Goods and Service Tax (GST) in India

This article was submitted by Philip Jonathan P from CMR Law School, Bengaluru for National Legal Writing Competition,2016.

The Goods and Services Tax Bill or GST Bill, officially known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, proposes a national Value added Tax to be implemented in India from 1 April 2017.

The introduction of Goods and Services Tax (GST) would be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax should lead to easier administration and enforcement. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%,free movement of goods from one state to another without stopping at state borders for hours for payment of state tax or entry tax and reduction in paperwork to a large extent.

An empowered committee was set up by the Atal Bihari Vajpayee government in 2000 to streamline the GST model to be adopted and to develop the required backend infrastructure that would be needed for its implementation.

In his budget speech on 28 February 2006, P.Chidambaram, the then Finance Minister, announced the target date for implementation of GST  to be 1 April 2010 and formed another  empowered committee

NEED FOR GST

Introduction of a GST to replace the existing multiple tax structure of center and state taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice verse. Separate taxation of goods and services for taxation, which leads to greater complexities, administration and compliance costs. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST, being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions and will help in development of a common national market.

JUSTIFICATION OF GST

Despite the success of VAT, there are still certain shortcomings in the structure of VAT , both at the central and at the state level.

  1. JUSTIFICATION AT THE CENTRAL LEVEL

*    At present excise duty paid on the raw material consumed is being allowed as input credit only. For other taxes and duties paid for post manufacturing expenses, there is no mechanism for input credit under the central Excise Duty Act.

  • Credit for service tax paid is being allowedmanufacture/ service provider to a limited extent. In order to give the credit of service tax paid in respect of services consumed, it is necessary that there should be a comprehensive system under which both the goods and services are covered.
  • At present, the service tax is levied on restricted items only. Manyother large number of services could not be taxed. It is to reduce the effect of cascading of taxes, which means levying tax on taxes.
  1. JUSTIFICATION AT THE STATE LEVEL
    • A major defect under the State VAT is that the state is charging VAT on the excise duty paid to the Central Government, which is a cascading effect on account t of Central element.
    • Eachtaxpayers would have be allotted a PAN-linked taxpayers identification number with a total of 13/15 digits.
    • In the present state level VAT scheme, Cenvat allowed on the goods remains included in the value of goods to be taxed which is acasecading effect On the account Cenvat
    • Many of the states are still continuing with various types of indirect taxes, such as luxury tax, entertainment tax, etc.
    • As tax is being levied on inter-state Transfer of goods, there is  no provision for taking input credit on  CST leading to additional burden on the dealers.

MODEL OF GST

  • The dual GST model proposed by the Empowered committee and accepted by the Center will have dual system for imposing the tax. GST shall have two components i.e.,
  • Central GST
  • State GST
  • Central Excise duty, additional excise Duty, service tax and additional duty of customs(equivalent to excise),state VAT entertainment tax, taxes on lotteries, betting and gambling and entry tax (not levied by local bodies)would be subsumed within GST.

GST – SALIENT FEATURES

  • It would be applicable to all transactions of Goods and service.
  • It to be paid to the accounts of the center and the States separately.
  • The rules for taking and utilization of credit for the Central GST and the State GST would be aligned.
  • Cross utilization of ITC between the central GST and the State GST would not be allowed except in the inter-State supply of goods.
  • The Central and the State would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Center.

The tax payers would need to submit common format for  periodical returns, to both the central and to the concerned State GST authorities.

CHARGEABILITY OF TAX UNDER GST

  • It will be a replacement of ED and other taxes.
  • There will be two parallel Statutes – one at center and other under the respective State GST Act –governing the tax liability of the same transaction.
  • All the items of goods and services are proposed to be covered and exemptions will be granted to few selected items.
  • Afterintroduction of GST, all the traders will be paying both the types of taxes i.e., CGST and SGST.

TAXABLE PERSON

  • It will cover all types ofperson carrying on Business activities,i.e., manufacturer, job-worker, trader, importer, exporter, all types of service providers, etc.
  • If a company is having four branches in Four different states, all the four branches will be considered as TP under each jurisdiction of SGs.
  • All the dealers/ business entities will have to pay both the types of taxes on all the transactions.
  • A dealer must get registered under CGST as it will make him entitle to claim ITC of CGSTthere by attracting buyers under B2B transactions.
  • Importers have to register under both CGST and SGST as well.

SUBSUMING OF EXISTING TAXES

  • Thesub-mission should result in free flow of Tax credit in intra and inter-state levels so that unrelated taxes, levies and fees are not be subsumed under GST.

TAXES THAT MAY OR MAY NOT BE SUBSUMED

  • Purchase Tax
  • Stamp Duty
  • Vehicle Tax
  • Electricity Duty
  • Other Entry Taxes and Octroi

RATE OF TAX

  • There will be a two-rate structure –a lower rate for necessary items and items basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.
  • It is understood that the government is considering 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.

GST ON EXPORT AND IMPORT

  • GST on export would be zero rated
  • Both CGST and SGST will be levied on Import of goods and services into the country.

REGISTRATION UNDER GST 

  • Likely to be linked with the existing PAN.
  • The new business identification number (total number of digits likely to be 13-14).

CONCLUSION

It is well recognized that this problem can be effectively addressed by shifting the tax burden from production and trade to final consumption.

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