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GST is a consumption based levy. Destination principle would be applicable in normal course of business to business [B2B] other than for few services and business to consumer. [B2C] GST is proposed to be in place by April 2016- maybe a bit optimistic.
In an
ideal GST, all the credit of taxes paid on purchase of inputs, input services
and capital goods are seamlessly allowed for set-off against the tax payable on
subsequent sale of goods that are either sold as such or sold upon conversion,
or in the context of services, are supplied.
Backdrop:
It is required to have a brief view of the existing
indirect taxes regime, before proceeding to understanding GST. The excise duty,
import duties of customs, VAT/CST and service tax are the main levies at
present. The principles of GST would be drawn form the best practices
internationally and some time tested principles which have been working well in
India.
a. Excise
duty: Central Excise Duty is levied by
the Central Government under the Central Excise Act, 1944. The levy is on all
goods manufactured and produced in India, which are specified in the schedule
to the Central Excise Tariff Act subject to certain exemptions. The effective
rate may vary from product to product though most goods are subject to excise duty
at 12% (without education cess).
The concepts of cenvat credit, dispute resolution,
removal and valuation on intrinsic value under this law may find a place in
GST. Also the principle of trusting the tax payer while having the checks and
balances of audit rather than suspecting all businessmen would hopefully be
adopted.
b. Import Duties: Customs
duties are levied by the Central Government under the Customs Act, 1962.
The levy gets attracted on all specified goods imported into and exported from
India, which are specified in the schedule to the Customs Tariff Act. The
customs duties are levied on assessable value and the total customs duty
ordinarily would amount to an average of 28 % (subject to cenvat credits) on
the value of goods imported.
Basic
Customs duty would continue but the additional duty of customs (CVD) and
special additional duty (SAD) would get subsumed into GST as an IGST. The
Classification under customs which is based on the harmonised System of
Nomenclature would be adopted under GST.
c. Value
Added Tax (VAT): Value Added Tax (VAT) is levied
by the State Governments on transfer of property in goods from one person to
another, when such transfer is for cash, deferred payment or other valuable
consideration. VAT is also payable on certain transactions that are
deemed to be sale such as transfer of right to use goods, hire purchase and
sale by instalments, works contract and sale of food and drink as a part of
rendering of any service.
The
supplies of goods and importantly services would now be available to the States
as SGST. They would also get apportioned part of the
IGST.
d. CST: The rate of CST is 2% against the declaration in
Form C and in case the said declaration is not provided by the buyer, they are
subject to tax at the rate specified in the local VAT law. Form C is
allowed to be issued by the buyer when he purchases the goods for use in
manufacture or for resale or for use in telecommunication network or in mining
or in generation or distribution of power. Sales without C form would be at the
rate as applicable in State of origin.
The
principles of interstate sales, sales in the course of export/ import with
required changes for supplies would be a part of the GST. The aspects of
valuation in some parts would also be adopted.
e. Service
Tax: Service tax is levied all activities as defined
other than those specified in the negative list and those specifically
exempted. Service tax is presently taxed at 12% (without education cess).
Ordinarily, service tax is payable by the service provider, except in specified
cases where a reverse charge and joint charge has been put in place.
The
principles of Place of Provision of Services would be adapted from the place of
supply rules. The point of taxation philosophy could also be a viable option.
The States are expected to enjoy at least Rs.150,000/- Crores of revenue
depending on the intra state consumption of services.
What is meant by GST?
Goods
& Service Tax (GST) as the name suggests, is a tax on supply of goods or
services. Any person, providing or supplying goods or services would be liable
to charge GST. The States would be eligible for the SGST part of services
consumed within the State which would be additional revenue for the State. The
person supplying the goods or services is allowed to take credit for taxes paid
on supply of goods or services, consequent to which, GST becomes a tax on the
value added at the next stage by the dealer. Further GST would be levied by
both the Central Government (CGST) and State Government (SGST) on the same
transaction, making GST a dual transaction tax structure. For interstate
transactions IGST (total of SGST + CGST) would be charged which would be apportioned
to the Union as well as the States. This would apply for the subsumed part of
the customs duties.
A 1%
origin based tax to offset the CST loss would be collected by the Union
retained by the States. This tax would not be vattable.
The
definition of services being other than goods raises the concern of whether it
would also cover Immovable property transactions.
What
would be the Applicability of Levy?
Under
GST, every specified transaction would be subject to tax.
Supply
within State: In case the supply of goods or services is done
locally i.e. the place of consumption rules provide that local GST needs to be
applied for the transaction, then the supplier would charge dual GST i.e. SGST
and CGST at specified rates on the supply. This is explained with the
following example:
Basic
value charged for supply of goods or services
|
10,000
|
Add:
CGST @ 10%*
|
1,000
|
Add:
SGST @ 10%*
|
1,000
|
Total
price charged for local supply of goods or services
|
12,000
|
Note:
In the above illustration, the rate of CGST and SGST is assumed to be 10% each
The CGST
& SGST charged on the customer for supply of goods or services would be
remitted by the seller into the appropriate account of the State/ Central
Government.
Supply
from One State to Another
In case
the supply of goods or services is done interstate i.e. the place of
consumption rules provide that interstate GST (or integrated GST) needs to be
applied for the transaction, then the supplier would charge IGST at specified
rates on the supply. This is illustrated with the help of the following
example:
Basic
value charged for supply of goods or services
|
10,000
|
Add:
IGST @ 20%*
|
2,000
|
Total
price charged for interstate supply of goods or services
|
12,000
|
Note:
In the above example, the rate of IGST is assumed to be 20%
The IGST
charged on the customer for supply of goods or services would be remitted by
the seller into the appropriate account of the Central Government. The CG would
share the same with the State of destination and itself.
Exports
In case
the supply of goods or services are exported out of India i.e. the place of
consumption rules provide that regard the transaction as ‘exported’, then the
transaction would be zero rate. In other words, the supplier would be
allowed to export the goods or services without charging any tax. This is
explained with the help of the following example:
Basic
value charged for supply of goods or services
|
10,000
|
Add:
GST
|
Nil
|
Total
price charged for export of goods or services
|
10,000
|
From the
above the following features of the GST emerge. The salient features of GST are
given below:
Þ Dual GST: Dual GST
signifies that GST would be levied by both, the Central Government and the
State, on supply of goods or services. Under the Constitution, presently
the taxing powers are presently split between the State and the Centre.
In case of certain transactions, the power to tax is vested with the Centre and
while in certain others, the power is vested with the State. Under GST,
the power to tax on supply of all goods and services would be vested in the
hands of both, the State and the Centre. In certain cases, such as the
interstate transactions, the power to tax would be vested with the Central
Government, while the revenue would in some appropriate manner, get distributed
to the States. Considering the dual taxation power to tax transactions under
GST, the structure is referred to as Dual GST. Considering the basic framework
of the constitution and keeping its structure intact, Dual GST appears to be
implementable solution for India scenario.
Þ Subsuming
many Taxes: GST should subsume all major indirect taxes levied
by the Central Government i.e. central excise, customs and service tax and
majority of the taxes levied by the State Government i.e. VAT, luxury tax,
entertainment tax, etc. In this regard, tax on sale of 5 specified
petroleum products would continue to be under sales tax and central excise till
the GST Council suggests its inclusion in the GST. Alcohol is intended to
be kept for state excise ONLY. The following taxes would be absorbed/ subsumed
into GST:
The
following indirect taxes would be subsumed under GST:
Particulars
|
Levied
By
|
Duty
of excise on manufacture
|
Centre
|
CVD
& SAD (component of customs duties)
|
Centre
|
Service
tax
|
Centre
|
Central
Sales Tax - Taxes when sale or purchase takes place in the course of
inter-State trade
|
Centre
|
CST-
Taxes on consignments that take place in the course of inter-State trade
|
Centre
|
Taxes
on the entry of goods into a local area for consumption, use or sale therein
( Including octroi).
|
State
|
Taxes
on sale/purchase of goods within state
|
State
|
Luxury
Tax
|
State
|
Entertainment
Tax
|
State
|
Þ Rate
Structure: It is expected that GST would be levied on the
transaction value i.e. price actually paid or payable for supply of goods and
services. The GST for local supplies would be split into SGST and CGST. The
Task Force on GST of Thirteenth Finance Commission (TFC) has worked out a
Revenue-Neutral Rate (RNR) of 12% (5% CGST and 7% SGST) assuming there is a
single GST rate and stamp duty & electricity duty are also subsumed in the
GST. However the rate now being discussed is in excess of 20%.
GST could
have a 4 rate structure with standard rate, concessional rate, special rate for
bullion & jewellery and exempted/ nil rated. It is presently the view
that services and goods would have the same rate.
The
discussion paper mentions and the Constitution Amendment bill 2014 indicates
that the empowered committee has decided to adopt the following rate structure
for taxing goods and services:
· Exempted
goods: The short list [Out of 91 items ] under the State VAT law-0%
· Special
rate: Precious metals- could be 1 %
· Concessional
rate: Necessities and goods of basic importance [ the concept of declared goods
would not longer be relevant] -could be 10%
· Standard
rate: For all other goods- could be 20% [ Maybe more is the indication]
Note:
States maybe able to fix the SGCT based on a band say 9-11%. [ 1-2 %]
The
recommend uniform State GST threshold of INR 25 Lakhs for both goods and
services and composition scheme for those between Rs. 25 Lakhs to 75 Lakhs is being
discussed.
A 1% tax
would accrue to the originating States for a period of 2 years unless extended
by the GST council.
Þ GST
Council would be put in place which would consist of the
FM of Union and States. The issue of veto power for the Union still is to be
resolved.
Þ Credit
Scheme: GST would be levied on supply of goods and
services and the supplier would be allowed credit for the GST paid on
purchases. The credit would be seamless except that the credit of CGST
paid would not be allowed for set-off against SGST payable and vice versa.
The
objective of seamless credit would be met except for those below the threshold
limit, those under special composition schemes and the products which are
exempted. Presently in the central as well as the state tax laws a number of
restrictions exist on eligibility of goods and services used for business. It
is hoped that these anomalies would be taken care in the draft law which is
expected tobe in place by June 2015.
How would
this work?
The
assessee dealer would be entitled to avail credit of GST paid on
purchases. In this regard, the dealer may purchase the goods or services
locally or interstate or as imported. The following taxes paid on purchases
when made locally, interstate or imported, would be available as credit in the
hands of the dealer:
Type of
purchase
|
Local
|
Interstate
|
Imported
|
GST
incidence on purchase (taxes payable)
|
CGST
SGST
|
IGST
|
BCD
CGST
SGST
|
Credit
entitled on (with respect to taxes paid)
|
CGST
SGST
|
IGST
|
CGST
SGST
|
The
assessee is required to account for CGST, SGST and IGST separately.
Extent of
Cross Utilisation:
Nature
of tax paid on purchase
|
Can be
utilized for payment of
|
CGST
|
CGST
IGST
|
SGST
|
SGST
IGST
|
IGST
|
CGST
SGST
IGST
|
Þ IGST: Under
this model the Centre would levy the IGST which would be CGST plus SGST on all
inter-State transactions of taxable goods and services.[ This would also
include goods and services imports] Inter-State seller would pay the IGST on
value addition after adjusting of IGST, CGST and SGST on purchases. The
Exporting state would transfer to the Centre the credit of SGST used on payment
of IGST.
Þ Compensation to States: In the opinion of the paper writer though some
States who are consumer centric like Kerala would immensely benefit by GST most
well to do States like Gujrat, Maharastar, Haryana, Tamil Nadu & Karnataka
among others would get a share of the services consumed in the State which is a
much bigger proposition [ 59% of GDP]. They would also get a share of
the Rs125,000/- of Additional Customs Duty as well as the Special Additional
Duty] on imports.
The
compensation for the first 3 years would be 100% of the shortfall. Then 75 %
and 50% in the 5th year. States which over estimate the impact may
find delayed disbursement a possibility.
Þ Administrative Mechanism: Both the Central Government and State Government
would have the authority and control over the assessee as follows.
(i) The administration of the Central GST would be with
the Centre and for State GST with the States.
(ii) Each taxpayer could 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 prevailing PAN-based system for Income
tax facilitating data exchange and taxpayer compliance. The exact design would
be worked out in consultation with the Income-Tax Department.
(iii) Keeping in mind the need of tax payers convenience, 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. Both the State and Centre may also adjudicate jointly to
avoid conflicting decisions.
(iv) The
assessee dealer would be required to pay GST into the specified account of the
State/ Centre and file periodic returns separately with the State/ Central
Government.
Þ Challenges
For GST Implementation: Some expected hurdles to be adequately overcome
could be as under:
1. Standardization
of systems and procedures all over India
2. Unfair
dispute resolution- Equal powers
3. Training/
Equipping Tax administration
4. Adoption
of huge capacity IT to improve efficiency and credit states for input credit
utilised as taxes collected would be on account of destination state.
5. States
not willing to give Veto to Union
6. Compensation
disbursal doubts
Article Submitted by
K.K. Juneja
Advocate