THE SHAPING UP OF GST REGIME

[Dr. Sanjiv Agarwal]

Tax Reforms and GST

The introduction of goods and services tax (GST) from April 2010 was announced by Finance Minister in 2006-07 Budget. Union Budget 2007-08 reconfirms the proposal and moves a step ahead in announcing that the empowered committee of State Finance Ministers will work with the Union Government to prepare a roadmap for introducing a national level goods and services tax with effect from April 1, 2010. Union Budget 2006-07 (and reconfirmed in Budget 2007-08) has proposed a date, i.e., 1st April, 2010 for introduction of GST in the country.

After value added tax, GST, when implemented  shall be the most significant fiscal initiative of independent India and shall boost the economic development.

The Vijay Kelkar Task Force had proposed the levy of Goods and Services Tax (GST) as a common tax for goods and services and availability of CENVAT to all the assessees. GST is proposed at both Central and State level and shall be accompanied by the simultaneous withdrawal of all the cascading taxes. Central Government has announced its intention to levy GST (on dual basis) w.e.f. 1st April, 2010. The report recommends as under for Goods and Service Tax (GST) :

The introduction of the GST at both Central and State levels should be accompanied by the withdrawal of all cascading taxes such as Octroi, Central Sales-tax, State Level Sales-tax, Entry tax, Stamp duties, Telecom license fees, Turnover taxes, tax on consumption or sale of electricity, taxes on transportation of goods and passengers, etc. This removal of inefficient and distortionary taxes would constitute a major milestone for reforms in Indian public finance.

The Central Excise Act and the taxation of services by the Finance Act, 1994, will be subsumed under the central goods and services tax. This should be implemented through a legislation which may be named Indian Goods and Services Act. The States will need to simultaneously introduce corresponding legislation for taxation of goods and services which will subsume their existing State-level cascading taxes.

Need for a common tax

Why do we need GST today? In today's Indian economy, where service sector contributes over 55%, separate taxation of goods and services is neither viable nor desirable. Value added in manufacture and sale of goods require inputs of both - goods and services and vice versa, which is often not separable. Taxation of goods and services separately by union as well as States brings in distortion in tax structure, is retrogatory and adversely affects revenues. The present consumption tax system in India is complicated as well as multi-layered. GST is a part of ongoing tax reforms which aims at evolving an efficient and harmonized consumption tax system. It shall replace the multiple taxes with a single tax operating at various levels of supply chain, thus, avoiding the cascading effect of multiple taxes. Also, it shall cover all goods and services, unlike the present system, with a negative or exempted list. It will also end the distortion in differential tax treatment of various goods and services. GST is going to be pinnacle of achieving an integration of excise duties, service tax, State value added tax and other local taxes. With GST, uniformity of levy of indirect taxes will be ensured across the country.

The basic objective of GST is to remove trade barriers by creating a common domestic market for goods and services at a national level. GST will be an answer to this goal which is a broad based tax levied at multiple stages of production and distribution with the taxes on inputs credited against taxes payable on output. At the same time, revenue is protected by being collected throughout the chain of economic transactions but without any distortions in production processes or decisions. Tax collected at any intermediate stage is only a pass through transaction leading to an incentive for tax compliance. GST thus, seeks to achieve economic efficiency and tax neutrality.

What is GST

Simply put, goods and services tax is a tax levied on goods and services imposed at each point of sale or rendering of service. Such GST could be on entire goods and services or there could be some exempted class of goods or services or a negative list of goods and services on which GST is not levied. GST is an indirect tax in lieu of tax on goods (excise) and tax on service (service tax). The GST is just like State level VAT which is levied as tax on sale of goods. GST will be a national level value added tax applicable on goods and services.

A major change in administering GST is that the tax incidence is at the point of sale as against the present system of point of origin.

GST components

According to Dr. Vijay Kelkar, "There are four parts to the GST effort: establishing IT systems, building the Central GST, the political effort of agreeing on "a grand bargain," and administrative efforts at the State level. Simultaneous efforts need to be undertaken on all four fronts, under the oversight of the Empowered Committee. The first task is that of the IT systems. The Tax Information Network (TIN) system, built by NSDL, is the right foundation for implementing the GST. TIN already reaches 600,000 establishments, and these are exactly the establishments which need to be plugged into the GST. The second task is that of consolidating Central Excise, the Central Service Tax and VAT on imports (i.e. CVD) into a single tax called the Central GST. The next task is that of interacting with the States. On one hand, this is the political question about revenue sharing. The most fair formulation would place the entire GST collection into the hands of the Finance Commission for sharing with States. Calculations and fiscal scenarios must be made, and discussed with State Finance Ministers, in order to arrive at an agreement. After this, the focus would shift to State-level administration. At first, individual States should be merged into the TIN, one by one, at an administrative level while keeping the State VAT distinct from the Central GST. Once all major States are administratively working through the TIN, and the "grand bargain" has been agreed to, the stage would be set to throw a switch in April, 2010, where India would become a common market with a single Goods and Services Tax."

India needs to adopt a GST system which is politically acceptable and administratively feasible.

Internationally, there are three practices followed. GST is levied either on invoice system where GST is claimed on the basis of invoice and claimed when invoice is received irrespective of payment. In payment system, GST is claimed and availed when payments are received or made. Presently, service tax in India is based on payment system only where service tax is required to be deposited only when payment is collected. In yet another system, hybrid approach is followed wherein GST is claimed on the basis of invoice but accounted for on the basis of payment.

Steps involved in GST introduction

Following steps are needed on political, administrative and technological fronts -

-    Strong political commitment

-    Arriving at common/general consensus including political agreement.

-    Setting up a high level committee for monitoring the project of GST

-    Preparing a blue print/road map for GST (discussion paper just out)

-    Creating a conducive environment for GST

-    Centre-state coordination

-    Consolidation of Central Excise, Service Tax and VAT on imports/exports

-    Identification of issues to be resolved

-    Interaction with trade and industry and others stock holders concerned

-    Building up GST infrastructure and administrative machinery

-    Adequate reinvestment administration, training and public education programme.

-    Establishment of information technology systems, software and enabling environment (like TIN)

GST : The way forward

India require two tier integration - one at central level and other one at state level where all indirect taxes integrate into a single value added tax. All this will require great deal of political will, intellectual skill and administrative drill.

For national level GST, Central Sales Tax (CST) of four per cent is being abolished, which Government has already announced from 1st April, 2007 in a phased manner. The country shall have to follow uniform Cenvat rate alongwith administration for goods and services and a uniform exemption free level. An efficient data base (tax information network) and audit system are also pre-requisite for an efficient and effective GST regime. The phasing out of CST has begun since Union Budget 2007 and by 2010 it shall be completely abolished.

The Empowered Committee of State Finance Ministers should also try to integrate the recommendations of Govinda Rao and Vijay Kelkar Committees. There will be a need to follow a gradual approach rather than one go stand. It may take 3 to 5 years to implement. It may be noted that Finance Minister has in his Budget speech (2007) announced that Empowered Committee of VAT shall help the Centre in implementation of GST also. During the Budget Speech for 2008-09 it was indicated that substantial progress has been made in moving towards GST.

Budget speech for 2009-10 emphasizes for introduction of GST in India w.e.f. 1sr April, 2010 but the road map is still missing. Also few states have not agreed to the present thinking and revenue sharing model. The Government intends to accelerate the process for smooth introduction of GST from April 2010 but it does not seem to happen now. It is understood that the Empowered Committee has reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in Indian constitution. According to the Budget Speech for 2009-10 (July 2009), the broad contour of the GST model is that it will be a dual GST comprising of a central and a state GST. The center and the state will each legislate, levy and administer the central GST and state GST respectively. Towards the goal to have GST in place by April 2010, Central Government has taken steps for convergence of central excise duty rates to a mean rate, currently at eight percent.

Under GST, the format will change and central taxes (CST, central excise, service tax) shall be subsumed into one. Also, sharing between centre and states will be there mere with a major shift in sharing pattern. In fact, GST will change the tax horizon of the country for the good. GST will also provide an opportunity to policy makers to follow principle of certainty and have clear cut defined exemptions, concessions, non taxable areas and services so as to avoid confusion and litigation.

The rate of GST is not yet final and various State Governments are discussing it. While the indications of a dual GST structure look bright, unified GST would be preferred by assessees as it would be cost effective and provide efficient mechanism. Dual GST is not for which India is looking for. It will only increases complexities in already too complex and multiplex taxation system in India. In such a case, sharing formula could be devised between centre-states. GST on inter-state sales is likely to be levied by the destination state, collected by the state that sells and would be creditable to the purchasers. But it may not be simple.

There are disagreements on rate and structure and compensation to states. Users and assessees would also require training and education on GST, besides review of supply chain, computerization, transitional issues.

Government also needs to address issues such as treatment of levies (octroi, stamp duty, state excise etc) as any exclusion from GST would again lead to many taxes and defeat the objective of comprehensive GST. Ideally, alongwith transitional provisions concerning input tax credit, pending demands and litigation, government will have to exempt or provide level playing field for projects and contracts with periods spanning over more than a year as in such cases, migration would be difficult and some cut off arrangement will have to be worked out. Obviously, as of now, all such contacts must be silent on this issue and may create a bottleneck between parties to contract.

In GST regime, there will be no place for duties like additional custom duty or special additional duties or cess. Ideally, central and state indirect taxes such as central sales tax, excise duties, service tax, value added tax, entry tax, tax on consumption of goods, luxury tax, entertainment tax etc should be subsumed in GST. It needs to be cleared as to what would happen to issues involving stock transfers, inter state transfer, cross border taxation of service, taxation of service etc. Issues on Cenvat credit, place of taxation, timing of taxation and person liable - all are relevant and crucial. What all taxes will be subsumed in GST should be made clear.

On indirect tax front, India is all set to usher into the era of a all new tax to be called 'goods and services tax' (GST) which will bring in India at par with over 140 developed nations of the world. It is going to be the biggest ever tax reform in independent India. World over, goods and services attract the same rate of tax. This is the foundation of GST. Finance Minister has made a statement in budget speech that GST is a critical part of our economic reforms. That's going to happen.

Discussion Paper on GST

The Empowered Committee of State Finance Ministers has released the 'First Discussion Paper' on proposed goods and services tax on 10^th November 2009. This much aviated paper or report is the first concrete official communication on preparedness of GST at the Government's level. As already announced in Parliament at the time of Union Budget, Indian GST will be a dual GST- at central leval (CGST) and at state level (SGST).

It is proposed that CGST will subsume the following taxes-

(a) Central excise duties, additional excise duties, excise duties under Medicinal and   Toilet Preparation Act,

(b) Service tax

(c) Additional customs duty (CUD) and Special additional Customs Duty (SAD)

(d) Surcharge

(e) Cess

SGST is expected to subsume the following state taxes-

(a)  Value added tax( or sales tax)

(b) Entertainment tax

(c)  Luxury tax

(d) Tax on lottery, betting and gambling

(e) State cess/ surcharge.

Following are the highlights of proposed GST to be levied in India -

Dual structure: As expected, India is implementing 'dual GST'. Centre Government would be levying Central GST (CGST) and State Governments would be levying State GST (SGST). CGST and SGST would be applicable on all the transactions of goods and services made for a consideration except:

- Exempted goods and services which are outside the purview of GST and

- Transactions which are below the prescribed threshold limits.

Statutes: This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, an assurance is given in the paper that the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.

Date of introduction of GST: No date for introduction of the GST is proposed in the Paper. The deadline for its implementation i.e. 01.04.2010 is likely to be missed.

Rate of GST: Rate for SGST and CGST is not specified in the paper but it is assured that the same would be known at appropriate time. The rates in GST regime would be:

• Necessities: Lower Rate
• Goods of basic importance: Standard rate
• Precious metal: Special rate
• Exempted items: Nile Rate

  Tax credits: The paper state specifies that the Credit of CGST would be available for payment of CGST and credit of SGST would be available for payment of SGTS. It is also assured that, in due course, the rules for taking and utilization of credit for the Central GST and the State GST would be prescribed and would be on similar lines. Fortunately, cross utilization of tax credit between the Central GST and the State GST would be allowed in the case of inter-State supply of goods and services under the IGST model.

  Interstate GST (IGST): Central Government would levy IGST (which would be CGST plus SGST) on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

  Basic threshold: A dual threshold is proposed for CGST and SGST. For CGST, the basic exemption for goods would remain at ₹ 1.5 crores and for services a similar exemption would be provided later. For SGST, the basic exemption for goods and services would be ₹ 10 lakhs.

  Composition/ Compounding Scheme: There would be a compounding cut-off at ₹ 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for dealers with turnover below the compounding cut-off.

   Zero rating of exports: Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). It is also specified that the refund of CGST/SGST should be granted in a time bound manner.

  GST on Imports: Both CGST and SGST will be levied on import of goods and services into the country. Full and complete set-off will be available on the GST paid on import on goods and services.

  Special Industrial Area Scheme: After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives would be converted, if at all needed, into cash refund schemes. Regarding Special Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would continue up to legitimate expiry time both for the Centre and the States.

  Taxes to be subsumed in GST : In CGST the taxes to be subsumed are Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty, commonly known as Countervailing Duty (CVD), Special Additional Duty of Customs - 4% (SAD), Excise Duty levied under the Medicinal and Toiletries Preparation Act, Surcharges and cesses. Whereas SGST will subsume VAT/Sales tax, Entertainment tax (unless it is levied by the local bodies), Luxury Tax, Taxes on lottery, betting and gambling, State Cesses and Surcharges in so far as they relate to supply of goods and services, Entry tax not in lieu of Octroi.

  Products outside GST regime: Items containing Alcohol and petroleum products will be outside the GST regime. However in respect of 'Purchase Tax' no decision is made whether it should be part if GST regime or outside it.

  Compliances and Procedures: The assessees would be allotted PAN based registration numbers and would be required to file periodic returns for SGST & CGST. Also, appropriate accounting codes will be prescribed for Central GST and State GST separately.

  Tax Administration: Tax administration of CGST and SGST would be parallel meaning SGST will be administered by State Government and CGST by Central Government. In view of the introduction of GST, IT Infrastructure will be improved. Further, requisite Constitutional amendments will also be carried out. It is mentioned that specific provisions would also be made to the issues of dispute resolution and advance ruling. It is apparent that now paper gives clarity on many fronts though clarity still eludes on the taxable event in GST, rate, carry forward of cenvat credit etc.

  Conclusion

  A very strong infrastructure network would be required to administer GST which would include facility for online payment of tax and e-filing of returns. The GST as a new levy could be a very effective tool and break through in indirect tax reforms, provided it is made simple and assesses friendly- not like the present tax system.

  Given the preparedness on the government front, legislative and administrative side, it is likely that the GST may not be implemented from 1 April, 2010 and may be deferred by four months to one year.

   

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