GST IN INDIA – AN OVER VIEW

-* Dr. S. Vijay Kumar

                                            

           The Goods and Service Tax (GST) is a Value Added Tax (VAT) to be implemented in India from July, 2017. It is a comprehensive tax mechanism where in all major indirect taxes are clubbed into one, whether they are levied on services (service tax) or goods (excise and vat). Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. In simple terms, GST means the state will share the Central Sales Taxes that it is currently receiving fully with the Center. The Center in return will share the Service Tax with the States. Presently, there are around 160 countries in the world that have implemented GST/VAT in some form or other. In some countries, VAT is the substitute for GST, but conceptually it is a destination based tax levied on consumption of goods and services. France was the first in the world to introduce GST or Goods and Services tax in 1954. Presently, only Canada has a dual GST model (somewhat similar to the Dual GST Model that India is going to implement).

Brief Review of Literature of GST in India: In 2000, the Vajpayee Government started discussion on GST by setting up an empowered committee. An announcement was made by P. Chidambaram, the then Union Finance Minister, during the central budget of 2007–2008 that it would be introduced from April 1, 2010. 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-conveners and the concerned Joint Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries of the states as its members. Centre Included Compensation in GST Constitutional Amendment Bill, accordingly compensation will be paid to the states for revenue loss on account of rolling out the new indirect tax regime. Liquor has been completely kept out of the GST. The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 was introduced in the Lok Sabha by Finance Minister Arun Jaitley on 19 December 2014, and passed by the House on 6^th  May 2015. In the Rajya Sabha, the bill was referred to a Select Committee on 14 May 2015. On 3^rd, August 2016, the Constitution (122nd Amendment) Bill, 2014 was approved by the Rajya Sabha with 203 votes in favour and none against, after a seven-hour debate during which a rare bonhomie was witnessed among the ruling and the opposition parties. Finally, it was declared by Finance Minister, Mr. Arun Jaitley that GST will come in to force in our country from 1-07-2017.

*Head & Professor (Associate) of Economics (Retd.), Kakatiya Govt. (UG&PG) College (NAAC “A” Grade), Bharat Jyoti Awardee & Ex-Member of Board of Studies, Kakatiya University, Warangal (Telangana State).

Salient Features of GST:

·         GST is the India's biggest tax reform. There would be a single tax policy across the country that will allow free movement of goods and services to each and every state of India. The cost of the product throughout the country would be almost the same and customers will have more money in their pocket to spend. This will likely boost India’s GDP by 1 to 1.5 percent, according to experts.

·         Exports will be zero-rated and imports will be levied the same taxes as domestic goods and services adhering to the destination principle.

·         Since GST will cut down a large number of taxes imposed by the central government, this will lead to the creation of a unified market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses.

·         The commodities that are exempted from GST are potable alcohol, aviation turbine fuel etc.

• The GST shall have two mechanisms: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter denoted to as State GST). Rates for Central GST and State GST would be set appropriately, reflecting revenue considerations and acceptability. This twofold GST model would be implemented through manifold statutes (one for CGST and SGST statute for every State).
• Though, the basic structures of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification would be uniform across these statutes as far as practicable.
• The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the dealings which are below the prescribed threshold limits.
• The Central GST and State GST are to be paid to the accounts of the Centre and the States independently. It must be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST.
• Since the Central GST and State GST are to be treated distinctly, taxes paid against the Central GST shall be permitted to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST.
• Cross utilization of ITC (Input Tax Credit) between the Central GST and the State GST would not be permitted except in the case of inter-State supply of goods and services under the IGST model.
• Preferably, the problem related to credit accumulation on account of refund of GST should be evaded by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax where, again refund/adjustment should be completed in a time bound manner.
• In order to make it practical, uniform procedure for collection of both Central GST and State GST is recommended in the respective legislation for Central GST and State GST.
• The supervision of the Central GST to the Centre and for State GST to the States would be given. This would infer that the Centre and the States would have parallel jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.
• The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is required. It is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be approved with satisfactory compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. To respect the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be stated that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.
• The States has opinion that Composition/Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. Particularly, there would be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also permit option for GST registration for merchants with turnover below the compounding cut-off.
• The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.
• Each taxpayer would 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 predominant PAN-based system for Income tax, facilitating data exchange and taxpayer compliance.
• For the convenience of tax payer, 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.

Why are we getting 3 taxes -SGST, CGST, IGST?

India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes. Both the levels of Government have distinct responsibilities to perform, as per the Constitution, for which they need to raise resources. A dual GST will, therefore, be keeping with the Constitutional requirement of fiscal federalism. The Centre and States will be simultaneously levying GST. 3 taxes will be implemented to help tax-payers to take credit against each other thus ensuring “One nation one tax”. 

Advantages of GST:

• The tax structure will be lean and simple.
• The whole Indian market will be an incorporated market which may transform into lower business costs. It can simplify seamless movement of goods across states and reduce the transaction costs of businesses.
• It is beneficial for export businesses. Because it is not applied for goods/services which are exported out of India.
• It's implementation has long term benefit. The lower tax burden could translate into lower prices on goods for customers.
• The Suppliers, manufacturers, wholesalers and retailers are able to recover GST suffered on input costs as tax credits. This decreases the cost of doing business, thus enabling reasonable prices for customers.
• It can bring more transparency and better compliance.
• GST implementation can control corruption. Number of departments (tax departments) will reduce which in turn may lead to less corruption.
• More business persons will come under the tax system thus broadening the tax base. This may lead to better and more tax revenue collections.
• Companies which are under unorganized sector will come under tax area.

·         The procedure of GST registration would also be made simple, thereby improving the ease of starting a business in India.

• GST will lead to the elimination of multiple taxes like excise, CST, VAT, service tax calculations.
• For both goods and services and less confusion in determining what constitutes a good or what is a service.

• Avoiding double taxation means the consumer pays tax on an item, on which already government has collected tax from the manufacturer under some other head.

·         Reduces number of hidden Taxes. Currently hidden taxes actually push up the    taxes on a majority of goods to anywhere in the 27% to 32% range. But with GST coming in, the % tax number is much lesser.

• GST is a transparent tax and also reduce number of indirect taxes. With GST implemented a business premises can show the tax applied in the sales invoice.

• GST will not be a cost to registered retailers therefore there will be no hidden taxes and the cost of doing business will be lower.

• Benefit people as prices will come down which in turn will help companies as consumption will increase.

• In the GST system, when all the taxes are integrated, it would make possible the taxation burden to be split equitably between manufacturing and services.

• GST will be levied only at the final destination of consumption based on VAT principle and not at various points (from manufacturing to retail outlets). This will help in removing economic distortions and bring about development of a common national market.

·      Benefit of GST for the Centre and the States. According to experts, by implementing the GST, India will gain $15 billion a year. This is because, it will promote more exports, create more employment opportunities and boost growth. It will divide the burden of tax between manufacturing and services.

·         Benefit of GST for Individuals and Companies. In the GST system, taxes for both Centre and State will be collected at the point of sale. Both will be charged on the manufacturing cost. Individuals will be benefited by this as prices are likely to come down and lower prices mean more consumption, and more consumption means more production, thereby helping in the growth of the companies.

·         Easier Tax Compliance - instead of having to deal with many different taxation laws and spending a lot of time in legal advice and compliance, businesses will now need to pay GST only. This is a big relief and it creates simplicity and predictability in business. The GST is being introduced to create a common market across states, not only to avoid enfeebled effect of indirect tax but also to improve tax compliance.

·         Price reduction as credit of input tax is available against output tax.

·         Simplified and Cost Saving system as procedural cost reduces due to uniform accounting for all types of taxes. Only three accounts; CGST, SGST, IGST have to be maintained.GST is structured to simplify the current indirect system. It is a long term strategy leading to a higher output, more employment opportunities, and economic boom.

·         GST is beneficial for both economy and corporations. The reduced tax burden on companies will reduce production cost making exporters more competitive.

·         Reduced Tax Evasion - the difference between present system and GST is that the present system gave an incentive to evade taxes (because excise duty was a cost for traders, thereby making it attractive for them to purchase without invoice). With GST, this incentive will vanish. Therefore, tax evasion will fall.

·         More Money to Poor States - present taxation system was origin based, so tax collection used to go to manufacturing heavy states (Tamil Nadu, Gujarat etc.) Now, the tax collection of poor states (Bihar, Madhya Pradesh etc) will also rise. This gives an opportunity for all the poor states to develop.

·         Tax Bias for Location will go - many businesses create depots and godowns in different states simply because there is a difference in tax rates. Now that GST will come, this difference between states will vanish. It would help to remove the tax difference as a bias, thereby helping businesses.

·         The current indirect system is so burdensome that the trucks have to stop at check posts and toll plazas for weeks to get the clearance to enter the state which considerably lessen their average distance travelled per day. With the application of the GST, the trucks need not to stop on check posts. Therefore, it will reduce the buffer stock. In this way, it will increase the operating proficiency of the companies. Single tax will also reduce managerial costs of companies.

·         Some economic evaluators inferred that GST will eliminate flowing effect of taxes rooted in cost of production of goods and services and will provide seamless credit throughout value chain. This will considerably decrease cost of home-grown goods and will encourage ‘Make in India’. The sectors which have long value chain from basic goods to final consumption stage with operation spread in multiple states such as FMCG, pharma, consumer durables, automobiles and engineering goods will be the major recipients of GST system.

Disadvantages of GST:

·         Some Economist say that GST in India would impact negatively on the real estate market. It would add up to 8 percent to the cost of new homes and reduce demand by about 12 percent.

·         Some Economist says that CGST (Central GST), SGST (State GST) are nothing but new names for Central Excise/Service Tax, VAT and CST.

·         GST is a form of Value Added Tax that would include all the indirect taxes into one throughout all the regions of India. That means every state will have the same GST rate unlike now where the states can fix their own rates.

Impact of GST:​

On 3rd November,2016 a four tier GST rate structure has been passed, the final slab rates being agreed upon are 5%,12%,18% and 28%.

·         Zero rated items : Food grains used by common people.

·         5% Rate : Items of mass consumption including essential commodities will have low tax incidence.

·         12% and 18 % Rate :  Two standard rates have been finalized as 12% and 18%.

·         28% Rate : White goods like Air conditioners, washing machines, refrigerators, soaps and shampoos etc. that were taxed at 30-31% shall be now taxed at 28%.

·         Services that are now taxed at 15% shall be taxed at a higher rate of GST @ 18%. The tax rate on Gold is yet to be decided.

·         Demerit goods like tobacco, tobacco products, pan masala,aerated drinks and luxury cars shall be charged at the highest rate of 28%. An additional cess on some luxury goods shall also be imposed.

·         Taxes on service would increase from present 14% to 20%

·         Taxes on retail sale would go up from present 12.5% to 20%
Local Taxes (Counter Vailing Duty) on imported items would go up by around from present 16% to 20%

·         The manufacturers and service providers have to register separately in each State.

·         There will be a dual control on the GST where State and Central Authorities will monitor all supply of goods and services

·         All invoices has to be captured online by GSTN 

Positive Impact of GST on the Common man :

·         A unified tax system removing a bundle of indirect taxes.

·         Less tax compliance.

·         Removes cascading effect of taxes.

·         Manufacturing costs will be reduced, hence prices of consumer goods likely to come down.

·         Due to reduced costs some products like cars, FMCG (Fast Moving Consumer Goods) etc. will become cheaper.

·         Lower prices will increase demand/consumption. Increased demand will lead to increase supply. Hence, rise in production of goods. The increased production will lead to more job opportunities in the long run. But, this can happen only if consumers actually get cheaper goods.

·         A unified tax regime will lead to less corruption which will indirectly affect the common man.

Hence, this is possible only if the benefit is actually passed on to the consumers. There are other factors also like the sellers profit margin that determine the final price of goods.GST alone does not determine the final price of goods.

Negative Impact of GST on the Common man :

·         Services will become expensive. e.g. Telecom, banking, airline etc.

·         Being a new tax, it will take some time for the people to understand its implications.

·         It is easy to say, but there are always some complications attached. It is a consumption based tax, so in case of services the place where service is provided needs to be determined.

·         If actual benefit is not passed to consumer and seller increases his profit margin, the prices of goods can also see a rising trend.

Impact of GST on Small Businesses (Start up):

1. Simple Taxation: Currently, a startup spends a lot of time and energy to manage the various taxes at various points. Adhering to different regulations at different States make the process very complex. GST will simplify the process by integrating all taxes, making the process of paying tax simpler

2. Ease of Registration: Any new business needs to have a VAT registration from sales tax department. A business operating in many States has to face a lot of issues regarding the different procedures and fees in each state. GST will bring about a uniformity in process and centralised registration that will make starting business and expanding in different States much simpler.

3.Higher Exemption : As per the current indirect tax structure, any business with a turnover of more than Rs five lakh has to get VAT registration and pay VAT. GST will make this limit higher, to up to Rs 10 lakh and, further to it, businesses with turnover between Rs 10 and 50 lakh will be taxed at a lower rates. This will bring rejoice to newly established start up and small businesses.

4. Businesses in Both Sales and Services: Businesses like restaurants, which fall under both sales and service taxation, have to calculate the VAT and service tax on both items separately. This makes the calculations process very complex. GST will not distinguish between sales and services, and thus the tax calculation will be done on total.

5. Saving in Logistics Cost and Time : Many transport vehicles get delayed during movement across States due to small border tax and check post issues. Interstate movement will become cheaper and less time consuming, as these taxes will be eliminated. The whole Indian market opens up for manufacturers as interstate supply becomes tax-neutral. This will also bring down costs associated with maintaining high stocks, as there will be undisrupted movement of goods. As per a CRISIL analysis, GST can reduce logistics costs of companies producing non-bulk goods (comprising all goods besides the primary bulk commodities transported by railways – coal, iron ore, cement, steel, food grains, fertilizers) by as much as 20 percent.

Major Challenges of GST system:

 

·         To implement the bill, there has to be lot changes at administration level. 

·         GST, being a consumption-based tax, states with higher consumption of goods and services will have better revenues. So, the co-operation from state governments would be major factors for the effective implementation of GST.

·         It is assessed that since GST substitutes many flowing taxes, the common man may get benefit after implementation. But it depends on rates fixed on the GST.

·         It is assumed by experts that the most substantial opposing impact for consumers may arose because petroleum is excluded of the GST domain. Subsequently, the tax costs (taxes other than GST will continue) could have a flowing impact on the whole economy. According to news reports, economic adviser has mentioned that "bringing electricity and petroleum within the scope of GST could make Indian manufacturing more competitive". Additionally, certain challenges in-built in the GST structure, such as a GST levy on maximum retail price (MRP) for packaged goods and GST on barter exchanges, will trouble to the common man.

How GST Will Operate?

Sale in one State, Resale in the Same state:

Let us suppose, goods are moving from Hyderabad to Warangal. Since it is a sale within a State, CGST and SGST will be levied. The collection goes to the Central Government and the State Government. Then the goods are resold from Warangal to Khammam. This is again a sale within a State, so CGST and SGST will be levied. Sale price is increased so tax liability will also increase. In the case of resale, the credit of input CGST and input SGST is claimed and the remaining taxes go to the respective governments.

Sale in One State, Resale in Another State:

In this case, goods are moving from Adilabad to Warangal. Since it is a sale within a State, CGST and SGST will be levied. The collection goes to the Central Government and the State Government. Later the goods are resold from Warangal to Vijayawada (outside the State). Therefore, IGST will be levied. Whole IGST goes to the Central Government.

Against IGST, both the input taxes are taken as credit. But, the SGST never go to the Central Government, still the credit is claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the State Government compensates the Central Government by transferring the credit to the Central Government.

Sale Outside the State, Resale in that State:

In this case, goods are moving from Delhi to Agra. Since it is an interstate sale, IGST will be levied. The collection goes to the Central Government. Later the goods are resold from Agra to Lucknow (within the State). Therefore, CGST and SGST will be levied.

However, GST is a long term strategy and the positive impact shall be seen in the long run only. This can happen if GST is introduced at a nominal rates to reduce the overall tax burden of the final consumers. The rate of GST also plays a crucial role in deciding the actual impact of GST on the common man.

To conclude, we can say that GST is a major breakthrough in the Indian taxation system. GST is an indirect tax which entails that the tax is approved till the last stage where it is the purchaser of the goods and services who bears the tax. The GST will substitute most other indirect taxes and synchronize the differential tax rates on mass-produced goods and services. The government of India claims that GST will enhance Indian GDP by 2%. With the enactment of GST, customers will have funds to spend because of lower tax rates. It can be seen that it will completely change the indirect tax system in India. Let us hope this “One nation, One tax” proves to be a game changer in a positive way and proves to be beneficial to the common man.