Asian Research Consortium

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1 Asian Research Consortium Asian Journal of Research in Business Economics and Management Vol. 5, No. 8, August 2015, pp ISSN Asian Journal of Research in Business Economics and Management Goods and Service Tax (GST): A Step towards Indirect Tax Reforms in India Abhimanyu Sahoo* Abstract *Chartered Accountant and Assistant Professor, Ravenshaw Business School, Ravenshaw University, Cuttack, India. DOI NUMBER / Buoyed by the overall success of the State VAT, the Centre and the States are now embarked on the design and implementation of the perfect solution alluded to in the Bagchi Report *. As announced by the Empowered Committee of State Finance Ministers in November 2007, the solution is to take the form of a Dual Goods and Services Tax (GST), to be levied concurrently by both levels of government which is a destination based consumption tax. While presenting the Union Budget , former Finance Minister P Chidambaram had announced that GST would be introduced from April 1, 2010, in order to supplement the existing VAT system in India with a tax structure where goods and services tax can be unified in a comprehensive manner. The Empowered Committee of State Finance Ministers would work with the Central government to prepare a road map for its roll out. The implementation of GST will, in all likelihood, be delayed, given that there is lack of consensus among the States and Centre on aspects relating to limiting fiscal autonomy of the States. But sooner or later it will see the light of the day. This paper discusses about the mechanism and operating framework of the proposed GST in detail. Keywords: Indirect Tax, GST, VAT, Cascading Effect, Input Credit. * See the web resources available at 58

2 I. Introduction India has witnessed substantial reforms in indirect taxes over the past two decades with the replacement of State sales taxes by Value Added Tax (VAT) in 2005 marking a watershed in this regard. Prior to VAT implementation, the tax structure was considered problematic primarily due to the cascading effect of taxes whereby an item is taxed more than once from the production to the final retail sales stage. Exporters were also becoming less competitive in the international market due to the huge input costs involved (tax burden of a commodity increases manifold as it is taxed repeatedly) through the earlier sales tax mode, reflected in higher prices of products as compared to global competitors. To avoid this kind of a tax structure, VAT was introduced so that taxes are paid on the value added portion by each producer and the hurdles of the cascading effect are done away with. But shortcomings were also noticed in the VAT structure and efforts were made to further rationalise the system. For instance, a number of Central taxes like customs duty, surcharge were not included in Central Value Added Tax (CENVAT) while indirect taxes at the State level such as entertainment and luxury taxes were left out of the purview of VAT. The major problem with VAT is that CENVAT on certain commodities remains included in the value of goods to be taxed under State VAT. Thus, the same set of goods is taxed repeatedly once by the Centre and then by the State. Moreover, since VAT is applied on goods only (tax on services in India is a complicated issue due to various exemptions and definitional problems), there is also the task of calculating tax on services and adding it to the VAT on goods. The government has therefore recognised the need for harmonisation of goods and services tax so that both can be levied in a comprehensive and rational manner in a new taxation regime Goods and Services Tax (GST). II. Significant Features of GST Some of the important features of Goods and Service Tax(GST) can be explained as follows: The basic principal governing behind GST is to have single Taxation System for Goods and Services across the country. Currently Indian economy has various taxes on Goods and services such as VAT, Service Tax, Excise, Entertainment Tax, Luxury Tax Etc. now in the new Proposal of GST; we will be having only two taxes on all goods and Services as follows: a) State Level GST(SGST) b) Central Level GST (CGST) 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 59

3 c) The Excise Duty levied under Medicinal and toiletries preparation Act d) Service Tax e) Additional Custom Duty (CVD) f) Special Additional Duty g) Surcharge h) Education Cess and Secondary and Higher Secondary education Cess 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. The basic principal for subsuming of taxes in GST is provided as follows: a) Those taxes which commences with import / manufacture /production of goods or provision of services at one end and the consumption of goods and services o other end. b) The taxes, levies and fees which are not related to supply of goods & services should not be subsumed under GST. The GST shall have two components: one levied by the Centre (hence, referred to as Central GST), and the other levied by the States (hence, referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, taking into account the revenue considerations and acceptability. This dual GST model would be implemented through a certain number of legal provisions (for every State there would be one Central GST [CGST] and State GST [SGST], and the associated legal framework). The Central GST and the State GST would be applicable to all transactions of goods and services except the exempted goods and services, goods that are outside the purview of GST and the transactions that are below the prescribed threshold limits. 60

4 The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13 or 15 digits. Taxes on items containing alcohol and petroleum product are kept out of GST. They will continue to be taxed as per existing practices. Tax on Tobacco products will be subject to GST. But government can levy the extra Excise duty over and above GST. The Small Taxpayer: The small taxpayers whose gross annual turnover is less than 1.5 Crore are exempted from CGST and SGST. Input Tax Credit (ITC): Taxes Paid against CGST allowed as ITC against CGST. Taxes paid against SGST allowed as ITC against SGST. Cross utilization of ITC between the Central GST and State GST would not be allowed. Exception: Inter State Supply of goods and services. PAN based identification number will be allowed to each taxpayer to have integration of GST with Direct Tax. IGST Model and ITC: a) Centre would levy IGST ( CGST + SGST) b) The ITC of IGST will be allowed in this transaction c) Appropriate provision will be provided for consignment or Stock transfer. 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 Exports are fully exempted with Zero rates. III. Mechanism of Proposed GST The Goods and Service Tax is an improvement over the present VAT structure which will streamline flow and avail of input-credits from the stage of production to the time of consumption. 61

5 Unlike the present indirect tax structure which provides for a different kind of tax for a different kind of transaction i.e VAT is levied on intra-state transactions of goods, CST is levied on interstate transaction of goods, Service tax on service providers, CENVAT on manufacture of goods etc, the proposed GST subsumes all the above taxes besides others. It prescribes for the three models of levying of tax i.e a) At central level[central Goods and Service Tax(CGST)] b) At state level[state Goods and Service Tax(SGST)] c) For inter-state transactions[inter-state Goods and Service Tax(IGST)] The taxes which are to be included in the GST after introduction of it can be explained as follows: Central Taxes Central excise duty Additional excise duties Service tax Excise duty under Medicinal & Toiletries Preparation Act Countervailing duties (on imports in lieu of excise duty) Additional duty of Customs (levied on imports in lieu of value added tax or central sales tax) Surcharges and Cess State Taxes Value Added Tax Sales tax Entertainment tax (unless it is levied on local bodies) Luxury tax Tax on lottery, betting and gambling Entry tax not in lieu of Octroi State surcharges and cess in so far as they relate to supply of goods and services A. Central Goods and Service Tax Under this option, the two levels of government would combine their levies in the form of a single National GST, with appropriate revenue sharing arrangements among them. The tax could be controlled and administered by the Central Government. There are several models for such a tax. Australia is the most recent example of a National GST, which is levied and collected by the Centre, but the proceeds are allocated entirely to the States. In the case of a Central GST (where all goods and services are taxed by the Central government only), the Centre will collect most of the country s total tax revenue, leaving very little for the sub-national Governments. As against this, the present proposal is to have a dual GST. A single national VAT has great appeal from the perspective of establishment and promotion of a common market in India. However, the States may worry about the loss of control over the tax design and rates. Indeed, some control over tax rates is a critical issue in achieving accountable sub-national governance and hard budget constraints. The States may also be apprehensive that the revenue sharing arrangements would over time become subject to social and political considerations, deviating from the benchmark distribution based on the place of final consumption. The Bagchi Report also did not favour this option for the fear that it would lead to too much centralization of taxation powers. The key concerns about this option would thus be political. 62

6 Notwithstanding the economic merits of a National GST, it might have a damaging impact on the vitality of Indian federalism. The proposed GST also provides for dual GST system both at centre and state level and the central GST will subsume service tax, central excise etc which are presently levied by central Govt. B. State Goods and Service Tax The second model is to have a State GST in which the States alone levy GST and the Centre withdraws from the field of GST or VAT completely. It can be a desirable option given the mismatch in resources and responsibilities of the States. In this case, the State GST will work as the redistributing mechanism. The loss to the Centre from vacating this tax field could be offset by a suitable compensating reduction in fiscal transfers to the States. This would significantly enhance the revenue capacity of the States and reduce their dependence on the Centre. The USA is the most notable example of such arrangements, where the general sales taxes are relegated to the States. However, there would be significant hurdles in adopting this option in India, and it may not be suitable here. The proposed GST system provides for a state level GST along with central level GST which will replace the present intra-state VAT system. C. Inter-state Goods and Service Tax The Central Sales Tax will be removed and IGST will do the job for inter-state transaction of goods and services. The operating mechanism of IGST can be explained as follows: Seller in the origin State will charge IGST [(CGST+SGST) on ISS transactions, by whatever name called], which will be aggregate of CGST & SGST, i.e., IGST = CGST+SGST. Inter-State Seller shall use his input CGST and input SGST for payment of IGST, i.e., he shall pay net IGST. Inter-State Buyer shall avail input tax credit on the basis of tax invoice for payment of his own IGST, CGST or SGST. Both, the seller and the buyer shall report these transactions in their respective e-returns. To maintain the GST to be a destination based tax, amount paid by the seller in his State (along with input tax credit claimed by him) will be remitted by the Central Agency to the buying State through some mechanism. B2B transactions could get input tax credit without break till it reaches the final consumer. It involves lesser refunds since the seller will pay net IGST (after claiming input tax credit) in his State. 63

7 Illustration Inter-State GST Assumptions (1) Central GST Rate 12%; (2) State GST Rate 8%; Sahoo (2015). Asian Journal of Research in Business Economics and Management, (3) Profit Margin Rs. 10,000/- fixed (before tax); (4) Both, CGST & SGST, are levied on every transaction starting from manufacturing level till it reaches the final consumer, irrespective of State boundaries; and (5) The seller pays net GST (after claiming input tax) in his State. Particulars Under VAT Under GST (I) Manufacturer (D1) to Wholesaler (D2) Cost of Production 90,000 90,000 Input Tax Credit (Assuming nil) 0 0 Add : Profit Margin 10,000 10,000 Producers Basic Price 1,00,000 1,00,000 Add: Central Excise 12% 12,000 0 Add : Value Added 12.5% on Rs. 1,12,000/- 14,000 0 Add : Central 12% 0 12,000 Add : State 8% 0 8,000 Sale Price 1,26,000 1,20,000 (II) Wholesaler (D2) to Retailer (D3) Cost of Goods to D2 1,12,000 1,00,000 Available Input Tax Credit for set off 14,000 20,000 Add : Profit Margin 10,000 10,000 Total 1,22,000 1,10,000 Add : Value Added 12.5% 15,250 Add : Central 12% 0 13,200 Add : State 8% 0 8,800 Total Price to the Retailer 1,37, (III) Retailer (D3) to Final Consumer (C) Cost of Goods to D3 1,22,000 1,10,000 Input Tax Credit 15,250 22,000 Add : Profit Margin 10,000 10,000 Total 1,32,000 1,20,000 Add : Value Added 12.5% 16,500 - Add : Central 12% - 14,400 Add : State 8% - 9,600 Total Price to the Consumer 1,48,500 1,44,000 Total Tax Payable in All Transactions 28,500 24,000 Verification:- [148,500 * 12.5 / 112.5] = 16, ,000 (CENVAT) = 28,500 - D1 (12, ,000) 26,000 - D2 (15,250-14,000) 1,250 - D3 (16,500-15,250) 1,250 Verification:- [ *20 / 120] = D1 (12, ,000) 20,000 - D2 (22,000-20,000) 2,000 - D3 (24,000-22,000) 2,000 64

8 IV. GST on Imports Sahoo (2015). Asian Journal of Research in Business Economics and Management, As per Poddar-Ahmad Working Paper, in most countries, imports attract VAT/GST at the time of entry into the country. The tax is generally applied on the value of goods declared for customs purposes, including the amount of the customs duty. However, there are no well-established precedents for the application of sub- national taxes to imports. In India, the Centre levies an additional duty (called the special additional duty - SAD) on imports at the rate of 4%, which is meant to be in lieu of the State VAT. This duty is allowed as a credit against the central excise duty on manufacturing or refunded where the imports are resold and the State VAT is charged on them. In Canada, the provincial Harmonised Sales Tax(HST) is collected by the Customs Authorities on non-- commercial importations of goods. The tax is collected at the time of importation on the basis of place of residence of the person importing the goods, regardless of where the goods enter the country. Commercial importations do not attract the provincial HST because of difficulties in determining their destination within the country. For example, a large consolidated commercial shipment could contain goods that are initially destined to a central warehouse, for subsequent distribution to various parts of the country. The Canadian system is conceptually appealing and could be considered for the application of State taxes under the Dual GST in India. Most possibly in the proposed GST both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services. V. The Constitution (122 nd Amendment)(GST) Bill 2014 The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 was introduced in the Lok Sabha on December 19, 2014 by the Minister of Finance, Mr. Arun Jaitley. Some of the salient feature of this bill is explained as follows: The Bill seeks to amend the Constitution to introduce the goods and services tax (GST). Consequently, the GST subsumes various central indirect taxes including the Central Excise Duty, Countervailing Duty, Service Tax, etc. It also subsumes state value added tax, octroi and entry tax, luxury tax, etc. See the web resource available at %20in%20india.pdf See the details at See the web resource at 0%28A%29%20bill.pdf 65

9 Concurrent Powers for GST: The Bill inserts a new Article in the Constitution to give the central and state governments the concurrent power to make laws on the taxation of goods and services. Integrated GST (IGST): However, only the centre may levy and collect GST on supplies in the course of inter-state trade or commerce. The tax collected would be divided between the centre and the states in a manner to be provided by Parliament, by law, on the recommendations of the GST Council. GST Council: The President must constitute a Goods and Services Tax Council within sixty days of this Act coming into force. The GST Council aim to develop a harmonized national market of goods and services. Composition of the GST Council: The GST Council is to consist of the following three members: (i) the Union Finance Minister (as Chairman), (ii) the Union Minister of State in charge of Revenue or Finance, and (iii) the Minister in charge of Finance or Taxation or any other, nominated by each state government. Functions of the GST Council: These include making recommendations on: (i) taxes, cesses, and surcharges levied by the centre, states and local bodies which may be subsumed in the GST; (ii) goods and services which may be subjected to or exempted from GST; (iii) model GST laws, principles of levy, apportionment of IGST and principles that govern the place of supply; (iv) the threshold limit of turnover below which goods and services may be exempted from GST; (v) rates including floor rates with bands of GST; (vi) special rates to raise additional resources during any natural calamity; (vii) special provision with respect to Arunachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and (viii) any other matters. Resolution of Disputes: The GST Council may decide upon the modalities for the resolution of disputes arising out of its recommendations. Restrictions on Imposition of Tax: The Constitution imposes certain restrictions on states on the imposition of tax on the sale or purchase of goods. The Bill amends this provision to restrict the imposition of tax on the supply of goods and services and not on its sale. Additional Tax on Supply of Goods: An additional tax (not to exceed 1%) on the supply of goods in the course of inter-state trade or commerce would be levied and collected by the centre. Such additional tax shall be assigned to the states for two years, or as recommended by the GST Council. Compensation to States: Parliament may, by law, provide for compensation to states for revenue losses arising out of the implementation of the GST, on the GST Council s recommendations. This would be up to a five year period. 66

10 Goods Exempt: Alcoholic liquor for human consumption is exempted from the purview of the GST. Further, the GST Council is to decide when GST would be levied on: (i) petroleum crude, (ii) high speed diesel, (iii) motor spirit (petrol), (iv) natural gas, and (v) aviation turbine fuel. VI. Pre-Conditions to make GST System Successful All these Models discussed above require the following pre-requisites for successful implementation of GST: Extensive Computerization and strong IT infrastructure E-filing of periodical returns E-payment of tax Common tax period National portal for access of information National Agency Trained and well equipped staff. VII. Conclusions GST is the most logical and simplified step towards the comprehensive indirect tax reform in our country since independence. GST is leviable on all supply of goods and provision of services as well combination thereof. All sectors of economy whether the industry, business including Govt. departments and service sector shall have to bear impact of GST. All sections of economy viz., big, medium, small scale units, intermediaries, importers, exporters, traders, professionals and consumers shall be directly affected by GST. One of the biggest taxation reforms in India the Goods and Service Tax (GST), is all set to integrate state economies and boost overall national growth and welfare. GST will create a single, unified and level playing Indian market to make the economy stronger. Experts say that GST is likely to improve tax collections and Boost India s economic development by breaking tax barriers between States and integrating India through a uniform tax rate. Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions so as to make the tax structure less burdensome on consumers. References ELP%20GST%20Insight,%20Bulletin%205.pdf 67

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