Blog
GST: ONE NATION, ONE TAX
“One Tax, One Market, One Nation,” said Finance Minister Arun Jaitley as he heralded the GST regime. The term GST has raised a lot of issues for laymen and professions alike. In this article, we attempt to tackle a few of them.
- Background history to GST
France was the first country in the world to implement the GST law in the year 1954. Since then, around 159 countries have adopted the GST regime in some form or other. In India, the discussion on GST law began in the year 2000, when the then Prime Minister Atal Bihari Vajpayee brought the issue to the table. In India, the taxes levied are of two kinds: Direct and Indirect. Direct taxes are those in which the liability cannot be passed onto anyone else eg. Income Tax. Where the person earning the income is directly responsible for paying the tax on the same. Indirect tax, by contrast, is where the burden of payment can be passed to someone else. For eg, in case of VAT, a manufacturer can pass on the onus of paying this tax on to the consumer by proportionately increasing the process of the good in question.
Before the GST regime, the Indirect tax regime was fragmented and comprised of several taxes such as VAT, Service Tax, Octroi Tax, Central Excise Duty etc. However, after the introduction of GST as per the 122nd Constitutional Amendment Bill, 2014, passed by both the houses of the Parliament from July 1, 2017, a single unifying indirect tax is now being imposed on all goods and services. This change in tax regime will also impose the same tax on goods and services, thereby ceasing distinguishing a good from a service. India’s ranking was 152 out of 185 countries on Ease of “Paying Taxes” in the 2014 “Doing Business” indicators of the World Bank. This ranking highlights the shortcomings of a multiple tax regime that had existed before GST.
- Meaning of GST
GST, as mentioned earlier, is an indirect tax imposed on the supply of goods and services with the burden of paying tax resting ultimately on the consumer. GST is a tax on value addition as tax is imposed on the value added at each stage beginning with the manufacture. As a simple example take the process of sale of a garment. In this process, the raw material is purchased from the seller of raw materials, it is then manufactured by a manufacturer and sold to a retailer who sells it to a consumer.
Seller of Raw Material à Manufacturer of garment à Retailer of clothes à Consumer
In this example, there has been value addition to the piece of cloth bought at the first stage until it is sold to the consumer. The consumer bears the burden of paying all taxes levied ultimately. Another important aspect of GST is that it is a destination based tax and has to be paid at the point of consumption. Currently, the tax slab rates for GST in India are- 0%, 5%, 12%, 18% and 28%. Goods under 0% category are popularly known as essential goods while those under 28% are being called as the sin goods.
- Which taxes does GST replace?
At the Central level, the following taxes are being subsumed by GST:
- (i) Central Excise Duty,
- (ii) Additional Excise Duty,
- (iii) Service Tax,
- (iv) Additional Customs Duty commonly known as Countervailing Duty, and
- (v) Special Additional Duty of Customs.
At the State level, the following taxes are being subsumed by GST:
- (i) Subsuming of State Value Added Tax/Sales Tax,
- (ii) Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),
- (iii) Octroi and Entry tax,
- (iv) Purchase Tax,
- (v) Luxury tax, and
- (vi) Taxes on lottery, betting and gambling.
- Legislative framework of GST
The Constitution of India under Article 245 gives the authority to the government levy taxes. It states that no tax shall be levied or collected except by the authority of law. Article 246 provides for the distribution of taxation powers between the Centre and the States. This distribution has been laid down in the Schedule VII of the Constitution. The 122nd Constitutional Amendment Bill introduced Article 246A which reads as:
“(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”
Some other amendments have been made to the Entry 84 and 92A of the Union List empowering the Union to levy tax on sale of states and inter-state services respectively. Similarly, Entry 54 of the State list has been amended to empower the States to levy taxes on services.
The GST regime in India can be best described as dualistic in nature with both centre and state governments imposing taxes in the form of CGST and SGST.
Basically, there will be 3 kinds of applicable under Goods and Service Taxes: CGST (Centre GST), SGST (State GST) & IGST (Inter-State GST).
- CGST is where the revenue will be collected by the central government.
- SGST is where the revenue will be collected by the state governments for intra-state sales.
- IGST is where the revenue will be collected by the central government for inter-state sales.
When a sale takes place under GST, both the Centre and State Government shall simultaneously levy GST across the value chain. In this case, GST shall be levied on every time supply of the good or service takes place. The Central Government 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 that take place within a State. The input tax credit (input tax credit means the credit available to the buyer against the tax paid by it to the seller preceding him on purchase of inputs and ultimately passed to the consumer) 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 would be permitted i.e. CGST and SGST cannot be set off against each other.
- Administration of GST
The GST is administered through a GST Council that consists of the Union Finance Minister as the Chairman and Minister of State in charge of Revenue, Minister in charge of Finance or Taxation, or any other Minister, nominated by each state. The Council shall make all decisions by a three-fourths majority of the votes cast. The Centre shall have a third of the votes cast and the states shall have two-thirds of the votes all together. In case of any disputes that may arise, the same shall be decided by the Council itself. The GST Council is empowered to take all decisions related to tax rates, inclusions and exemptions under the GST Regime.
For implementing the nation-wide system of GST, a Goods and Services Tax Network called GSTN has been jointly registered by the Central and State Governments as a Not-For-Profit, Non-Government organisation to provide a shared IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders. The GSTN has been set up with the key objective to provide a standard and uniform interface to the taxpayers and an infrastructure to the Central and State Governments. GSTN shall provide a common GST portal which shall provide registration services, return and payments to the taxpayers, and other backend services such as processing returns, registrations, audits, assessments, appeals, etc.
- Goods excluded and exempted from GST
The following items have been excluded from the scope of GST and shall be included later with the permission of the GST council. These are classified under Schedule III of the GST Act as “Neither goods nor services”. Some of them include Alcohol for human consumption, Petroleum, etc. GST Council has approved a list of over 100 items that have been exempted from GST i.e. taxed at 0%. These include products like animal feed, curd, milk, bread, fish etc.
- Benefits of GST
The biggest benefit of GST is that it will keep a check over tax evasion. Sellers hiding their sales will not be eligible for credits for taxes on the purchases made by them. Thus, all underground transactions are expected to come under scrutiny.
Not just this, GST will create a uniform integrated market that will eliminate the snowballing effect in case of products that were being sold through e-commerce.
GST is designed to be electronic thereby eliminating manual filing. Such a change shall bring about transparency and accountability in the process.
GST is also expected to reduce the logistics and distribution costs.
Over the coming years, the rates imposed under GST are expected to reduce as more goods and services shall be absorbed within its ambit.
All these benefits are expected to aid in improving India’s GDP.
- Criticism of GST
Several criticisms have been levelled against GST. Some tax experts are of the opinion that the GST structure that has been rolled out is complicated and flawed due to multiple tax rates and a complex tax structure. The entrepreneurial community has also expressed dissatisfaction at the increased tax compliances and the GSTN platform. Lack of adequate IT infrastructure and government’s incapability at resolving it has angered the business community. In order to ensure a more stable transition to GST, the government has granted a two month extension in submitting tax returns.
