“IMPLEMENTATION OF GST IN INDIA”

Bachelor of CommerceFINANCIAL MARKETS

Semester V

(2015-2016)

Submitted by

SOWJANYA SAMPATHKUMAR

Roll No. 51

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INDEX

Sr. No. Particulars Page No.1 Introduction to GST 12 Need for GST in India 33 Existing taxation system vs.GST 54 Application and functioning of GST 145 Process of implementation and

Roadmap

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6 Hurdles of implementation 257 Features 288 Advantages 319 Disadvantages 3610 Impact on the economy 3711 Expectation from various other sectors 4312 Status of implementation of GST 4513 Conclusion 4814 Bibliography 49

Introduction to GST

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GST (goods and service tax) is a comprehensive tax levy on

manufacture, sale and consumption of goods and service at a national

level.

‘G’ – Goods

‘S’ – Services

‘T’ – Tax

GST is a tax on goods and services with value addition at each stage

having comprehensive and continuous chain of set-of benefits from the

producer’s/ service provider’s point up to the retailer’s level where only

the final consumer should bear the tax.” Through a tax credit

mechanism, GST is collected on value-added goods and services at

each stage of sale or purchase in the supply chain.

GST is paid on the procurement of goods and services can be set off

against that payable on the supply of goods or services. But being the

last person in the supply chain, the end consumer has to bear this tax

and so, in many respects, GST is like a last-point retail tax.

France was the first country to introduce GST in 1954. Worldwide,

Almost 150 countries have introduced GST in one or the

other form since now. Most of the countries have a unified GST system.

Brazil and Canada follow a dual system vis-à-vis India is going to

introduce. In China, GST applies only to goods and the provision of

repairs, replacement and processing services.

GST rates of some countries are given below:

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Country Rate of GST

Australia 10%

France 19.6%

Canada 5%

Germany 19%

Japan 5%

Singapore 7%

New Zealand 15%

Basically, GST is a value added tax, levied at all points in the supply

chain with credit allowed for any tax paid on inputs acquired for use in

making the supply. It is indirect tax that brings most of the taxes imposed

on most goods and services, on manufacture, sale and consumption of

goods and services, under a single domain at the national level. It would

apply to both goods and services in a comprehensive manner with

exemptions restricted to a minimum and it is payable at the final point of

consumption.

Need for GST in India

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Introduction of a GST to replace the existing multiple tax structures of

Centre and State taxes are not only desirable but imperative in the

emerging economic environment. Increasingly, services are used or

consumed in production and distribution of goods and vice versa.

Separate taxation of goods and services often requires splitting of

transaction values into value of goods and services for taxation, which

leads to greater complexities, administration and compliances costs.

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, would also greatly help in

removing economic distortions and will help in development of a

common national market.

The implementation of GST will help create a common Indian market

and reduce the cascading effect of tax on the cost of goods and

services. It will impact tax structure, tax incidence, tax computation,

credit utilization and reporting, leading to a complete overhaul of the

current indirect tax system.

GST will have a far-reaching impact on almost all aspects of business

operations in a country, including pricing of products and services;

supply chain optimization; IT, accounting and tax compliance systems.

GST is expected to be a critical reform in spurring growth in the

economy. When introduced, GST will not only make the tax system

simpler, but will also help in increased compliance, boost tax revenues,

reduce the tax outflow in the hands of the consumers and make exports

competitive.

It is hoped that the new Government will set forth a roadmap of the GST

implementation in the upcoming Budget. The GST or the Goods and

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Service Tax is a long pending indirect tax reform which India has been

waiting for, and which is hoped to iron out the wrinkles in the existing tax

system. This comprehensive tax policy is expected to be one of the most

important reforms in contributing to the India growth story.

GST was first introduced in India during 2007-08 budget sessions. On

17th December 2014, the current Union Cabinet ministry approved the

proposal for introduction GST Constitutional Amendment Bill. On 19th of

December 2014, the bill was presented on GST in Lok sabha. The Bill

will be tabled and taken up for discussion during the coming Budget

session. The current central government is very determined to

implement GST Constitutional Amendment Bill.

The introduction of the GST system is by far the most important tax

reform in India. Consensus and coordination among states is required

for it to succeed. It will affect prices, business processes and

investments in all segments of the economy. It will act as a catalyst for

promoting manufacturing in the country, thereby, supporting the ‘Make in

India’ program of the Government.

The Government of India is proposing to replace the current complex

structure of multiple indirect taxes in favour of a comprehensive dual

Goods and Services Tax (GST) expected to be implemented from 1 April

2016. GST will be one of the most significant tax reforms in the fiscal

history of India.

Existing taxation system vs. GST

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Existing:

Tax is compulsory contribution to state revenue, levied by the

government on workers' income and business profits, or added to the

cost of some goods, services, and transactions.

Direct Taxes:These types of taxes are directly imposed & paid to Government of

India. There has been a steady rise in the net Direct Tax collections in

India over the years, which is healthy signal. Direct taxes, which are

imposed by the Government of India, are:

Income Tax- Income tax, this tax is mostly known to everyone.

Every individual whose total income exceeds taxable limit has to

pay income tax based on prevailing rates applicable time to time.

By doing investment in certain scheme you can save Income Tax.

For FY 2015-16 Income tax rates are:-

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Wealth tax- A wealth tax (also called a capital tax, equity tax,

or net worth tax) is a levy on the total value of personal assets,

including owner-occupied housing; cash, bank deposits, money

funds, and savings in insurance and pension plans; investment

in real estate and unincorporated businesses; and corporate

stock, financial securities, and personal trusts. Typically liabilities

(primarily mortgages and other loans) are deducted; hence it is

sometimes called a net wealth tax.

A wealth tax taxes the accumulated stock of purchasing power, in

contrast to income tax, which is a tax on the flow of assets.

Capital Gains Tax- Capital Gain tax as name suggests it is tax on

gain in capital. If you sale property, shares, bonds & precious

material etc. and earn profit on it within predefined time frame

you are supposed to pay capital gain tax.

The capital gain is the difference between the money received

from selling the asset and the price paid for it.

Capital gain tax is categorized into short-term gains and long-

term gains. The Long-term Capital Gains Tax is charged if the

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capital assets are kept for more than certain period 1 year in case

of share and 3 years in case of property. Short-term Capital

Gains Tax is applicable if these assets are held for less than the

above-mentioned period.

Indirect Taxes:

An indirect tax is a tax collected by an intermediary (such as a retail

store) from the person who bears the ultimate economic burden of the

tax (such as the consumer). The intermediary later files a tax return and

forwards the tax proceeds to government with the return. Some of the

indirect taxes imposed are:

Sales Tax: Sales tax charged on the sales of movable goods.

Sale tax on Inter State sale is charged by Union Government,

while sales tax on intra-State sale (sale within State) (now termed

as VAT) is charged by State Government.

Sales can be broadly classified in three categories. (a) Inter-State

Sale (b) Sale during import/export (c) Intra-State (i.e. within the

State) sale. State Government can impose sales tax only on sale

within the State.

CST is payable on inter-State sales is @ 2%, if C form is

obtained. Even if CST is charged by Union Government, the

revenue goes to State Government. State from which movement

of goods commences gets revenue. CST Act is administered by

State Government.

Service Tax: Most of the paid services you take you have to pay

service tax on those services. This tax is called service tax.  Over

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the past few years, service tax been expanded to cover new

services.

Few of the major service which comes under vicinity of service

tax are telephone, tour operator, architect, interior decorator,

advertising, beauty parlour, health centre, banking and financial

service, event management, maintenance service, consultancy

service.

Current rate of interest on service tax is 14%. This tax is passed

on to us by service provider.

Value Added Tax: The Sales Tax is the most important source of

revenue of the state governments; every state has their

respective Sales Tax Act. The tax rates are also different for

respective states.

Tax imposed by Central government on sale of goods is called as

Sales tax same is called as Value added tax by state

government.VAT is additional to the price of goods and passed

on to us as buyer (end user). Around 220+ Items are covered

with VAT. VAT rates vary based on nature of item and state.

Government is planning to merge service tax and sales tax in form of

Goods service tax (GST).

Custom duty & Octroi (On Goods): Custom Duty is a type of

indirect tax charged on goods imported into India. One has to pay

this duty, on goods that are imported from a foreign country into

India. This duty is often payable at the port of entry (like the

airport). This duty rate varies based on nature of items.

Octroi is tax applicable on goods entering in to municipality or

any other jurisdiction for use, consumption or sale. In simple

terms one can call it as Entry Tax.

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Excise Duty: An excise or excise duty is a type of tax charged on

goods produced within the country. This is opposite to custom

duty which is charged on bringing goods from outside of country.

Another name of this tax is CENVAT (Central Value Added Tax).

If you are producer / manufacturer of goods or you hire labour to

manufacture goods you are liable to pay excise duty.

Entertainment Tax: Tax is also applicable on Entertainment; this

tax is imposed by state government on every financial transaction

that is related to entertainment such as movie tickets, major

commercial shows exhibition, broadcasting service, DTH service

and cable service.(Indirect taxes)

GST:

GST is a major indirect tax reform in India which takes VAT to its logical

conclusion. GST would avoid burden of multiple taxation (tax on tax) with

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a cascading effect. GST seeks to rule out cascading tax effect. Once it

introduced, CST will also be removed.

The proposed model of GST and the rate-

A dual GST system is planned to be implemented in India as proposed

by the Empowered Committee under which the GST will be divided into

two parts:

State Goods and Services Tax (SGST)

Central Goods and Services Tax (CGST)

Integrated Goods and Services Tax (IGST)

Both SGST and CGST will be levied on the taxable value of a

transaction. All goods and services, leaving aside a few, will be brought

into the GST and there will be no difference between goods and

services. The GST system will combine Central excise duty, additional

excise duty, services tax, State VAT entertainment tax etc. under one

banner.

The GST rate is expected to be around 14-16 per cent. After the

combined GST rate is fixed, the States and the Centre will decide on the

SGST and CGST rates. At present, 10 per cent is levied on services and

the indirect taxes on most goods are around 20 per cent.

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Comparison between the Existing system and GST:

Example: 1 (Comprehensive Comparison) (Assumed rates)

Comparison between Multiple Indirect tax laws and proposed one law

Particulars Without GST With GST(Rs.)

Manufacture to Wholesaler

Cost of Production 5,000.00 5,000.00

Add: Profit Margin 2,000.00 2,000.00

Manufacturer Price 7,000.00 7,000.00

Add: Excise Duty @ 12% 840.00 –

Total Value(a) 7,840.00 7,000.00Add: VAT @ 12.5% 980.00 –

Add: CGST @ 12% – 840.00

Add: SGST @ 12% – 840.00

Invoice Value 8,820.00 8,680.00Wholesaler to RetailerCOG to Wholesaler(a) 7,840.00 7,000.00

Add: Profit Margin@10% 784.00 700.00

Total Value(b) 8,624.00 7,700.00Add: VAT @ 12.5% 1,078.00 –

Add: CGST @ 12% – 924.00

Add: SGST @ 12% – 924.00

Invoice Value 9,702.00 9,548.00Retailer to Consumer:

COG to Retailer (b) 8,624.00 7,700.00

Add: Profit Margin 862.40 770.00

Total Value(c) 9,486.40 8,470.00

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Add: VAT @ 12.5% 1,185.80 –

Add: CGST @ 12% – 1,016.40

Add: SGST @ 12% – 1,016.40

Total Price to the Final consumer

10,672.20 10,502.80

Cost saving to consumer – 169.40

% Cost Saving – 1.59

Indirect taxes that will be included under GST:State taxes which will be subsumed in SGST-

VAT/Sales Tax

Entertainment Tax (unless it is levied by local bodies)

Luxury Tax

Taxes on lottery, betting and gambling.

State cess and surcharges to the extent related to supply of goods and

services.

Entry tax not on in lieu of octroi.

Central Taxes which will be subsumed in CGST-

Central Excise Duty.

Additional Excise Duty.

The Excise Duty levied under the medical and Toiletries Preparation Act

Service Tax.

Additional Customs Duty, commonly known as countervailing Duty

(CVD)

Special Additional duty of customs(SAD)

Education Cess

Surcharges.

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Taxes that may or may not be subsumed due to no consensus between

the Central and State Governments-

Stamp Duty

Vehicle Tax

Electricity Duty

Other Entry taxes and Octroi

Entertainment Tax (levied by local bodies)

Basic customs duty and safeguard duties on import of goods into India.

Application and functioning of GST

In keeping with the federal structure of India, it is proposed that GST be

levied concurrently by the Centre (CGST) and the States (SGST). It is

expected that the base and other essential design features would be

common between CGST and SGST, across SGSTs for the individual

States. Both CGST and SGST would be levied on the basis of the

destination principle.

Thus, exports would be zero-rated, and imports would attract the tax in

the same manner as domestic goods and services. Inter-State supplies

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within India would attract an Integrated GST (aggregate of CGST and

the SGST of the Destination State).

GST is a consumption based tax/levy. It is based on the “Destination

principle.” GST is applied on goods and services at the place where

final/actual consumption happens.

GST is collected on value-added goods and services at each stage of

sale or purchase in the supply chain. GST paid on the procurement of

goods and services can be set off against that payable on the supply of

goods or services. The manufacturer or wholesaler or retailer will pay the

applicable GST rate but will claim back through tax credit mechanism.

But being the last person in the supply chain, the end consumer has to

bear this tax and so, in many respects, GST is like a last-point retail tax.

GST is going to be collected at point of Sale.

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The GST is an indirect tax which means that the tax is passed on till the

last stage wherein it is the customer of the goods and services who

bears the tax. This is the case even today for all indirect taxes but the

difference under the GST is that with streamlining of the multiple taxes

the final cost to the customer will come out to be lower on the elimination

of double charging in the system.

The current tax structure does not allow a business person to take tax

credits. There are lot of chances that double taxation takes place at

every step of supply chain. This may set to change with the

implementation of GST.

So, how is GST Levied? GST will be levied on the place of consumption of Goods and services. How does GST operate?

Case 1: Sale in one state, resale in the same state.

In the example illustrated below, goods are moving from Mumbai

to Pune. Since it is a sale within a state, CGST and SGST will be

levied. The collection goes to the Central Government and the

State Government as pointed out in the diagram. Then the goods

are resold from Pune to Nagpur. This is again a sale within a

state, so CGST and SGST will be levied. Sale price is increased

so tax liability will also increase. In the case of resale, the credit

of input CGST and input SGST (Rs. 8) is claimed as shown; and

the remaining taxes go to the respective governments.

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Case 2: Sale in one state, resale in another state.

In this case, goods are moving from Indore to Bhopal. Since it is

a sale within a state, CGST and SGST will be levied. The

collection goes to the Central Government and the State

Government as pointed out in the diagram. Later the goods are

resold from Bhopal to Lucknow (outside the state). Therefore,

IGST will be levied. Whole IGST goes to the central government.

Against IGST, both the input taxes are taken as credit. But we

see that SGST never went to the central government, still the

credit is claimed. This is the crux of GST. Since this amounts to a

loss to the Central Government, the state government

compensates the central government by transferring the credit to

the central government.

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Case 3: Sale outside the state, resale in that state.

In this case, goods are moving from Delhi to Jaipur. Since it is an

interstate sale, IGST will be levied. The collection goes to the

Central Government. Later the goods are resold from Jaipur to

Jodhpur (within the state). Therefore, CGST and SGST will be

levied.

Against CGST and SGST, 50% of the IGST, that is Rs. 8 is taken

as a credit. But we see that IGST never went to the state

government, still the credit is claimed against SGST. Since this

amounts to a loss to the State Government, the

Central government compensates the State government by

transferring the credit to the State government.

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It is proposed that the CGST will subsume central excise duty (Cenvat),

service tax, and additional duties of customs at the Central level; and

value-added tax, central sales tax, entertainment tax, luxury tax, octroi,

lottery taxes, electricity duty, state surcharges related to supply of goods

and services and purchase tax at the state level.

Rate of GST:

There would be two-rate structure –a lower rate for necessary items and

items of basic importance and a standard rate for goods in general.

There will also be a special rate for precious metals and a list of

exempted items. For goods in general, government is considering

pegging the rate of GST from 20% to 23% that is well above the global

average rate of 16.4% for similar taxes, however below the revenue

neutral rate of 27%.

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The combined GST rate is currently being discussed by the Centre and

the EC. The rate is expected to be in the range of 14-16 %. Once the

total GST rate is determined, the states and the Centre have to agree on

the CGST and SGST rates. Today, services are taxed at 10% and the

combined incidence of indirect taxes on most goods is around 20%.

Model of GST with example:

The GST shall have two components: one levied by the Centre (referred

to as Central GST or CGST), and the other levied by the States (referred

to as State GST or SGST). Rates for Central GST and State GST would

be approved appropriately, reflecting revenue considerations and

acceptability.

The CGST and the SGST would be applicable to all transactions of

goods and services made for a consideration except the exempted

goods and services.

Cross utilization of ITC both in case of Inputs and capital goods between

the CGST and the SGST would not be permitted except in the case of

inter-State supply of goods and services (i.e. IGST).

The Centre and the States would have concurrent jurisdiction for the

entire value chain and for all taxpayers on the basis of thresholds

For goods and services prescribed for the States and the Centre.

The prices of commodities are expected to come down in the long run as

dealers pass on the benefits of reduced tax incidence to consumers by

slashing the prices of goods.

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Process of implementation and Roadmap

The Constitution (One Hundred and Twenty-second Amendment) Bill,

2014 was introduced in the Lok Sabha by Finance Minister Arun

Jaitley on 19 December 2014. The Bill was passed by the House on 6

May 2015, receiving 352 votes for and 37 against. All 37 no votes came

from members of the AIADMK. The Indian National Congress party

opposed the Bill and boycotted the vote, its members leaving the House

before voting began. Although the BJD and the CPI(M) had previously

opposed the Bill, they cast votes in favour. The Government attempted

to move the Bill for consideration in the Rajya Sabha on 11 May 2015,

however, members of the Opposition repeatedly stalled the proceedings

of the House. In order to appease the Opposition's demand for further

scrutiny of the Bill, Jaitley moved a motion to refer the Bill to a Select

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Committee. The 21 member Committee is expected to give its report by

the end of the Monsoon session.

In 2000, the Vajpayee Government started discussion on GST by setting

up an empowered committee. The committee was headed by Asim

Dasgupta, (Finance Minister,Government of West Bengal). It was given

the task of designing the GST model and overseeing the IT back-end

preparedness for its rollout. It is considered to be a major improvement

over the pre-existing central excise duty at the national level and the

sales tax system at the state level, the new tax will be a further

significant breakthrough and the next logical step towards a

comprehensive indirect tax reform in the country. The Kelkar Task Force

on implementation of the FRBM Act, 2003 had pointed out that although

the indirect tax policy in India has been steadily progressing in the

direction of VAT principle since 1986, the existing system of taxation of

goods and services still suffers from many problems and had suggested

a comprehensive Goods and Services Tax (GST) based on VAT

principle. GST system is targeted to be a simple, transparent and

efficient system of indirect taxation as has been adopted by over 130

countries around the world. This involves taxation of goods and services

in an integrated manner as the blurring of line of demarcation between

goods and services has made separate taxation of goods and services

untenable. Introduction of an Goods and Services Tax (GST) to replace

the existing multiple tax structures of Centre and State taxes is not only

desirable but imperative in the emerging economic environment.

Increasingly, services are used or consumed in production and

distribution of goods and vice versa. Separate taxation of goods and

services often requires splitting of transactions value into value of goods

and services for taxation, which leads to greater complexities,

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administration and compliances costs. Integration of various Central and

State 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, would also greatly help in removing

economic distortions caused by present complex tax structure and will

help in development of a common national market. 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. 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).

In April, 2008, the EC a report to the titled “A Model and Roadmap for

Goods and Services Tax (GST) in India” containing broad

recommendations about the structure and design of GST.

In response to the report, the Department of Revenue made some

suggestions to be incorporated in the design and structure of proposed

GST. Based on inputs from GOI and States, The EC released its First

Discussion Paper on Goods and Services Tax in India on the 10th of

November, 2009 with the objective of generating a debate and obtaining

inputs from all stakeholders. A dual GST module for the country has

been proposed by the EC. This dual GST model has been accepted by

centre. Under this model GST have two components viz. the Central

GST to be levied and collected by the Centre and the State GST to be

levied and collected by the respective States. Central Excise duty,

additional excise duty, Service Tax, and additional duty of customs

(equivalent to excise), State VAT, entertainment tax, taxes on lotteries,

betting and gambling and entry tax (not levied by local bodies) would be

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subsumed within GST. In order to take the GST related work further, a

Joint Working Group consisting of officers from Central as well as State

Government was constituted. This was further trifurcated into three Sub-

Working Groups to work separately on draft legislations required for

GST, process/forms to be followed in GST regime and IT infrastructure

development needed for smooth functioning of proposed GST. In

addition, an Empowered Group for development of IT Systems required

for Goods and Services Tax regime has been set up under the

chairmanship of Dr. Nandan Nilekani. A draft of the Constitutional

Amendment Bill has been prepared and has been sent to the EC for

obtaining views of the States.

The Goods and Service Tax Bill or GST Bill, officially known as The

Constitution (122nd Amendment) Bill, 2014, would be a Value added

Tax (VAT) to be implemented in India, from April 2016.

.

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Suggestions, in the Report to be submitted by the Select

Committee, will be discussed and consensus reached before

Rajya Sabha passes the Bill with two-third majority.

The Bill thereafter will be needed to be ratified by minimum of 15

States in their respective assemblies before the President can give

its assent for its enactment.

GST Council will be formed within 60 days of the enactment of the

Bill.

GST Legislation and Place of Supply Rules will be framed and put

in the public domain for comments.

GST Network, an IT backbone of GST, which will facilitate online

registration, tax payment and return filing will be launched.

States will frame their respective GST Legislations to enable them

to implement GST. It will be in line with the Central GST

Legislation.

Hurdles of implementation

Before it can be introduced, the Centre and states have to sort out

issues like agreement on GST rates, constitutional amendments

empowering states to tax services, taxation on inter-state transactions of

goods and services, drafting of CGST and SGST laws, consultation with

all stakeholders including trade and industry associations before

finalisation, administrative preparedness to implement the new tax

regime and resolution of all other issues under discussion.

Challenges for implementing Goods & Services Tax system:

The bill is yet to be tabled and passed in the Parliament.

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To implement the bill (if cleared by the Parliament) there has to be

lot changes at administration level, Information Technology

integration has to happen, sound IT infrastructure is needed, the

state governments has to be compensated for the loss of revenues

(if any) and many more.

It is really required that all the states implement the GST together

and that too at the same rates. Otherwise, it will be really

cumbersome for businesses to comply with the provisions of the

law. Further, GST will be very advantageous if the rates are same,

because in that case taxes will not be a factor in investment

location decisions, and people will be able to focus on profitability.

For smooth functioning, it is important that the GST clearly sets out

the taxable event. Presently, the CENVAT credit rules, the Point of

Taxation Rules are amended/ introduced for this purpose only.

However, the rules should be more refined and free from

ambiguity.

The GST is a destination based tax, not the origin one. In such

circumstances, it should be clearly identifiable as to where the

goods are going. This shall be difficult in case of services, because

it is not easy to identify where a service is provided, thus this

should be properly dealt with.

More awareness about GST and its advantages have to be made,

and professionals really have to take the onus to assume this

responsibility.

GST, being a consumption-based tax, states with higher

consumption of goods and services will have better revenues. So,

the co-operation from state governments would be one of the key

factors for the successful implementation of GST

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Assuming GST at 20%, services would see a rise in tax rates

while manufactured consumer goods may see a fall. The two

are likely to offset each other resulting in a limited net impact on

inflation based on the consumer price index.

But actual impact on inflation can’t be known with certainty as

much depends on how the change in tax rates is passed on to

consumers and what the actual GST rate is.

If there is a partial pass through of higher taxes, impact could be

limited, but if GST rate is higher than 18-22%, effect on inflation

can be more than anticipated

2 levels of GST—state and Centre—means multiple compliances.

This could mean not just stricter compliance and audit but also an

increase in cost of compliance.

Globally, the norm is a single, central GST. The jury is still out

whether the central and state governments will function on a

common platform due to existing cultural and operational

differences.

The GST credit flow requires each vendor to input details of

invoices issued containing details of the customer, for the next in

line (i.e. the customer) to receive credit. If vendors aren’t able to

upload invoice details in a timely manner, then credit blockages

could happen.

Since GST replaces many cascading taxes, the common man may

benefit after implementing it. But it all depends on ‘what rate the GST is

going to be fixed at?’ Also, Small Traders (based on Annual Business

turnover) may be exempted from it.

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Features

The proposed Article 246A intends to grant concurrent powers to

the Union and State legislatures to make laws with respect to GST.

The power to make laws in respect of supplies in the course of

inter-State trade or commerce will be vested only in the Union

government. States will have the right to levy GST on intra-State

transactions including on services.

Centre will levy IGST on inter-State supply of goods and services.

On intra-State supply of goods and services, Centre to levy CGST

and States shall levy SGST. Import of goods will be subject to

basic customs duty and IGST.

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GST defined as any tax on supply of goods and services other

than alcohol for human consumption.

Central taxes like, Central Excise duty, Additional Excise duty,

Service tax, Additional Custom duty and Special Additional duty

and State level taxes like, VAT or sales tax, Central Sales tax,

Entertainment tax, Entry tax, Purchase tax, Luxury tax and Octroi

will subsume in GST.

Petroleum and petroleum products shall be subject to the GST on

a date to be notified by the GST Council.

Alcohol for human consumption will be out of GST, States to

continue to levy taxes on alcohol. Items of tobacco product will be

subject to separate excise duty by the centre over and above GST.

1% origin based additional tax to be levied on inter-State supply of

goods will be non-creditable in GST chain. This origin based non-

creditable tax on supply of goods will be hugely distortionary and

should be revisited.

Provision for removing imposition of entry tax / Octroi across India.

Entertainment tax, imposed by States on movie, theatre, etc will be

subsumed in GST, but taxes on entertainment at panchayat,

municipality or district level to continue.

GST may be levied on the sale of newspapers and advertisements

and this would give the government’s access to substantial

incremental revenues.

Stamp duties, typically imposed on legal agreements by the state,

will continue to be levied by the States.

Article 279 provides the constitution of GST Council by the

president within 60 days from the date of the passing of the Bill

and also provides for the appointment of members of the GST

Council and its composition and powers to make recommendation.

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Administration of GST will be the responsibility of the GST Council,

which will be the apex policy making body for GST. Members of

GST Council comprised of the Central and State ministers in

charge of the finance portfolio. In the GST Council Centre will have

one-third vote and all States combined to have two-third vote.

Quorum for GST Council is 50% of total members and for majority

of Council decisions 75% of the weighted votes of the members

present and voting.

The power to make laws in respect of supplies in the course of

inter-State trade or commerce will be vested only in the Union

government. States will have the right to levy GST on intra-State

transactions including on services.

It would be applicable to all transactions of goods and service.

It to be paid to the accounts of the Centre and the States

separately.

The rules for taking and utilization of credit for the Central GST

and the State GST would be aligned.

Cross utilization of ITC between the Central

GST and the State GST would not be allowed except in the case

of inter-State supply of goods.

The Centre and the States would have concurrent jurisdiction for

the entire value chain and for all taxpayers on the basis of

thresholds for goods and services prescribed for the States and

the Centre.

The taxpayer would need to submit common format for periodical

returns, to both the Central and to the concerned State GST

authorities.

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Each taxpayer would be allotted a PAN-linked taxpayer

identification number with a total of 13/15 digits.

Advantages

GST has been envisaged as a more efficient tax system, neutral in its

application and distributional attractive. The advantages of GST are:

The tax structure will be made lean and simple.

The entire Indian market will be a unified market which may

translate into lower business costs. It can facilitate seamless

movement of goods across states and reduce the transaction

costs of businesses.

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It is good for export oriented businesses. Because it is not applied

for goods/services which are exported out of India.

In the long run, the lower tax burden could translate into lower

prices on goods for consumers.

The Suppliers, manufacturers, wholesalers and retailers are able

to recover GST incurred on input costs as tax credits. This reduces

the cost of doing business, thus enabling fairer prices for

consumers.

It can bring more transparency and better compliance.

Number of departments (tax departments) will reduce which in turn

may lead to less corruption.

More business entities will come under the tax system thus

widening the tax base. This may lead to better and more tax

revenue collections.

Companies which are under unorganized sector will come under

tax regime.

Wider tax base, necessary for lowering the tax rates and

eliminating classification disputes.

Elimination of multiplicity of taxes and their cascading effects.

Rationalization of tax structure and simplification of compliance

procedures.

Harmonization of Centre and State tax administrations, which

would reduce duplication and compliance costs.

Taxes to be subsumed-

GST would replace most indirect taxes currently in place such as:

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Central Taxes Central Excise Duty

[including additional excise

duties, excise duty under

the Medicinal and Toilet

Preparations (Excise

Duties) Act, 1955]

Service tax

Additional Customs Duty

(CVD)

Special Additional Duty of

Customs (SAD)

Central surcharges and

cesses

State Taxes

Value Added Tax

Central Sales Tax( Levied by

the Centre and collected by the

States )

Octroi and Entry Tax

Purchase Tax

Luxury Tax

Taxes on lottery, betting &

gambling

State cesses and surcharges

Entertainment tax (other than

the tax levied by the local

bodies)

You may wonder why this tax reform is so important for the country and

how it will help the common man. Here’s how:

Destination principle: Accordingly, imports would be subject to

GST, while exports would be zero-rated. In the case of inter-State

transactions within India, the State tax would apply in the State of

destination as opposed to that of origin.

Simpler tax structure: As multiple taxes on a product or service are

eliminated and a single tax comes into place, the tax structure is

expected to be much simpler and easier to understand. Paperwork

will become simpler and there will be a reduction in accounting

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complexities for businesses. A simple taxation regime can make

the manufacturing sector more competitive and save both money

and time. Experts opine that the implementation of GST would

push up GDP by 1%-2%.

Increased tax revenues: A simpler tax structure can bring about

greater compliance, thus increasing the number of tax payers and

in turn tax revenues for the Government. The current state of the

Indian economy demands fiscal consolidation and reduction in

fiscal deficit. A recent report by CRISIL states that GST is the

country’s best bet to achieve fiscal consolidation. As there is not

much scope to reduce Government expenditure, increasing tax

revenues is the best alternative to improve the fiscal health.

Competitive pricing: GST will eliminate all other forms of indirect

taxing. This will effectively mean that the tax paid by the final

consumer will come down in most cases. Lower prices will help in

boosting consumption, which is again beneficial to companies. The

biggest positive of GST is that goods and services will be taxed on

a common basis.

Boost to exports: When the cost of production falls in the domestic

market, Indian goods and services will be more price-competitive

in foreign markets. This can bode well for exporters, who compete

with manufacturers abroad facing a lower cost structure.

Reduces transaction costs and unnecessary wastages:A single

registration and a single compliance will suffice for both SGST and

CGST provided government produces effective IT infrastructure

and integration of states level with the union.

Eliminates the multiplicity of taxation: The reduction in the number

of taxation applicable in a chain of transaction will help to reduce

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the paper work and clean up the current mess that is brought by

existing indirect taxation laws.

One Point Single Tax: They would be focus on business rather

than worrying about their taxation that may crop at later stages.

This will help the business community to decide their supply chain,

pricing modalities and in the long run helps the consumers being

goods competitive as price will no longer be the function of tax

components but function of sheer business intelligence and

innovation.

Reduces average tax burdens:- The cost of tax that consumers

have to bear will be certain and it is expected that GST would

reduce the average tax burdens on the consumers.

Reduces the corruption:-As the no. of taxes reduces so does

the no of visits to multiple department reduces and hence the

reduction in corruption.

There is no doubt that in production and distribution of goods,

services are increasingly used or consumed and vice versa.

Separate taxes for goods and services, which is the present

taxation system, requires division of transaction values into value

of goods and services for taxation, leading to greater

complications, administration, including compliances costs. In the

GST system, when all the taxes are integrated, it would make

possible the taxation burden to be split equitably between

manufacturing and services.

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In all cases except a few products and states, there would be

uniformity of tax rates across the states.

Disadvantages Critics have argued that the GST is a regressive tax, which has a

more pronounced effect on lower income earners, meaning that the

tax consumes a higher proportion of their income, compared to those

earning large incomes.

A study commissioned by the Curtin University of

Technology, Perth in 2000 argued that the introduction of the GST

would negatively impact the real estate market as it would add up to 8

37

percent to the cost of new homes and reduce demand by about 12

percent.

India has opted for a dual-GST model. Critics claim that CGST, SGST

and IGST are nothing but new names for Central Excise/Service Tax,

VAT and CST and hence GST brings nothing new to the table. The

concept of value-add has never been utilised in the levy of service as

the Delhi High Court is attempting to prove in the case of Home

Solution Retail while under Central Excise the focus is on defining

and refining the definition of manufacture instead of focusing on value

additions. The Revenue can be very stubborn when it comes to

refunds as the Maharashtra Government proves and software entities

that applied for refunds on excess service tax paid on inputs

discovered.

Impact on the economy

GST would be one of the most significant fiscal reforms of independent

India. GST is expected to result in major rationalization and simplification

of the consumption tax structure at both Centre and State levels. It is

expected to replace all indirect taxes, thus avoiding multiple layers of

taxation that currently exist in India.

Depending on the final GST base and rate, there will be a significant

redistribution of tax across different goods and services. Goods currently

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subject to both Centre and State taxes should experience a net

reduction in tax, with positive impact on consumer demand.

Besides simplifying the current system and lowering the costs of doing

business, GST will call for a fundamental redesign of supply chains. It

will affect how the companies operate their businesses, presenting

significant opportunities for long-term revenue and margin improvement.

For instance, under the current tax structure, supply chains are

invariably designed to minimize the burden of the Central Sales Tax,

with distribution centres located in individual States where the

consumers are located. They are sub-optimal from a strategic and

economic perspective. The elimination of the central sales tax will

provide an opportunity to optimize supply chains, enabling companies to

re-evaluate existing procurement patterns, and distribution and

warehousing arrangements.

GST is also expected to result in a reduction in inventory costs. Dealers

would be able to claim a credit for the tax paid on their inventories,

leading to improved cash flows.

A successful implementation of GST is significantly dependent on IT

capability – not just at the tax administration level but also at the

taxpayer level. Efforts will be required to change existing IT systems for

GST enablement which could be complex, challenging and lengthy task

for the IT department.

Impact on Prices of Goods & Services:

For manufactured consumer goods, the current tax regime

means the consumer pays approximately 25-26% more than the

cost of production due to excise duty (peak of about 12.5%) and

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value added tax

While there hasn’t been any clear indication of a GST rate,

experts suggest between 18% and 22%. Such goods are

likely to become marginally cheaper

On the other hand, for goods where the current duty structure is

lower, e.g. small cars, which have an excise duty of only 8%, the

impact of GST will most likely be opposite—these can get more

expensive

Heavy vehicles such as SUVs and large cars that have an

excise duty of 27-30% will see a marked drop in prices if GST

is implemented in the expected range of 18-22%

As regards petroleum, it has been proposed to keep this out of

the GST umbrella for at least the first two years, which means

petroleum prices aren’t likely to change with the advent of GST

and the variance in prices across states could also continue.

Prices of goods may not be completely uniform across states

as there is talk of allowing states to have 1-2% variance in tax.

Let’s assume that if the median GST rate is 20% and the

Centre applies 10%, for the remainder, the states may be

allowed, say, a range of 9-11% levy.

Service tax is 14% currently. If GST is implemented, this rate will

increase (given the expectation that GST will be 18-22%)

making services more expensive

GST will affect every part of your business in India with regards to cash

flow, costing of capital, pricing of products and services, financial

reporting, tax accounting, compliance processes, supply chain,

procurements and contracts and all technology currently enabling this

40

ecosystem. In addition, there will be significant training needs for

personnel to understand and operate effectively under this new regime.

The transition to GST will have to be managed in a phased manner and

will require proactive and timely planning. Companies will have to start

by understanding key areas of impact to their business model and

prepare different scenarios for the design and application of GST.

Implementation of changes will have to be managed through robust

program management across various company stakeholders in the

entire value chain.

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Summary of key business impacts:

Sourcing Inter-State procurement could prove viable

This may open opportunities to consolidate

suppliers/vendors

Additional duty/CVD and Special Additional duty

components of customs duty to be replaced.

Distribution Changes in tax system could warrant changes

in both procurement and distribution.

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Current arrangements for distribution of finished

goods may no longer be optimal with the

removal of the concept of excise duty on

manufacturing

Current network structure and product flows

may need review and possible alteration

 

Pricing and

profitability Tax savings resulting from the GST structure

would require repricing of products

Margins or price mark-ups would also need to

be re-examined

 

Cash flow Removal of the concept of excise duty on

manufacturing can result in improvement in

cash flow and inventory costs as GST would

now be paid at the time of sale/supply rather

than at the time or removal of goods from the

factory.

 

System changes

and transaction

management

Potential changes to accounting and IT systems

in areas of master data, supply chain

transactions, system design.

Existing open transactions and balances as on

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the cut-off date need to be migrated out to

ensure smooth transition to GST

Changes to supply chain reports (e.g., purchase

register, sales register, services register), other

tax reports and forms (e.g., invoices, purchase

orders) need review

Appropriate measures such as training of

employees, compliance under GST, customer

education, and tracking of inventory credit are

needed to ensure smooth transition to the GST

regime

Expectation from various other sectors

44

Benefits of GST-

For the Centre and the States:

According to experts, by implementing the GST, India will gain $15

billion a year. This is because it will promote more exports, create more

employment opportunities and boost growth. It will divide the burden of

tax between manufacturing and services.

For individuals and companies:

In the GST system, taxes for both Centre and State will be collected at

the point of sale. Both will be charged on the manufacturing cost.

Individuals will be benefited by this as prices are likely to come down

and lower prices mean more consumption, and more consumption

means more production, thereby helping in the growth of the companies.

General points on Various Business Sectors that arise after GST

implementation:-

Real Estate Industry: Construction and Housing sector need to be

included in the GST tax base being high tax revenue generating sector

and for reduction in no. of tax legislations involved.

FMCG Sector: Implementation of proposed GST and opening of Foreign

Direct Investment (F.D.I.) are expected to fuel the growth and raise

industry’s size.

Rail Sector: There have been suggestions for including the rail sector

under the GST umbrella to bring about significant tax gains and widen

the tax net so as to keep overall GST rate low. This will have the added

benefit of ensuring that all inter–state transportation of goods can be

tracked through the proposed Information technology (IT) network.

Information Technology enabled services: At present, if the software is

transferred through electronic form, it should be considered as

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Intellectual Property and regarded as a service and if the software is

transmitted on media or any other tangible property, then it should be

treated as goods and this classification is full of litigation. As GST will

have uniform rate for Goods and Services and no concept of state

revenue being VAT or central revenue being service tax and hence,

the reduction in litigation.

Transport Sector: Truck drivers spend more than half of their time while

negotiating check post and tolls. At present there are more than 600

check points and more than ton types of taxes in road sector.

After the introduction of GST, the time spend by the road transport

industry in complaining with laws will reduce and service is going to be

better which will boost the goods industry and thus the taxes also.

Impact on Small Enterprises: There will be three categories of Small

Enterprises in the GST regime.

Those below threshold limit of Rs.1.5 Crores would not be covered.

Those between the threshold and composition turnovers will have the

option to pay a turnover based tax i.e. composite tax or opt to join the

GST regime.

Those above threshold limit will need to be within framework of GST.

Possible downward changes in the threshold in some States consequent

to the introduction of GST may result in obligation being created for

some dealers.

Status of implementation of GST

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To be fully viable by law in all the States, the GST Bill needs to be

passed by a two-thirds majority in both Houses of Parliament and by the

legislatures of half of the 29 States. In December 2014, Finance Minister

Arun Jaitley introduced the constitutional amendment Bill of the GST in

the Lok Sabha. He announced that the GST would be a major reform in

India’s taxation system since 1947, which would reduce transaction

costs for business and boost the economy.

Earlier, the Bill was rejected by a few States saying that it does not

include the issues of compensation, entry tax and the tax on petroleum

products. Jaitley while introducing the Bill said that all efforts have been

taken to make sure that the States do not suffer any loss of revenue with

the implementation of the GST. The States will receive Rs 11,000 crore

this fiscal year so that it would compensate the losses suffered by them

for decline in Central sales tax (CST) and subsequently financial

assistance would be provided for a five-year period.

All said and done, the GST Bill which was conceived way back in the

year 2000 has not seen the light of the day as yet. If everything goes

well, most likely the Bill will be legislated by April 2016. According to a

study by the National Council of Applied Economic Research (NCAER),

full implementation of the GST could expand India’s growth of gross

domestic product by 0.9-1.7 percentage points. By removing the system

of multiple Central and State taxes, the GST can help in reducing

taxation and filing costs and expand business profitability, thereby

attracting investments and promoting GDP growth. Simplification of tax

norms can help in improving tax compliance and increasing tax

revenues.

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India: Current status of India’s proposed GST program

• Constitution Amendment Bill passed in the Lok Sabha (Lower House of

Parliament) 

• Union Finance Minister in his press conference has assured that

effective peak GST rate for India may not be 27%, could be lower than

that 

• Bill now scheduled to be tabled in Rajya Sabha (Upper House of

Parliament) for approval, Parliament slated to stay in session for

additional two days (till Friday 15 May 2015) to allow time for passage of

important Bills (including the Constitution Amendment Bill) 

Once the Constitution Amendment Bill is passed in the Parliament, it

would still need to be ratified by a majority of the State Assemblies which

is expected to occur during the Monsoon session of respective State

Assemblies (ie June-July 2015). After the States have ratified the Bill,

the Indian Constitution would be changed to allow Centre and States

similar powers to levy indirect taxes on goods and services. 

Once the Constitution is amended, the GST Council (constituted under

the amended Constitution) would release the draft Model GST Bills – the

Central GST Bill, the State GST Bill and the Integrated GST Bill.

Associated Rules and Regulations are also likely to be released around

the same time together with the proposed schedule of goods and

services that are to be taxed at a lower rate of GST. If all goes well, we

expect the Model GST Bills to be published for public consumption

around mid-September to early-October 2015. 

48

Also if not, the Finance Minister Arun Jaitley recently said the

government is confident of the new GST regime to roll out from the next

fiscal and expressed confidence about an early resolution of pending

disputes on direct taxes front.

While expressing confidence that GST would be passed in the Rajya

Sabha as well in the next session, he said it's not necessary to

implement it from April 1, 2016, itself as it is a transactional tax and can

come into effect from the first date of any other month as well.

Parliament panel might propose optional GST for states.

The panel, to consider its draft report on the Constitution (115th

Amendment) Bill on the GST, feel states should be given

enough fiscal space if the success of Value Added Tax (VAT) is

to be replicated.

To address concerns of the states on revenue loss, the panel

might recommend an automatic compensation mechanism,

wherein a fund is created under the proposed GST Council. It

also wants a study to evaluate the impact of GST on the

revenue of states. It could suggest a floor rate with a narrow

band, decision by voting and not consensus in the GST Council,

omitting the provision on setting up a Dispute Settlement

The report of the standing committee could be adopted in its

next meeting and the finance ministry, after incorporating the

panel’s views, would approach the cabinet to present the Bill in

Parliament with the changes.

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Conclusion

The taxation of goods and services in India has, hitherto, been

characterized as a cascading and distortionary tax on production

resulting in misallocation of resources and lower productivity and

economic growth. It also inhibits voluntary compliance. It is well

recognized that this problem can be effectively addressed by shifting the

tax burden from production and trade to final consumption. A well

designed destination-based value added tax on all goods and services is

the most elegant method of eliminating distortions and taxing

consumption. Under this structure, all different stages of production and

distribution can be interpreted as a mere tax pass-through, and the tax

essentially ‘sticks’ on final consumption within the taxing jurisdiction.

A ‘flawless’ GST in the context of the federal structure which would

optimize efficiency, equity and effectiveness. The ‘flawless’ GST is

designed as a consumption type destination VAT based on invoice-credit

method.

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