GOODS AND SERVICE TAX (G.S.T.) OPPORTUNITIES AND CHALLENGES

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1 62 News & Views 2010 NTN I II GOODS AND SERVICE TAX (G.S.T.) OPPORTUNITIES AND CHALLENGES Sudhir Kumar Arora Advocate 140, Ist Floor, Navyug Market, Implementation of G.S.T. Principal Costing Impact. Possibility of Tax Evasion. Ghaziabad The taxes being attentively Correlative to one another, The methods of collection follow the same general model, and many of the provisions of the various Acts are in the same manner or closely similar and this is the case also with many of the statutory Acts. This Mass of statutes and regulations dealing with similar matter is neither convenient for the assessee nor conducive to administration. It is accordingly proposed to consolidate in a single enactment all the laws relating to and to embody therein a one Act. The proposed introduction of goods and service Tax (G.S.T.) will further has major step on this way. Implementation of G.S.T. Principal Costing Impact. Under the GST, where it is proposed to merge Central and State Tax rules, the costing of every product and service will change. The cost structure of business will fully based on profitability after implementation of GST. It is now clear that we would have a duel GST, as Central goods service tax (CGST) and State goods Service Tax (SGST) on all transactions of goods and service. At present main existing tax structure is based on central level on goods Cenvat (Central Value Added Tax) of the Central excise Act, C.S.T. ( Central Sale Tax) of the Central Sale Tax Act, Customs duties are levied on the goods the taxable transaction is import into or export from India and vertex Service Tax. Service sector has come to play a dominant role in the Indian economy. Service tax is administered by the C.B.E.C. After implementation of GST, Central GST to include Central Excise, Service Tax, CVD and SAD, state GST to include VAT, Entertainment, Luxury Tax, Purchase Tax, taxes on Lottery, Gambling. Proposed a three year schedule for GST rollout, In the first year the empowered committee has suggested 20% (10% CGST + 10% SGST) * Editor's Note : Views express in this article are personal views of the Author. Editor's does not necessarily have the same opinion as of the Author of this Article.

2 2010 NTN News & Views 63 tax on goods and 16% (8% CGST + 8% SGST) on services and 12% on essential items. In the second year the rate on goods will drop to 18% (9% CGST + 9% SGST) while other two will remain unchanged. In the third year a uniform 16% rate will apply to both goods and services Hon able Finance minister proposed a three year timeline to fully implement of the GST. In the first year, there will be a duel rate GST, the Central GST is proposed at 6% for essential commodities and a 10% standard rate for other goods. States are to impose similar levies, as a first year result, the combined GST on goods will be between 12% and 20%. The tax on services will be levied at 8% by the centre and a similar levy by the states. In the second year only the standard rate will be reduced 20% to 18% In the third year, all the rates will be brought to a level of 16% for both centre and put together. As assessment is that the peak effective rate taking account of credits for taxes paid up stream will be about 15% in the first year, settling down to 12% once the full GST rollout. The report of the empowered committee on G.S.T. has proposed that small service providers, dealers should be exempted form the purview of both CGST & SGST, if their annual turnover of all goods and services does not exceed Rs. 10 Lakh, considering the roll of small medium enterprises sector, the government should give a serious thought about determining the threshold limit. Currently, the exemption is available to the small medium enterprises having a gross turnover of less than Rs. 1.5 Crore. At present Central Excise is a tax on act of manufacture or production. Manufacture includes any process incidental or ancillary to the manufactured product. Currently, Cenvat scheme is optional but after implementation of GST Cenvat scheme will be covers all taxable inputs. Chain of Business I Manufacturer - Production. II Whole Seller - Retailer - Buyer III Consumers The supplies can be categorized as business to business supplies and business to consumers supplies. The computation of CGST and SGST liability will be based on profitability through the Credit method, allow Credit for Tax paid on all intermediate goods or services on the basis of invoices issued by the supplier, A result. All different stages of production and distribution can be interpreted as a TAX pass through profitability, and the Tax will effectively on final consumption in this way.

3 64 News & Views 2010 NTN The current regime substantial taxes paid on procurements by the small medium enterprises were not creditable by dealers and hence, it increased the costing for example, a traders of goods was no entitled to avail credit of the duty paid however, under the GST regime, all eligible taxes paid by the manufacturer would be available as credit, which can be utilized to discharge the CGST and SGST liability. This would reduce their cost. Business to business supplies, The market for the existing dealers manufacturer would also expand. Under the current regime the tax structure was determined by the state wise, In the same state in order to avail the Vat Credit advantage however, under the GST regime tax credits would flow irrespective of the location of the buyer and the seller but it would be a beneficial legislation for those who are engaged in supplying goods and service to the business after all, In General, in the supply chain leading to increase in final cost to the consumer. GST is not a tax on business but a tax on consumers. Business that purchase goods and services that are consumed, used or supplied can claim inputs tax credit subject to prescribed documentation as apply GST on the same goods or service several times as it passes from business to business on its way to the final consumer, in this way the tax is essentially borne by final consumer. GST the tax base will shift from production to consumption. Service Sector Current Proposed 1st Proposed 2nd Proposed 3rd Increase Tax Year Tax Year Tax Year Tax Rate Rate Rate Rate 10.3% 16% 16% 16% 5.7% Goods Sector Current Proposed Proposed Proposed Increase Decrease tax rate 1 st Year 2 nd Year 3 rd Year 1 st 2 nd 3 rd 1 st 2 nd 3 rd without Tax Tax Tax Y. Y. Y. Y. Y. Y. A.T. Rate Rate Rate Duty + VAT Total 1 st Slab 10.3% 20% 18% 16% % = 14.3% % % % 2 nd Slab 10.3% 20% 18% 16% % = 22.8% % % %

4 2010 NTN News & Views 65 In all probability cost of services could go up, this would have to pay a higher GST. Food grain may cost more in GST regime. Food grains will become low in price only if these are exempted from GST. For exempting food grains on the consideration that the levy of GST would have a major impact in India on those people living at or below the subsistence levels if the exemption is extended to all categories of food items, the revenue base will repugnant. A eligible 99 essential items exempt under the vat regime will not be taxed under the GST. A main customary items to play a dominant role in the economy constrained by revenue alcohol, petroleum and electricity would remain outside the GST. Structure as the finance ministry is yet to fix the threshold turnover limit. The implementation of GST gains from GST will propel the country from a one trillion dollar economy to a two trillion dollar economy in a short span of time but will it help the consumer, nobody knows for sure Hon able finance minister said government optimism the tax burden on people will come down by 25-30% with the implement of the proposed GST therefore, there was no presumption who would benefit and who would not. Possibility of Tax Evasion As the excise duty regime is solely concentrated on manufacturing, GST would cover all industries from service to retail. Therefore, this phenomenon has to be handled carefully. Difference between payment of GST and the claim for GST, it is clear to now that the cost of sales is subject to GST until that is claimed and to restrain. The exemption list and a Inter State transaction will main object to track. Recall the compliance problems to embolden after introduction of the Cenvat ( Central Value Added Tax ) at the manufacturing level (Modvat) in 1986, systems were not in place to track transactions, Cenvat Credit Rules, 2004 the service provider is allowed to take Cenvat Credit, leading to fictions claims. Filling of mispleading returns. Many of them claimed credit on input taxes that they never paid. States fear that once the indirect tax regime is rolled out, it may lead to fall in their revenue as claim of ITC no out put tax. It was found that a DIP in the average growth of revenue during the post Vat regime against those relating to prevat period. GST tax friendly or tax heavens. Number of factors for identifying tax heavens, lack of transparency, lack of effective exchange of information. Avoid being listed as an uncooperative tax heaven to make commitments to implement the principal of transparency and exchange of information. The GST is a consumption tax under which both manufacturers and service providers will have the right to offset state taxes paid on inputs sourced from another state. The centre should get going with the country s biggest indirect tax reform. A simple consolidated destination based tax structure took years to adopt but it would be a beneficial if government to ensure that mistakes such as these are not repeated.

5 66 News & Views 2010 NTN Study Notes