GST TO ELIMINATE MULTIPLE TAXES

[Dr. Sanjiv Agarwal]

After 25 years India started walking on the road to economic reforms and as India marches towards introduction of GST in 2016-17 in 70^th year of its independence, we may liberalize ourselves from the clutches of multiplicity of taxes levied by both, centre as well as states. However, the GST which is proposed in the current form is a combination of three types of taxes- Central GST, State GST and Integrated GST.

There cannot be a better way to celebrate India's independence. The dream to have GST in India may soon be a reality now. The month of August once again became historic after August of 1947 when India attained independence from British raj. August 2016 created a historic achievement once again as India march ahead on the road to fiscal freedom on tax front as 122^nd Constitutional Amendment has been approved by both the houses of Indian Parliament i.e, on 3^rd August 2016 by Rajya Sabha (upper house) and on 8^th August, 2016 by lok sabha (lower house). What a gift to Indian citizens and businessmen in 70^th year of Independence.

Goods and Services Tax (GST)

GST is one indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Goods and Service Tax (GST) is the biggest ever tax reform of Independent India whereby multiplicity of taxes are subsumed in one tax called GST, though we will have three versions of GST (CGST, SGST and IGST). The GST will subsume taxes like Central Excise Duty (1944), Central Sales Tax (1956) Service Tax (1994) and a host of state levied taxes including Value Added Tax (VAT).  GST aims at subsuming many multiple taxes presently levied by Central and State Governments with the objective to follow one nation – one market - one tax policy and scrap the cascading effect of taxes on cost i.e. payment of tax on taxes. GST would therefore, bring in economies of scale, operational efficiency, lower cost of production and benefits accruing to consumers. GST is expected to change the way businesses are done, provide host of opportunities to professionals, reduce corruption and consumer will eventually benefit.

Constitutional  Amendment

The Constitution (122^nd Amendment) Bill, 2014 as amended has now been passed by both the houses of Parliament in August, 2016 - on 3^rd August by Rajya Sabha and on 8^th August by Lok Sabha ( and that too unanimously in both houses). The major amendments made in the original Constitutional Amendment Bill while passage thereof include the following :

1. The amounts apportioned to / collected by / used for payment by States shall not from part of consolidated fund of India
2. Taxes collected by Union shall be distributed between Union and States
3. The additional tax proposed for manufacturing states shall not be levied
4. GST Council to establish a mechanism for adjudicating any dispute arising out of Council's recommendations –

1.  Government of India and State(s)
2. Government of India and State(s) on one side and one or more States on other side
3. Two or more States

5. Parliament shall, by law on the recommendations of  Council, compensate to States for loss of revenue on account of introduction of GST

Taxes being subsumed

At the Central level, the following taxes are being subsumed:

1. Central Excise Duty,
2. Additional Excise Duty,
3. Service Tax,
4. Additional Customs Duty commonly known as Countervailing Duty, and
5. Special Additional Duty of Customs.

At the State level, the following taxes are being subsumed:

1. Subsuming of State Value Added Tax/Sales Tax,
2. Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),
3. Octroi and Entry tax,
4. Purchase Tax,
5.  Luxury tax, and
6. Taxes on lottery, betting and gambling.

However, it will have to be ensured by the GST Council that states should not levy new taxes in future (unless there is a emergency) to complicate the taxes again over a period. We should not have a sequel of GST like GST-2 after a decade or so. This is important as centre has agreed to compensate the states for any revenue loss arising out of GST. Also, there is a need to discourage local bodies to levy taxes. Their fund requirements may be met by States.

Benefits of GST

The benefits of GST accruing to various stake holders can be summarized as under:

For business and industry

• Easy compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
• Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
• Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
• Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
• Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

For Central and State Governments

• Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.
• Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
• Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.

For the Consumers

• Single and transparent tax proportionate to the value of goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
• Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most

Administration of GST

For GST administration, keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.

Input Tax Credit    

The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit between CGST and SGST would be permitted. However, IGST can be set off against IGST, CGST and SGST.

GST Preparedness

Preparedness for GST in next few months will involve Tax Planning Review, Transactions Review, Training Manpower, Cost Effectiveness in Inventory, logistics & Final goods, business Planning with anticipation of new tax structure with competition, Fastest Implementation & Transition to GST, Procurement and Purchase Orders Implementation, Invoicing Patterns, Proper Implementation of GST Transition in input stage credit, tax management versus business operations, various misc provisions, etc.

One has to take all steps to ensure that no dispute arises during transition and thereafter. If precautions and safeguards are not taken, well in time, during the pre and post implementation period of GST regime, then the possibility of litigation, due to ignorance and/ or non implementation, cannot be ruled out.

To Sum-up

GST is expected to play a key role in bringing about more transparency into the tax system. Instead of fiscal concessions, concessions to select industries on grounds such as environmental protection etc. could be provided in a transparent manner through cash refunds or otherwise. While unified rate may be there, states may be allowed to charge rates most suitable to them such as on alcohol, petroleum products, etc. 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 assessee-friendly – not like the present tax system.

It is felt that GST may seem to be a reality in 2017 (if not April, may be October). The key lies in broad consensus, on simple tax law and commitment of States to a comprehensive tax law which may be a watershed tax reform of the century which our generation will witness. The GST is expected be a win-win proposition for all Government, trade, industry and consumers.

Discussions to this article

[Ganeshan Kalyani]

Sir, very nice article. Thanks.