Goods & Services Tax (GST) – One Nation One Tax

Why In News:

After being subject to years of haggling and histrionics, the Goods & Services

Tax (GST) finally had its historic day in the Parliament with the passage of the Bill

in both the Loksabha and RajyaSabha to amend the Constitution, paving the way

for implementation of GST which is the biggest Indirect tax reform in the last 30

years.

The Rajya Sabha passed it with amendments on 3rd August . Loksabha Passed

the amended Bill on 8th August

What is GST:

GST is a single tax on the supply of goods and services, right from the manu-

facturer to the consumer. 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. 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 previ-

ous stages.More than 160 countries across the world have implemented GST in di-

verse forms.

Background:

GST is being introduced in the country after a very long journey since it was first dis-

cussed in the report of the Kelkar Task Force on indirect taxes. A brief chronology

outlining the major milestones on the proposal for introduction of GST in India is as

follows:

In 1986 Jha Committee first introduced value added taxation in India. This

was called as MODVAT(modified VAT). Before this taxes at both inputs and out-

puts. Removal of cascading burden, rationalisation and avoiding double taxation

was the aim..It was renamed as CENVAT later. However CENVAT was about excise

duties charged only at the central level. state level VAT/sales tax and interstate tax re-

mained untouched.

VAT minimises tax erosion because a seller pays VAT on his sales but

gets refund of VAT paid by him on previous purchase. A retails pays VAT but

is refunded VAT paid buy him on goods purchased by him on wholesale. He

cannot claim refund unless he shows a receipt

CENVAT applies only to manufacturing stage and does not extend

down to distribution stage till retail sale of goods. CENVAT mechanism ex-

tends for set off only amongst central excise duty and services tax into level of

production. CENVAT does not extend to value addition by the distribution

trade below stages of manufacturing. Manufacturers cannot claim set off

against other central taxes like and duties like additional excise duties and sur-

charges.

In 2005 based on recommendations of Asim Das Gupta committee State level

VAT was introduced. This replaced sales tax, turnover tax, surcharge on sales tax

etc at state level.

In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive

Goods and Services Tax (GST) subsuming both central, state and interstate taxa-

tion based on VAT principle.

A proposal to introduce a National level Goods and Services Tax (GST) by

April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07

by then FM Chidambaram.

Since the proposal involved reform/ restructuring of not only indirect

taxes levied by the Centre but also the States, the responsibility of preparing a

Design and Road Map for the implementation of GST was assigned to the

Empowered Committee of State Finance Ministers (EC).It was headed by

Asimdasgupta initially and then later by Sushil Kumar modi.

Based on inputs from Govt of India and States, the EC released its First

Discussion Paper on Goods and Services Tax in India in November, 2009..

In order to amend the Constitution to enable introduction of GST, the Constitu-

tion (115th Amendment) Bill was introduced in the Lok Sabha in March 2011. As

per the prescribed procedure, the Bill was referred to the Standing Committee on

Finance of the Parliament for examination and report.

The Parliamentary Standing Committee submitted its Report in August,

2013 to the Lok Sabha. The recommendations of the Empowered Committee

and the recommendations of the Parliamentary Standing Committee were ex-

amined in the Ministry in consultation with the Legislative Department. Most

of the recommendations made by the Empowered Committee and the Parlia-

mentary Standing Committee were accepted and the draft Amendment Bill

was suitably revised.

The 115th Constitutional (Amendment) Bill, 2011, for the introduction of

GST introduced in the Lok Sabha in March 2011 lapsed with the dissolution of the

15th Lok Sabha.

In June 2014, the draft Constitution Amendment Bill was sent to the Empow-

ered Committee after approval of the new Government.Based on a broad consensus

reached with the Empowered Committee on the contours of the Bill, the Cabinet on

17.12.2014 approved the proposal for introduction of a Bill in the Parliament for

amending the Constitution of India to facilitate the introduction of Goods and Ser-

vices Tax (GST) in the country.

The Bill was introduced in the Lok Sabha on 19.12.2014, and was passed by

the Lok Sabha as Constitution 122nd Amendment Bill on 06.05.2015. It was then

referred to the Select Committee of Rajya Sabha, which submitted its report on

22.07.2015.

The Rajya Sabha passed it with amendments on 3rd August 2016 . Loksabha

Passed the amended Bill on 8th August 2016.

Current Indirect Taxation Structure that GST will Subsume:

Goods and services are currently taxed separately.

VAT applies at manufacturing stage (CENVAT) as well as Sales stage (State

level VAT)

Input credit set off not available against different taxes. For eg: set off not

available for CENVAT against state VAT

Different tax rates levied across different states.

Intra state transaction gets input credit set off but not inters state transaction.

Likewise as CENVAT, State VAT covers only sales. Sellers can claim credit

only against VAT paid on previous purchase.

Centre cannot impose taxes on goods beyond manufacturing (excise) or prima-

ry import (customs) stage. Centre only can tax services. State has no powers to tax

services. State has exclusive domain of taxes on consumption.

At the Central level, the following taxes are currently charged that will be sub-

sumed when GST is in place:

• Central Excise Duty,

• Additional Excise Duties (Goods of Special Importance)

• Additional Excise Duties (Textiles and Textile Products)

• Service Tax,

• Additional Customs Duty commonly known as Countervailing Duty, and

• Special Additional Duty of Customs.

At the State level, the following taxes are currently charged that will be sub-

sumed when GST is in place:

• Subsuming of State Value Added Tax/Sales Tax,

• Entertainment Tax (other than the tax levied by the local bodies)

• Central Sales Tax 3% (levied by the Centre and collected by the States selling

state from buying state from buying state.Basically interstates tax will be

abolished after GST).

• Octroi and Entry tax,

• Purchase Tax,

• Luxury tax, and

• Taxes on lottery, betting and gambling

Also many indirect taxes not included in state VAT

Current Exemptions under CENVAT and Service tax.

Oil & gases productions, mining, agriculture wholesale & retail trade,

real estate and construction & other services.

Current Exemptions under State VAT:

All services, real estate properties, agriculture oil & gases production &

mining

Procedure for adopting GST Constitution Amendment bill

To pass GST bill it needs 2/3rd

majority in both houses (more than 50% of total

membership of house present & voting)

Then it has to be ratified by minimum 50% of states ( 50% of 29 states & 2 UT

with legislature → 31)

It will be then sent for Presidential asset culminating in the Bill being passed.

State & central govt should pass simple bills to adopt Model GST laws

Expected Roll out date proposed by government is April, 2017.

Salient points of the GST Bill:

No differentiation between good and services tax.One rate for both goods and

services.

Keeping in mind the federal structure of India, there will be two components of

GST – Central GST (CGST) and State GST (SGST). Both Centre and States will

simultaneously levy GST across the value chain. Tax will be levied on every sup-

ply of goods and services. Centre would levy and collect Central Goods and Ser-

vices Tax (CGST), and States would levy and collect the State Goods and Services

Tax (SGST) on all transactions within a State. The input tax credit of CGST would

be available for discharging the CGST liability on the output at each stage. Similar-

ly, the credit of SGST paid on inputs would be allowed for paying the SGST on

output. No cross utilisation of credit would be permitted.

Centre & State to have concurrent powers to make laws on goods and services.

Only centre can levy IGST (Intersect Supply of Goods and Services) and imports.

Law made by parliament in relation to GST will not override state laws on GST.

Subsumes all Indirect taxes at state and central level( barring few exceptions

listed below).

Input tax credit set off will be accessible across Intra and Inter state transac-

tions as GST will be one single tax at central and state level.The Central GST and

the State GST would be levied simultaneously on every transaction of supply of

goods and services except on exempted goods and services, goods which are out-

side the purview of GST and the transactions which are below the prescribed

threshold limits. Further, both would be levied on the same price or value unlike

State VAT which is levied on the value of the goods inclusive of Central Excise.

Alcohol for human consumption has been exempted from purview of GST.

GST will not apply to

- Petroleum crude

- High speed diesel

- Motor spirit (petrol)

- Natural gas

- Aviation turbine fuel.

GST council will decide when GST will apply to the above.

GST council will be formed comprising of Union FM, State FM’s, and Union

Minister of state for revenue.

The centre has 1/3rd

voting rights & states together have 2/3rd

of voting

powers in GST council. Any decision to be taken in GST council will need

3/4th of the majority.

GST council will recommend

Taxes, surcharges, cess that need to come under GST.

Tax rate of GST (at present recommendations is for 18% GST rate)

Threshold limit for GST (like in Vat, below 5 lakh transaction in full

need not file VAT)

framing of model GST laws

Special Provisions with respect to North eastern states, J & K, Uttarak-

hand etc.

Committee may decide for mechanism to resolve disputes.

Producing and consumption states.

Compensation to State for loss of revenue. Huge manufacturing state

like Gujarat and Maharastra will lose out on tax revenue like interstate tax-

es(Central sales tax) due to onset of GST. Such states will be completely

compensated (100% of the losses) for the loss of revenue for upto 5 years.

1% additional tax for Integrated Goods and service tax (IGST) tax for 2

years was proposed initially.however this provision was deleted in the amend-

ed final bill passed in Rajya Sabha.

Advantages Of GST

Removal of cascading: A system of seamless tax-credits throughout the value-

chain, and across boundaries of States, will ensure that there is minimum cascad-

ing of taxes. This will reduce hidden costs of doing business.

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. To be more specific, GST will make doing business in the

country tax neutral, irrespective of where one chooses to do business.

Easy compliance: A robust and comprehensive IT system would be the founda-

tion of the GST regime in India. Therefore, all tax payer services such as registra-

tions, returns,credit set offs, payments, etc. would be available to the taxpayers

online, which would make compliance easy and transparent.Infosys is currently

working with government to develop IT infrastructure for the GST Network.

Improved competitiveness: Reduction in transaction costs of doing business

will eventually lead to an improved competitiveness for the trade and industry.

Gain to manufacturers and exporters: The subsuming of major Central and

State taxes in GST, complete and comprehensive set-off of input goods and ser-

vices and phasing out of Central Sales Tax (CST) will 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.

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.

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 incentivise tax compliance by traders.

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 effi-

ciency.

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 incom-

plete 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 con-

sumer, leading to transparency of taxes paid to the final consumer

Relief in overall tax burden: Because of efficiency gains and prevention of

leakages, the overall tax burden on most commodities will come down, which will

benefit consumers.

Apprehension regarding the GST Bill:

Opposition has demanded in parliament the rate of GST which is to be decided

by GST council should not exceed 18%.also it wants the GST rate to be incorpo-

rated into the Constitution bill itself.government is yet non committal on the rate of

GST however it feels 18% is too less and anything above 20% would be ideal. Also

if GST rate is incorporated in the constitution itself any changes in future due to

dynamics of economy will require going through the entire process of approval by

both houses of parliament and ratification by states to change the GST rate which

will be a herculean task.

At present the total tax rates on good including CENVAT and state level VAT

comes to around 27%.if we add other taxes CST, Cess, surcharges etc it is effec-

tively around 30% depending on interstate variations. Bringing in GST will defi-

nitely bring the tax rates down to 18%-20% on goods which will benefit the con-

sumer.However the effective service charges paid today are currently around 14%-

15%.Bringing in GST will naturally increase the amount of service charges paid

currently . In India where services contributes to around 60% of GDP that might

lead to a Cost push Inflation as cost of services might go up.

Arvind Subramaniam The Chief Economic Adviser, has suggested a revenue

neutral rate of (15-15.5 per cent) and standard rate (16.9-18.9 per cent) for the pro-

posed GST which will make sure that high inflation is not experienced in the econ-

omy after roll out of GST.He also proposed that GST rate should not exceed 20%.

huge compliance-related benefits expected from the tax reform once it gets rolled

out will negate the need for high GST tax rate.

India is a federal country. for the first time states are getting concurrent power

to tax services under GST. However there might also be issues in future between

centre and also between states regarding compensation for loss of reve-

nue.producing and consuming states might have different view points regarding

rate of taxation.for example producing states like Gujarat and Maharastra might

want low taxation on manufacturing of cotton textiles related goods and consump-

tion states like Haryana, Uttarpradesh might want high rate of taxation on retail

sales of these goods leading to conflict. GST council will have to resolve such dis-

putes.

Cess ( education, Krishi Kalyan, Swatch Bharat) and surcharges charged by

centre are currently not part of GST.States might have an issue over this. also GST

will not apply to Petroleum crude,High speed diesel,Motor spirit (petrol),Natural

gas,Aviation turbine fuel. these have a very high interconnectivity with both manu-

facturing and service costs which might hinder seamless application of GST across

sectors.

How to approach for the Civil Services Examination:

Salient points of GST may figure in objective questions in prelims. In mains focus

will be on effect of GST on Indian economy, federal structure ( centre state relations)

and analysis of the new Indirect taxation structure.

Paper III:

Indian Constitutional amendments

Functions and responsibilities of the Union and the States, issues and

challenges pertaining to the federal structure, devolution of powers and fi-

nances up to local levels and challenges therein.

Parliament and State Legislatures - structure, functioning, conduct of

business, powers & privileges and issues arising out of these.

Paper IV:

Indian Economy and issues relating to planning, mobilization of re-

sources, growth, development and employment.

Government Budgeting.