GST explained

What is GST?

‘G’ – Goods

‘S’ – Services

‘T’ – Tax

“Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and service at a national level under which no distinction is made between goods and services for levying of tax. It will mostly substitute all indirect taxes levied on goods and services by the Central and State governments in India.

GST is a tax on goods and services under which every person is liable to pay tax on his output and is entitled to get input tax credit (ITC) on the tax paid on its inputs(therefore a tax on value addition only) and ultimately the final consumer shall bear the tax”.

OBJECTIVES OF GST:

One of the main objective of Goods & Service Tax(GST) would be to eliminate the doubly taxation i.e. cascading effects of taxes on production and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country.

 Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle.

Let’s know the structure of GST

It would have a dual structure , a Central component levied and collected by the Centre and a state component administered by states.

At the Central level, it will subsume Central excise duty, service tax and additional customs duties.

At the state level, it will include value-added tax(VAT), entertainment tax, luxury tax, lottery taxes and electricity duty.

The central government will have the

exclusive power to levy and collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST).

Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco.

The 2016 Act requires Parliament to compensate states for any revenue loss owing to the implementation of GST.

What taxes at centre and state level are incorporated into the GST?

At the State Level:

• State Value Added Tax/Sales Tax
• Entertainment Tax(Other than the tax levied by the local bodies)
• Octroi and Entry Tax
• Purchase Tax
• Luxury Tax
• Taxes on lottery, betting and gambling

At the Central level:

• Central Excise Duty
• Additional Excise Duty
• Service Tax
• Additional Customs Duty(Countervailing Duty)
• Special Additional Duty of Customs

The benefits of Goods and Service Tax (GST)

GST is beneficial not only for the business and industry, but also for the government and consumers. Here, we bring the ten benefits of Goods and Service Tax (GST).

1. Easy compliance:

A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers

online , which would make compliance easy and transparent.

2. Uniformity of tax rates and structures:

GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business .

3. Removal of cascading:

A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes . This would reduce hidden costs of doing business.

4. Improved competitiveness:

Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry. World Bank believes that the implementation of the Goods and Service Tax (GST), combined with dismantling of inter-state check-posts, is the most crucial reform that could improve competitiveness of India’s manufacturing sector.

5. Gain to manufacturers and exporters:

The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST)

would reduce the cost of locally manufactured goods and services . This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports . The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

6. Simple and easy to administer:

Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.

7. Better controls on leakage:

GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.

8. Higher revenue efficiency:

GST is expected to decrease the cost of collection of tax revenues of the Government , and will therefore, lead to higher revenue efficiency.

9. Single and transparent tax proportionate to the value of goods and services:

Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer , leading to

transparency of taxes paid to the final consumer .

10. Relief in the overall tax burden:

Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage . Because of efficiency gains and prevention of leakages , the overall tax burden on most commodities will come down, which will benefit consumers. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Supporting Laws to implement GST

For the implementation of GST, apart from the Constitution Amendment Act, some other statutes are also necessary. Recently 5 supporting laws to the GST were recommended by the council. 4 for the bills should be passed by the parliament, while the 5th one should be passed by respective state legislatures. The details are given below.

• 1. The Central Goods and Services Tax Bill 2017 (The CGST Bill).
• 2. The Integrated Goods and Services Tax Bill 2017 (The IGST Bill).
• 3. The Union Territory Goods and Services Tax Bill 2017 (The UTGST Bill).
• 4. The Goods and Services Tax (Compensation to the States) Bill 2017 (The Compensation Bill).
• 5. And a state GST will be passed by the respective state legislative assemblies.

Tax slabs are decided as 0%, 5%, 12%, 18%, 28% along with categories of exempted and zero rated goods for different types of goods and services.

Further, a cess would be levied on certain goods such as luxury cars, aerated drinks, pan masala and tobacco products, over and above the rate of 28% for payment of compensation to the States.

However, which goods and services fall into which bracket is still an enormous task to be completed by the GST council.

Highest tax slab is pegged at 40% .

• Brief information about each of them is as follows

Constitution 101st amendment Act, 2016

This is the enabler act for GST and it amends several important articles and schedules of the constitution of India 

The new articles added by this amendment to Indian Constitution are Article 246-A (Special provision with respect to goods and services tax); Article 269-A ((Levy and collection of goods and services tax in course of inter-State trade or commerce) and Article 279A (GST Council).

Two schedules have been changed viz. 6 th schedule and 7 th

As per article 246-A:

Both Union and States in India now have “concurrent powers” to make law with respect to

goods & services

The intra-state trade now comes under the jurisdiction of both centre and state; while inter-state trade and commerce is “exclusively” under central government jurisdiction.

As per Article 269-A:

In case of the inter-state trade, the tax will be levied and collected by the Government of India and shared between the Union and States as per recommendation of the GST Council.

The article also makes it clear that the proceeds such collected

will not be credited to the consolidated fund of India or state but respective share shall be assigned to that state or centre. The reason for the same is that under GST, where centre collects the tax, it assigns state’s share to state, while where state collects tax, it assigns centre’s share to centre. If that proceed is deposited in Consolidated Fund of India or state, then, every time there will be a need to pass an appropriation tax. Thus, under GST, the apportionment of the tax revenue will take place outside the Consolidated Funds.

Article 279-A:

There will be a GST council constituted by President, headed by finance minister as its chairman and one nominated member from each state who is in charge of finance or taxation. GST Council has been discussed in detail here.

All decisions taken at the GST council will be taken based on voting. Process of voting is clearly articulated in detail in the constitutional amendment bill.

Other Changes

• The residuary power of legislation of Parliament under article 248 is now subject to article 246A.
• Article 249 has been changed so that if 2/3rd majority resolution is passed by Rajya Sabha, the Parliament will have powers to make necessary laws with respect to GST in national interest.
• Article 250 has been amended so that parliament will have powers to make laws related to GST during emergency period.
• Article 268 has been amended so that excise duty on medicinal and toilet preparation will be omitted from the state list and will be subsumed in GST.
• Article 268A has been repealed so now service tax is subsumed in GST.
• Article 269 would empower the parliament to make GST related laws for inter-state trade / commerce.

Issues Arisen OR Unresolved

• Not all items are covered: Taxation for certain items such as Alcohol, Tobacco etc. are still not under the GST domain. States argue that including them would hamper their revenue and they would suffer a huge resource. However, some experts say that the real reason is the nexus of politicians with some business class and high profile lobbying. Further, the Finance minister of India has said in the parliament that the consensus to include alcohol and tobacco under GST regime is possible in foreseeable future.
• Decision criteria for the tax bracket: There are apprehensions that how to decide about the items and the criteria that which item will fall into which tax bracket. It may lead to lobbying. To this, the Finance minister has said that the decision will be taken by the GST Council only and after due diligence and most probably by the consensus.
• Multiple tax rates and brackets: The philosophical idea that GST means “One Nation one Tax” is currently diluted due to multiple tax rates and brackets. To this, the Finance minister has said that since the target consumer of goods and services have different capabilities and therefore there must be a system similar to the democratic lines where higher value consumer pays more taxes .
• Power to impose tax taken away by Central Government from the Parliament: The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20% , without requiring the approval of Parliament. Under the Constitution, the power to levy taxes is vested in Parliament and state legislatures. Though the proposal to set the rates through delegated legislation meets this requirement, the question is whether it is appropriate to do so without prior parliamentary scrutiny and approval.
• Confusion regarding the location of consumption: Under GST, both state and Centre can tax the services based on their location of consumption . Now the confusion arises since the general rule to determine the location of the recipient is his location or address on record; there are specific rules for various services such as telecom, property, transportation, etc. This means that while a service may be consumed across multiple states, the tax revenue would be attributed to the state where the recipient is registered or his office is located. This could lead to higher tax attributed to states that have more registered offices. For example , suppose a company is located in Bangalore and advertises its products in the Kolkata edition of a newspaper, which has its registered office in Delhi. In this case, one may argue that the service is being finally consumed in Kolkata. However, as the recipient of services is in Bangalore, the tax would accrue to Karnataka.
• Anti-Profiteering Clause: The government is planning to set up an authority to see if any reduction in tax rates after GST is passed on to the consumer by companies or not. The industry and businesses are not taking this idea kindly and they see it as a backdoor entry of inspector raj. Experts say that prices should be market determined and no government authority has the business of deciding prices for goods and services.
• Confusion regarding the control over taxation: To avoid dual control, the GST council has reached a compromised formula. 90 percent of tax assesses with an annual turnover of Rs 1.5 crore or less, will be assessed by states and the rest by the Centre. For those with a turnover of over Rs 1.5 crore, the states and the Centre will share it equally. However, this ‘solution’ has its own set of issues . For example, if an entity with a turnover of less than Rs 1.5 crore in one year, posts a turnover of Rs 1.5 crore in the following financial year, who would be the new authority to take over the assessment? And, how will the existing investigations, if any, against the entity be addressed, and by whom? “There are a lot of procedural issues, and if these issues are not addressed properly, they would lead to litigations.
• The issue of casual taxable person: If a person registered in one state moves to another state for a short period for some business transaction – say to participate in a fair or exhibition, then that person would have to get himself registered in that state for that period.

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History of GST

• 1986: VishwanathPratap Singh, Finance Minister in Rajiv Gandhi’s government, proposed in the Budget a major overhaul of the excise taxation structure. This was similar to GST in a theoretical sense.
• 2000 : Initiating discussions on GST, Vajpayee government appoints an Empowered Committee headed by the then finance minister of West Bengal Asim Gupta.
• 2004 : Vijay Kelkar, then advisor to the Finance Ministry, recommends GST to replace the existing tax regime.
• Feb 28, 2006 : GST appears in the Budget speech for the first time . Finance Minister Chidambaram sets an ambitious task of implementing GST by April 1, 2010.
• Feb 28, 2007 : Chidambaram said in his Budget speech that the Empowered Committee of finance ministers will prepare a road map for GST.
• April 30, 2008 : The Empowered Committee submits a report titled ‘A Model and Roadmap Goods and Services Tax (GST) in India’ to the government.
• Nov 10, 2009 : Empowered Committee submits a discussion paper in the public domain on GST welcoming debate.
• Feb 2010 : Government launches project for computerisation of commercial taxes. Finance Minister Pranab Mukherjee defers GST to April 1, 2011.
• March 22, 2011 : Constitution Amendment Bill (115th) to GST introduced in the LokSabha
• March 29, 2011 : Bill referred to Standing Committee on Finance.
• Nov 2012 : Finance minister and state ministers decide to resolve all issues by Dec 31, 2012.
• Feb 2013 : Declaring government’s resolve to introduce GST, the finance minister makes provisions for compensation to states in the Budget.
• Aug 2013 : The standing committee submits a report to Parliament suggesting improvements. But the bill lapsed as the 15th LokSabha was dissolved.
• Dec 18, 2014: Cabinet approval for the Constitution Amendment Bill (122nd) to GST.
• Dec 19, 2014 : The Amendment Bill (122nd) in the LokSabha
• May 6, 2015: The Amendment Bill (122nd) passed by the LokSabha.
• May 12, 2015 : The Amendment Bill presented in the RajyaSabha
• May 14, 2015 : The Bill forwarded to joint committee of RajyaSabha and LokSabha
• Aug 2015 : Government fails to win the support of Opposition to pass the bill in the RajyaSabha where it lacks sufficient number.
• Aug 3, 2016: RajyaSabha passes the Constitution Amendment Bill by a two-thirds majority. Note: GST
• constitutional amendment bill needs to passed by at least 50% of state legislatures to be implemented. Assam is 1 State to pass GST bill.
• 1 July 2017 : GST  applicable across India.