A Project report on “GOODS AND SERVICES TAX IN INDIA”. Project report submitted to SIMS, KIRKEE, PUNE In partial fulfillment of Requirement for the Award of degree of EX- MASTER OF BUSINESS ADMINISTRATION By Anuradha Bharat Babar PRN No. Under the valuable guidance of Prof. Arati Chandani SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES Ex MBA 2014-2017 (SEM V)
DECLARATION
I, Anuradha Bharat Babar the undersigned, hereby declare that the project report entitled “Goods & Services Tax in India” written and submitted by me to the SIMS, Pune, in partial fulfillment of the requirement for the award of degree of Master of Business Administration under the guidance of
Prof.
Arati Chandani. This is my original work and the conclusions drawn therein are based on the material collected and data analyzed by myself.
Place:
Date: / /
Anuradha Bharat Babar
ACKNOWLEDGEMENT
I take this opportunity as privilege to express my deep sense of to Prof. S.R. Phadke for his continuous encouragement, invaluable guidance and help for completing the present research work. He has been a source of inspiration to me and I am indebted to his for initiating me in the field of research. So in the same sequence, I would like to confer the flower of acknowledgment to Prof. S.R Phadke for his support and expert guidance in preparing the report. I would like to thank SIMS for conducting such confidence building activity as a part of academics of ex-MBA. At last but not least, I would remain indebted to all my friends, teachers and all concerned persons for their precious support in the preparations of this project.
Thanking all,
Place:
Date: / /2013
Signature
Certificate This is to certify that Mr. Harshawardhan Satish Agashe (PRN No. 12020446016) student of Symbiosis Institute of Management Studies, Ex-MBA 2012-15 Sem III, has successfully carried out the project titled “Inventory Management Systems” under my supervision and guidance as partial fulfillment of the requirement of Ex-MBA (SIMS) Batch 2012-15
Prof. S.R. Phadke Project Guide - Operations Date: Place: Pune
Foreword Tax policies play an important role on the economy through their impact on both efficiency and equity. A good tax system should keep in view issues of income distribution and, at the same time, also endeavour to generate tax revenues to support government expenditure on public services and infrastructure development. Cascading tax revenues have differential impacts on firms in the economy with relatively high burden on those not getting full offsets. This argument can be extended to international competitiveness of the adversely affected sectors of production in the economy. Such domestic and international factors lead to inefficient allocation of productive resources in the economy. This results in loss of income and welfare of the affected economy. Value added tax was first introduced by Maurice Laure, a French economist, in 1954. The tax was designed such that the burden is borne by the final consumer. Since VAT can be applied on goods as well as services it has also been termed as goods and services tax (GST). During the last four decades VAT has become an important instrument of indirect taxation with 130 countries having adopted this, resulting in one-fifth of the world’s tax revenue. Tax reform in many of the developing countries has focused on moving to VAT. Most of these countries have gained thus indicating that other countries would gain from its adoption. For a developing economy like India it is desirable to become more competitive and efficient in its resource usage. Apart from various other policy instruments, India must pursue taxation policies that would maximise its economic efficiency and minimise distortions and impediments to efficient allocation of resources, specialisation, capital formation and international trade. Traditionally India’s tax regime relied heavily on indirect taxes including customs and excise. Revenue from indirect taxes was the major source of tax revenue till tax reforms were undertaken during nineties. The major argument put forth for heavy reliance on indirect taxes was that the India’s majority of population was poor and thus widening base of direct taxes had inherent limitations. Another argument for reliance on indirect taxes was that agricultural income was not subjected to central income tax and there were administrative difficulties involved in collecting taxes. The broad objectives of our report relates to analysing the impact of introducing comprehensive goods and services tax (GST) on economic growth and international trade; changes in rewards to the factors of production; and output, prices, capital, employment, efficiency and international trade at the sectoral level. Analysis in this report indicates that implementation of a comprehensive GST in India is expected to lead to efficient allocation of factors of production thus leading to gains in GDP and exports. It will also ensure better compliance of tax law and will remove cascading effective which is still present in the taxation system. This would translate into enhanced economic welfare and returns to the factors of production, viz. land, labour and capital.
Table of Contents Executive Summary I.
Backdrop
II.
India’s Tax Regime
III.
Rationale for GST
IV.
Overview of GST: How GST works System of GST
V. VI.
Salient features of GST model Proposed GST Model Taxes to be subsumed under GST Rate Structure Taxes out of purview of GST Threshold Limits Exemptions Tax Credit How integrated GST will work?
VII. VIII IX X
GST on Import GST on Export Miscellaneous Road Blocks in implementation of GST?
XI XII XIII
Proposed amendments in legislations. Suggestion for effective Implementation GST Implications for organisations
1-
Executive Summary The differential multiple tax regime across sectors of production leads to distortions in allocation of resources thus introducing inefficiencies in the sectors of domestic production. While indirect taxes paid by the producing firms get offsets under state VAT and CENVAT, the producers do not receive full offsets particularly at the state level. The multiplicity of taxes further adds the difficulty in getting full offsets. Add to this, the lack of full offsets of taxes loaded on to the fob export prices. The export competitiveness gets negatively impacted even further. Efficient allocation of productive resources and providing full tax offsets is expected to result in gains for GDP, returns to the factors of production and exports of the economy. The Joint Working Group of the Empowered Committee of the State Finance Ministers submitted its report on the proposed Goods and Services Tax (GST) to the Finance Minister in November 2007. A dual GST, one for the Centre and other for the states, was to be implemented by 1 April 2010. The new system would replace the state VAT , CENVAT, and some other taxes. The proposed GST would eliminate the cascading effect and would integrate hitherto disjointed goods and service taxes. It will lead to uniformity in tax rates and procedures throughout the country. It will ensure better compliance and thus will increase the revenue of both centre and states. The export sector will also gain from this integration of state and centre taxes. Consumer will be benefited in form of lower tax rates. There will be dual tax rate viz Central GST(CGST) and State GST(SGST). Also, for interstate sales there will be an Integrated GST. However cross credits among CGST and SGST will not be allowed. The rates for CGST and SGST are yet to be decided. It is also proposed to keep certain taxes such as taxes on petroleum products to be kept out of purview of GST. However, there are major challenges to introduction of GST like amendment of constitution of India to alter power of taxation of centre and state, rates of SGST and CGST, standardisation of procedure, compensation for revenue loss to states, etc.
1. Backdrop 1.1 Tax policies play an important role on the economy through their impact on both efficiency and equity. A good tax system should keep in view issues of income distribution and, at the same time, also endeavour to generate tax revenues to support government expenditure on public services and infrastructure development. Cascading tax revenues have differential impacts on firms in the economy with relatively high burden on those not getting full offsets. 1.2 Traditionally India’s tax regime relied heavily on indirect taxes including customs and excise. Revenue from indirect taxes was the major source of tax revenue till tax reforms were undertaken during nineties. The major argument put forth for heavy reliance on indirect taxes was that the India’s majority of population was poor and thus widening base of direct taxes had inherent limitations. Another argument for reliance on indirect taxes was that agricultural income was not subjected to central income tax and there were administrative difficulties involved in collecting taxes. However, it became evident that indirect taxes lead to undesirable effects on prices and allocation of resources. The Government of India constituted Indirect Taxation Enquiry Committee in 1976 headed by Shri L. K. Jha to study the structure of indirect taxes, central, state and local level taxes and suggest policy reforms. Indirect Taxation Enquiry Committee submitted its report in 1978. The committee found a major problem with indirect tax regime as it had caused unintended distortion in the allocation of resources and cascading effects. The committee recommended that indirect taxation should move towards taxation of final products and introduce modified form of value added tax. However, a major obstacle in rationalisation of indirect tax system was the levy of tax on commodities by government at different levels viz., centre, state and local authorities. This multiple taxation provides incentives for tax evasion and undermines efficiency. Further, there is lack of uniformity in the pattern of commodity taxation resulting in harassment to the public by multiple tax authorities. Heavy reliance on indirect taxes for raising revenue was also found to increase cost and fuel inflation. 1.3 The Government of introduced the Long Term Fiscal Policy (LTFP) on 19 December 1985 for prudent fiscal management. Major excise and custom reforms were introduced in LTFP. The reforms in excise relates to introduction of modified value added tax i.e MODVAT. However, fill up in the tax policy came with introduction of economic reforms in 1990. The system of MODVAT was progressively converted into VAT and CENVAT was introduced at centre level. Subsequently, after Constitutional Amendment empowering the Centre to levy taxes on services, these service taxes were also added to CENVAT in 2004-05.At state level also VAT was introduced in 2005.
1.4 Despite all the various changes the overall taxation system continues to be complex and has various exemptions. The Government of India constituted a Task Force on implementation of Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) to chalk out a framework for fiscal policies to achieve FRBM targets. The Report of the Task Force on implementation of the FRBMA, chaired by Dr. Vijay Kelkar, submitted its Report in July 2004. It has recommended introduction of a national VAT on goods and services (GST) which would help improve the revenue productivity of domestic indirect taxes and enhance welfare through efficient resource allocation. The Joint Working Group of the Empowered Committee of the State Finance Ministers submitted its report on the proposed Goods and Services Tax (GST) to the Finance Minister in November 2007. A dual GST, one for the Centre and other for the states, was to be implemented by 1 April 2010
II INDIA’S TAX REGIME 2.1 In India the power for taxation has been divided between centre and state under article 246 of the constitution. As per the said article the centre has power to tax under list I of the Schedule VII of the constitution, the state can tax under list II of the schedule and both can make law under list III of the schedule. Therefore, there is a clearly defined and multiple tax regime in India. Taxation structure existing in country:Taxes levied by Centre Central Excise and Custom
Taxes Levied by State Value Added Tax( state sales tax) Local taxes
Service Tax Direct Taxes
2.2 Prior to the introduction of VAT in the Centre and in the States, there was a burden of multiple taxation in the pre-existing Central excise duty and the State sales tax systems. Before any commodity was produced, inputs were first taxed, and then after the commodity got produced with input tax load, output was taxed again. This was causing a burden of multiple taxation (i.e. “tax on tax”) with a cascading effect. Moreover, in the sales tax structure, when there was also a system of multi-point sales taxation at subsequent levels of distributive trade, then along with input tax load, burden of sales tax paid on purchase at each level was also added, thus aggravating the cascading effect further. 2.3 In India, VAT was introduced at the Central level for a selected number of commodities in terms
of
MODVAT
with
effect
from
March
1,
1986,
and
in
a
step-by-step manner for all commodities in terms of CENVAT in 2002-03. Subsequently, after Constitutional Amendment empowering the Centre to levy taxes on services, these service taxes were also added to CENVAT in 2004-05. 2.4 When VAT is introduced in place of Central excise duty, a set-off is given, i.e., a deduction is made from the overall tax burden for input tax. In the case of VAT in place of sales tax system, a set-off is given from tax burden not only for input tax paid but also for tax paid on previous purchases. With VAT, the problem of “tax on tax” and related burden of cascading effect is thus removed. .
2.5 Before introduction of VAT, in the sales tax regime, apart from the problem of multiple taxation and burden of adverse cascading effect of taxes as already mentioned, there was also no harmony in the rates of sales tax on different commodities among the States. Not only were the rates of sales tax numerous (often more than ten in several States), and different from one another for the same commodity in different States, but there was also an unhealthy competition among the States in terms of sales tax rates – so-called “rate war” – often resulting in, revenue-wise, a counter-productive situation. 2.6 It is in this background that attempts were made by the States to introduce a harmonious VAT in the States, keeping at the same time in mind the issue of sovereignty of the States regarding the State tax matters. The States started implementing VAT beginning April 1, 2005. After overcoming the initial difficulties, all the States and Union Territories have now implemented VAT.
III Rationale for GST 3.1 Despite this success with VAT, there are still certain shortcomings in the structure of VAT both at the Central and at the State level. The shortcoming in CENVAT of the Government of India are as follows: non-inclusion of several Central taxes in the overall framework of CENVAT, such as additional customs duty, surcharges, etc., and thus keeping the benefits of comprehensive
input
tax
and
service
tax
set-off
out
of
reach
for
manufacturers/dealers.
no step has yet been taken to capture the value-added chain in the distribution trade below the manufacturing level in the existing scheme of CENVAT.
The introduction of GST at the Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade and increased compliance. 3.2 In the existing State-level VAT structure there are also certain shortcomings as follows: several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., have yet not been subsumed in the VAT.
CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and contributing to that extent a cascading effect on account of CENVAT element.
non integration of VAT on goods with tax on services at the State level
and
cascading effect of service tax. 3.3 In the GST, both the cascading effects of CENVAT and service tax are removed with setoff, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects. GST is not simply VAT plus service tax but an improvement over the previous system of VAT and disjointed service tax.
3.4 Implementation of GST will also remove several roadblocks in the existing taxation system in India. Some of these are: a)Tax cascading – The Goods and Services Tax Act will overcome the problem of taxcascading through input tax credit mechanisms. Under this system, sellers or vendors of goods and services are eligible to avail tax credits on the amount of GST paid to eligible procurements. Manufacturers can avail credits for the GST paid to procure inputs, capital goods and services used in the manufacturing process. In the same way, wholesalers and retailers can avail credits for the GST paid on procurement of stock. But the final customer who purchases the product for consumption will not be able to avail and utilize any tax credit. Tax cascading can be understood by the following example:A tax is applied on a particular product at each stage and and no credit is available, then tax will be charged at each stage whenever a good or service changes hands. In other words, tax is applied several times and is charged even on the tax which forms part of the inputs. The following taxes will be applied to the product:
While purchasing inputs i.e. raw materials for the product, the manufacturer pays sales tax.
When a wholesaler purchases the product from the manufacturer, then he pays tax on procurement of the product.
When the retailer purchases the product from the wholesaler, the wholesale again charges tax.
Lastly, the customer purchases the product from the retailer; the retailer again charges a tax. This layering of sales tax will significantly increase the final sales price as each party in the supply chain increases the price of the product to recover the tax they paid. The cascading effect will increase then tax is paid on tax.
There are a large number of products and range of services that are outside the ambit of CENVAT and service tax. The exempts sectors are not allowed to claim any credit of the input tax. In the same way, under the state VAT, no credits are allowed for the inputs procured and used towards exempted sectors. Non-eligibility for availment of credits leads to tax cascading. Due to large number of exemptions, the effect of tax cascading in India is significantly high. b) Complexity – Presently in India, for taxing sale of goods, there is Central Sales tax and respective VAT Acts for each state and Union territory. The Goods and Services Tax will remove this complication by having a unified code for implementation of State GST in different states. The GST will not only subsume a large number of indirect taxes but also
solve the classification issues by introducing only one or two rates of tax. Other than this there would be categories that are exempted or zero rated. Presently the activities in a supply chain are subject to several taxes. For example – the manufacture of goods is subject to excise duty and sale of these manufactured goods is subject to state VAT or CST. The GST will ensure uniform single tax across the entire supply chain. c) Double taxation – The GST will not make any difference between goods and services as GST will be levied at each stage in the supply chain. This will help in solving the problem of double taxation. The issue is not only between the taxes of customs duties, excise duties and service tax but also between service tax and VAT. The issue of double taxation was addressed by the Honorable Supreme Court in the case of BSNL vs. UOI (2006(3)SCC-1), wherein the Court held that the same activity cannot be regarded as both goods and services and hence both service tax and VAT should not be applicable on the same set of transactions. The implementation of GST will resolve the dilemma of a large number of assessee who are not sure of application of the type of tax on certain specified transactions like software development, sale of sim cards by telecom operators, online subscription of newspapers, value added services provided by telecom operators, right to distribute movies etc. d) Composite contracts – There are a large number of works contracts which involve the supply of goods and services which are available to customers under different supply chain arrangements. Such situations arise in a gap or overlapping in taxation of goods and services as the States do not have the power to impose tax on services and the Centre does not have the power to impose tax on sale of goods within the state. In such cases, a comprehensive solution can be provided only by implementation of GST. e)Revenue growth- The introduction of GST along with prudent accounting policies, transparency and supported by a robust electronic controls will bring down the peak rates of taxation and enhance revenue growth. This can be understood by the following table by comparing the present rates of tax and the proposed GST. Goods from producer to wholesaler Cost of production Producers margin of profit Producer’s price Central Excise duty at 14% VAT at 12.5% Central GST at (expected rate )12% State GST at (expected rate) 8% Total Price
Present taxes (Rs.) 80,000 20,000 1,00,000 14,000 14250 Nill Nill 1,28,250
GST (Rs.) 80,000 20,000 1,00,000 Nil Nil 12,000 8,000 1,20,000
Goods from wholesaler to retailer Cost of goods to wholesaler Profit margin at 5% Total VAT at 12.5% Central GST (expected rate )12% State GST at (expected rate) 8% Total Goods from retailer to final consumer Cost of goods to wholesaler Profit margin at 10% Total VAT at 12.5% Central GST (expected rate )12% State GST at (expected rate) 8% Total price to the final consumer Tax component in the price to the final consumer Final price exclusive of taxes
Present taxes (Rs.) 1,14,000 5,700 1,19,700 712.5 Nil Nill 1,20,412.5 Present taxes (Rs.) 1,20,412.5 12,041.25 1,32,453.75 1,505.15 Nill Nill 1,33,958.9
GST (Rs.)
30,467.65
22,890
1,03,491.25
95,500
1,00,000 5,000 1,05,000 Nill 600 400 1,06,000 GST (Rs.) 1,06,000 10,500 1,16,500 Nill 1,050 840 1,18,390
IV Benefits of GST 4.1 Benefits for centre As per the existing taxation system the centre does not has power to tax on production of goods. The power to levy tax on sales rests with state except in case of inter state sales. Therefore, introduction of GST would empower centre to tax sales also. Benefits of GST for Centre: Increase in GDP Increase in exports Power to tax after production down to distribution point Ensures better compliance and prevent tax evasion
4.2 Benefits to state There is no uniformity in rate of taxes among the states. Even after introduction of VAT there are different rates of tax in different states. Therefore, there was rate war among states. GST will lead to uniformity in tax rates. Other benefits for state are:-
Benefits for states Will get power to tax services Will reduce rate wars, therefore, outflow of investment to other states due to rate war will be prevented Introduction of comprehensive system of reliefs including set off of CENVAT and service taxes Increase in revenue due to broadening of tax base Removal of burden of CST
4.3 Benefits to industry Benefits to industry Will provide comprehensive input tax credit, the service tax can be set off with sales tax No need to pay CST
Many central and state indirect taxes will be subsumed in GST, therefore, a single tax is to be paid. Uniformity in tax procedure throughout the country Reduced tax burden will increase competitiveness of Indian products in foreign markets
4.4 Benefits to consumer Benefits to consumer Reduced tax burden will be passed on to consumers in form of reduced prices. Better compliance and increased tax revenue will enable the government to spend more on welfare
4.5
The GST at the Central and at the State level will thus give more relief to industry,
trade, agriculture and consumers through a more comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several taxes in the GST and phasing out of CST. With the GST being properly formulated by appropriate calibration of rates and adequate compensation where necessary, there may also be revenue/ resource gain for both the Centre and the States, primarily through widening of tax base and possibility of a significant improvement in tax compliance. In other words, the GST may usher in the possibility of a collective gain for industry, trade, agriculture and common consumers as well as for the Central Government and the State Governments. The GST may, indeed, lead to the possibility of collectively positive-sum game.
V Overview of GST WHAT IS GOODS AND SERVICE TAX ? 5.1 Goods and Service Tax is a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service.
HOW WILL IT WORK? 5.2 GST will be paid at each step till final distribution stage. It will be charged by dealers(manufacturer, trader and service provider) on the price of goods and services. While GST is paid at each step in the supply chain of goods and services, the paying dealers don’t actually bear the burden of the tax because GST is an indirect tax and ultimate burden of the GST has to be taken by the last Customer. This is because they include GST in the price of the goods and services they sell and can claim credits for the most GST included in the price of goods and services they buy. The cost of GST is borne by the final consumer, who can’t claim GST credits, i.e. input credit of the tax paid. The working of GST with respect to manufacturer, trader and consumer can be seen in the illustrations given below. The manufacturers will get the input credit of all the taxes paid by them on the raw material and also on the services. Let us assume the rate of GST is 16 percent and a toy manufacturer used following inputs for manufacturing toys and sells the goods at Rs 120 lakh to trader:Manufacturer Item no 1 2 3
Particulars
Amount (Rs in lakhs) 50 25 25 100
Raw material Stores and spares Services Total value of inputs
Rate of tax ( in percent) 16 16 16
Input tax paid (Rs in lakhs) 8 4 4 16
The output tax to be paid Sale Value
Rate of tax
Rs 120 lakh
16
( in percent)
output tax to be paid (Rs in lakhs) 19.2
Net Tax payable by manufacturer Total output tax to be paid Total Input tax Paid Net Tax to be Paid
Rs 19.2 lakh Rs 16 lakh Rs 3.2 lakh
Suppose trader use services amounting to Rs 5 lakh paying service tax at rate of 16 percent amounting to Rs 0.8 lakh. Therefore total input tax paid by trader is:Trader Item no 1 2
Particulars Goods purchased from manufacturer Services Total value of inputs
Amount (Rs in lakhs) 120
Rate of tax ( in percent) 16
Input tax paid (Rs in lakhs) 19.2
5 125
16
0.8 20
If trader sell goods to consumer by adding Rs 5 lakh profit margin .The output tax payable by trader is :Sale Value
Rate of tax
Rs 130 lakh
16
( in percent)
output tax to be paid (Rs in lakhs) 20.8
( in percent)
output tax to be paid (Rs in lakhs) 20.8
Net Tax payable by Trader Total output tax to be paid Total Input tax Paid Net Tax to be Paid
Rs 20.8 lakh Rs 20 lakh Rs 0.8 lakh
Net Tax payable by consumer Sale Value
Rate of tax
Rs 130 lakh
16
From the above illustration it can be seen that the manufacturer and the trader gets credit of the tax paid on good and services and had to pay tax on value added only. Further, the government will get tax of Rs 20.8 lakh which is tax on final sale value of the product though from different sources as detailed below:-
Description
Output tax (Rs in lakh)
Input tax credit (Rs in lakh)
Raw material supplier Stores and spares supplier Service provider I Manufacturer Service Provider II Trader Total Tax payable to Government
8
0
Net tax payable to government (Rs in lakh) 8
4
0
4
4 19.2 0.8 20.8
0 16 0 20
4 3.2 0.8 0.8 20.8
GST composition of manufacturer and dealer
Composition of tax paid by the consumer
Systems of GST 5.3 Internationally, there are three systems in vogue: (a) Invoice System (b) Payment System (c) Hybrid System Brief description of three systems is: Type of System Invoice system Payment system Hybrid
Input Credit On receipt of invoice On making payment At the option of dealer to be declared in advance
Output Tax On issue of invoice On making payment At the option of dealer to be declared in advance
(a) Invoice System: In the invoice system, the GST (Input) is claimed on the basis of invoice and it is claimed when the invoice is received, it is immaterial whether payment is made or not. Further the GST (Output) is accounted for when invoice is raised. Here also the time of receipt of payment is immaterial. One may treat it as mercantile system of accounting. In India the present system of sales tax on goods is an invoice system of VAT and here it is immaterial whether the taxpayer is following the cash basis of accounting or mercantile basis of accounting. The advantage of invoice system is that the input credit can be claimed without making the payment. The disadvantage of the invoice system is that the GST has to be paid without receiving the payment. (b) Payment System: In the payment system of GST, the GST (Input) is claimed when the payment for purchases is made and the GST (Output) is accounted for when the payment is made. In this system, it is immaterial whether the assessee is maintaining the accounts on cash basis or not. The advantage of cash invoice system is that the Tax (output) need not be deposited until the payment for the goods and/or services is received. The disadvantage of the payment system is that the GST (input) cannot be claimed without making the payment. The Taxes on services in India are based on this payment system since service tax is payable on receipt basis and further Cenvat credit is only allowable when payment of the service is made. In some countries, this system is also adopted for small traders to keep them away from the complexities of the Invoice system, which is purely a mercantile system. (c) Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and GST (Output) is accounted for on the basis of payment, if allowed by the law. In some countries the dealers have to put their option for this system or for a reversal of this system before adopting the same.
VI Salient features of the GST model proposed in India
Rate Structure 6.1 The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for Central GST (CGST) and State GST ( SGST) would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable. The proposed rate structure is as follows:
A lower rate for essential structure.
Standard rate for general goods.
Special rates for precious metals.
For services their shall be single rate for SGST and CGST.
These GST rates are yet not announced by the government.
Applicability 6.2 The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited). Input Credit
6.3 Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Cross utilization of Income Tax Credit between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained later. Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment should be completed in a time bound manner. Procedures 6.4 To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.
Administration 6.5 The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply that the Centre and the States 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 Centre. The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities. Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PANbased system for Income tax, facilitating data exchange and taxpayer compliance. Keeping in mind the need of tax payer’s convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and state
VII Taxes to be subsumed under GST 7.1 The following taxes levied at centre will get subsumed under GST:i. Central Excise Duty ii. Additional Excise Duties iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act iv. Service Tax v. Additional Customs Duty, commonly known as Countervailing Duty (CVD) vi. Special Additional Duty of Customs - 4% (SAD) vii. Surcharges, and viii. Cesses.
7.2 The following State taxes and levies would be, to begin with, subsumed under GST: i.
VAT / Sales tax
ii.
Entertainment tax (unless it is levied by the local bodies).
iii.
Luxury tax
iv.
Taxes on lottery, betting and gambling.
v.
State Cesses and Surcharges in so far as they relate to supply of goods and services.
vi.
Entry tax not in lieu of Octroi.
Taxes to be kept out of purview of GST 7.3 However following taxes are proposed to be kept out of purview of GST due the reasons as detailed:Purchase tax: Some of the States felt that they are getting substantial revenue from Purchase Tax and, therefore, it should not be subsumed under GST while majority of the States were of the view that no such exemptions should be given. The difficulties of the foodgrain producing States was appreciated as substantial revenue is being earned by them from Purchase Tax and it was, therefore, felt that in case Purchase Tax has to be subsumed then adequate and continuing compensation has to be provided to such States. This issue is being discussed in consultation with the Government of India.
Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST. Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the existing practice. In case it has been made Vatable by some States, there is no objection to that. Excise Duty, which is presently levied by the States may not also be affected. Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre may be allowed to levy excise duty on tobacco products over and above GST with ITC. Tax on Petroleum Products: As far as petroleum products are concerned, it was decided that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is the prevailing practice in India. Sales Tax could continue to be levied by the States on these products with prevailing floor rate. Similarly, Centre could also continue its levies. A final view whether Natural Gas should be kept outside the GST will be taken after further deliberations.
.VIIIThreshold
Limits- Services
8.1 In order to give relief to small dealers government has proposed to provide exemption
from SGST and CGST. Different threshold limits may be specified for taxes on services and taxes on goods. The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is desirable and, therefore, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in NorthEastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT. The present threshold limit vis a vis proposed limit is:Turnover of Services
Present System
Proposed Syatem
Below Rs. 10 Lakh
No Service Tax
Neither SGST nor CGST
Between Rs 10 lakh and Rs 150 lakh
Service tax payable
Only SGST
Above Rs 150 lakh
Service tax payable
Both SGAT and CGST
Thresh hold limit for goods
Differs from state to state In case of Centre it is Rs 150 lakh
No exemption Threshold limit of Rs 150 lakh
IX INTEGRATED GOODS AND SERVICE TAX (IGST): 9.1 The scope of IGST model is that, Centre would levy IGST which would be CGST plus SGST on all Inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. 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. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information is also submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.
The major advantages of IGST Model are: (i)
Maintenance of uninterrupted ITC chain on inter-state transactions.
(ii) No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer. (iii) No refund claim in exporting State, as ITC is used up while paying the tax. (iv) Self monitoring model. (v) Level of computerization is limited to inter-state dealers and Central and State Governments should be able to computerize their processes expeditiously. (vi) As all inter-state dealers will be e-registered and correspondence with them will be done by e-mail, the compliance level will improve substantially. (vii) Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.
X GST on Export Zero Rating of Exports 10.1 Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.
GST on Imports: 10.2 The GST will be levied on imports with necessary Constitutional Amendments. Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services.
Special Industrial Area Scheme 10.3 After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives should be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. Regarding Special Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would continue up to legitimate expiry time both for the Centre and the States. Any new exemption, remission etc. or continuation of earlier exemption, remission etc. would not be allowed. In such cases, the Central and the State Governments could provide reimbursement after collecting GST.
XI Miscellaneous Matters 11.1 Refunds: If for a tax period the input credit of a dealer is more than the output credit then he is eligible for refund subject to the provisions of law applicable in this respect. The excess may be carried forward to next period or may be refunded immediately depending upon the provision of law. 11.2 Exempted Goods and Services: Certain goods and services may be declared as exempted goods and services and in that case the input credit cannot be claimed on the GST paid for purchasing the raw material in this respect or GST paid on services used for providing such goods and services. 11.3 Tax Exemptions Various tax exemptions have been granted both by the Centre and States to achieve objectives of promoting a particular sector or to reduce tax burden on a particular segment of society in the interest of fairness or to promote a particular economic activity etc. Tax exemptions have the effect of narrowing the tax base and increasing the administrative and compliance cost of GST. Therefore, it is felt that exemptions should be minimized. Direct and transparent subsidies, instead of tax exemptions, are more efficient way to achieve the targeted objective. It is recommended that apart from a dual rate GST structure at the Central and the State levels, there should be a common exemption list. Further, specific provisions to provide limited flexibility to the States within a set of prescribed criteria may need to be incorporated, as in the prevailing VAT structure, in order to accommodate exemption of goods of local importance. Similar limited flexibility would need to be provided to the Centre to address exceptional situations such as natural disasters .
11.4 Advance Ruling Advance ruling and dispute resolution authorities should be set up by the Centre and States to ensure uniformity and fairness in decision-making. 11.5 Joint Authority and Legislation The authority to amend the common exempted list and the common composition scheme should rest with a joint authority of Central and State Governments to ensure that no single State or Central Government amends either of these unilaterally. 11.6 IT Infrastructure
The success of the GST largely depends upon IT infrastructure available for collection, compilation and exchange of data at the shortest possible time. IT infrastructure with national coverage and extensive reach is critical for the successful implementation of GST. For this, an initiative at the Central Government level needs to be taken in order to put in place a strong IT infrastructure.
XII Roadblock to implementation of GST 12.1 Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is a Herculean task to say the least. The Constitution of India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and international imports are with the Union and post- production levies rest with
the
states.
The
Centre
levies
duties
of
excise
on
manufactures
and
import/countervailing duties on international imports apart from levying a tax on services under various taxing and the residuary entry in the Union List. The states levy VAT on goods sold or entering in the state under various entries of the state list. Even if all Union-level levies are integrated into a single levy and all state level levies culminate in a single State level levy; this may still have two levies and the resultant cascading and administrative burdens may nevertheless remain to an extent, though this may go a long way in harmonising levies. A harmonised, integrated and full fledged GST calls for the following: (1) Constitutional Amendments: Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. As per provisions of Article 368 of the constitution , the bill for amendment is to be passed by majority of the members of both houses and two third of the members present and voting. Also, the amendment is to be approved by fifty percent of the state legislative assemblies.In the current scenario it is difficult to visualise constitutional amendments of such far reaching implications going through, more so in view of the fact that sharing of legislative powers is such an essential element of our federal polity and it may be perceived to be a basic feature of the Constitution; (2) Integration of Services: Services have to be appropriately integrated in the tax network; (3) Design and structure of GST: No less significant is the issue of an appropriate design and structure of GST. For instance, how the issue of inter-state movement of goods and services may be addressed. The phasing out of CST may go a long way in addressing the issue of inter-state trade and commerce in goods but the crucial issue regarding services originating in one state and being consumed in other state still remains; (4) Resources Sharing: Another contentious issue that is bound to crop up in this regard is the manner of sharing of resources between the Centre and the states and among the states inter se as also the basis of their devolution;
(5) Flow of Goods and Services: Apart from all these, there has to be a robust and integrated MIS dedicated to the task of tracking flow of goods and services across the country and rendering accurate accounting of levies associated with such flow of goods and services; and (6) Determination of Revenue Neutral Rate (RNR): At present States are charging VAT rates 0%, 4%, 12.5% and 20% besides other levies and thus the average rate of tax comes to 17%. Similarly, Centre is charging Central Excise duty @ 14%, CST 2%, Service Tax 10%. The combined effect of all the taxes taken together comes to an average rate of tax @ 27.5%. The proposed GST rate is mooted @ 20% both for the Central GST @ 12% and the State GST @ 8%. Assuming that the States may agree on the implementation of GST based on compensation being given to them like what was decided at the time of introduction of VAT i.e. 1st April, 2005, the Centre may suffer loss while satisfying the needs of about 30 states.
XIII Some questions to be answered The following issues are yet to be answered even after the release of the Discussion paper 1. Does Exemption of 1.5 Crores in CGST for goods equally apply to dealers? As GST will cover in its scope the levy of excise and VAT therefore the exemption limit of 1.5 Crores specified in the discussion paper will extend its hands to dealers also or the same will be limited to the manufacturers. If the second view is opted then the definition of Manufacture will be rolled back in the GST tax regime. 2. What is the Service tax threshold exemption limit under CGST? The Empowered Committee has not specified the threshold exemption limit applicable to services under CGST. However they have clarified that the same will be in conformity with the existing threshold exemption of Rs. 10 Lakhs. 3. IGST (Inter-state transaction of GST) levy will be equal to CGST plus SGST, thus the same will be single rates. Are separate records are to be maintained in this respect also? It has been clarified that the IGST credit will be allowed to be set off against IGST, CGST or SGST payable by the taxpayer. In the current scenario CST is levied on interstate sale of goods, but the dealers aren't allowed to avail the credit of the same and they are emphasizing on the scenario to buy the goods from within the state so as to avail the credit of VAT. However in this new tax regime the IGST will be levied at the rate which will be equal to CGST plus SGST, this leads to a new issue that IGST will be levied at a single compound rate or two different rates i.e. CGST and SGST will be levied differently or not. If the rear view is adopted then the question arises that the credit of the IGST will be allowed to be set off against both CGST and SGST separately or cross adjustments will be allowed. If the cross adjustment is allowed then the taxpayers availing exemption of 1.5 Crores under CGST will be willing to purchase goods and sale them outside the state as in that situation they will be getting the full credit of
IGST thus benefiting them utmost. This scenario
changes the complete situation as it exists presently. This difficulty is yet to be sorted and clarified by the Government. 4 The dual GST model would be implemented through multiple statutes one for CGST and SGST statute for every State. Different statues will govern the SGST levy. This will lead to non uniformity in the tax structure at state levels. Further, there may be complexities for smooth implementation of GST across the nation. 5 Transitional Issues The transition would cause ambiguity with respect to issues like treatment of "stock in hand", available CENVAT (Central Value Added Tax), credit / VAT (Value
Added Tax) credit. However, these should be provided for much before the implementation of GST. 6 Exemptions There should be a common exemption list for CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) so that there is no discrepancy in the collection of taxes. Another important issue are area-based exemptions. A scheme for the treatment of such exemptions should be well devised so that there is no adverse affect on the industry. Though Customs will remain outside the GST regime, a large number of bonds executed by importers and exporters with Government will have to be suitably amended for changed liability in view of new GST. 7 Job Work Issues such as what documents and records need to be prepared by the job worker and the principal and time limits for claiming CENVAT credit are to be decided. Since, the focus would be on 'supply' after the implementation of GST, the status of job workers needs to be determined. 8 Assessable Value The calculation of assessable value under GST is ambiguous since it still unknown what the components of the assessable value are. Are discounts and other charges such as loading/unloading, freight, cartage and packing includible in the assessable value or would they be chargeable separately? 9 Place of Supply In the GST regime, the taxable event would be 'supply' and it is very essential to understand as to where the 'supply' actually takes place. "Place of Supply" rules refers to the rules that allocate the right to tax between the states. The main concern here is which state will collect the SGST. 10Branch / Stock Transfer An efficient provision for branch transfer / stock transfer should be put in place under the GST regime. The system should enable the businesses to make branch transfers without payment of tax and the procedure should be simple to ensure maximum compliance and minimise disputes. 10 Return / Rejection / Replacement of Goods There has been no clarification on the treatment of goods which are returned, rejected or replaced. A major question here is whether the treatment would be similar to the present system of reversing the credit or whether new provision would be introduced.
9. Common Procedures The industry expects that there would be similar formats for registration, returns and other records for both CGST and SGST. Functions such as assessment, enforcement, scrutiny and audit should be undertaken by the authority which is collecting the tax with information sharing between the Centre and the States. Conclusion GST, if implemented efficiently, could prove to be a "Good Sensible Tax". But the Government should
come up with the draft rules as soon as possible so that there is enough time for industry to analyse the draft and make representations to the concerned authorities with their suggestions.
XIV SUGGESTIONS FOR EFFECTIVE IMPLEMENTATION 14.1 Some suggestions for better administrative machinery to handle the implementation of Goods and Services Tax Act in India are:
Standardization of systems and procedures.
Tax relief in case of branch transfer
Well defined procedures in case of Job works
Uniform dispute settlement machinery.
Adequate training for both tax payers and tax enforcers.
Re-organization of administrative machinery for GST implementation.
Building information technology backbone – the single most important initiative for GST implementation.
Uniform Implementation of GST should be ensured across all states (unlike the staggered implementation of VAT) as many issues might arise in case of transactions between states who comply with GST and states who are not complying with GST.
XV GST Implications for organisations 15.1 GST shall be the mother of all Indian tax reforms of this centaury and it would subsume most (if not all) of the existing Central and State level taxes on supply of goods and services. Accordingly, GST would have a significant impact on business environment and its operations. When undertaking oversight of organizational readiness to adopt GST, independent directors need to focus on the following aspects: 1 GST will have a multi-fold impact on operations – Besides the fiscal impact and tax compliance, GST will have an impact on cash flows, product pricing, supply chain arrangements, procurement, revenue recognition and the IT systems. It is therefore important to assess whether the organization is undertaking a holistic impact assessment of GST encompassing all of the above. 2 Assess the impact on financial results – GST will have an impact on the financial statements; for example the top-line may get reduced in some cases (e.g. traded items) due to elimination of tax cascading. The gross margins will also undergo changes as Cost of Goods Sold may undergo changes as a result on input tax credits. For listed companies, these changes will need to be factored in quarterly forecasts and earning releases to the stock markets. 3 Monitor the impact on cash flows – Most of the planning in GST will revolve around optimizing cash flows. The impact will be as a result of GST on imports, stock transfers and changes in point of taxation/ tax credits. 4 Organisations may need to re-design certain aspects of their Supply Chain – The concept of mere supply of goods and services trigger tax liability under GST as opposed to sale under the present VAT, will impact Sourcing, Production and Distribution aspects of the Supply Chain. For instance, sourcing considerations would involve revisiting sourcing mix (local, inter-state and imports), stock transfer policy and renegotiation of vendor price due to the GST impact. From a production perspective, GST impact would vary depending upon the manufacturing and distribution arrangements e.g. own/ job-work/ contract manufacturing. The “Place of Supply” rules will determine state where GST is to be deposited. 5 Understand the linkages, differences for companies implementing IFRS – For companies implementing IFRS, the requirements under IFRS vary with those under GST. Organizations will need to consider necessary re-alignments within their IT systems to effectively manage these differences. For instance, there could be possible differences between GST levy date and date of revenue recognition, accounting for multiple element arrangements (e.g. the invoice value includes a supply and maintenance element), accounting for barter transactions, reconciliation of GST on stock transfers with accounting records etc.
6 Understand the implications on product pricing, marketing and HR – The impact of GST needs to be considered in the margins of various stakeholders in the distribution chain to ensure that GST does not negatively impact product pricing and consequently market share. This calls for a reassessment of exchange, discount and incentive schemes. From a HR perspective, there may be a need to reconsider the indirect tax management structure, training requirements of key indirect tax personnel depending upon the impact assessment. 7 Assess if the IT systems are geared to address GST requirements effectively with minimal manual workarounds – The Audit Committee should at the outset require management to undertake necessary enhancements to IT systems so that the necessary systemic alignments are in place to manage GST MIS requirements. Changes in the system are likely to be required primarily on account of change in taxes/ tax rates, availability of credits for input taxes on purchases including inter-state purchases and Import GST, availability of cross credits for goods and services and GST on stock transfer. 15.2 To summarise, organizations need to undertake the following to enable a smooth transition to GST:
Have an internal core team which will closely monitor the GST developments.
Identify existing bottlenecks and those likely to arise from proposed GST framework.
Representation to the implementing agencies through appropriate industry associations to
highlight issues and propose solutions in the proposed GST framework.
Ensure flexibility in new systems/ processes/ contracts, to accommodate changes warranted by GST
Identify need for restructuring business/ transactions/supply chain in the light of the GST framework
Modify internal IT, invoicing and other systems/ processes/ policies to make them GST compliant
Create awareness within organization about changes, modifications in roles/ responsibilities of team
