Introduction: The Goods and Service
Tax Bill or GST Bill, officially known as The Constitution (One Hundred and
Twenty-Second Amendment) Bill, 2014, proposes a national VAT to be implemented
in India from April 2016. 'Goods and Services Tax' would be a comprehensive
indirect tax on manufacture, sale and consumption of goods and services
throughout India, to replace taxes levied by the Central and State governments.
GST would be levied and collected at each stage of sale or purchase of goods or
services based on the input tax credit method. This method allows
GST-registered businesses to claim tax credit to the value of GST they paid on
purchase of goods or services as part of their normal commercial activity.
Taxable goods and services are not distinguished from one another and are taxed
at a single rate in a supply chain till the goods or services reach the
consumer. Administrative responsibility would generally rest with a single
authority to levy tax on goods and services. Exports would be zero-rated and
imports would be levied the same taxes as domestic goods and services adhering
to the destination principle.
The introduction of Goods and
Services Tax (GST) would be a significant step in the reform of indirect
taxation in India. Amalgamating several Central and State taxes into a single
tax would mitigate cascading or double taxation, facilitating a common national
market. The simplicity of the tax should lead to easier administration and
enforcement. From the consumer point of view, the biggest advantage would be in
terms of a reduction in the overall tax burden on goods, which is currently
estimated at 25%-30%. As India is a federal republic GST would be implemented
concurrently by the central government and by state governments. After GST come
into force.
How will the GST work?
Example--let us suppose that GST
rate is 10%, with the manufacturer making value addition of ₹30 on his purchases
worth ₹100 of input of goods and services used in the manufacturing process the
manufacturer will then pay net ₹10 as GST paid on his inputs i.e ITC from gross
GST of ₹13. The manufacturer sells the goods to the wholesaler. When the
wholesaler sells same goods after making addition of ₹20, he pays net GST of
only ₹2 after set of ITC of ₹13 from the gross GST ₹15 to the manufacturer.
Similarly when retailer sells the same goods after value addition ₹10 he pays
net of GST 1 after set of ₹15 from his gross GST ₹16 paid to wholesaler. Thus
manufacturer, wholesaler and retailer have to pay only ₹6(3+2+1) as GST on
value addition along the entire value chain from the producer to retailer,
after setting of GST paid at the earlier stages.
Concept of GST(Goods and Services
Tax)
GST is an integrated scheme of
taxation that does not discriminate between goods and services and is a part of
the proposed tax reforms that centre on evolving an efficient and harmonized
consumption tax system in the country. GST is expected to replace the
plethora of indirect taxes including service tax, central excise duty,
additional excise and customs duties, central surcharges and cesses, state VAT,
state sales tax, entertainment tax not levied by local bodies, luxury tax,
taxes on lottery, betting and gambling, tax on advertisements and state cesses
and surcharges related to supply of goods and services. As these taxes have
been ineffective and have suffered from a litany of infirmities, including
exemptions and multiple rates, GST is expected to transform the labyrinthine
patchwork of taxes to a lean, streamlined process.
Main features of GST
- One levied by the Central Govt (hereinafter referred to as Central GST), and the other levied by the State Govt (hereinafter referred to as State GST) ,rates for which would be prescribed appropriately, reflecting revenue considerations and acceptability.
- 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.
- A two-rate structure a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.
- The GST will also be levied on import of goods and services into the country.
- The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply a reduction in unhealthy competition among the centre and the states over tax revenue that was prevalent earlier and an increase in harmonious functioning between them.
Benefits of GST:
a.The implication of GST assures a
single taxation system in the entire country for all goods and services making
tax compliance easier and more effective.
b. It will assist in better
conformity and revenue resilience
c. It will boost up economic
unification of India
d. It will certainly reduce the tax
burden for consumers
e. It will evade the cascading
effect in Indirect tax regime. For instance, when a paper making company
produces registers, the Central Government charges an excise duty on them as
they leave the factory. Whereas on the lower end of the supply chain i.e. at
the retail level, VAT is charged, without giving credit of the excise duty
levied earlier. But in GST system, both Central and state taxes will be
collected at the point of sale. Both components (the Central and state GST)
will be charged on the manufacturing cost.
f. It will result in cost
competitiveness of goods and services in Global market
g. It will bring uniformity in tax
rates with only one or two tax rates across the supply chain
h. It will result in a simple,
transparent and easy tax structure; merging all levies on goods and services
into one GST
i. It will increase tax collections
due to wide coverage of goods and services
j. It will result in a good
administration of tax structure
k. It will result in increased tax
collections due to wider tax base and better conformity
l.It will reduce transaction costs
for taxpayers through simplified tax compliance
Long Term Strategy:
It would lead to a higher output,
more employment opportunities, and economic inclusion. Initially however, it is
likely cause high inflation rates, administrative costs, and face stiff
oppositions from states due to loss of autonomy.
Key problems:
The key problems in the current
taxation system in India can be categorized into:
a.Exclusion of Services from state
taxation 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. Though these problems have been
addressed by amending the Constitution to bring such transactions within the
purview of the State taxation, services per se remain outside the scope of
state taxation powers.
b.Taxation at Manufacturing Level
i.e. CENVAT is levied on goods manufactured or produced in India which 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 which through
judicial proceedings has been observed to be a severe impediment to an
efficient and neutral application of tax
c. Cascading Tax - Oil and gas
production and mining, agriculture, wholesale and retail trade, real estate
construction, and range of services remain outside the ambit of 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.
d. Complexity- 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. The systems suffer
from substantial compliance gaps, except in the highly organized sectors of the
economy. The implementation of GST would be a positive step towards "a
strong single taxation system wherein various Central and State statutes will
be subsumed into one comprehensive enactment"
The states want petroleum, alcohol
and tobacco to be kept out of the purview of the GST. Seen as key to facilitating
industrial growth and improving the business climate in the country, the GST
bill needs to be passed by a two-thirds majority in both houses of parliament
and by the legislatures of half of the states in the country to become
law. By subsuming most indirect taxes
levied by the central and state governments such as excise duty, service tax,
VAT and sales tax, the Goods and Services Tax proposes to facilitate a common
market across the country, leading to economies of scale and reducing inflation
through an efficient supply chain.
In an Diametric View-For Better Under Standing
Discussion:
If we calculate the total tax that
the producer has to pay in this case, it would be 120 lakhs(INR 50 lakhs on
procurement and INR 70 lakhs on sales). Now if you have a GST framework in
place, the total tax that the producer pays is INR 70 lakhs. How?
The producer had initially paid an
input tax of INR 50 lakhs. Now when he goes on to sell his batch for INR 700
lakhs, he gets a tax credit of INR 50 lakhs. Thus, he pays INR 20 lakhs in the
form of taxes for the final transaction. This adds up to just INR 70 lakhs for
the producer. The GST hence, reduces the tax burden on producers. The biggest
benefit of such a system is that it would contain various indirect taxes
currently levied on various participants in the supply chain. Reducing such
taxes would lower the overall production cost and increase the output of the economy in the
long run.
That sounds great but why GST when
we already have VAT..? isn't the VAT framework similar to that of GST..? VAT
regulations and rates generally vary across states. There is a tendency, as has
been observed, that states may resort to undercutting of rates to attract more
investors. This generally leads to a loss of revenue to both the state and
centre. GST would introduce uniform taxation laws across states and different
sectors. The taxes would be divided between the state and centre, based on a
formula that would be acceptable to both. Also, it would be easier to supply
goods and services uniformly across the country, as no additional taxes would
have to be paid across different states.Currently, no tax credits are provided
for interstate transactions. So do we as consumers get goods at
a cheaper price? Probably not, and it is here that the GST has been attacked by
the opposition.
Since taxes are distributed across
the chain, the consumer prices are likely to rise to maintain the current tax
revenue levels. The government has justified this by saying it would provide
tax cuts across various brackets. This isn't entirely satisfactory. First, the
tax paying population isn't too significant a number to begin with and second,
the tax payer is likely to get a meager tax cut for the GST he would pay for
all the goods or services he purchases.
Present Indirect Taxes Link to GST:
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 12.5% (without education cess).If VAT is added then
this rate for RNR products would be 27%.
Link to Proposed GST
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.Custom Duty: 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.
If VAT is added then this rate for NRN products would be total of 40%.
Link to Proposed GST
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.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.
Link to Proposed GST
The principles of interstate 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. The origin based tax of 1% is being proposed akin to CST for a limited
period of 2 years to get States to agree to entry tax subsuming.
d.Value Added Tax (VAT): Value
Added Tax (VAT) is levied by the State Governments on transfer of property in
goods from one person to another, when such transfer is for cash, deferred
payment or other valuable consideration.
VAT is also payable on certain transactions that are deemed to be sale
such as transfer of right to use goods, hire purchase and sale by installments,
works contract and sale of food and drink as a part of rendering of any
service.
Link to Proposed GST
The supplies of goods and
importantly services would now be available to the States as SGST. States would
also get apportioned part of the IGST for stock transfers which would suffer
IGST.
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 14% (Revised). 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.
Link to Proposed GST
The principles of point of taxation
to decide when the GST is payable may be followed. Further the Place of
Provision of Services Rules would be tweaked into place of supply rules to
decide the State where the service is destined or deemed to be provided. States
would get the SGST part of all services consumed in the State whether provided
from outside to the State or that which is provided and consumed in the State
itself.
© Taaza Vaartha
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