Good and Services Tax……. A big tax reform after the development reform in 1991, which will virtually change the whole indirect tax structure in the world’s largest democracy. Now friends, lets initially discuss the changes that will take place in existing indirect tax structure in India.
Goods and Services Tax will subsume following taxes:
- Central Excise duty
- Service tax
- Countervailing duty (CVD)
- Sales tax
- Luxury Tax
- Entertainment tax
- Octroi / LBT (Not yet confirmed)
Before looking after the basic meaning and crux of Goods and Service Tax, let’s take a look after present status of the same in India.
Status of GST in India:
As GST will make the whole indirect taxation system centralized, it needs a constitutional amendment and ratification of minimum 16 states of the nation, in order to turn the dream of GST in reality. At present Lok Sabha (May 2015) and Rajya Sabha (August 2016) have passed the constitutional amendment, putting the ball in court of all states. At present, 17 states have already ratified the GST bill.
Model law for GST is released in June 2016. It contains following points:
- Goods and Services Tax Act, 2016
- Integrated Goods and Services Tax Act, 2016
- GST Valuation (Determination of the Value of supply of Goods and Services) Rules, 2016.
It is to be noted friends, why do we need constitutional amendment???
The right to tax sale rest with state and right to tax rest with Union of India. At the same time, right to tax services rest only with Union. Also right to tax local movement of goods rest with respective local authorities. As GST will replace 17 indirect taxes of all levels, constitutional amendment to ratify the right to tax and get the whole taxation regime under one roof.
Another major point of difference is earlier point of taxation was production based and new GST taxation system is consumption based.
I hope you guys have started getting the idea of GST and would be issues in framing and implementation of Goods and Services Tax.
Positive impact of Congress opposition to Initial GST Law:
GST is one instance where Congress obstructionism has actually helped the country. The initial version being piloted by Arun Jaitley was overly compromised in trying to cater to every state whim, making GST not only unviable, but counter-productive. At one stage, it seemed as if the revenue-neutral GST rate would be well above 20 percent, which would have killed growth in the dynamic services sector, which is 60 percent of the economy. Thankfully, that idea is gone.
For the most part, the Congress obstruction has helped improve the bill, though not all its interventions have been useful. For example, its previous insistence that the 18 percent GST upper limit should be carved into the constitution has, hopefully, been abandoned. Governments can commit to low and reasonable tax rates, but they must always retain the flexibility to adjust rates when the situation so demands. Just as no government has even put the upper limit on personal taxes into the constitution, the same logic applies to GST.
However, the government seems to have seen reason in trying to keep the initial GST rate at not more than 18 percent. This concession is vital or else the whole point of GST would have been lost. Service taxes, raised in this year’s budget, have already slowed down demand; another ratchet-up to 18 percent will make things worse – and result in cost-push inflation. But one can at least grin and bear the short-term shock for the long-term good of the economy. Depending on how it is implemented, the GST rate should start trending downwards after the initial years of implementation and increasing the taxpayer base.
The shape of the emerging consensus on the bill seems to be that the one percent extra tax demanded by manufacturing states will be dropped, despite mutterings from the manufacturing states of Tamil Nadu, Gujarat and Maharashtra. When Jaitley has already promised compensation for revenue losses over five years, this would have been a needless distortion of the GST whose main purpose is to reduce the number of taxes, not increase them. As things stand, GST will subsume excise, service tax, value-added tax, octroi and entry tax. Adding an inter-state tax to help manufacturing states was pointless.
There is still some friction over the creation of an independent dispute settlement mechanism, and the centre’s voting share of 33 percent in the GST Council. But both are essential. Giving the centre a veto with a 33 percent vote is important in order to avoid the implementation of bad rules pushed by narrow state interests. While this goes marginally against state autonomy, it is a price worth paying.
But autonomy is what states already have, having managed to keep a key revenue gusher like petroleum out of GST for now. That has to go at some point, but now is not the time to bring up the idea. The only fly in the ointment could be a Congress rethink on the emerging consensus. Hopefully, Rahul Gandhi will put the country above party.
Let’s discuss some of major issues and reasons why Congress and other political parties were opposing GST:
Sharing of Revenue between State and Union:
As per existing tax system, states are authority to collect taxes on sales inside or outside the state and also tax certain items like liquor, cigarate, etc. Also the local authorities are authorized to tax movement of goods in the local authority. Also the taxes are production based. So in new system there will be revenue loss of states who are industry oriented and are developed as compared to others like Maharashtra, Gujarat, etc. Hence, there comes a issue of compensation of loss of more developed states leading to first issue in GST regime. Hence, it was decided that Central government will compensate loss for the period of 5 years of these states. Also north eastern states will be compensated for a period of three years.
Also, the sharing of revenue between state and Centre will based on collection of taxes from respective states.
Rate of GST:
The rate of tax was always a major issue in the whole reform of introducing GST. At existing rate VAT is 4% or CST 2% and rate of excise is 12%, hence, the total rate taxes on most of the products was 14% or 16%. In case of services, it is 14%. But in case of GST, the rate so decided is 18%.
Ratification by majority of Constitutional amendment and states:
Another major issue is constitutional amendment. In lok sabha it was not a big issue for ruling BJP to pass a constitutional amendment, but in Rajya Sabha were Congress is still in majority was a political challenge for the ruling party.
(Adjustments by BJP Government to pass constitutional amendment in Rajya Sabha:
Giving clean cheat to Jaylalita for her corruption charges
Though after passing constitutional amendment in Rajya Sabha, next difficult task is of getting consent of majority that is minimum 16 states. Though after taking support of BJP ruling states, they need other states to ratify the GST bill.
Ratification by Jammu and Kashmir:
As we all know, service tax is not applicable to state of Jammu and Kashmir but excise laws are applicable to the state. In case of GST, if the state assembly does not ratify the GST bill, the same will not be applicable to them, even if all other states ratify the GST bill. This is because of special status of Jammu and Kashmir given at the time of independence. Hence, ratification of GST bill by the state assembly of Jammu and Kashmir is of different and special importance for successful and complete implementation of Goods and Services Tax.
Types of taxes under GST regime:
Though the rate of taxation will be uniform, but nomenclature of the same will differ as follows:
These differentiation is made in order to ease the process of revenue sharing among various states.
- Persons crossing threshold of aggregate turnover of Rs 9 lakhs in a financial year (but GST will be payable after crossing turnover of Rs 10 lakhs.)Threshold is Rs. 4 lakhs for North-Eastern States.
- Persons making inter-State taxable supply irrespective of threshold.
- Persons liable to pay GST under reverse charge.
- Input Service Distributor.
- E-Commerce Operator.
- Separate registration is required to be taken in each State. This is point is specifically for ease in revenue sharing.
- There is no provision for centralized registration. Hence, there will be a slight increase in compliance process for FMCG and huge organization.
- Existing taxpayers will be issued Registration Certificate on a provisional basis valid for 6 months. Certain documents are required which are to be provided by tax payers through portal. If the existing tax payers fail to renew the registration, then whole new registration will be required.
After registration let’s move on to transitional provisions:
- Closing Balance in current return.
- Unavailed Cenvat credit on capital goods, which is not carried forward in a return, will also be allowed in certain situations.
Credit of eligible duties and taxes in respect of inputs held in stock will also be allowed in certain situations.
When Tax is to be paid: (Taxable Event)
Like excise is payable on manufacturing activity, service tax is payable on provision of service and VAT is payable on sale, in the same manner GST will be payable on “supply”. Hence, the different point of taxation as per existing tax structure will come to end and uniform point of taxation will be in use.
Meaning and definition of term supply:
The term ‘supply’ is defined inclusively to inter alia include –
- All form of Supplies for a consideration.
- Specific Supplies without consideration
- Transactions between principal and agent is deemed to be supply.
- Supply of branded services by aggregator.
- Supply of services – broadly aligned with the Point of Taxation Rules, 2011.
- Supply of Goods – Similar principles as in respect of supply of services. The time of supply of goods is also dependent on removal or non-removal of goods.
This was about point of taxation. Now let’s see the valuation rules under GST structure.
Various methods have been prescribed for valuation which are:
- Transaction Value
- Comparison Method
- Computed Value Method
- Residual Method
Each of the method is explained in brief below:
Transaction value method:
The amount of transaction/consideration paid/ decided upon between the parties to the contract is the taxable amount. For example: Any vendor providing services at a fixed rate is the taxable value for the purpose of GST.
If the transaction value cannot be ascertained or is misleading, the one can use this method. Under this method, the tax payer needs to find a comparative value of providing identical service or similar goods at market rate, and assume same as taxable amount. For example: if a vendor providing a service of vehicle on rent. He provides services free of cost or on very concessional rates to friends and family, then comparative market rate or rate at which service is provided to normal clients is to be taken and tax is to be calculated thereon.
Computed Value Method:
Special transactions are covered under this method. If both of the above methods are unable to tackle the situation, in that case amount of services/goods supplied is to be calculated by the tax payer.
For example: Earlier gifts to employees was not covered under any taxation, but under GST regime, any gifts or any other perquisite without consideration or with minimum consideration is taxable and the taxable value is to be computed by the employer on various basis like fair value of goods/ services provided or market value of goods/ services provided, etc.
For example: Diwali gifts like power banks, etc. free of cost to employees will be taxable as it is considered as supply as per GST rules and value of taxable services/ goods is to be determined by calculating the fair value/ market value of those power banks.
If any one of the above methods cannot be used, then mixture of above three methods can be used. Such mixture will be called as residual method.
Input Tax Credit under GST Regime:
Sequence of Input Tax credit:
Credit of IGST can be taken against IGST, then CGST and then against SGST.
In the same manner, credit of CGST can be taken firstly against CGST and then against IGST. Hence, credit of CGST cannot be taken against SGST.
Credit of SGST can be taken first against SGST and then against IGST. Hence, credit of SGST cannot be taken against CGST.
Summary of above is as follows:
- Credit of SGST
|Sequence for utilization of Credit|
Example of GST vs. Current tax system:
|Cost Of goods||–||–|
|Add: Value addition||10,000||10,000|
|Add: CENVAT @ 12.5%||1,250||–|
|Add: GST @ 18%||–||1,800|
|Cost Of goods||11,250||11,800|
|Less : Input GST credit||–||(1,800)|
|Add: Value addition||5,000||5,000|
|Add: VAT @ 12.5%||2,031||–|
|Add: GST @ 18%||–||2,700|
|Cost Of goods||18,281||17,700|
|Less : Input VAT credit||(2,031)||–|
|Less : Input GST credit||–||(2,700)|
|Add: Value addition||2,000||2,000|
|Add: VAT @ 12.5%||2,281||–|
|Add: GST @ 18%||–||3,060|
|Total value added||17,000||17,000|
|Total Taxes paid||3,531||3,060|
|Effective tax rate (% of value addition)||21%||18%|
|• Excise is payable on removal of excisable goods
• Service Tax is payable on Provision of service
• VAT/CST is payable on sale of goods
Summarized Comparison of Taxation in today laws vs. GST:
|• CGST and SGST is payable on supply of goods / services within state
• IGST is payable on supply of goods/ services outside the state
- Normal taxpayer has to file 3 Returns in a month namely for outward supplies, inward supplies and consolidated. Taxpayers are also required to file an annual return.
- Returns have also been prescribed for Input Service distributor (ISD), Tax deducted at Source (TDS), Tax Collected at Source (TCS, applicable for e-Commerce Operators).
Minimum 37 returns for all registered person for every registered business segment and/or geographical segment.
These 37 returns are for each dealer in each state. As there is not system for centralized registration, companies like Reliance, HUL, ITC have to file hundreds of returns each year in order to comply with GST rules and Regulations.