What is GST?
If the news reports are to be believed, India may implement GST around October 2011. Hence, its just matter of few months more before GST becomes a reality. In the following paras the author has made an attempt to demystify GST 21 FAQs.
1. What is GST?
GST is abbreviation for Goods and Service Tax. GST would be levied on all the transactions of goods and services made for a consideration. This new levy would replace almost all of the indirect taxes. In particular, it would replace the following indirect taxes:
At Central level
• Central Excise Duty
• Service Tax
• Various additional Excise Duties
• Excise Duty levied on Medicinal and Toiletries preparations
• Additional Customs Duty (levied on imports in lieu of Excise duty)
• Special Additional Customs Duty (levied on imports in lieu of VAT)
• Central Sales Tax
• Surcharges and cesses
At State level
• VAT/Sales tax
• Purchase tax
• Entertainment tax (unless it is levied by the Local Authorities)
• Luxury Tax, Taxes on lottery/betting/gambling
• Entry tax not in lieu of Octroi
• Cesses and Surcharges
2. Which levies/products would be outside GST?
Products such as alcohol, tobacco and specified petroleum products would remain outside GST regime. Further, Land and properties may remain outside since they are neither goods nor services. Taxes such as Octroi, which is levied by municipal corporations, may also remain outside GST regime. Electricity duty is another levy which may remain outside GST regime.
In my view, keeping certain products outside GST regime and allowing parallel levies will only add to cascading effect than any good to industry/economy.
3. What are the international practices on GST?
Internationally, GST was first introduced in France and now more than 150 countries have introduced GST. Most of the countries, depending on their own socio-economic formation, have introduced National level GST or Dual GST.
4. How GST would be implemented in India?
India is implementing ‘dual GST’. In ‘dual GST’ regime, all the transactions of goods and services made for a consideration would attract two levies i.e. CGST (Central GST) and SGST (State GST).
5. Why GST is being introduced?
A product or service passes through many stages till it reaches the consumer. Governments at Central and State level have, as and when the need arose, introduced many indirect taxes on various taxable events in this value chain (such as Excise duty on ‘manufacture’, VAT on ‘sale’ etc).
As these taxes are levied on different taxable events they have their limitations. To illustrate further, let’s take example of Excise Duty. Excise duty is levied on ‘manufacture’ and thus it fails to tax the value addition at trader/retail sale level.
Additionally, at present, ‘goods’ primarily suffer two levies (Excise duty and VAT) whereas ‘taxable services’ suffer only one levy i.e. Service tax. This leads to distortion: distortion arises because the relative prices of serviceswould be lower as compared to goods.
Even though current indirect tax system treats goods and servicesdifferently, in certain cases there is double taxation. Software being one of such case where the industry has taken conservative stand and both VAT and Service Tax is being currently levied.
Also, there are restrictions on availment of credit such as a service provider cannot avail credit of VAT and a trader cannot avail credit of Service tax.
The above lacunas affect free flow of goods and services. Additionally, it brings uncertainty in the trade which is not good for the economy as a whole. GST is now being projected as a solution to all these problems.
6. Whether GST will cure all the problems prevalent in the current tax structure?
Though not all, but surely, most of the current issues will be resolved such as the classification, valuation, double taxation disputes etc. On a positive note, most of the credit which is not available will be available in GST regime such as the service provider will be eligible to avail credit of VAT, Luxury tax, Entertainment Tax etc. The compliances are also expected to reduce drastically.
7. How GST is different from the current tax structure?
GST is different from the current tax structure in many ways. Currently,indirect taxes treat goods and services differently. As mentioned above, ‘goods’ attract Excise duty at manufacturing level and VAT at the time of sale. In contrast, services attract only one levy i.e. Services tax on provision of taxable services.
This distinction, in GST regime, would loose its importance as both goods and services would be treated as par for taxing purposes. Supply of goods and services for a consideration would attract CGST and SGST. Thus, State Governments now get the power to tax services and Central Government gets the power to levy tax at the trader and retail level.
8. When GST would be introduced?
Though, over the last 3-4 years Government worked with great perseverance to introduce GST and the Finance Minister also had assured and reassured the Parliament that it will be his earnest endeavour to introduce GST along with the DTC in April, 2011. However, then the FM announced that it will not be possible to introduce GST in April 2011.
However, S Dutt Majumdar, Member (Central Excise), Central Board of Excise and Customs (CBEC), has stated that GST is likely to be introduced from October 2011.
9. What about the legislations and the rules?
GST would be implemented with single CGST statute which would beapplicable across India. However, for SGST, each state will have its own statute. At present, the Government is working on the requisite constitutional amendments, the draft legislation and the rules. It appears that the draft GST legislation may be made public, for feedback, at a date near December 2010.
10. What would be the rate?
The Finance Minister at the meeting with the Empowered Committee of State Finance Ministers on 21 July 2010 announced that ‘services’ would attract 8% CGST and 8% SGST each whereas ‘goods’ would attract GST at the following rates:
Lower rate Standard rate Lower rate Standard rate
Year 1 6% 10% 6% 10%
Year 2 6% 9% 6% 9%
Year 3 8% 8% 8% 8%
Thus, year 3 onwards India may have a single cumulative GST rate of 16% spanning across goods and services.
It is worth noting that the proposed cumulative rate of GST is much higher than the Revenue Neutral Rate suggested by the Thirteenth Finance Commission (TFC). TFC had suggested a rate of 5% CGST and 7% SGST.
It appears that the Government is reviewing the existing exemptions so that the list of goods exempt from CGST is aligned to the SGST list and 99 items currently exempt from VAT may be exempt from both components of GST.
11. How the input tax credit mechanism would work in GST?
Input tax credit of CGST would be available for payment of CGST and input tax credit of SGST would be available for payment of SGST. Thus, effectively GST may be levied on the value addition.
It may be noted that input tax credit of CGST would be available for payment of CGST and input tax credit of SGST would be available for payment of SGST. However, 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.
12. What about the current input tax credit balance?
Looking at the experience we have on VAT introduction, it appears that, the input credit balances may be allowed to be carried forward and set off against CGST and SGST subject to certain conditions.
13. Whether there would be any basic exemption limit?
The Finance Minister of India at the meeting with the Empowered Committee of State Finance Ministers on 21 July 2010 announced that there would basic exemption threshold Rs. 10 lakhs for both CGST and SGST.
However, the speech was silent about the basic exemption threshold for ‘Integrated GST’.
14. How Interstate transactions will be taxed?
First Discussion Paper categorically states that all the inter-State transactions of goods and services would attract IGST (which would beCGST plus SGST). Also, there would be appropriate provision forconsignment or stock transfers.
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. Centre will transfer to the importing State credit of IGST used in payment of SGST.
15. How to tax transactions of interstate supply of ‘services’?
Given the intangible nature of ‘services’ it would not be simple to tax the inter-State transaction of services. Hence, in GST regime, Government will have to introduce appropriate Place of Supply Rules to determine the place of consumption of service.
At present, place of supply rules exist in case export of services [Export of Services Rules, 2005] and import [Taxation of Services (Provided from outside India & Received in India), Rules, 2006. To tax interstate supply of services, on similar lines the Government may introduce place of supply rules. In my view the Government should also consider the ‘Place of Supply Rules’ which are prevalent in European Union (EU has 27 member countries).
16. Whether there would be any special provisions for small tax payers?
The First Discussion Paper suggest that tax payers having turnover of less than Rs. 50 lacs can opt for Composition scheme wherein they need to discharge tax at a floor rate of 0.50%.
17. How exports and SEZ would be treated?
Exports would be zero rated, as currently they are. In case of SEZ, if the supply of goods or services is for consumption in processing zone then it would be zero rated. Supply of goods and services from SEZ to domestic tariff area would be treated as domestic transaction and taxed.
18. How imports would be taxed?
Currently, import of ‘goods’ normally suffers ACD (in lieu of Excise duty) at the rate of 10.30% and SACD (in lieu of VAT) at the rate of 4%. On import of ‘taxable services’, Service tax is attracted. In GST regime, both CGST and SGST would be levied on import of goods and services.
Consecutively, import of services will become costlier as service import would attract GST at the rate of 16% as compared to the present Service tax rate of 10.30%. Even, import of goods may become cheaper or costlier depending on the fact whether they attract GST at lower rate (12%) or standard rate (20%).
GST paid on goods and services would be eligible for input tax credit.
19. How GST would be administered?
It appears that CGST will be administered by ‘Central Government’ and SGST will administered by the respective State Governments. So, an assessee will have to liaise with these two Departments.
At present, a manufacturer liaises with two Departments viz. Excise Department (for excise duty) and VAT Department (for sales tax). Whereas, a service provider and trader deals with only one Department, Service Tax Department and VAT Department respectively. So in GST regime, the service providers and traders will have to deal with two departments.
20. How the Government would ensure that proper IT infrastructure is in place?
For the purpose of simplification and to minimize physical interference between taxpayer and administration, the Government is keen to have robust IT infrastructure in place before introduction of GST. To facilitate such infrastructure FM proposed constitution of an Empowered Group chaired by Dr. Nilekani with joint representation from the Centre and the States which would be authorized to take decisions about the size, features and functionalities of such IT system.