Analytics of Goods And Services Taxation (GST) Enigma In India Prospects, implications & Rollout Neelam Tandon, Deepak Tandon

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1 Analytics of Goods And Services Taxation (GST) Enigma In India Prospects, implications & Rollout Neelam Tandon, Deepak Tandon The introduction of GST is considered to be one of the most crucial tax reforms to be implemented by the Indian government since 1947 and aims to bring all the indirect taxes under one umbrella. Tax is defined as a fee charged ( levied ) by a government on a product, income or activity. The main purpose of levying taxes by Government to finance Government expenditures. According to the Constitution of India, Government has been given the right to levy taxes on both corporates and individuals. The Indian tax system is a three-tier tax system comprising of the following: Central Government Personal income tax Custom duties Central excise Service tax Sales tax Services tax Corporate tax Capital gains tax Securities transaction tax State Government Sales tax Stamp duty Land revenue Duty on entertainment Tax on professions and callings State excise Value Added Tax (VAT) Local Bodies Tax on properties Tax on markets Octroi Utility tax The taxes in India are classified into two main categories: Direct and Indirect taxes. The difference between the two can be explained as follows: Direct taxes Tax paid Directly to Government by the person on whom it is legally imposed Impact Tax burden Impact and incidence of tax lies only on the person on whom it is legally imposed Person cannot shift the burden and directly pays to the Central, State and Local Government Indirect taxes Indirectly to the Government by other persons. It is levied upon different activities like consumption, manufacturing, sales and others Impact and incidence of tax lies on different people Burden to pay the tax can be shifted on other persons apart from payee A. Need for GST in India Given the large number of issues that are associated with current indirect tax structure, Goods and Services Tax (GST) is the need of the hour in order to bring about a major revolution and upscale the Indian taxation system. Some of the benefits that GST provide which make its implementation crucial include the following: Elimination of cascading effect (no tax on tax) leading to reduced tax burden thereby fostering growth through increased production as removal of double taxation will provide tax credit to manufacturers. Increase in tax base thereby leading to overall increased tax revenue. Single taxation will bring in more efficiency as it will reduce the time wasted in tax collection on borders when goods were transported across states. More transparency and reduced final costs of goods and services. Bring uniformity in tax structure across states. Removal of multiplicity of taxation thus reducing the complexity of tax design. Lower compliance and procedural costs as GST would require maintaining single record and single compliance for both the Centre and the States. Boost the economic growth and facilitate ease of doing business. Make Indian goods and services more price competitive in the world thus boosting exports. Seamless cash flow and increased credit availability. Reduced corruption and tax evasion.

2 Simpler and rationalized tax structure with reduced accounting complexities. Centre) and SGST (goes to the State). The proportion that goes to the State is decided by the Centre on the basis of destination. B.1. Proposed GST Model Hence, GST is also known as destinationbased tax A new term has been introduced for GST implementation- Taxable supply against earlier used terms such as manufacture, sale or Till date, the multiple tax structure has created complexities and an unhealthy environment among different states as they follow different tax regime which leads to hampering the overall growth of the Indian economy. The implementation of GST in India will not only remove hindrances existing in the present indirect tax structure but will also boost the economy by making the country more business friendly, simplifying tax administration and reducing tax evasion to a large extent. GST is a comprehensive indirect tax to be levied on manufacture, sales and consumption of goods and services in India. Since India is a federal nation with States and Centre having difference in interests and opinions, hence in order to protect the same, a dual taxation structure was proposed by Empowered Committee (EC) in April The proposed GST structure comprises of Central GST (CGST) and State GST (SGST) to be levied on the same base. One salient feature of GST is that it does not discriminate among different states and proposes same tax rate thereby bringing uniformity and effectiveness. This also implies that definition of taxable person and event, chargeability, identifying measures to levy GST, etc. will be uniform across all States. Moreover, goods and services under GST will be considered the same for the purpose of taxation and legislation. Under the proposed dual model, all goods and services will form part of GST excluding a few exceptions. The GST will be levied under multiple statues: 1. CGST to be levied by the Central Government 2. SGST to be levied by the State Governments 3. Integrated GST (IGST) for Inter-State taxable supply and inter-state branch transfer of goods and services. It will comprise of both CGST (goes to the consumption. Also another thing to be considered is Input Tax Credit (ITC). Since CSGT and SGST will be levied separately under the proposed model, taxes paid under CSGT can be allowed as ITC for CSGT and can be utilized the same for future purposed and similar holds true for SGST. However, cross-utilization is not possible except in the case of ISGT. For the purpose of tax collection, a uniform procedure will be there for IGST, CGST and SGST wherein the assesse will be required to file return (monthly/quarterly) for all the three GSTs but a unified return will be there for all the three. A unique Taxpayer Identification Number (TIN) will be issued to each taxpayer which would be linked to Permanent Identity Number (PAN). This will help in removing the problem of information asymmetry and would lead to tax compliance and exchange of data. Also, all the information related to purchase and flow of credit will be available to tax authorities thus providing ease in tax collection and calculations. Similar system is currently followed for TDS Provision of the Income Tax Act. B.2. Salient Features GST is expected to be a game changing reform for the Indian economy and aims at reducing the cascading effect of tax on the cost of goods and services. B.2.1. Exemptions and exclusions under GST Exemptions under GST form an important aspect of GST efficiency and effectiveness. Suitability with the current fiscal policies of the Government becomes important for India when in chooses to adopt traditional GST (involving

3 large number of exemptions like that applied in European countries) or modern GST (involving small number of exemptions like that applied in New Zealand, Australia or Canada). The proposed GST is therefore expected to be applied to all the goods and services apart from the following: Exempted goods and services that are common to CGST and SGST Transactions that occur below the threshold limits defined Goods and services that are outside the purview of GST. These include: Electricity (Electricity duty) Real estate (Stamp duty and property tax) Petroleum products (Yet to be included by GST council) Tobacco products (Central excise along with GST) Alcohol for human consumption (State excise plus Value Added Tax (VAT)) B.2.2. Dual Goods and Service Tax (CGST and SGST), Integrated Goods and Service Tax (IGST) and Setting off Input Tax Credit (ITC) Integrated Goods and Service Tax (IGST) Model was proposed by the Central Board of Excise & Customs and was subsequently improved by incorporating suggestions from various states. IGST will replace the Central Sales Tax and would incorporate levying taxes on all inter-state transactions. The Empowered Committee has suggested that IGST model would be applied to all inter-state transactions of Goods and Services at a rate equal to the sum of CGST and SGST rates. IGST Rate = CGST Rate + SGST Rate However, it should be noted that IGST is not a 3 rd tax in addition to SGST and CGST but only a mechanism to monitor the inter-state trade of Goods and Services. The seller (i.e. the inter-state seller) would pay IGST on the value addition after adjusting the available credit on his purchases. The purchaser or the importing state would claim credit of IGST. Though cross utilization between CGST and SGST will not be allowed, set off of CSGT and SGST against IGST will be permitted. The major advantages of IGST Model are improvement of compliance level substantially since all inter-state dealers would be e-registered and correspondence with them would be over , maintenance of uninterrupted ITC chain on inter-state transactions, since input tax credit is used while paying the tax, no refund claims in the exporting state, and no upfront payment of tax or substantial blockage of funds for the inter- State seller or buyer. B.2.3. Destination based tax structure Under destination based tax structures, exports are allowed zero tax rates and imports are charged at par with domestic production. Destination based tax would help in the upliftment of less developed states that consume more and produce less. B.2.4. Goods and Service Tax Network Effective implementation of GST cannot be achieved until Government puts in place a strong IT infrastructure which takes care of smooth credit flow, granting of refund claim in auto-mode and other such activities. The IT infrastructure will bring transparency and simplicity in the tax structure thereby providing more clarity of the flow of funds and greater revenue collection. Some of significant benefits of the infrastructure include low compliance and procedural costs, automation of various processes such as e-registration, e- return and e-payments, automatic verification, greater administrative efficiency, smooth flow of credit, proper channelizing of funds between the Centre and the States, and minimisation of tax evasion due to complete access of information.

4 Some of the desirable features of GSTN include: Features Simplicity taxpayers Respect autonomy of States Uniformity of policy administration Enable digitalization and automation of the whole chain Reduce leakages Leverage investments and purchases will be filed on the 10th and 15th of every. The data so collected will be populated in monthly and annual returns. In Particulars addition, GSTN is also in discussion with for Easy compliance process and accounting software firms such as Tally ease to pay tax through online Solutions and as SAP along with online portals portal rather than visiting a specific location like ClearTax which can provide interfaces to help businesses file tax using their own Complete autonomy of States should be maintained without any systems rather than logging into the portal. dilution GSTN is also promoting mobile applications to generate invoices and process returns for Standardised business processes leading to reduced compliance extremely small retailers.as of September cost and better administration 2016, approximately 60% of the work has been completed by Infosys. The IT network for Documents should be processes electronically and process should CEBC, EBI, banks, state accounting authorities be digitalized leading to faster and states is expected to be ready by endprocessing and more transparency December 2016 while testing and complete Increase in tax base, removal of integration is expected to be completed by double taxation and transparency March Also, GSTN released Application will lead to reduction in tax Program Interface (APIs) in the first week of evasion and leakages October These will provide the taxpayers existing Aligning the Mission Mode a platform to pay their taxes and undertake all Project in Commercial Tax with functions such as registration, filing of returns GST and many more. GSTN aims to create an ecosystem of service providers known as GST Suvidha Provider (GSPs) which will look further providing application for websites, mobile apps and tax filing. In order to provide the services in the fastest possible way would be a common GST portal providing common registration, returns and challans for all stakeholders. GSTN is therefore a huge electronic network that will provide complete transparency and will help not just know the turnover or the tax collected for the financial year but also analyse the trends and frauds, if any. The work of GSTN commenced in November In November 2015, contract of INR13.8 billion was signed with Infosys for being the IT partner. This forms the entire cost of the project. Of this, INR5 billion is the capital expenditure. GSTN took a loan of INR5.5 billion from IDFC to finance the same. GSTN currently has data centres in two locations- Delhi and Bangalore. It is currently building backend system for more than 20 states while the remaining states and the CBEC are working on their own systems. Moreover, it has planned that four forms will be filed for return by an average taxpayer. These include return for purchases, supplies, annual and monthly returns. Of this, return for supplies B.2.5. Advantages of GST in India Some of the benefits of GST include: Area Business Government (Central and State) Consumer Advantages Reduced compliance cost due to robust IT infrastructure Removal of cascading effect or double taxation Uniform tax structure and rates Provide price competitiveness Reduction in final costs leading to increased production and also boost exports Better tax administration Reduced leakages and tax evasion Increased tax base thereby increase in overall tax revenue Single, uniform, transparent and corruption-free tax structure Reduction in overall tax burden

5 B.2.6. Challenges faced under GST While GST will revolutionize Indian tax structure, there exists some challenges with its introduction and final implementation. Few of them are listed below: Lack of proper infrastructure Determination of rate Sector related issues It may help larger companies more than the smaller ones thereby creating discrimination Reduced state fiscal and political autonomy The burden of taxes is expected to fall more on lower income groups B.2.7. GST Impact on various sectors Sector Impact Description Manufacturing and Positives Increased Input Tax Credit Retail Sector Full credit of tax on interstate sales Negatives Job work transactions and stock transfers likely to be taxed. FMCG Positives Reduced logistics and distribution cost: need for multiple sales depots eliminated. Warehouse rationalisation Negatives Probable introduction of Sin Tax on aerated beverages and tobacco products. Food companies may not get benefits of concessional excise rates E-Commerce Positives Improved Ease of Doing business index and single unified market across India Free movement of goods across the country Negatives Increased administration, documentation costs. Automobiles Positives On-road price of vehicles to fall by roughly 7-8%; suggests some analyst reports. This may in-turn boost volumes of sales. Negatives Demand for commercial vehicles may be hit mid-term Pharmaceuticals Positives Concessional tax structure for this sector is expected to continue. Supply chain efficiencies expected if the rate is below 15%. Negatives If GST rate is higher than current tax rate on medicines, they may become costlier Banking & Positives Smooth and effective disbursement of loans and allied services. Financial Services Negatives Expected increase of rate of fee based transactions to 18-20% Loan processing fees, debit/credit card charges, insurance premiums expected to increase. Being a destination based tax, ascertaining the destination of financial services would be difficult Literature Review Dr. R. Vasanthagopal (2011) 1 in his report suggested that switching to seamless GST from current complicated indirect tax system in India will be a positive step in booming the Indian economy. A successful implementation of GST will lead to its acceptance by more than 130 countries in world and name India amongst the few countries that have implemented GST. Saravanan Venkadasalam (2014) 2 analysed the post effect of GST on the national growth of ASEAN states using Least Squares Dummy Variable Model (LSDVM) in his research paper. He stated that seven out of 10 ASEAN countries are implementing GST and studied the correlation of GST implementation to nation s development. He also suggested that a positive impact of GST depends on a neutral and rational design of the GST model. Pinki, Supriya Kamma and Richa Verma (July 2014) 3 studied, Goods and Service Tax- Panacea For Indirect Tax System in India and concluded that the new NDA government in India is positive towards implementation of GST and it is beneficial for central government, state

6 government and as well as for consumers in long run if its implementation is backed by strong IT infrastructure. Gupta,Ankita (2016) 4 in her research study highlighted the problems of double taxation in India. Indirect Taxes Committee of ICAI (2016) 8 discusses the current and proposed laws with regard to time and place of the incidence of tax. It also talks about provisions if any. It carefully examines sections 12 and 13 and the amendments in the same. Objectives of Study The study aims to achieve the following objectives: To study the current multilayer tax structure in India and the concept of GST To ascertain the need for GST in India and analyse the proposed GST structure To know the advantages and challenges of GST and suggest a roadmap forward for GST Rationale for Study The Constitution Amendment Bill for GST has been approved in Rajya Sabha on 3 August Groundwork for the same is in progress and GST is expected to roll out in April It will be an important step by the Government to achieve transparency and remove cascading effect in indirect tax structure. Methodology and Analysis The study has been carried out using secondary data collected from several journals, articles, magazines and newspapers. Descriptive study has been undertaken to understand the vast topic of the study. The authors have empirically analysed the implication of GST through the following caselets: Caselet I. In case of GST regime: Particulars Stage 1 (Purchase of raw material by manufactu rer) A shirt manufacturer buys raw material or Stage 2 (Manufact urer to wholesaler ) Stage 3 (Wholes aler to Retailer) INR10,000 INR13,000 INR15,0 00 inputs (cloth, buttons, thread, tailoring equipment) Tax on material INR1,000 INR1,300 INR1,50 purchased (at 0 10%) Added value INR3,000 INR2,000 INR1,00 0 Gross value of the good New tax amount (at 10%, on gross value) Effective GST inc idence on the manufacturer INR10, ,000, or INR13,000 INR13, ,000, or INR15,000 INR15, ,000, or INR16,0 00 INR1,300 INR1,500 INR1,60 0 INR300 (1,300 1,000) INR200 (1,500 1,300) INR100 (1,600 1,500) Thus, the total GST on the entire value chain from the raw material/input suppliers through the manufacturer, wholesaler and retailer is, INR1,000 + INR300 + INR200 + INR100, or INR1,600. If case of non-gst regime: In a full non-gst system, there would a cascading burden of tax on tax, as there are no set-offs for taxes paid on inputs or on previous purchases. For Stage I, since there will be no-set off of earlier paid tax of INR1,000, therefore manufacturer will good to wholesaler at INR14,300 (INR13,000 + INR1,300). With the wholesaler adding value of INR20, the gross value of the good sold by him is, then, INR16,300. On this, the tax of INR1,630 (at 10%) takes the sale value of the good to INR17,930. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchase from the manufacturer. The retailer, thus, buys the good at INR17,930, and sells it at a gross value of INR2,0823, which includes his value addition of INR1,000 and a tax of INR1,893 (at 10% of INR17,930). Again, there is no mechanism for setting off the tax on the retailer s sale against the tax paid on his previous purchase. The total tax on the chain from the raw material/input suppliers to the final retailer in this full no- GST regime will, thus, work out to INR1,000+ 1, , ,893 = INR5,823. For the

7 final consumer, the price of the good would then be INR15,000 + INR5,823 = INR20,823. Compare this INR20,823 with a tax of INR5,823 to the final price of INR16,600, which includes a total tax of INR1,600, under GST. Caselet II: The caselet assumes that CGST and SGST rates are 5% each and hence IGST rate would be 10%. A a dealer in Madhya Pradesh has made an intra-state purchase of goods worth INR1,000,000 and sold them to a dealer B in Delhi for INR1,200,000 after some value addition. B, sold the above goods for INR1,500,000 locally. For A: 1. Total input tax calculation for A (bought goods locally) SGST= 5% of INR1,000,000 i.e. INR50,000 CGST= 5% of INR1,000,000 i.e. INR50,000 Total input tax for A = INR50,000 + INR50,000 = INR100, Total output tax calculation for A (sold goods inter-state) IGST= 10% of INR1,200,000 i.e. INR120,000 The output liability of IGST is first adjusted against input CGST and then against input SGST. So for A, output IGST of INR120,000 would be 1 st used to set off INR50,000 of input CGST and then to set-off INR50,000 of input SGST. Since the output IGST amount has been used to set off input SGST, this amount will be transferred to the Union Government by the Madhya Pradesh Government. Mr. A would pay rest of the INR20,000 in the IGST account of the central government. For B: 1. Total input tax calculation for B (bought goods inter-state) IGST= 10% of INR1,200,000 i.e. INR120, Total output tax calculation for B (sold goods locally) SGST= 5% of INR1,500,000 i.e. INR75,000 CGST= 5% of INR1,500,000 i.e. INR75,000 Total output tax for B = INR75,000 + INR75,000 = INR150,000 The input tax of IGST of INR120,000 is first adjusted against output CGST (of INR75,000) and then against output SGST (INR120,000- INR75,000 = INR45,000). After availing the input tax credit, B would be liable to pay the balance of INR30,000 (INR75,000-INR45,000) as SGST to the state government. Now, since INR45,000 of IGST has been used to set off SGST, the amount will be transferred from the Union government to the Delhi state government. VI. Latest on GST : (i) As there is a turf issue over tax payer jurisdiction the rollout maybe delayed by a quarter to July 1,2017. GST is not an income tax but a transactional tax. Can be delayed Status is that unanimous decisions on 10 issues while three more dual control, list of items in tax bracket and model CGST and IGST laws are still pending. (ii) The CGST and IGST laws can be passed only in the Budget Session in early February Budget can come this year on February 1,2017 instead on the last day. Thereafter, states will have to pass the SGST law in their assemblies. After the law is passed, industry would need at least 3-4 months time to be GST ready, especially on the IT infrastructure front. Most IT companies would come out with their patches and updates after the final law is crystallised. July 1 appears to be a more feasible date for implementation. GST Council has already cleared discussion on 20 chapters and only 7 chapters remain (iii) Various timelines had been decided for different aspects of implementation of GST such as recommendation of the Model GST Laws by the GST Council

8 propose a four-tier tax structure with a peak rate of 26% under GST. It is expected that approximately 20-25% of the taxable items would come under peak rate. It is a proposal yet to be devised. The area of study (GST in India) is vast and continuously evolving and therefore all the intricacies cannot be incorporated completely. Lack of Time just 6 months left may be a tough task to implement GST. Centre and state yet to have a consensus. Another extension till October November 2017 looks more realistic. The Constitution Amendment Bill will now require the President s assent, following which the all-important GST Council will also be set up. Simultaneously, the real nitty-gritty of the GST will have to be worked out. References and its passage by the Union Parliament and State Legislatures, the development of front-end Information Technology (IT) modules on the common GST portal and the back-end IT systems Conclusion As of September 2016, Government of India proposed to implement the Goods and Service Tax (GST) from the financial year beginning April The Chief Economic Adviser (CEA) of India Arvind Subramanian has arrived at 18% as the ideal rate. However states are demanding to be capped higher to at least 20% fearing a sharp fall in the revenues. A lot of analysts suggest that April 2017 is too early to bring about such a major tax reform in the Indian Tax structure. The passing of the 122 nd Constitutional Amendment Bill came forward as a major hurdle crossed for effective implementation of this uniform tax regime. A large number of day to day implementation issues have to be tackled before its streamline rollout on 1 April The need of efficient IT infrastructure combined with synergy between the state and central implementations is the need of the hour. Since the tax rate is yet to be decided, the exact effect of GST on various sectors cannot be stated. However, an estimate of implementation has been duly recorded. If implemented GDP of the Country may cross 9%. Overall, while a large part of work has been completed, a lot is yet to be done for the effective implementation of GST in India. If roll-out effectively, GST could be the game changer in the Indian economy and provide an impetus for growth and transparency. Limitations Some of the limitations include: The study has been conducted till September The recent talks regarding 26% peak rate of GST have not been incorporated in the study. As on 17 October 2016, the Centre is likely to 1. Gupta A.K.(2016), GST: Concept & Roadmap, Lexis Nexis, Gurgaon, India, Gupta, Ankita (2016), Problems Of Double Taxation In India - A Case For Progressive GST (Goods and Services Tax), Journal of Commerce & Management Thought,July-September 2016, Pg No Kumar, N (2014), Goods & Services in India: A way forward, Global Journal of Multidisplinary Studies, Pg No. 3(6) Pinki, Supriya Kamna, Richa Verma(2014), Good and Service Tax Panacea For Indirect Tax System In India, Tactful Management Research Journal,Vol2, Issue 10, July Dr. R. Vasanthagopal (2011), GST in India: A Big Leap in the Indirect Taxation System, International Journal of Trade, Economics and Finance, Vol. 2, No. 2, April Saravanan Venkadasalam, Implementation of Goods and Service Tax (GST): An Analysis on ASEAN States using Least Squares Dummy Variable Model (LSDVM), International Conference on Economics, Education and Humanities (ICEEH'14), Dec , 2014 Bali (Indonesia), Pg No Satya Poddar; 2016 (Partner, Tax & Regulatory Services, EY),(2016), Model GST Law or lowest common denominator?, Business Standard, Vasanthagopal, Dr. R. (2011), GST in India: A by leap in Indirect Taxation System 9. Report:PricewaterhouseCoopers Private Limited., Decoding the Model GST Law Key features of the draft Model GST Law, Various websites: