Goods and Service Tax, as fondly known as GST, is a proposed tax regime in India which claims to bring with itself certain major overhaul / reforms in the Indian Indirect Taxation system and thereby the Economy. Interestingly, GST is not a new but an internationally well recognized and established tax regime prevalent in over 160 countries across the World covering Asia, Europe and Australia.
Under the existing tax regime in India, there exists multiple indirect taxes such as: (i) Centre levies of Excise, Customs and Service tax; and (ii) State levies such as Entry Tax, Value Added Tax (VAT) and others. The above-mentioned taxes are levied in different situations and by the Central and different State Governments respectively. The present system has certain issues such as complexities, cascading effect of taxes, double taxation, multiple compliances, non-availability of proper tax credits, administrative hassles encountered by different Governments and so on. Keeping the aforesaid in perspective, GST is a simplistic and integrated tax which propose to replace / subsume within itself, the various Central and State levies into one uniform tax. Therefore, GST is reformatory tax regime that will supposedly bring in simplicity, reduce tax burden on taxpayer, generate better revenues for the Government, act as stimulus to economy and make compliances simpler and effective.
The first time when I heard about GST was in the year 2005 (in the Budget speech of then Hon’ble Finance Minister of the Indian Union Government) and till today a lot has been said and done about it, but it is not enacted as a law till date. There are various theories around and almost every other person holds a different perspective on GST’s enactment, the timing, the form and the manner of such enactment / implementation. The fact is that not even after 11 years of continuous deliberation and much conviction shown by the Hon’ble legislators, GST could not see the light of day and is still a proposed ‘bill’ in the Indian Parliament. It surely is complicated and requires treading a difficult path.
But before I could come to the GST and its supposed form, impact and so on, it is important to have a look at the present taxation system, its anomalies and the certain substantial events that has taken place to reach us where we are currently.
India, being a federal republic, has several ‘Indirect Taxes’ – some levied and administered by the Central / Union Government and few levied and administered by the respective State Governments in both of their respective Constitutional rights. The Taxes collected by the Central Government gets deployed in Central Government’s initiatives / projects and also distributed amongst various States, whereas the respective State taxes directly go to the kitty of such State. Conventionally, on activities such as ‘manufacture’ of goods and ‘import’, ‘export’ of goods into / from India, there have been Central levies of Excise and Customs. Similarly, upon ‘sale’ of goods from a particular state / entry of goods into a particular state, there has been a levy of ‘Sales tax’ / ‘Octroi’ or ‘Entry tax’. Whenever, goods occasioned inter-state movement (from one Indian state to another), there has been a levy of ‘Central Sales Tax’ (CST) thereon. Clearly, it is a complicated and burdensome structure where Central Government forms its rules and remains responsible for its set of taxes, likewise respective State Governments. Often they both act in parallel on the taxpayer and mostly, they do not meet each other. One can imagine what could happen to a taxpayer amid all this.
Indian federal structure, socio-economic, political and several other considerations have contributed to the above, over the past. Continuous conduct of above structure has led to huge disputes (between Taxpayer and Government and sometimes between Governments) and several inefficiencies. The need to reduce complexities, have a better tax system, provide stimulus to the business / economy, keep taxes in healthy check, ensure proper administration and consistency in the attitude of different Governments and also to increase tax base have been increasingly felt time and again.
Much has also been done by the Legislators towards this direction and several attempts have been made to keep the taxation system progressive and effective, over the recent past particularly. Few measures requires a mention here, such as (a) reduction in Central Sales Tax rate from 4% to 2% (this remain non-creditable); (b) Introduction of Service tax by the Centre (from the year 1994) and a substantial expansion of the same; (c) rationalization of CENVAT (Excise duty) rates and (d) enactment of Value Added Tax (VAT) in all States and Union Territories.
However, despite all this, the present system of taxes still continue to suffer from anomalies. As an illustration, if a manufacturer of certain product has a cost of INR 100 and margin of INR 10, his final price would be INR 110, there will be excise duty (on manufacture) of 12.5% which is INR 13.75. Upon sale, there will be VAT of 12.5% on total price (inclusive of excise), thus on taxable value of INR 123.75, there will be VAT of INR 15.47. Thus, the product ultimately get sold at price of INR 139.22. The Purchaser of such product may sell it further and would have tax liability on it. Such purchaser may / may not be eligible for set-off of taxes paid on input(s) with his output tax liability. Thus, there exists cascading effect of taxes in the value chain (State taxes over Centre taxes), simultaneous levy of Central and State taxes and credit of inputs against output may not be uniform and consistent. Due to lack of clarity, a few items could have multiple tax levies (for instance on sale of software and food, there could be levy of both Service tax and VAT). Upon inter-state movement of goods, there could be further taxes, procedures (Entry form, C / E1 form etc) and delays. For CST, no credit available.
To put our example in the GST scenario, on the final price of the manufacturer (i.e. INR 110), there will be a levy of GST (say 20% - comprising Central GST of say 10% and State GST 10%). Accordingly, the tax cost will be INR 22 and final price of product INR 132. Thus, GST propose to remove cascading effect of taxes, it proposes to levy only one tax on underlying taxable transaction and leave such taxes to the Authorities to distribute among itself. Taxpayer does not have to deal with different Authorities.
GST propose to subsume within its scope Central Taxes such as Excise, Service tax, CST, Additional and Special Custom Duties, other surcharges and State Taxes such as VAT, Luxury Tax, Entry tax, Octroi, Purchase Tax. Few taxes such as Basic Customs duty, Stamp Duty, Taxes and Duties on liquor for human consumption have been kept out of GST as of now. The proposed model of GST will be in the form of dual GST model comprising of (i) Central GST – levied by Central Government; (ii) State GST – levied by State Governments; and (iii) Integrated GST (sum of CGST and SGST) – on inter-state and import transactions. Credit for CGST input against output liability of CGST available, similar for SGST. However, credit for IGST available against both CGST and SGST in prescribed manner. Does it make it sound like old wine in a new bottle – actually it may not be the same as old since taxpayer may not deal with multiple authorities here and it is left to the Authorities to work this out in a proper manner.
In the GST scenario, following taxes shall be chargeable on supply of goods and services: (i) On within the state transactions - CGST (To be collected by the Central Government) and SGST (To be collected by the State Government), (ii) On interstate transaction : Sale of goods transactions: IGST - To be collected by the Central Government and additional 1% (maybe); Supply including provision of services (other than sale of goods transaction) – IGST, (iii) On import of goods - BCD and IGST, and (iv) On import of services – IGST.
At a conceptual level, GST is different from the existing regime – that GST shall supposedly be levied on the taxable supply of goods and services. It does not recognize the concepts of ‘manufacture’, ’sale’ or ‘provision of services’ prevalent in the current tax regime. Whereas the current tax regime taxes levies tax on ‘origination’, GST is a ‘destination’ based tax. Thus, GST has got resistance from Industrially advanced Indian States such as Maharashtra which till now could produce / originate a lot of Industrial output and earn huge revenues thereon by levying several (origination based) state taxes. Unlike current system where no credit is available for CST, GST propose to provide credit of IGST (against the output liability of both CGST and SGST) in a prescribed manner. The existing system also provide numerous exemptions (to sectors such as Power Generation, to Pure Agents) and also recognize concepts of Branch / Stock transfers. The fate of such concepts in GST is yet to be seen. The GST rate is also supposedly going to be around 18 to 20%.
Till today, GST has encountered several roadblocks. There have been unprecedented hurdles which also had to be overcome prior to its implementation – the biggest being building consensus amongst the Central and State Governments towards revenue sharing, administration and acting under a single uniform tax code after 6 to 7 decades of past tax practices followed by Independent India. It also require necessary infrastructure to implement and administer this law. Also, effective dispute resolution mechanism, taxpayer registrations, faster and effective ways to ensure inter-state movement of goods and so on. It also require a Constitutional amendment, where it is right now. Meanwhile, certain procedures relating to GST returns, refund, registrations etc have been prescribed.
GST has been the Buzzword across all Industrial sectors – be it FMCG, Power, Real Estate, Pharma, Capital Goods, Logistics and Transportation, Textiles, Software, Food, Services (including Financial Services) or be any other sector in India today. The businesses do realize that GST not only brings a change in the tax numbers and overall costs, but somewhere will be a shift from the way business is being done currently in India. As much as I have experienced, Indian Businesses have been proactively taking measures to examine the impact of GST and taking necessary steps to deal with it effectively. Much is expected from the present Administration to enact this long pending legislation and really be able to achieve what it intends to.
Under the existing tax regime in India, there exists multiple indirect taxes such as: (i) Centre levies of Excise, Customs and Service tax; and (ii) State levies such as Entry Tax, Value Added Tax (VAT) and others. The above-mentioned taxes are levied in different situations and by the Central and different State Governments respectively. The present system has certain issues such as complexities, cascading effect of taxes, double taxation, multiple compliances, non-availability of proper tax credits, administrative hassles encountered by different Governments and so on. Keeping the aforesaid in perspective, GST is a simplistic and integrated tax which propose to replace / subsume within itself, the various Central and State levies into one uniform tax. Therefore, GST is reformatory tax regime that will supposedly bring in simplicity, reduce tax burden on taxpayer, generate better revenues for the Government, act as stimulus to economy and make compliances simpler and effective.
The first time when I heard about GST was in the year 2005 (in the Budget speech of then Hon’ble Finance Minister of the Indian Union Government) and till today a lot has been said and done about it, but it is not enacted as a law till date. There are various theories around and almost every other person holds a different perspective on GST’s enactment, the timing, the form and the manner of such enactment / implementation. The fact is that not even after 11 years of continuous deliberation and much conviction shown by the Hon’ble legislators, GST could not see the light of day and is still a proposed ‘bill’ in the Indian Parliament. It surely is complicated and requires treading a difficult path.
But before I could come to the GST and its supposed form, impact and so on, it is important to have a look at the present taxation system, its anomalies and the certain substantial events that has taken place to reach us where we are currently.
India, being a federal republic, has several ‘Indirect Taxes’ – some levied and administered by the Central / Union Government and few levied and administered by the respective State Governments in both of their respective Constitutional rights. The Taxes collected by the Central Government gets deployed in Central Government’s initiatives / projects and also distributed amongst various States, whereas the respective State taxes directly go to the kitty of such State. Conventionally, on activities such as ‘manufacture’ of goods and ‘import’, ‘export’ of goods into / from India, there have been Central levies of Excise and Customs. Similarly, upon ‘sale’ of goods from a particular state / entry of goods into a particular state, there has been a levy of ‘Sales tax’ / ‘Octroi’ or ‘Entry tax’. Whenever, goods occasioned inter-state movement (from one Indian state to another), there has been a levy of ‘Central Sales Tax’ (CST) thereon. Clearly, it is a complicated and burdensome structure where Central Government forms its rules and remains responsible for its set of taxes, likewise respective State Governments. Often they both act in parallel on the taxpayer and mostly, they do not meet each other. One can imagine what could happen to a taxpayer amid all this.
Indian federal structure, socio-economic, political and several other considerations have contributed to the above, over the past. Continuous conduct of above structure has led to huge disputes (between Taxpayer and Government and sometimes between Governments) and several inefficiencies. The need to reduce complexities, have a better tax system, provide stimulus to the business / economy, keep taxes in healthy check, ensure proper administration and consistency in the attitude of different Governments and also to increase tax base have been increasingly felt time and again.
Much has also been done by the Legislators towards this direction and several attempts have been made to keep the taxation system progressive and effective, over the recent past particularly. Few measures requires a mention here, such as (a) reduction in Central Sales Tax rate from 4% to 2% (this remain non-creditable); (b) Introduction of Service tax by the Centre (from the year 1994) and a substantial expansion of the same; (c) rationalization of CENVAT (Excise duty) rates and (d) enactment of Value Added Tax (VAT) in all States and Union Territories.
However, despite all this, the present system of taxes still continue to suffer from anomalies. As an illustration, if a manufacturer of certain product has a cost of INR 100 and margin of INR 10, his final price would be INR 110, there will be excise duty (on manufacture) of 12.5% which is INR 13.75. Upon sale, there will be VAT of 12.5% on total price (inclusive of excise), thus on taxable value of INR 123.75, there will be VAT of INR 15.47. Thus, the product ultimately get sold at price of INR 139.22. The Purchaser of such product may sell it further and would have tax liability on it. Such purchaser may / may not be eligible for set-off of taxes paid on input(s) with his output tax liability. Thus, there exists cascading effect of taxes in the value chain (State taxes over Centre taxes), simultaneous levy of Central and State taxes and credit of inputs against output may not be uniform and consistent. Due to lack of clarity, a few items could have multiple tax levies (for instance on sale of software and food, there could be levy of both Service tax and VAT). Upon inter-state movement of goods, there could be further taxes, procedures (Entry form, C / E1 form etc) and delays. For CST, no credit available.
To put our example in the GST scenario, on the final price of the manufacturer (i.e. INR 110), there will be a levy of GST (say 20% - comprising Central GST of say 10% and State GST 10%). Accordingly, the tax cost will be INR 22 and final price of product INR 132. Thus, GST propose to remove cascading effect of taxes, it proposes to levy only one tax on underlying taxable transaction and leave such taxes to the Authorities to distribute among itself. Taxpayer does not have to deal with different Authorities.
GST propose to subsume within its scope Central Taxes such as Excise, Service tax, CST, Additional and Special Custom Duties, other surcharges and State Taxes such as VAT, Luxury Tax, Entry tax, Octroi, Purchase Tax. Few taxes such as Basic Customs duty, Stamp Duty, Taxes and Duties on liquor for human consumption have been kept out of GST as of now. The proposed model of GST will be in the form of dual GST model comprising of (i) Central GST – levied by Central Government; (ii) State GST – levied by State Governments; and (iii) Integrated GST (sum of CGST and SGST) – on inter-state and import transactions. Credit for CGST input against output liability of CGST available, similar for SGST. However, credit for IGST available against both CGST and SGST in prescribed manner. Does it make it sound like old wine in a new bottle – actually it may not be the same as old since taxpayer may not deal with multiple authorities here and it is left to the Authorities to work this out in a proper manner.
In the GST scenario, following taxes shall be chargeable on supply of goods and services: (i) On within the state transactions - CGST (To be collected by the Central Government) and SGST (To be collected by the State Government), (ii) On interstate transaction : Sale of goods transactions: IGST - To be collected by the Central Government and additional 1% (maybe); Supply including provision of services (other than sale of goods transaction) – IGST, (iii) On import of goods - BCD and IGST, and (iv) On import of services – IGST.
At a conceptual level, GST is different from the existing regime – that GST shall supposedly be levied on the taxable supply of goods and services. It does not recognize the concepts of ‘manufacture’, ’sale’ or ‘provision of services’ prevalent in the current tax regime. Whereas the current tax regime taxes levies tax on ‘origination’, GST is a ‘destination’ based tax. Thus, GST has got resistance from Industrially advanced Indian States such as Maharashtra which till now could produce / originate a lot of Industrial output and earn huge revenues thereon by levying several (origination based) state taxes. Unlike current system where no credit is available for CST, GST propose to provide credit of IGST (against the output liability of both CGST and SGST) in a prescribed manner. The existing system also provide numerous exemptions (to sectors such as Power Generation, to Pure Agents) and also recognize concepts of Branch / Stock transfers. The fate of such concepts in GST is yet to be seen. The GST rate is also supposedly going to be around 18 to 20%.
Till today, GST has encountered several roadblocks. There have been unprecedented hurdles which also had to be overcome prior to its implementation – the biggest being building consensus amongst the Central and State Governments towards revenue sharing, administration and acting under a single uniform tax code after 6 to 7 decades of past tax practices followed by Independent India. It also require necessary infrastructure to implement and administer this law. Also, effective dispute resolution mechanism, taxpayer registrations, faster and effective ways to ensure inter-state movement of goods and so on. It also require a Constitutional amendment, where it is right now. Meanwhile, certain procedures relating to GST returns, refund, registrations etc have been prescribed.
GST has been the Buzzword across all Industrial sectors – be it FMCG, Power, Real Estate, Pharma, Capital Goods, Logistics and Transportation, Textiles, Software, Food, Services (including Financial Services) or be any other sector in India today. The businesses do realize that GST not only brings a change in the tax numbers and overall costs, but somewhere will be a shift from the way business is being done currently in India. As much as I have experienced, Indian Businesses have been proactively taking measures to examine the impact of GST and taking necessary steps to deal with it effectively. Much is expected from the present Administration to enact this long pending legislation and really be able to achieve what it intends to.
