Goods and Services Tax (GST) - India's Biggest Tax Refo Reform rm Abstract
In India currently we are having service tax & VA VAT for collection as indirect taxes. On central centra l level, service tax is charged on services provided at central level & VAT VAT is charged for sale of goods on state level. But current system is not ale to minimi!e the tax evasion, distortion & cascading effect therefore it"s a need to move to goods & service tax. The #$T aims to cut red tape for taxpayers y replacing an array of central excise and state levies such as sales tax and VAT. The #oods and $ervice Tax %#$T is one of the iggest taxation reforms in India, #$T is expected to unite the country economically as it will remove various forms of taxes that are currently levied at different points. It will also end the practice of imposing a levy on goods coming from outside a state which sees long 'ueues of truc(s stuc( at state arriers which also slows the movement of goods across the country. Input tax credit system will help to decrease the liaility liailit y of output tax. #$T will not only ma(e the tax system simpler, ut will also help in increased compliance, oost tax revenues, reduce the tax outflow in the hands of the consumers and ma(e exports competitive. This paper shows how a goods and service tax is an improvement in taxation structure.
CURRENT SCENARIO •
)urrently India is reeling under a lot of different indirect taxes * excise duty, VAT, $ervice Tax, sales tax etc. $ome are levied y the )entral #overnment, while others y the $tate #overnment * as India has a +federal" system of #overnments * i.e. two governments, one in the centre and the ones in the states. xcise and $ervice tax are central government levied levi ed indirect taxes. VA VAT and $ales tax are $tate #overnment levied indirect taxes.
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xcise -uty is a tax on the manufacturing of excisale goods. Thus if a manufacturer, manufactures those goods which the central government has deemed to e +excisale" good good%s %s * then then the the manu manufac factu ture rerr will will have have to pay exci excise se duty duty on thos thosee good goods. s.
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$ervice Tax is a tax on +services rendered" which are not in the +negative list". Thus * all services rendered are under the lan(er of service tax * except for those which are mentioned in the negative list
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VAT * or Value Added Tax is a stage wise levy of tax on value addition * thus at
every stage of +value addition" VAT is levied and passed on to the next person in the chain of changing hands.
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$ales Tax is a tax on sale of goods * interstate and intrastate.
The rules and regulations and compliance procedures of all are different * and complex and tedious. To ring all these varied and sometimes overlapping taxes under one umrella and to plug the loopholes that invarialy comes with such multiple and confusing and dual taxation system * the concept of #$T was formulated.
Need of GST
$tarting with the concept of * cascading effect of taxes. It is also, logically, referred to as /taxes on taxes0. It is simple to illustrate * say A sells goods to B after charging sales tax, and then B re1sells those goods to ) after charging sales tax. 2hile B was computing his sales tax liaility, he also included the sales tax paid on previous purchase, which is how it ecomes a tax on tax. This was the case with the sales tax few years ago. At that time, a VAT system was introduced wherey every next stage dealer used to get credit of the tax paid at earlier stage against his tax liaility. This reduced an overall liaility of many traders and also helped to reduce inflationary impact this had on the prices. $imilar concept came in the duty on manufacture * The )entral xcise -uty – much efore it came for sales tax. The )3VAT credit scheme %earlier (nown as 4O-VAT was also a welcome move y trade and industry where credit of excise duty paid at the input stages was allowed to e set1off against the liaility of excise on removal of goods. 2ith effect from 5667, this system was extended to $ervice Tax also. 4oreover, cross utilisation of credit etween excise duty and service tax was also permitted. To a huge extent, the prolem of cascading effect of taxes is resolved y these measures.
However, there are still roble!s with the s"ste! that have #ot bee# solved till date, li(e8 •
The credit of Input VAT is availale against Output VAT. In the same manner, the credit of input excise9service tax is availale for set1off against output liaility of excise9service tax. :owever, the credit of VAT is not availale against excise and vice versa.
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VAT is computed on a value which includes excise duty, and no )3VAT credit is allowed for it. This shows that there is a tax on tax
xcise duty and service tax are levied y the )entral #overnment, while the VAT is levied y the $tate #overnment, which is one of the reasons why such a cross1utilisation of credits was not allowed. :owever, this does not constitute a valid reason that ;ustifies the cascading effect of taxes.
GST $Goods a#d Services Ta%&
3ew Article '(($)*A& of the Indian )onstitution, defines #oods and $ervices Tax %#$T to mean any tax on supply of goods or services or oth except taxes on the supply of the alcoholic li'uor for human consumption. 3ew Article '(($*(A& defines service to mean anything other than goods xisting Article '(($)*& defines goods to include all materials, commodities and articles.
#oods and $ervices Tax %#$T in India is proposed to e the maiden =
1 Joshi, Suhasini (2013, Aug 13), Goods and Services Tax –A Step Forard, The !cono"ics Ti"es# $etrieved Fro"http%&&artic'es#econo"icti"es#indiati"es#co"
The proposed reform on moving to a ?goods and services tax? would impact the national economy, international trade, firms and consumers. > #$T is a tax on oth goods and services across the supply chain9Value )hain 5 It is levied at every stage of supply9Value Addition. @ The #$T on Inputs %(nown as IT) 1Input Tax )redit is generally availale as credit for set1off against the #$T on the output supply.
+UA GST -O+E
roposed #$T 4odel for India is opting for )oncurrent -ual #$T model. The need for a -ual #$T model is ased on the following premise8 •
At existing framewor(, oth levels of #overnment i.e. )entre and $tate, as per
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)onstitution holds concurrent powers to levy tax domestic goods and servicesC The proposed )oncurrent -ual1#$T model would e a dual levy imposed
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concurrently y the )entre and the $tates, ut independentlyC Both the )entre and $tate will operate over a common ase, i.e. the ase for levy and imposition of duty9tax liaility would e identical.5
To understand the operating procedure of )oncurrent -ual #$T 4odel, we have to consider the tax9taxes which shall e levied as per place of supply of goods and services . • • •
)#$T *)entral #oods and $ervice Tax $#$T *$tate #oods and $ervice Tax I#$T *Integrated #oods and $ervice Tax
Additional Tax % upto >D to e levied in case of inter1state supply of goods, which is a non1 vatale item. :ence, no input credit availale on such.
2 Eel(ar, Vi;ay, et al %5667.
O.ERATION O/ GST
Case )0 Sale in one state, resale in the same state
In the example illustrated elow, goods are moving from 4umai to une. $ince it is a sale within a state, )#$T and $#$T will e levied. The collection goes to the )entral #overnment and the $tate #overnment as pointed out in the diagram. Then the goods are resold from une to 3agpur. This is again a sale within a state, so )#$T and $#$T will e levied. $ale price is increased so tax liaility will also increase. In the case of resale, the credit of input )#$T and input $#$T %=s. F is claimed as shownC and the remaining taxes go to the respective governments.
Case *0 Sale in one state, resale in another state
In this case, goods are moving from Indore to Bhopal. $ince it is a sale within a state, )#$T and $#$T will e levied. The collection goes to the )entral #overnment and the $tate #overnment as pointed out in the diagram. Gater the goods are resold from Bhopal to Guc(now %outside the state. Therefore, I#$T will e levied. 2hole I#$T goes to the central government. Against I#$T, oth the input taxes are ta(en as credit. But we see that $#$T never went to the central government, still the credit is claimed. This is the cr1% of GST . $ince this amounts to a loss to the )entral #overnment, the state government compensates the central government y transferring the credit to the central government.
Case '0 Sale outside the state, resale in that state
In this case, goods are moving from -elhi to Haipur. $ince it is an interstate sale, I#$T will e levied. The collection goes to the )entral #overnment. Gater the goods are resold from Haipur to Hodhpur %within the state. Therefore, )#$T and $#$T will e levied. Against )#$T and $#$T, 6D of the I#$T, that is =s. F is ta(en as a credit. But we see that I#$T never went to the state government, still the credit is claimed against $#$T. $ince this amounts to a loss to the $tate #overnment, the )entral government compensates the $tate government y transferring the credit to the $tate government.@
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A+VANTAGES O/ GST
Apart from full allowance of credit, there are several other advantages of introducing a #$T in India8 •
Reduction in prices: -ue to full and seamless credit, manufacturers or traders do not
have to include taxes as a part of their cost of production, which is a very ig reason to say that we can see a reduction in prices. :owever, if the government see(s to introduce #$T with a higher rate, this might e lost. •
Increase in Government Revenues: This might seem to e a little vague. :owever,
even at the time of introduction of VAT, the pulic revenues actually went up instead of falling ecause many people resorted to paying taxes rather than evading the same. :owever, the government may wish to introduce #$T at a =evenue 3eutral =ate, in which case the revenues might not see a significant increase in the short run. 7
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Less compliance and procedural cost: Instead of maintaining ig records, returns and
reporting under various different statutes, all assesses will find comfortale under #$T as the compliance cost will e reduced. It should e noted that the assessees are, nevertheless, re'uired to (eep record of )#$T, $#$T and I#$T separately. •
Move towards a Unified GST: Internationally, the #$T is always preferred in a
unified form %that is, one single #$T for the whole nation, instead of the dual #$T format. Although India is adopting -ual #$T loo(ing into the federal structure, it is still a good move towards a Jnified #$T which is regarded as the est method of Indirect Taxes. The Salie#t /eat1res of GST0 •
#$T will comine the est of all indirect taxes to ring a compact, singular and easy system for levy, collection and assessment of indirect taxes in India.
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mpowered )ommittee of $tate
re'uirements,
infrastructural
re'uirements,
dataases,
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education, and most importantly the procedural compliances during transition stage etc. •
4ost important feature 1 Tax Input )redit under #$T * will e availale for set1off at every stage.
I#1t Credit means, if you"ve paid tax on purchase of any good%s or procurement of any
service%s and * when selling your goods or services you"re re'uired to further pay tax * you can set off your tax payment liaility with the tax already paid y you when you procured your inputs.
xample8 Kou are +special muffin manufacturer". Kou uy a whole lot of special ingredients to manufacture your muffin * say you ought multi flavoured syrups for the flavours * you had to pay tax %indirect you see to procure the syrups.
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3ow you used these syrups and made your muffins %this is value addition * without the process of a(ing, adding of ingredients there would e no muffin * you sell them * ut you got to pay tax on the +manufactured" muffins
$o you paid tax when you ought the ingredients %input tax and when you manufactured9sold them you paid tax again %output tax * here, you will get the credit of the input tax paid to decrease your liaility of output tax.
This is the Input tax credit system simplified for understanding. •
#$T will e levied at every stage of value addition.
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Value addition would mean * applying effort on the goods or services to ma(e worth more. By undergoing a certain process, or set of activities * +value" is eing added to the goods or services.
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Jnder #$T * the rate of tax * +=evenue 3eutral =ate" or =3= * is set to not exceed 5LD comining oth central and state tax rates.
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It will ring more people under the indirect taxes net therey increasing revenue and also dealing with tax evasion and lac( money issues.
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4eanwhile a higher rate of $ervice Tax M >7D, adding ducation )ess to xcise -uty and ta(ing off items from the exempted list are nothing ut measured steps towards applying #$T * which is slated for a >st April 56>N release * after having missed numerous past deadlines
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4ore specifics on #$T will ecome availale as the #overnment will approach the 56>N deadline so (eeping areast with the development is important.
.OINTS TO .ON+ER 0
The #$T is a very good type of tax. :owever, for the successful implementation of the same, we must e cautious aout a few aspects.
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introduced for this purpose only. :owever, the rules should e more refined and free from amiguity. •
The #$T is a destination based tax , not the origin one. In such circumstances, it should e clearly identifiale as to where the goods are going. This shall e difficult in case of services, ecause it is not easy to identify where a service is provided, thus this should e properly dealt with.
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4ore awareness aout #$T and its advantages have to e made, and professionals li(e us really have to ta(e the onus to assume this responsiility. N
CONCUSION
The #$T is expected to ring aout a 'ualitative change in the tax system y redistriuting the urden of taxation e'uitaly etween manufacturing and services. The 61>7 per cent. The mpowered )ommittee descries the #$T as /a further significant improvement * the next logical step 1 towards a comprehensive indirect tax reforms in the country.0 Indeed, it has the potential to e the single most important initiative in the fiscal history of India. It can pave the way for moderni!ation of tax administration 1 ma(e it simpler and more transparent and significant enhancement in voluntary compliance.
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It is ecause of this reason that the government is (een to push through economic reform.
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proposed1ill9>9@@65.html http899articles.economictimes.indiatimes.com956616L1>59news95F7@N@P>Pgst1 state1finance1ministers1goods1and1services1tax https899www.'uora.com9:ow1will1the1goods1and1services1tax1#$T1wor(1in1India1 :ow1is1it1any1different1than1the1value1added1tax1 http899www.an(examstoday.com956>[email protected] Ahmad, htisham, $atya oddar A.4. Adel1=ahman, =ic( 4atthews, and )hristophe 2aer!eggers%566F, Indirect Taxes for the )ommon 4ar(etC =eport to the
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#)) $ecretariat. Hoshi, $uhasini %56>@, Aug >@, #oods and $ervices Tax *A $tep
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