GOODS & SERVICES TAX - INDIA Preamble: India is at the behest of implementing an indirect tax reform, Goods and Service Tax (GST). GST, as the term refers to, is a composite tax on goods and services. The objective of GST is to create one common market for business and trade in India in terms of which GST would be a multi-point tax with the benefit of set-off of tax paid on purchases. In this scheme, every transaction involving supply of goods or services would be liable to tax, viz., production, distribution, consumption or supply, when effected from one person to another. At this stage, it is envisaged that most of the Central and State levies prevalent under the current regime would be subsumed into GST and accordingly, the credit mechanism would work seamlessly, across, goods and services on one hand and across States on the other. Current Status: GST Structure: India will be implementing a dual GST with the tax structure and powers split between the Centre and the States, referred to as the Central GST (CGST) and State GST (SGST) respectively. The GST would have a 4 rate structure with standard rate, concessional rate, special rate for bullion & jewellery and exempted/ nil rate. GST will be levied on supply of goods and services and the supplier will be allowed credit for the GST paid on purchases of both, goods and services. The credit would be seamless except that the credit of CGST paid will not be allowed for set-off against SGST payable and vice-versa. Local supplies would be subject to CGST and SGST at specified rates, inter-State supplies would be subject to integrated or inter-State GST (IGST) and Exports would be zero-rated. IGST: The IGST is a tax on all inter-State transactions and is in the dual GST format to ensure seamless flow of credits across States. The expression IGST would arithmetically be equal to the aggregate of CGST and SGST payable on the relevant transaction. The IGST is a mechanism whereby the tax charged by the seller will be remitted into the appropriate account of the Central Government. Under the IGST model, the seller would pay the taxes after adjusting the available credits. To enable the buyer to avail the credit of IGST in the destination State, the component of SGST used in discharging the IGST on supplies would be transferred by the exporting State to the Centre and thereafter, the Centre would transfer to the importing State, the component of IGST used in discharging SGST component by the seller.December 03, 2011 Page 1 of 4
Progress made: The commitment to implement GST in India was first made in Union Budget 2006 by the then Hon’ble Finance Minister Mr. P Chidambaram. He proposed to implement GST on April 01, 2010. Since then, the Central and the State Governments have initiated certain steps in the direction of implementing GST. The prominent amongst them are, Establishment of the Empowered Committee (EC) of State Finance Ministers also referred to as Joint Working Group which functions as the nodal agency for all initiatives on GST. Mr. Sushil Kumar Modi, Deputy Finance Minister of Bihar is currently the Chairman of the EC; Release of the First Discussion Paper by the EC which highlighted certain key proposals and gave an indication of the thinking of the Government on GST matters; Establishing an ‘Empowered Group on IT Infrastructure’ under the Chairmanship of Mr. Nandan Nilekani, for strategizing the GST requirements and monitoring of the same, as and when implemented; Presenting the 115th Constitutional Amendment Bill, 2011, amongst others, to equally empower, both the Central and State Governments for levy of tax on supply of goods and services; Granting approval to establish the GSTN (Goods and Service Tax Network) as an SPV (Special Purpose Vehicle) for GST IT infrastructure requirements of which, the NSDL (National Securities Depository Limited), Central Government and State Governments are the stake holders; Since 2006, while the pace on the above matters and other developments has rather been slow, the introduction of the Constitutional Amendment Bill and Approval of the GSTN in March 2011 and August 2011 respectively, reinforces the vision of the Government to introduce GST. In terms of the secondary sources of information, the Constitutional Amendment Bill is expected be placed before both the houses of the Parliament before the end of the Winter Session 2011. Specifically, on the information technology aspects for implementation of GST, Mr. Nilekani has indicated that the basic framework providing a common portal for registrations, returns and payments (core services) is ready and further that appropriate systems are provided to facilitate reconciliation of transactions across taxes, viz., Income Tax, Central Excise and VAT. Once the initial deadline of April 2010 was missed, the target was to implement the GST with effect from April 2012. However, due to lack of constitutional amendment, consensus between States on various issues including compensation, release of draft laws and with a view to provide adequate space and time to the trade and industry, the GST is now proposed to be implemented effective October 2012.December 03, 2011 Page 2 of 4
Discussions: Rate of Tax: It is understood that the Government is considering pegging the revenue neutral rate of GST at a rate between 18% to 22%. This represents the aggregate of CGST and SGST payable on the transaction. However, it may be noted that at this stage, the Government is yet to indicate whether the revenue neutral rate of tax on goods and services would be the same. Out of GST: At this stage, based on the first discussion paper and subsequent comments and recommendations by the Thirteenth Finance Commission and the Department of Revenue read with the Constitutional Amendment Bill, 2011, while, the Central Excise, Central Sales, Tax, Service Tax and Value Added Tax would be subsumed into GST, the following are envisaged to be kept outside the GST framework. Levies on petroleum products Levies on alcoholic products Taxes on lottery and betting Basic customs duty and safeguard duties on import of goods into India Entry taxes levied by municipalities or panchayats Entertainment and Luxury taxes Electricity duties / taxes Stamp duties on immovable properties Taxes on vehicles Consequently, the taxation on the above products would continue as is currently prevalent, viz., Central / State Excise and Value Added Tax / Sales Tax, as the case may be. Insofar as it relates to the FMCG sector, the taxes / duties paid on alcoholic products such as liquor for human consumption; and taxes paid on vehicles such as road tax, would not be eligible for credits under the GST mechanism and thereby adding to the cost of production / procurement. In addition to the above, entry tax would also be payable, as applicable and levied by the municipalities and panchayats. Typically, under the current taxation scheme, goods such as machinery including spares and parts, tobacco products, motor vehicles and petroleum products attract entry tax. Some concerns: The framework contemplated for GST has raised certain key issues and concerns which the industry may have and those which may arise consequent to the introduction of GST in the currently proposed format. Apropos, the industry expectations, the Governments and / or the EC are yet to officially comment on the proposed GST rates, indicate the thinking on transitional issues and commit on timelines for releasing the Draft law or more appropriately release the roadmap for implementation of GST in India.December 03, 2011 Page 3 of 4
There should be no distinction between goods and services under the GST regime. Distinction between goods and services could lead to overlapping of taxes. The entire purpose of GST is defeated since such a differentiation would not be materially different from the current indirect tax regime prevalent in the country. With changes in the business dynamics and the advent of information technology in almost all activities, lot of business transactions are executed by way of bundled contracts where there is supply of goods and rendering of services as part of the same transaction which makes the distinction between goods and services rather blurred. The current transaction tax laws do not specifically address e-commerce transactions. Clarity on this is a must under the GST structure. Government should consciously work towards achieving a common basic framework of GST law between all States. This would include the initial exemption thresholds, provisions relating to composite schemes / small scale industry schemes, general exemptions, documentation, procedures and compliances, as far as practicable. The taxable event should be clearly defined. Under the current excise and service tax laws, there is considerable litigation on basic issues such as taxable event. Under the GST regime, it is very important that taxable events and the situs of tax are defined in an unambiguous manner. One of the foundations of an effective GST implementation is that, the GST should be simple and the tax structure should be transparent without any hidden levies or duty impact. Accordingly, GST should subsume all the indirect taxes. As indicated supra, the proposed GST model does not subsume all taxes and commodities. Currently there are a plethora of export refund mechanisms and each of them are going through various interpretational tests, which has resulted in blockage of funds for the exporters. Under the GST, it is imperative that such scheme/s are minimal and transparent which enable speedy refunds. Under the current credit mechanisms, both at the Centre and the State, there are considerable debates regarding the eligibility of credit on certain transactions. Again, it is imperative that the system be transparent and simple under the GST structure. Whilst the concerns on implementation of GST could be many, the trade and industry we believe is eagerly looking forward for GST. With the seamless flow of credits and congruence, amongst others, in the rates of tax, procedures and documentation across States, the cost of goods and services are expected to reduce over a period of 12-18 months and ‘doing business in India’ would be simpler. Last but not the least, the experience of implementation of VAT in India was not one of the most pleasing ones. While all the States are now under the VAT regime, despite intensive efforts by the EC (EC established for implementation of VAT), all the States did not move into the VAT regime simultaneously, viz., April 1, 2005. Prima facie, States ruled by parties other than the party at the Centre chose to defer the implementation of VAT. This created hardships to the trade and industry on one side and also the Government on the other. With this backdrop, unlike VAT, the trade and industry earnestly expects that all States implement GST simultaneously with effect from October 2012. The views expressed and the information provided in this document are of general nature and are not intended to address the circumstances of any particular individual or entity. The above content should neither be regarded as comprehensive nor sufficient for making decisions. 4 ofoneDecember 03, 2011 Page No 4 should act on the information or views provided in this document without appropriate professional advise.