GOODS and Services Tax also known as the Value Added Tax (VAT) or Harmonized Sales Tax (HRN) is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. GST is levied at every stage of the production-distribution chain with applicable set offs in respect of the tax remitted at previous stages. It is basically a tax on final consumption. In simple terms, GST may be defined as a tax on goods and services, which is leviable at each point of sale or provision of service, in which, at the time of sale of goods or providing the services the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service.
Why is GST needed?
There is a saying in Kautilya’s Arthshastra, the first book on economics in the world that the best taxation regime is the one which is liberal in assessment and ruthless in collection. The proposed GST seems to be based on this vey principle. It is very much needed because of the following reasons –
++ Eliminates multiplicity of taxes, rates and exemptions.
++ Eliminates dual taxation of the same transaction (e.g. VAT & Service tax on EPC (engineering, procurement and construction) contracts).
++ Only one return to improve the efficiency in administration.
++ Increase in collection of revenue due to simplification.
++ Eliminates cascading effect [‘tax on tax’] created by existing indirect taxes.
++ Ensures uniformity of taxes across the territory, regardless of place of manufacture or distribution.
Components of GST
Let me just enlist the fundamental terms in GST, the details and practical orientations of which have been discussed subsequently in the article.
* IGST is summation of SGST and CGST. It will be levied only on Inter State transactions.
1. More than 140 countries have been already using GST system.
2. France was the first country in the world to introduce GST system in 1954.
3. Most countries have single rate system.
4. Canada and Brazil have dual rate system.
5. Standard rate of GST is 15-20%.
6. Full tax credit on input- 100%.
Background in India
[A] Current Central taxes on goods and services:
++ Excise duty on manufacture of goods with input tax credit available only on procurement from another manufacturer or under excise net tax paid on services used as inputs also available for rebate.
++ Custom duties on import of goods
++ Tax on certain identified services with credit towards tax paid on both services and goods used as input.
[B] Current State Taxes on Goods:
++ Value Added Tax which is applicable on sale or purchase of all goods at all points with a facility of input tax credit.
++ Entertainment tax on amusement and recreation parlors.
++ Luxury tax on luxuries provided in hotels and clubs.
++ Entry Tax on entry of goods in local areas.
++ Betting tax on bets placed on horse races.
Hence, for implementation of GST an amendment shall be required so as to enable the central and state governments with the powers to collect GST. For this there shall be multiple statues i.e. one for CGST and SGST statues for every state.
So, on juxtaposing GST with existing indirect tax structure one can easily regard GST as a precursor and a way towards improving & strengthening international competitiveness.
There are two GST models – single and dual as explained in the table. Dual GST model will suit the needs of country like India.
|Meaning||In single GST model, Central Government has right to levy tax.||In dual GST model, both Central Government & State Government have right to levy tax.|
|Example||Australia , Germany||Canada and Brazil|
Why dual GST model required in India?
India is a federal country where both Centre and the States have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of Government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will, therefore, will be in line with the Constitutional requirement of fiscal federalism.
So on one invoice there will be two taxes – a central tax and the state tax. So if a person is buying something for Rs.100 and suppose the central tax rate is say 6% and the state tax rate is 8% – there will be a tax of Rs. 6 at the center level and tax of Rs.8 at the state level – and will have to pay tax of 14% in total. So even though there are two calculations it is really one tax of 14% in one sense.
Taxes to be subsumed
A. Taxes to be subsumed under CGST:
++ Central Excise Duty
++ Additional Excise Duty
++ Excise Duty levied under the Medicinal and Toiletries Preparation Act
++ Service Tax
++ Additional Custom Duty known as Countervailing Duty (CVD)
++Special additional custom duty (SVD)
B. Taxes to be subsumed under SGST:
++ Value Added Tax / Sales Tax
++ Entertainment Tax (unless it is levied by the local bodies)
++ Luxury Tax
++ Entry Tax on entry of goods in local areas.
++ Tax on lottery, betting and gambling
++ State cess and surcharges in so far as they relate to supply of goods and services.
Purchase Tax: Some states have expressed their views that purchase tax should not be covered by GST. They are earning substantial revenues from it. Whereas majority states are of the view that no such exemptions should be given. If purchase tax is subsumed in GST, compensation has to be provided. However, this is still under consideration.
C. Out of purview of GST:
++ Basic Custom Duty: It will be continued to be levied under Customs Act, 1962 at the time of importation of goods.
++ Stamp Duty: It will be levied as per Indian Stamp Act, 1899.
++ Tax on Petroleum Products: Tax on petroleum products i.e. crude, motor spirit including aviation turbine fuel will be continued to be levied by the states with prevailing floor rate.
++ Tax on items containing alcohol: Alcoholic beverages are kept out of GST.
++ Tax on tobacco products: It would be subject to GST with input tax credit
GST on X & M
Exports would be exempt. Benefits shall be given to SEZs. However, such benefit will only be allowed to their processing zones. No benefit allowed on sales to DTA.
On imports, both CGST and SGST would be levied and full set off shall be allowed. Tax revenue in SGST will accrue to the state where goods and services are consumed.
Following shows the analysis of present indirect tax system and the upcoming GST:
Analysis of Present System V/s GST
|At Present under Excise & VAT||After implementation of GST|
|In Factory||Amount (Rs)||In Factory||Amount (Rs)|
|Assessable value||1000||Assessable value||1000|
|Add : Excise Duty @ 10 %||100||Add : GST @ 10 %||100|
|Sale value||1100||Sale value||1100|
|In Retail Shop||Amount (Rs)||In Retail Shop||Amount(Rs)|
|Cost Price||1100||Cost Price (Rs 1100 – Rs 100)||1000|
|Add : Expenses & Profit||400||Add : Expenses & Profit||400|
|Assessable value||1500||Assessable value||1400|
|Add : VAT @ 12 %||180||Add : GST @ 10 %||140|
|Sales Price||1680||Sales Price||1540|
|ANALYSIS (Fig. in Rs)|
|Excise duty paid by Factory @ 10%||100||GST paid by Factory @ 10%||100|
|VAT paid by retail shop @ 12 %||180||GST paid by retail shop @ 10%
(Rs 140 – Rs 100)
|Total taxes paid||280||Total taxes paid||140|
|Here, excise credit of Rs. 100/- is not available.||Here, GST credit of Rs. 100/- is available.|
A threshold of gross annual turnover of Rs. 10 lakhs both for goods and services for all the States and UTs will be adopted with adequate compensation for the States where lower threshold had prevailed in the VAT regime.
After taking into consideration the interest of small traders and small scale industries and to avoid dual control, it has been decided that the threshold for Central GST for goods will be Rs. 1.5 crores and the threshold for services should also be appropriately high.
++ It will protect the interests of small traders and SSI.
++ It will have an upper ceiling i.e. compounding cut off at Rs.50 lakhs of the gross annual turnover and the floor rate of 0.5% across the States.
++ The scheme would allow option for GST registration for dealers below the compounding cut-off.
It has been decided to adopt a two-rate structure for goods -a lower rate for necessary items and items 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. For taxation of services, there may be a single rate for both Central GST and State GST.
13 th Task Force Commission has proposed 12% GST rate out of which CGST and SGST on all non-SIN goods and services should be fixed at a single positive rate of 5% and 7% respectively.
Set off Provisions
++ CGST against CGST
++ SGST against SGST
++ No cross utilization between CGST and SGST
++ IGST for CGST/SGST and vice versa
Interstate transactions would be taxed as per a new and innovative model of IGST. Centre would levy IGST which would be sum total of CGST and SGST. Interstate dealer will pay IGST after adjusting available IGST, CGST and SGST on his purchases. If dealer utilize SGST credit for payment of IGST then their State Government have to transfer SGST credit to Centre. If dealer utilize IGST credit for payment of SGST then Centre have to transfer IGST credit to state government.
Illustration on IGST Model
Rajasthan Manufacturer [T/O > Rs. 1.5 crores]
Purchase of Raw Material
He sold Finished Goods to Maharashtra buyer at Rs. 1, 00,000/- and collected IGST @ 12% i.e. Rs. 12,000.
Maharashtra Trader [ T/O < Rs.1.5crores]
He sold all goods within state at Rs. 2,00,000/- and collected SGST @ 7% i.e. Rs. 14,000.
He will pay IGST of Rs.2,400 to Central Government after adjusting ITC of SGST Rs. 4,200/, CGST Rs. 3,000/- and IGST Rs. 2,400/- and file his E-GST return to Rajasthan Government.
Now, Rajasthan Government has to transfer SGST credit of Rs.4,200/- to Central Government which was used by manufacturer for payment of IGST.
He will pay SGST Rs. 2,000/- to Maharashtra Government after adjusting ITC of IGST Rs. 12,000/- and file his E-GST return to Maharashtra Government.
Now Central Government has to transfer IGST credit of Rs. 12,000/- to Maharashtra Government which was used by trader for payment of SGST.
Issues in implementation of GST in India
Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is undoubtedly a Herculean task. To overcome these hurdles, following issues need to addressed-
1. Constitutional Amendments: Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. For example- The States do not have the powers to levy a tax on supply of services. To give them this power requires necessary changes in Constitution which is itself a very procedural task.
2. IT Infrastructure: The Government needs to develop/set up proper infrastructure to implement GST, especially IT infrastructure.
3. Advance Ruling: Advance ruling and dispute resolution authorities should be set up by the Centre and States to ensure uniformity and fairness in decision-making.
4. Design and Structure: No less significant is the issue of an appropriate design and structure of GST. For instance, how the issue of inter-state movement of goods and services may be addressed.
5. Sharing of resources : Another contentious issue that is bound to crop up in this regard is the manner of sharing of resources between the Centre and the states and among the states. Taking away the powers of taxation of goods by the States will not be favoured by them.
6. Treatment of credit embodied in closing stock: Treatment of closing stock of finished goods with respect to tax credits on the date of implementation is also one of the issues involved.
7. Compensation to States : To remove resistance to change, the Centre is expected to put in place a mechanism in initial years to compensate the States for any revenue loss due to GST.
8. Unadjusted Credit: Whether unadjusted tax credit would be refunded by the State as applicable under the present VAT system? This issue also needs to be addressed.
9. Training: It needs to be imparted to both i.e. the officials of Revenue as well as the tax payers.
To sum up
From the above discussion, the advantage that may be evidently laid out is the increasing proximity of our tax system to the global tax system. However, every system has its own intricacy embedded at the initial stages and removing these difficulties involves various constitutional, technological, political and procedural barriers. Although Shri P.Chidambaram, Hon’ble Finance Minister in his budget speech in Lok Sabha didn’t set any new deadline, earmarking of money for compensation to state governments raises the possibility that it will be implemented soon.