GST (Goods and Services Tax)
GST is a revolution in indirect taxes. GST will replace all Indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services. GST (Goods & Services Tax) is a domestic consumption tax applicable alike on all goods and services. It will eliminate the differential treatment of the manufacturing and service sector. It shall be a multi-stage tax where the ultimate burden shall lie on the consumer.
Global View on GST
France was the first country to introduce GST system in 1954.More than 150 countries have already introduced GST in some form. It has been a part of the tax landscape in Europe for the past 50 years and is fast becoming the preferred form of indirect tax in the Asia Pacific region. It is interesting to note that there are over 40 models of GST currently in force, each with its own peculiarities. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. It is only recoverable on goods used in the production process, and GST on fixed assets is not recoverable. GST was improved the yielded revenues higher than anticipated, in large part due to improved compliance. For example, when the GST was introduced in New Zealand in 1987, it yielded revenues that were 45 per cent higher than anticipated, in large part due to improved compliance. It is more neutral and efficient structure could yield significant dividends to the economy in increased output and productivity. The GST in Canada replaced the federal manufacturers' sales tax which was then levied at the rate of 13 per cent and was similar in design and structure as the CENVAT in India. It is estimated that this replacement resulted in an increase in potential GDP by 1.4 per cent, consisting of 0.9 per cent increase in national income from higher factor productivity and 0.5 per cent increase from a larger capital stock (due to elimination of tax cascading). The Canadian experience is suggestive of the potential benefits to the Indian economy. Most countries have a single GST rate that ranges between 15 – 20%. In GST regime, all sectors and transactions (whether in Goods or Services) are taxed with few exceptions or exemptions.
Need of GST
A. CENVAT and state VATs clubbed with CST present a grim tax scenario having cascading tax effects.
B. The Centre is restrained by the constitution from collecting tax on goods beyond the point of manufacture. Similarly States are restrained by the constitution from levying tax on services and interstate transactions.
C. Neither of the two is a comprehensive tax. With each one encroaching upon the domain of the other, inefficiencies, complexities and duplicity are order of the day.
D. GST operates on a negative list, i.e. all goods and services are subject to GST unless specifically exempted. Sales Tax operates on a similar principal; service tax operates on a different basis, where services that are specifically prescribed in Finance Act are taxable.
E. Nature of complexities varies from taxability to classification to valuation. Some of such burning issues are:
a. Excise on MRP
b. Excise, VAT and Service Tax on Software,
c. VAT & Service tax on:
i. Works Contracts
ii. Right to Use and
iii. Composite Contracts such as AMC transactions
F. Information Technology has bridged the communication gaps and redefined the manner of execution of business. Business transactions over Internet know no physical barriers.
G. Tangibility is no more a criteria to define goods thereby making copyrights and trade -marks as tradable goods.
H. Tax cascading effect –
a. 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
b. Real estate transactions are outside the scope of both VAT and CENVAT
c.The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs
Model of Indian GST
1. During the central budget of 2007–2008, Union Finance Minister Palaniappan Chidambaram announces introduction of GST from April 1, 2010. After announcement the Empowered Committee of State Finance Ministers would work with the Central Government to prepare a road map for introduction of GST in India. After this announcement, the Empowered Committee of State Finance Ministers decided to set up a Joint Working Group on May 10, 2007, with the Adviser to the Union Finance Minister and the Member-Secretary of Empowered Committee as co-convenors and the concerned Joint Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries of the states as its members. The Joint Working Group, after intensive internal discussions as well as interaction with experts and representatives of Chambers of Commerce and Industry, submitted its report to the Empowered Committee on November 19, 2007. During November, 2009 First Discussion Paper on GST presented by the Empowered Committee. During December, 2009 Recommendations on GST presented by the Task Force.
Main Element of Indian GST
1. It is a VAT – Plus, Consumption and Destination point based tax regime.
2. Applicable to ALL transactions of "Goods" and "Services".
3. Equates the concept of "Services" with "Goods".
4. Provides for "Input Tax Credit" (ITC) with set offs at each stage of value addition.
5. The taxable event is "Supply" : and "Supply" at all stages, including imports.
6. The tax itself is :
CGST : Central Goods & Services Tax
SGST : State Goods & Services Tax
IGST : Integrated Goods & Services Tax
Levies under GST
Central GST (CGST)
Intra – state sale of goods and provision of services
1. In case of Central GST, following Taxes will be subsumed with CGST which are at presently levied separately on goods and services by Central government:
a. Central Excise Duty
b. Additional Excise Duty
c. The Excise Duty levied under Medicinal and toiletries preparation Act
d. Service Tax
e. Additional Custom Duty (CVD)
f. Special Additional Duty
h. Education cess and Secondary and Higher Secondary education cess
2. State GST (SGST)
Intra – state sale of goods and provision of services
In case of State GST, following taxes will be subsumed with SGST; which are priestly levied on goods and services by State Governments :
a. VAT/ Sales Tax
b. Entertainment Tax (unless it is levied by local bodies)
c. Luxury Tax
d. Tax on lottery
e. State Cess and Surcharge to the extend related to supply of goods and services.
3. Integrated GST (IGST)
Inter – state sale of goods and provision of services
Integrated GST (IGST) to be levied on inter- State movement of Goods & Services
IGST = CGST + SGST
To be collected by the Central In the Origin State (i.e., tax collected from supplying state) To be passed over to the Destination State (i.e., ITC to Buying state) Clearing house mechanism to be adopted.
For Stock transfers and consignments, appropriate provision will be provided.
The ITC will be allowed in this transaction will be SGST, IGST, CGST as applicable.
4. GST on imports in the form of CGST & SGST
Input Tax Credit (ITC)
A. Taxes Paid against CGST allowed as ITC against CGST. Taxes paid against SGST allowed as ITC against SGST.
B. Cross utilization of ITC between the Central GST and State GST would not be allowed. Exception: Inter State Supply of goods and services.
GST Rate Structure:
A. Two Rate Structure
B. A lower rate for necessary items and goods of basic importance
C. Standard rate for goods in General
D. Special Rate
E. Exports are fully exempted with Zero rates.
Mechanism for Levy, Collection & Appropriation of tax
Both the present administrative machineries shall continue to work. IGST to be exclusive domain of Central Government.
One CGST and different SGST Acts to be promulgated. However the following definitions may be uniform:
a. Taxable Base
b. Chargeability of tax
c. Taxable Event
d. Taxable Person
e. Valuation Methods
f. Classification of goods and Services
i. ITC Mechanism
j. TIN-PAN Based
A. The rates may be changed only with mutual consent of states.
B. Check posts may reduce but not end. Joint check post of entry /exit states may be installed.
C. All forms and stationery may be common / uniform. Assessments may be common. Vigilance may be separate.
1. Distinction between Goods and Services must go.
2. Economic Transaction must be the criteria.
3. But Petroleum products have always been outside VAT and are likely to so continue.
4. Tobacco and Liquor may have special treatment
5. Basic threshold shall be prescribed at 10L for SGST and 1.5 Cr for CGST. Centre may not agree. Some states may be favored.
6. There is also list of non-creditable goods which is likely to be sustained.
7. All services are intended to be taxed at a standard rate.
8. If states tax all services the criteria for taxation shall be consumption state.
9. Rendering of services cannot be equated to selling of goods in terms of:
a. Transfer of property.
b. Movement from one state to another.
c. Storage and stocks
10. Services are normally produced, delivered and rendered at the same time.
11. Thus taxing of service related transactions shall be a nightmarish experience for the states