GST – Shape of things to come
Goods and Services Tax – Shape of things to come
V S Datey
After a very long wait, it seems time of Goods and Services Tax (GST) has almost arrived.
If all goes well, GST may become reality in April 2016 [no April Fool].
Constitution (One Hundred and Twenty Second Amendment) Bill, 2014 was introduced in Lok Sabha on 18-12-2014. The Bill makes enabling provisions for introduction of GST.
As per Statement of Objects and Reasons appended to the Bill, the object to have common national market and avoid cascading effect of taxes.
The Constitution Amendment Bill was passed by Lok Sabha on 7-5-2015.
In Rajya Sabha, the Bill was referred to Select Committee of Rajya Sabha on 12-5-2015 with instructions to report to Rajya Sabha before last day of first week of next session.
The Select Committee of Rajya Sabha has presented its report to Rajya Sabha on 22-7-2015.
The Committee consisted of 21 members. The majority report (by 14 members) has supported the major recommendations of the Bill. It has given three suggestions for amendments.
Even in the dissent note submitted by Congress, they have categorically stated that they support introduction of GST that is simple and comprehensive.
The Rajya Sabha session has commenced on 21-7-2015. Government intends to bring the amendment bill before Rajya Sabha in current session, which is going to continue upto 13-8-2015.
The Constitution Amendment Bill has to be passed by Rajya Sabha with 2/3 majority and by 50% of the total strength of members of that house.
Strength of Rajya Sabha is 245 members, out of which Congress has 68 members. Thus, without support of Congress (directly or indirectly by walking out), it is almost impossible to get the Constitution Amendment Bill passed in Rajya Sabha.
After the bill is passed by both houses of Parliament, it has to be ratified by at least 15 State Legislatures. This should not be a very big problem.
After such ratification, the Bill will be assented by President so that it can be converted into Act.
After that, Union and States have to pass GST Acts, make Rules, issue notifications etc.
Thus, it is still a long way, though preparations are going on in full scale.
The report of Select Committee of Rajya Sabha is not unanimous. There are three dissenting notes.
It may be noted that it is not mandatory that Union Government must accept all recommendations of the Select Committee and reject all dissent notes.
It is possible for Union Government to evolve a compromise solution by adopting flexible and give and take’ policy.
If it indeed happens, then it is possible that the Constitution Amendment Bill gets passed in the July-August 2015 session of Parliament.
The spade work is in full swing in Government. IT infrastructure is also almost ready.
The target of 1-4-2006 for implementation of GST is challenging but does not seem to be impossible.
Background of GST
The idea of national GST was first mooted by Kelkar Committee in year 2004. The first announcement for introduction of GST was made in budget speech in 2006 by the then Finance Minister, P Chidambaram. It was proposed to introduce nationwide GST w.e.f. 1-4-2010.
Task of designing GST was given to empowered committee. The first discussion paper was released in 2009. However, GST could not be implemented in 2010 as there was no consensus among States about introduction of GST.
Subsequently, after great deliberations, Constitution (One Hundred and Twenty Second Amendment) Bill, 2014 has been introduced.
As stated above, the Bill has been passed by LLok Sabha and presently pending before Rajya Sabha.
Present structure of indirect taxes
Present structure of indirect taxes is that Central Government is empowered to impose excise duty on manufacture and service tax on value of services. State Government is empowered to levy sales tax on sale of goods (even in case of Central Sales Tax, the revenue goes to State Government only)).
Thus, presently, Central Government cannot impose tax on goods beyond state of manufacture. State Government cannot impose tax on services. [It is like blind person and lame person walking together].
The present structure of indirect taxes is based on three lists [List I – Union List, List II – State List and List III – Concurrent List, as contained in seventh schedule to Constitution of India.
This list is based on the similar three lists as contained in Government of India Act, 1935.
Thus, it is like driving in year 2015 in a 1935 model vintage car.
What is Goods and Service Tax?
Goods and Services Tax means a tax on supply of goods or services, or both, except taxes on supply of alcoholic liquor for human consumption [proposed Article 366(12A) of Constitution of India]
Note that the word used is ‘supply’ and not ‘sale’. Thus, stock transfers, branch transfers will also get covered under GST net.
‘Services’ means anything other than goods [proposed Article 366(26A) of Constitution of India]
Definition of ‘service’ is risky. As it is presently worded, it can cover even immovable property. It is doubtful if that is the intention.
GST is consumption based tax
GST is consumption based tax, i.e. tax will be payable in the State in which goods and services are to be consumed.
As was envisaged, there will be duel GST – State GST (SGST) and Central GST (CGST) [proposed Article 246A of Constitution of India]
Both CGST and SGST will be on supply of goods and services.
Expected rates of GST
The rates of GST are not notified. There are various rates being discussed.
Initially, the rate envisaged was 16% [8% SGST, 8% CGST and 16% IGST}. Now, the rates being discussed are abnormally high.
Panel set up by State Government has proposes CGST of 12.77% and SGST of 13.91% i.e 26.68%.
This may be on the basis that excise duty rate is 12.36% and general State Vat rate is about 15%.
However, following factors have to be considered – (a) Presently, excise duty is only on manufacture, while CGST will be on all sales and supplies of goods (b) Presently, State Governments are not getting share of service tax. They will get share of service tax also in form of SGST.
In my view, the average rate of CGST and SGST should be around 10-11% for goods and 8-10% for services each [If rates are kept higher than that, it is likely to be counter-productive].
Of course, as at present, there will be 4-5 different rates. In my view, the average slabs may be around following average rates –
|SGST and CGST Rate %||Goods and Services|
|0||Natural and un-processed produces in unorganised sector, goods having social implications e.g. national flag and items which are legally barred from taxation (e.g. newspapers).|
|0||Basic education services, medical services, statutory activities of Government, Services in present negative list, Infrastructure related services, Personal services|
|0||Export of goods and services, Services provided to SEZ|
|1%||Gold and silver ornaments, precious and semi-precious stones|
|5%||Goods of basic necessities (including medicines and drugs), all industrial and agricultural inputs and capital goods. Goods and passenger transport services|
|8% to 10%||Normal rate on services|
|10% to 11%||Normal rate on all goods other than those mentioned elsewhere|
|Goods and services without restrictions on rate||Cigarettes, lottery tickets, luxury services, entertainment, betting and gambling|
|Will be brought in GST at a later stage||Aviation turbine fuel (ATF) and petroleum products (petrol, diesel and motor spirit),|
|Out of GST||Alcoholic Liquor|
These are only indicative rates, as per discussions in various press reports.
CGST and IGST rates will be common all over India. However, SGST rates will be decided by each State and will vary from State to State.
Concept of ‘declared goods’ will be abolished.
Integrated GST for interstate transactions
In case of Inter State supply of goods and services, there will be integrated GST (IGST) imposed by Government of India [proposed Article 269A(1) of Constitution of India]
IGST will also be imposed on imports [proposed explanation to Article 269A(1) of Constitution of India]
The IGST Rate which is expected to be double the CGST rate. It is expected to be equal to SGST plus CGST rate. However, IGST rate will be same all over India and will not vary from State to State.
Revenue from IGST will be apportioned among Union and States by Parliament on basis of recommendation of Goods and Service Tax Council [proposed Article 269A(2) and Article 270(1A) of Constitution of India]
Since IGST will be on ‘supply of goods’, IGST will be payable on stock transfers, branch transfers and even when goods are dispatched inter-state for job work and return.
Finance Cost will increase
Since IGST will be payable on branch transfers, stock transfers (and even may be on job work), finance will be blocked and interest burden of dealers having inter-state transactions will increase considerably.
Central Excise duty on petroleum and tobacco products
Central Excise duty will continue on petroleum products and tobacco products [proposed Entry 84 of List I (Union List) of Seventh Schedule to Constitution of India]
Tobacco products will be subject to excise duty plus GST.
Sales tax on petroleum products and alcoholic liquor within State
States will have powers to impose sales tax on sale within the State of petroleum products and alcoholic liquor for human consumption [proposed Entry 54 of List II (State List) of Seventh Schedule to Constitution of India]
Thus, petroleum products will be presently out of GST.
Petroleum products will be brought in GST network at a later stage.
Tax on entertainment by Municipalities, panchayat, regional council and district council
Municipality, panchayat, Regional Council and District Council will have powers to impose tax on entertainment and amusement [proposed Entry 62 of List II (State List) of Seventh Schedule to Constitution of India]
District Councils for administration of Tribal Areas in States of Assam, Meghalaya, Tripura and Mizoram will have powers to impose entertainment tax [proposed paragraph 8(3)(d) of Sixth Schedule to Constitution of India].
1% Additional Tax on supply of goods (ATSG) in inter state supply for two years
A 1% tax will be imposed on inter-state supply of goods for two years or such period as may be recommended by GST Council – proposed Section 18(1) of Constitution (Amendment) Bill, 2014.
This tax is in lieu of present Central Sales Tax. However, the word used is ‘supply’ and not ‘sale’. Hence, stock transfers, branch transfer and free supplies will also get covered under this levy.
Government of India can grant exemption from levy of this tax – proposed Section 18(3) of Constitution (Amendment) Bill, 2014.
The 1% tax will create problems in inter-state job work of goods.
It seems this tax will be only at first inter-state supply and not in subsequent supplies.
Abolition of other duties and taxes
Present central excise duty (except of petroleum products), service tax, duties of excise on medical and toilet preparations, CVD and Special CVD on imported goods will be subsumed in CGST [Of course, SGST will also be payable].
State Vat, Central Sales Tax, octroi, Entry Tax, Entertainment Tax, Luxury Tax, Tax on lotteries, betting and gambling will be subsumed in SGST [Of course, CGST will also be payable].
Basic customs duty on imports will continue. Stamp duties and motor vehicle taxes will also continue.
Issue relating to Purchase tax
Imposition of purchase tax is against the principle of GST as GST is principally a destination based tax.
However, some States (which are mainly producing States) have apprehension that they will be loser of tax revenue. For example, most of wheat produced in Punjab goes out of State. Most of minerals produced in Chhattisgarh go out of State.
States want power to impose purchase tax on such commodities. However, the Constitutional Amendment Bill makes no provision for imposition of purchase tax by States.
Definition of ‘deemed sale’ to continue
Interestingly, Article 366(29A) which defines ‘deemed sale of goods’ is being retained (may be to avoid disputes and litigation).
Taxation powers of district council
District Councils for administration of Tribal Areas in States of Assam, Meghalaya, Tripura and Mizoram will have powers to imposed entertainment tax [proposed paragraph 8(3)(d) of Sixth Schedule to Constitution of India].
Goods and Service Taxes Council
A ‘Goods and Service Taxes Council’ [GST Council] will be constituted [proposed Article 279A(1) of Constitution of India]
The Union Finance Minister will be Chairperson of the GST Council. Following will be its members – (a) Union Minister of State for revenue or Finance (b) Minister of Finance or any other Minister nominated by each State.
Vice Chairperson of GST Council will be elected by GST Council from amongst its members.
The GST Council is mainly a recommendatory body on various issues relating to GST
It will have statutory powers only in following situations – (a) When petroleum products should be brought in the GST net (b) Distribution of revenue of IGST and CGST among Union and States (c) Continuation of 1% tax on supply of goods inter-state (d) Compensation to States for loss of revenue for period upto five years.
Decision in GST Council be taken with at least 75% of weighted average voting in favour of the decision. Union Government will have 33.33% voting power and States will have 66.67% voting power.
Thus, practically, any decision in GST Council cannot be taken without consent of Union Government.
IGST is a novel idea – It is the game changer
IGST is a novel idea in the proposed amendment. Advantage of IGST is that taxes will move along with goods and services, eliminating need for obtaining refund of taxes in case of inter-state transactions.
AT present, dealers all over India having inter-state transactions face great difficulties in getting refund of input taxes on goods used for making inter-state sales.
Though the Amendment Bill does not specifically state, the input tax credit of IGST paid on inter-state transactions is expected to be available for subsequent supply of goods and services in following sequence – (a) IGST (b) CGST (c) SGST (if balance left).
If IGST is utilized for payment of SGST, the amount will be credited to that State Government.
IGST, CGST and SGST can be utilised (in that sequence) for payment of IGST. If SGST is utilized for payment of IGST, the corresponding amount will be debited to the concerned State Government.
The debit and credit transactions will be carried out with help of dedicated national computer based network.
No refund requirements except in case of exports
Refund of taxes will be required only in case of physical exports (and may be in case of supplies to SEZ, EOU and international bidding).
Refund will not be required in case of inter state supplies of goods (which is a big headache today).
Area based exemptions
Present Area Based exemptions (J&K, Himachal Pradesh, North East States) will continue.
However, advantage of these exemptions will be limited as they will be outside GST input tax credit network. Thus, such exemptions will be useful only where goods are sold to ultimate consumer or customer who is not in GST network.
It seems some idea like refund may be worked out.
Information Technology Network
Robust information technology network is vital for administration of GST to ensure proper compliance and avoid misuse of input tax credit.
A Technology Advisory Group for Unique Projects (TAGUP) was set up in 2010 under Mr. Nandan Nilekani. The group submitted its report in January, 2011.
A Goods and Service Tax Network (GSTN) has been constituted as Special Purpose Vehicle (SPV) inn August 2012. NSDL will provide service to this GSTN.
Goods and Services Tax Network (GSTN) has been incorporated as a section 8 company (non profit company) on 28-3-2013.
National Information Utilities (NIU) will be constituted in private sector for public service. This NIU will make available essential infrastructure for GSTN.
Tax Information Exchange System (TINXSYS) has been developed. It will be transferred to GSTN.
Registration number of assessee
The registration number of dealer is expected to be passed on income tax PAN number. PAN is a 10 digit number. Further 3 to 5 digits will be added. Thus, each dealer will have 13/15 digit PAN based registration number.
Value for purpose of GST
Provision for valuation are expected to be on same line as per present Central Sales Tax/State Vat laws. However, it is envisaged (and hoped) that ‘value’ will be same for purpose of SGST, CGST and IGST (otherwise, there will be chaos).
SGST and IFST will be on same ‘value’. There will be no ‘tax on tax’ as at present, i.e. SGST will be payable on ‘net value’ without addition of CGST in the ‘value’.
The returns will be filed by dealer (normally on monthly basis). The return will contain details of invoices made on customers with their Tax Registration Numbers and tax paid.
The return has to be filed along with payment of taxes.
In case of B2B transactions, the customer can avail input tax credit only on basis of such return and not on basis of invoice of seller/service provider.
In case of B2C transaction, there will be no registration number of the customer. In that case, the revenue will be received by the State where goods and services are consumed.
Composition Scheme for small dealers
Small assesses having turnover upto Rs 50 lakhs will be eligible for composition scheme. They may be required to pay around 1% of the turnover without any Cenvat credit and without charging the same in their invoice.
Exemption to small assesses
As per press reports, Central Government is of the view is that exemption limit should be Rs 25 lakhs as turnover lower that that will bring too many small dealers in the GST net. State Governments are of the view that exemption limit should be Rs 5 lakhs in North Eastern States and Rs 10 lakhs in other States.
It seems there is no consensus on this issue so far.
At present, excise duty exemption is available to small manufactures with turnover of Rs 1.50 crores. http://dateyvs.com/home-3/no-service-tax-audit-short-term-joy-to-assessees/ http://dateyvs.com/home-3/no-service-tax-audit-short-term-joy-to-assessees/It is expected that manufacturers with turnover less than Rs 1.50 crores per annum may be exempted from CGST and IGST on optional basis. However, they will not be exempt from SGST.
Administration of taxes
CGST and IGST will be administered by Central Government while SGST will be administered by respective State Governments.
There will be separate returns, separate payment of taxes, separate assessments and may be even separate appeals.
It is envisaged that in case of small taxpayers (say upto turnover of Rs 1.50 crores per annum), the administration will be mainly in hands of State Government though assessee may be paying both CGST and SGST.
In case of large assesses, both Union Government and State Government will administer the taxes.
The proposed GST is not an ideal GST. However, considering the present political situation and limitations, this is the best that can be achieved.
The way of doing business will drastically change on introduction of GST.
The proposed GST will surely be much better than the present provisions. It will help in developing a national market and considerably reduce the cascading effect of taxes.
Let us hope and pray that GST will be ‘Good and Sensible Tax’.