Goods and Services Tax (GST) - India's Biggest Tax Reform Abstract
In India currently we are having service tax & VAT for collection as indirect taxes. On central level, service tax is charged on services provided at central level & VAT is charged for sale of goods on state level. But current system is not able to minimize the tax evasion, distortion & cascading cascading effect therefore it’s a need to The GST need to move to goods & service tax. The GST aims to cut red tape for taxpayers by replacing an array of central excise and state levies such as sales tax and VAT. The Goods and Service Tax (GST) is one of the biggest taxation reforms in India, GST is expected to unite the country economically as it will remove various forms of taxes that are currently levied at different points. It will also end the practice of imposing a levy on goods coming from outside a state which sees long queues of trucks stuck at state barriers which also slows the movement of goods across the country. Input tax credit system will help to decrease the liability of output tax. GST will not only make the tax s ystem 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. This paper shows how a goods and service tax is an improvement in taxation tax ation structure.
CURRENT SCENARIO
Currently India is reeling under a lot of different i ndirect taxes – taxes – excise excise duty, VAT, Service Tax, sales tax etc. Some are levied by the Central Government, while others by the State Government – Government – as as India has a ‘federal’ system of Governments – i.e. i.e. two governments, one in the centre and the ones in the states. Excise and Service tax are central government levied indirect taxes. VAT and Sales tax are State Government levied indirect taxes.
Excise Duty is a tax on the manufacturing of excisable goods. Thus if a manufacturer, manufactures those goods which the central government has deemed to be ‘excisable’ good(s) – then the manufacturer will have to pay excise duty on those goods.
Service Tax is a tax on ‘services rendered’ which are not in the ‘negative lis t’. Thus – all services rendered are under the blanker of service tax – tax – except except for those which are
mentioned in the negative list!
VAT – or Value Added Tax is a stage wise levy of tax on value addition – thus at
every stage of ‘value addition’ VAT is levied and passed on to the next person in the chain of changing hands.
Sales Tax is a tax on sale of goods – interstate and intrastate.
The rules and regulations and compliance procedures of all are different – and complex and tedious. To bring all these varied and sometimes overlapping taxes under one umbrella and to plug the loopholes that invariably comes with such multiple and confusing and dual taxation system – the concept of GST was formulated.
Need of GST
Starting with the concept of – cascading effect of taxes. It is also, logically, referred to as “taxes on taxes”. It is simple to illustrate – say A sells goods to B after charging sales tax, and then B re-sells those goods to C after charging sales tax. While B was computing his sales tax liability, he also included the sales tax paid on previous purchase, which is how it becomes a tax on tax. This was the case with the sales tax few years ago. At that time, a VAT system was introduced whereby every next stage dealer used to get credit of the tax paid at earlier stage against his tax liability. This reduced an overall liability of many traders and also helped to reduce inflationary impact this had on the prices. Similar concept came in the duty on manufacture – The Central Excise Duty – much before it came for sales tax. The CENVAT credit scheme (earlier known as MODVAT) was also a welcome move by trade and industry where credit of excise duty paid at the input stages was allowed to be set-off against the liability of excise on removal of goods. With effect from 2004, this system was extended to Service Tax also. Moreover, cross utilisation of credit between excise duty and service tax was also permitted. To a huge extent, the problem of cascading effect of taxes is resolved by these measures.
However, there are still problems with the system that have not been solved till date,
like:
The credit of Input VAT is available against Output VAT. In the same manner, the credit of input excise/service tax is available for set-off against output liability of excise/service tax. However, the credit of VAT is not available against excise and vice versa.
VAT is computed on a value which includes excise duty, and no CENVAT credit is allowed for it. This shows that there is a tax on tax!
Excise duty and service tax are levied by the Central Government, while the VAT is levied by the State Government, which is one of the reasons why such a cross-utilisation of credits was not allowed. However, this does not constitute a valid reason that justifies the cascading effect of taxes. For the people, it makes no difference if a tax is levied by the Centre or the State – a tax is a tax, and there is a tax on tax. The GST is introduced to combat this problem, among many others.
GST (Goods and Services Tax)
New Article 366(12A) of the Indian Constitution, defines Goods and Services Tax (GST) to mean any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption. New Article 366(26A) defines service to mean anything other than goods Existing Article 366(12) defines goods to include all materials, commodities and articles.
Goods and Services Tax (GST) in India is proposed to be the maiden REFORM in the existing indirect taxation structure. The proposed GST is a long pending and much awaited tax reform in India which is hoped to iron out the wrinkles in the existing indirect taxation system. This comprehensive tax policy is expected to be one of the most important contributor to the India’s growth story. 1
The proposed reform on moving to a 'goods and services tax' would impact the national economy, international trade, firms and consumers. 1) GST is a tax on both goods and services across the supply chain/Value Chain 2) It is levied at every stage of supply/Value Addition. 1
Joshi, Suhasini (2013, Aug 13), Goods and Services Tax –A Step Forward, The Economics T imes. Retrieved Fromhttp://articles.economictimes.indiatimes.com
3) The GST on Inputs (known as ITC -Input Tax Credit) is generally available as credit for set-off against the GST on the output supply.
DUAL GST MODEL
Proposed GST Model for India is o pting for ―Concurrent Dual GST model. The need for a Dual GST model is based on the following premise:
At existing framework, both levels of Government i.e. Centre and State, as per Constitution holds concurrent powers to levy tax domestic goods and services;
The proposed Concurrent Dual-GST model would be a dual levy imposed concurrently by the Centre and the States, but independently;
Both the Centre and State will operate over a common base, i.e. the base for levy and imposition of duty/tax liability would be identical. 2
To understand the operating procedure of ―Concurrent Dual GST Model, we have to consider the tax/taxes which shall be levied as per place of supply of goods and services .
CGST – Central Goods and Service Tax
SGST – State Goods and Service Tax
IGST – Integrated Goods and Service Tax
Additional Tax ( upto 1%) to be levied in case of inter-state supply of goods, which is a nonvatable item. Hence, no input credit available on such.
2
Kelkar, Vijay, et al (2004).
OPERATION OF GST
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.
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.
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. 3
ADVANTAGES OF GST
Apart from full allowance of credit, there are several other advantages of introducing a GST in India:
Reduction in pri ces: Due to full and seamless credit, manufacturers or traders do not have to include taxes as a part of their cost of production, which is a very big reason to say that we can see a reduction in prices. However, if the government seeks to introduce GST with a higher rate, this might be lost.
I ncrease in G overnment Revenues: This might seem to be a little vague. However, even at the time of introduction of VAT, the public revenues actually went up instead of falling because many people resorted to paying taxes rather than evading the same.
3
https://www.quora.com/How-will-the-goods-and-services-tax-GST-work-in-India-How-is-it-any-differentthan-the-value-added-tax-VAT
However, the government may wish to introduce GST at a Revenue Neutral Rate, in which case the revenues might not see a significant increase in the short run. 4
Less compliance and procedural cost: Instead of maintaining big records, returns and reporting under various different statutes, all assesses will find comfortable under GST as the compliance cost will be reduced. It should be noted that the assessees are, nevertheless, required to keep record of CGST, SGST and IGST separately. 5
Move towards a Unified G ST: Internationally, the GST is always preferred in a unified form (that is, one single GST for the whole nation, instead of the dual GST format). Although India is adopting Dual GST looking into the federal structure, it is still a good move towards a Unified GST which is regarded as the best method of Indirect Taxes.
The Salient Features of GST:
GST will combine the best of all indirect taxes to bring a compact, singular and easy system for levy, collection and assessment of indirect taxes in India.
Empowered Committee of State Finance Ministers and their ‘thinkers’ are the ones nailing down the details for proper introduction and application and back-end operational
requirements,
infrastructural
requirements,
databases,
consumer
education, and most importantly the procedural compliances during transition stage etc.
Most important feature - Tax Input Credit under GST – will be available for set-off at every stage.
Input Credit means, if you’ve paid tax on purchase of any good(s) or procurement of any
service(s) and – when selling your goods or services you’re required to further pa y tax – you can set off your tax payment liability with the tax already paid by you when you procured your inputs.
Example: You are ‘special muffin manufacturer’. You buy a whole lot of special ingredients to manufacture your muffin – say you bought multi flavoured syrups for the flavours – you had to pay tax (indirect you see!) to procure the syrups. 4
http://www.businesstoday.in/current/economy-politics/why-gst-is-the-biggest-tax-reform-sinceindependence/story/226483.html 5 http://articles.economictimes.indiatimes.com/2009-07-12/news/28493639_1_gst-state-finance-ministersgoods-and-services-tax
Now you used these syrups and made your muffins (this is value addition – without the process of baking, adding of ingredients there would be no muffin) – you sell them – but you got to pay tax on the ‘manufactured’ muffins!
So you paid tax when you bought the ingredients (input tax) and when you manufactured/sold them you paid tax again (output tax) – here, you will get the credit of the input tax paid to decrease your liability of output tax.
This is the Input tax credit system simplified for understanding.
GST will be levied at every stage of value addition.
Value addition would mean – applying effort on the goods or services to make worth more. By undergoing a certain process, or set of activities – ‘value’ is being added to the goods or services.
Under GST – the rate of tax – ‘Revenue Neutral Rate’ or RNR – is set to not exceed 27% combining both central and state tax rates.
It will bring more people under the indirect taxes net thereby increasing revenue and also dealing with tax evasion and black money issues.
Meanwhile a higher rate of Service Tax @ 14%, adding Education Cess to Excise Duty and taking off items from the exempted list are nothing but measured steps towards applying GST – which is slated for a 1st April 2016 release – after having missed numerous past deadlines!
More specifics on GST will become available as the Government will approach the 2016 deadline so keeping abreast with the development is important.
POINTS TO PONDER :
The GST is a very good type of tax. However, for the successful implementation of the same, we must be cautious about a few aspects. Following are some of the factors that must be kept in mind about GST:
Firstly, 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 like us really have to take the onus to assume this responsibility. 6
CONCLUSION
The GST is expected to bring about a qualitative change in the tax system by redistributing the burden of taxation equitably between manufacturing and services. The Finance Commission had commissioned a study by NCAER to assess its impact on GDP growth and exports. Preliminary results of the study indicate that the growth in GDP can be between 22.5 per cent with the implementation of a well designed GST. The increase in exports can be between 10-14 per cent. The Empowered Committee describes the GST as “a further significant improvement – the next logical step - towards a comprehensive indirect tax reforms in the country.” Indeed, it has the potential to be the single most important initiative in the fiscal history of India. It can pave the way for modernization of tax administration - make it simpler and more transparent and significant enhancement in voluntary compliance.
It is because of this reason that the government is keen to push through economic reform. Finance ministry officials say introducing the new tax could increase the revenues of the Centre and state governments substantially as all consumers would pay taxes on most goods and services. However, many state governments fear revenue losses as a result of GST being
6
https://www.quora.com/How-will-the-goods-and-services-tax-GST-work-in-India-How-is-it-any-differentthan-the-value-added-tax-VAT
introduced, and a parallel discussion is also under way about how to compensate them, complicating efforts to reach a workable compromise. However, these benefits are critically dependent on a neutral and rational design of the GST. The discussion of selected issues in this paper suggests that there are many challenges that lie ahead in such a design. The issues are not trivial or technical. They would require much research and analysis, deft balancing of conflicting interests of various stakeholders, and full political commitment for a fundamental reform of the system. Hence GST is more a reformation in tax structure than a mere restatement. References:
http://www.businesstoday.in/current/economy-politics/why-gst-is-the-biggest-taxreform-since-independence/story/226483.html
http://indiatoday.intoday.in/story/what-is-the-gst-what-are-salient-features-of-the proposed-bill/1/533502.html
http://articles.economictimes.indiatimes.com/2009-07-12/news/28493639_1_gststate-finance-ministers-goods-and-services-tax
https://www.quora.com/How-will-the-goods-and-services-tax-GST-work-in-IndiaHow-is-it-any-different-than-the-value-added-tax-
http://www.bankexamstoday.com/2015/03/goods-and-services-tax-gst-indias.html
Ahmad, Ehtisham, Satya Poddar A.M. Abdel-Rahman, Rick Matthews, and Christophe Waerzeggers(2008), Indirect Taxes for the Common Market; Report to the GCC Secretariat.
Joshi, Suhasini (2013, Aug 13), Goods and Services Tax – A Step Forward, The Economics Times. Retrieved Fromhttp://articles.economictimes.indiatimes.com
Beniwal, Vrishti (2013, Dec 23), Years of wait before DTC, GST are roll out, Business Standard .Retrieved from http://www.business-standard.com
