what it has in its kitty to address problems of less privileged States of India. In the long run, what will differentiate one State from another is the quality of governance.

7. Its time for the Centre to act as a big Brother and a Facilitator to its States and to give to the Country – a comprehensive GST, the most innovative indirect reform of independent India. There is no doubt, GST can make the country as one market and can offer to its citizens an era of lower taxes, more revenues and lower prices.

Drawing the line from Chartered Accountants to the Goods and Service Tax (GST)