UNDERSTANDING GOODS & SERVICES TAX
Cover Story by B R Prabhakar; Money Wise; January-2015;
From times immemorial “Levy of Taxes” on the subjects by the Rulers has been in vogue in order to generate the required finances for administering the State. There are many numbers of references in our ancient Indian Texts/literature (dating back to 5000 years or more) like Srimad Ramayanam, Mahabharatham, Manu Smruthi etc, regarding the “Dos & Don’ts” to be followed while collecting taxes from the common men.
In India, we have both the Direct and Indirect Tax regime. Present tax structure is as under:
In addition, the local/Municipal Administration will have powers to levy Octroi, Toll, Property Tax, Vehicle Tax, Environment Tax etc,.)
Our Constitution of India, keeping in view the federal structure of the country, clearly lays down the powers of the Centre and the States to legislate on levy and collection of taxes. Hence, we have 3 lists in Schedule VII viz: List I- Union List, List II- State List & List III- Concurrent List.
However, at present the Constitution does not provide for any concurrent taxation powers to the
Centre as well as the States for the same subject matter of tax. Currently in the indirect tax structure, the Centre is empowered to levy tax on manufacture, rendering of services and import of goods up to production. States are empowered to levy and collect tax on the sale of goods.
In fact the revenues from Indirect Taxes are much higher as compared to Direct Tax revenues.
Over the period, the Indirect taxes have got multiplied and quite often have given rise to cascading effect. In order to remedy the situation, the Central government contemplated introduction of GST – a “destination based consumption tax”. The concept initiated in 2000, took a shape in 2004 when Kelkar Task Force Report recommended unification of all State & Central Taxes. GST- i.e. Goods & Services Tax – was to be introduced in April 2011 as mentioned in the speech of the then FM Mr. Pranab Mukherjee in February, 2010. However, only in 2014, some finality was attempted by the Central Government by tabling the 122nd Constitution Amendment Bill, before the Lok Sabha on December 19, 2014.
The Bill proposes to replace the current Indirect tax regime consisting of multiplicity of taxes with a single tax. The Constitution is proposed to be amended for conferring concurrent taxing powers on the Centre & States for levying GST on every transaction of supply of goods or services or both.
The proposed GST is consumption type VAT (Value Added Tax) where only final consumption is treated as the final use of a good. The tax will be levied on the value of the product or service supplied (and not sold). GST is expected to integrate taxes on goods and services across all supply chain for availing set-off and capture value addition at each stage. A continuous chain of set-off is expected to be established from the original producer (s)/ service provider(s) level up to the Retailer(s) level, which would eliminate the burden of all cascading effects of taxation. Suppliers at each stage would be permitted to set-off GST paid on the purchase of input goods and services against GST to be paid on the supply of goods and services.
The proposed Bill provides for the following salient aspects:
- Subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services.
- Subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services.
- Taxes not to be subsumed are Basic Customs Duty, Excise Duty on Tobacco products & Petroleum products (till notification by GST Council).
- Dispensing with the concept of ‘declared goods of special importance’
- Levy of Integrated GST on inter-State transactions of goods and services.
- Levy of an additional tax on supply of goods, not exceeding one per cent, in the course of inter-State trade or commerce to be collected by the Government of India for a period of two years and assigned to the States from where the supply originates.
- Conferring concurrent power upon Parliament and the State Legislatures to make laws governing GST.
- Coverage of all goods and services, except alcoholic liquor for human consumption, under GST.
- Compensation to the States for loss of revenue arising on account of implementation of the GST up to a period of five years;
- Creation of GST Council to examine issues relating to GST and make recommendations to the Union and the States on parameters like rates, exemption list and threshold limits, special provision for a few States (viz. Arunachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand) and other matters.
The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government as Members.
It is further provided that every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present wherein the vote of the Central Government shall have a weightage of one-third of the total votes cast, and the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
As of now, Goods & Services Tax (GST) is implemented in about 160 countries in the world under various models. France was the first to implement GST in 1960. India is opting for Concurrent Dual GST model (which has been implemented by Brazil & Canada) wherein for levy of tax/ taxes, the place of supply of goods & services are to be considered. Accordingly, following structure of GST will be followed in India:
*Additional Tax up to 1% is to be levied in case of inter-state supply of goods.
Revenue will be ultimately received by the State in which goods are finally consumed.
The expected benefits from GST
- One uniform tax legislation throughout India, in place of 37 different tax laws of today (29 States + Centre + 7 Union territories) ;
- One single application for Registration under GST;
- Avoidance of Industry – Bureaucracy interface, there by bringing down corruption, since practically every activity is “on-line”.
- Documentation of purchases and sales will be time bound and complete in order to obtain set-offs;
- Dispense with various Forms to be issued under various Acts;
- Dispense with the present system of Taxes deducted being misused as Working Capital by large Industrial houses by non-remittance of the same in time;
- Improvement in tax revenues of State and Central governments.
The difficulties / challenges which may have to be faced and solved are:
- Developing of IT infrastructure to support the continuous on-line activities of the expected One Crore dealers all over India;
- Strategic changes in business & Industry to change over to new system;
- GST Law, once it comes into force, cannot be easily modified since it has to be with the approval of Parliament based on recommendation of GST Council;
- As the levy is w.r.t. goods supplied, accounting for production quantity should not be left off, which had been taken care of by Central Excise law;
- At least for next 8 to 10 years, the cases /litigations under old laws will continue requiring a parallel run;
- Unlearning of old laws to a great extent and synthesizing the old provisions while implementing the new requirements, wherever needed.
The moot question is – Whether the introduction of GST will result in the consumer paying lesser taxes or more taxes?
There is no final answer as the Empowered Committee is still to suggest rates of GST. Experts opine that in the short term, prices could go up for many goods, as has happened internationally on introduction of GST. In many cases companies may not pass on the entire tax savings arising to them on inputs, while any increase in GST on output is passed on to the consumer. So till such time there is no compulsion on the companies to pass on the GST benefits to the ultimate consumer, some price inflation is expected.
Whatever it may be, the situation is that GST is a storm that is sure to hit our shore. The best course of action is to ensure that the provisions of proposed GST law are made ina way that is most convenient to us, when it hits us and also be totally prepared to face it. The 122nd Constitution Amendment Bill which is today in the Rajya Sabha and was expected to be passed in the Winter Session is still to be passed. The additional time which is available needs to be utilized properly. Hence, we need to have focused discussions to understand its implications and formulate suitable strategies to derive best benefits of this law, as and when it becomes effective.
After all we are told- वादॆ वादॆ जायतॆ तत्त्व बॊधः
Meaning -“It is only continuous debates which will result in proper understanding of principles”.
Let us do so as responsible citizens, as the successful implementation of GST in India will be the biggest collaborative effort in the world, given the complex federal structure of our economy.