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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