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The 122nd Constitutional Amendment Bill was finally cleared by both the Houses of Parliament in …the first week of August. This finally paves the way for the implementation of the much anticipated Goods and Services Tax (GST) regime in India, teeing off one of the most significant economic reforms in India since 1991.
The GST is an indirect tax that brings together most of the taxes that are imposed on all goods and services (except a few) under a single banner. Essentially, GST is one indirect tax for the whole nation, one which will make India one unified common market. Over 160 countries across the world have a value added tax (VAT) or a goods and services tax (GST). The two terms are often used interchangeably but the difference in India’s case was that the VAT system only applied to goods and not services.
The GST is a single tax on the supply of goods and services right from the manufacturer to the consumer. Under this regime, credits of input taxes paid at each stage would be available at subsequent stages of value addition thereby making GST essentially a value added tax at each stage. The final consumer of goods and services will thus bear only bear the GST charged by the last dealer in the supply chain, with set off benefits available to all the preceding stakeholders in the value chain. This is in stark contrast to the current system, where different taxes (both state and central) are levied separately on goods and services.
Currently, India has value added tax (VAT) system at both central and state level but the said mechanism only extends set off benefits against Central Excise Duty and Service Tax paid upto the level of production. The VAT system does not extend to value addition by distributive stage below the stage of manufacturing. Currently, our manufacturers cannot claim set off against the central taxes like Additional Excise Duty and Surcharge.
Likewise, State VAT’s only cover sales. Seller can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes like luxury tax, octroi, entertainment tax etc.
Once the GST comes into effect, all Central and State Level taxes and levies on all goods and services will be subsumed with an integrated tax having mainly two components 1) Central Goods and Services Tax (CGST) and 2) State Goods and Services Tax (SGST).
How would the GST be administered in India?
Keeping in mind the federal structure of India. Both the centre and state would simultaneously levy tax across the value chain. Tax would be levied on every supply of goods and services. The centre would levy and collect CGST and states would levy and collect SGST on all transactions within the state. The input tax credit of CGST would be available for discharging the liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying off the SGST on the output. No cross utilization of credit would be permitted under the system.
The prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidents to consumers by slashing the prices of goods and services. Being a consumption based tax, dual GST (CGST and SGST) will result will result in better revenue collection for states with higher consumption of goods and services. For better understanding, a comparative table reflecting the long term benefits of GST (assuming CGST @ 12% and SGST 8%) viz. a viz. the existing tax regime is produced hereunder-:
|(A) Goods-Producer to Wholesaler||Under VAT (Rs.)||Under GST (Rs.)|
|Cost of Production||100000/-||100000/-|
|Add: Producer’s margin of profit||20000/-||20000/-|
|Producer’s basic price||120000/-||120000/-|
|Add: Central Excise Duty @ 8%||8000/-||NIL|
|Add: Service Tax @ 10% on Transportation & Job Work paid||4000/-||NIL (Included in GST)|
|Add: Value Added Tax @ 12.5%||16500/-||NIL|
|Add: Central GST @ 12%||NIL||14400/-|
|Add: State GST @ 8%||NIL||9600/-|
|(B) Goods- Wholesaler to Retailer|
|Cost of goods to Wholesaler||132000/-||120000/-|
|Add: Profit Margin @ 10%||13200/-||12000/-|
|Add: VAT @ 12.5%||1650/-||NIL|
|Add: Central GST @ 12%||NIL||1440/-|
|Add: State GST @ 8%||NIL||960/-|
|(C) Goods- Retailer to Final Consumer|
|Cost of goods to Retailer||145200/-||132000/-|
|Add: Profit Margin @ 20%||29040/-||26400/-|
|Add: VAT @ 12.5 %||3630/-||NIL|
|Add: Central GST @ 12%||NIL||3120/-|
|Add: State GST @ 8%||NIL||2112/-|
|Total final price to Consumer||177870/-||163632/-|
|Tax Component in Final Price||21780/-||31632/-|
|Final Price Ex-Taxes||156090/-||132000/-|
It is evident from the above example that due to multiplicity of taxes and due to non-availability of tax credit across the board, the final price of the consumer is much higher which is not only due to the tax component(s) but also due to the cascading effect.
The SGST and CGST would be simultaneously levied on every supply of goods and services except certain goods like alcohol for personal consumption, crude oil etc. and also those transactions, which fall below the prescribed threshold limit for levy of GST. Further, both would be levied on the same price or value unlike state VAT, which is levied on the value of goods inclusive of Central Excise. For better understanding, a diagrammatic representation is produced hereunder;
*Source: Ministry of Finance, Government of India
In case of inter state transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter state supplies of goods and services under Article 269A(1) of the Constitution of India. The IGST would roughly be the sum of the CGST and SGST.
Firstly, the inter state seller would pay IGST on the sale of his goods to the central government after adjusting the credit of IGST, CGST and SGST on his purchases (in that order).
Second, the exporting state would transfer to the centre the credit the credit of SGST used in its payment of IGST.
Third, the importing state will claim credit of IGST while discharging its output tax liability (CGST+SGST) in his own state. The centre will then transfer to the importing state the credit of IGST used in the payment of SGST.
Lastly, since GST is a destination based tax, all GST on the final product would accrue to the consuming state.
For better understanding, a diagrammatic representation is produced hereunder;
*Source: Ministry of Finance, Government of India
Subsumption of Taxes:
At the central level, the GST will subsume the following taxes;
At the state level, the GST will subsume the following taxes;
Benefits of GST:
Easy Compliance: A robust and comprehensive IT system would be the foundation of GST in India. All tax payer services like registration, returns and payments would be available online, which would make compliance easy and transparent.
Uniformity of Tax Structures and Rates: GST would make doing business in India tax neutral, irrespective of the choice of place of doing business.
Removal of Cascading: A system of seamless tax credits throughout the value chain and across the state boundaries would ensure that there is minimal cascading of taxes.
Better Competition: Reduction in transactions costs would eventually lead to better competition for trade and industry.
Administration: Multiple indirect taxes at central and state levels would be replaced by a unified GST, thereby making it easier to administer.
Controlling Leakage: GST would result in better compliance due to robust IT infrastructure. The inbuilt mechanism of the GST would incentivize compliance by traders thereby improving the Tax to GDP ratio in the country.
Revenue Efficiency: GST is expected to decrease the cost of collection of taxes by the government thereby leading to a higher revenue efficiency.
Single and transparent tax proportionate to the value of goods and services: Currently, the value of goods and services is India is laden with many hidden taxes. Under GST, there would only one tax from the manufacturer to the consumer, leading to transparency of taxes to be paid by the consumer.
Relief in Tax burden: Due to efficiency gains and prevention of leakages, the overall tax burden on most commodities is set to come down considerably.
Impact on Revenue States: GST, being consumption based and not an origin based tax, meaning thereby that the tax would be collected by the states where the goods are actually consumed and not where they are produced. This may lead to heavy losses for the producing states. To mitigate the potential damage, the parliament is considering incorporating a provision to compensate the producing states for the first five years from the official enactment of the GST regime.
Inflation: The cap on GST to be levied is expected to be between 17% to 20% as opposed to 14% to 16% which is considered apposite for emerging economies. According to statisticians, this may lead inflation anywhere between 1% to 2%, which poses to risk of nullifying some of the benefits proposed to be introduced by the GST.
Having already been unanimously ratified by both the Houses of Parliament, the Bill, being a Constitutional Amendment, would now have to be ratified by more than half of the state assemblies by a minimum of two-thirds majority of members present and voting before it is ready to get the final assent of the President. This would be followed by the formation of the GST Council within 60 days from the date the bill is notified, the Council would be assigned the task of framing the GST laws/byelaws/rules for both the centre and the states.
The Government under its flagship propaganda of “ease of doing business in India” has set a target date of April 1, 2017 for the roll out of GST.
Developing a common Indian market and by reducing the cascading effect of taxes and the cost of goods and services, the GST is set to be a game changing reform for the Indian economy. GST is set to have a far reaching impact on all aspects of business operations in the country for instance the pricing of products and services, supply chain optimization, IT, accounting and tax compliance systems thereby leading to a complete overhaul of the current indirect taxation regime in India. ‘