GOODS AND SERVICES TAX (GST) IN INDIA

This article was written by Sougato Ghosh, a student of School of Law, KIIT University.

1. ABSTRACT

Currently, Goods and Services are taxed separately by different authorities at different sectors at different rates which is more complex and time consuming and also becomes difficult for maintaining records for businesses, traders and suppliers. At present, indirect tax increases the price of goods due to cascading burden of ‘tax on tax’ and multiplicity of tax which create problems for the end user.

Goods and Services Tax (GST) is the current topic which is continuously in flash under the scenario. It is a comprehensive Value – Added Tax (VAT) system which will ultimately ensure flow of uninterrupted credit among different sectors whether in manufacturing of goods, sale or consumption of goods and services. It is one indirect tax which will be levied on the supply or consumption of goods and services at the national level which will make the entire nation (India), a unified single or common market.

The paper will shed some light on the need of single taxation system in India. Whether single taxation system would be beneficial by subsuming almost all indirect taxes at the Central as well as State Government and what are the problems that would be faced after the implementation of single taxation system in India will be dealt with in the paper. What makes single taxation system different from current taxation system and what would be the rate of single taxation system in India, these are the questions that the author intend to deal with in the paper with apt answers in the system.

Keywords: GST, Present Scenario of Indirect Taxes, Comparison, Need, Cascading Effect of Tax, Multiplicity of Tax.

1. Introduction

Tax is the common burden which is imposed upon a person by the Government on income, commodity or activity. Revenue earned by way of taxes are used for meeting the expenses of Government which include provision of education, infrastructure facilities such as roads, dams, etc.[2]So, it is a major source of revenue for the Government. It helps in the growth of economy and capital formulation for the country.

Currently, Goods and Services are taxed separately by different authorities at different sectors at different rates which is more complex and time consuming and also becomes difficult for maintaining records for businesses, traders and suppliers. At present, indirect tax increases the price of goods due to cascading burden of ‘tax on tax’ and multiplicity of tax which create problems for the end user.

Goods and Services Tax (GST) is the current topic which is continuously in flash under the scenario.

The concept of Goods and Services Tax was discussed by Dr. Man Mohan Singh in the mid 90’s. The BJP Government under Atal Bihari Vajpayee started consulting about Goods and Services Tax and formed a committee under AsimDasgupta for implementing GST.  Goods and Services Tax was recommended by Kelkar Task Force on FRBM Act in the year 2005. In the year 2011, The Constitution (115^th Amendment) Bill, 2011 was introduced in the Parliament for imposing of GST. But, due to the dissolution of 15^thLok Sabha, the bill was lapsed. Subsequently, in December 2014, The Constitution (122^nd Amendment) Bill, 2014 was introduced and passed by Lok Sabha in May, 2015 and referred to the Rajya Sabha for examination.[3] Presently, it has also been passed by the Parliament. Goods and Services Tax (GST) would be a Value-Added Tax (VAT) to be implemented in India from the 1^stday of July, 2017.

Goods and Services Tax (GST) is a comprehensive VAT system which will ultimately ensure flow of uninterrupted credit among different sectors whether in manufacturing of goods, sale or consumption of goods and services. It is one indirect tax which will be levied on the supply or consumption of goods and services at the national level which will make the entire nation (India), a unified single or common market. Almost all indirect taxes will be eliminated, once GST comes into power. One of the most basic feature of Goods and Services tax is that consumers will have to pay the tax for one time at the final level of the transactions on the supply of goods and services but not at the various levels. The thing which is more interesting about Goods and Services Tax is that it will avoid both ‘cascading effect’ and ‘multiplicity’ of tax. Here, the word ‘cascading effect of tax’ means paying of tax on tax which is already paid on previous purchase and the word ‘multiplicity of tax’ means multiple number of taxes at different levels at different rates. The main objective for which the Goods and Services Tax is proposed is to bring an uniformity in tax rates for the entire nation based on the principle “One Country, One Tax Rate”. India has opted for a dual GST model as preferred in Brazil and Canada. Under the dual GST system, both the centre and the state, shall have the concurrent powers to levy and collect taxes on the supply of the goods and services.[4] If the,

1. Sale which is within the state (Intra-state sale),

• Central GST (CGST) – It will be levied and collected by the Central Government.
• State GST (SGST) – It will be levied and collected by the state Government.

1. Sale which is outside the state (Inter-state sale),

• Integrated GST (IGST) – It will be levied and collected by the Central Government.

• Need for single taxation system in India

Presently, the indirect taxes are origin-based tax, where the producing state gets the tax revenue. But, after the implementation of single taxation system in India, the tax structure would follow a destination-based principle where, the consuming state would get the tax revenue and the producing state would get the profit on goods sold. Since, increase in profits would surely increase the consumption in the state and due to increase in the consumption, the tax revenue would also increase. Hence, due to this, both the states would end up happily.[5]

Suppose, Mr. X sold goods to Mr. Y for which sales tax was charged. Again, Mr. Y re-sold those goods to Mr. Z after charging sales tax. While Mr. Y was computing his sales tax liability, he included sales tax paid on previous purchase. This is cascading effect of tax (tax on tax). This was the scenario of computing sales tax few years ago. After that, VAT system is introduced in which person gets full allowance of input tax credit paid at the prior stage of purchase. For example, Mr. Y paid tax of Rs. 20, he deducts Rs. 10 of tax which is paid on previous purchase.

At present, there are still some problems with the system which are not solved till date which are-

• Input VAT credit is applicable against output VAT. Input excise/service tax credit is applicable against output excise/service tax. But, input VAT credit is not applicable against output excise/service tax and vice-versa.
• VAT is computed on the value which includes excise duty. This means there is still cascading effect of tax (tax on tax).

The purpose of bringing Goods and Services tax is to solve these problems[6] which will be operated as –

Case 1. Sale within the state (Intra-state sale), resale in that state (Intra-state sale).

For example, when goods are sold from Kolkata to Durgapur, since it is a sale within the state (intra-state sale), both Central GST and State GST will be levied. Central GST will be levied and collected by the Central Government and State GST will be levied and collected by the State Government. Again, those goods are sold from Durgapur to Asansol, since it is again a sale within the state (intra-state sale), both Central GST and State GST will be levied. Since the sale price of the good is increased so the tax liability also increases. In case of re-sale within the state (intra-state sale), both the credits of input Central GST and State GST are available against both the outputs of Central GST and State GST respectively.

Case 2. Sale within the state (Intra-state sale), resale outside the state (Inter-state sale).

Suppose, if goods are sold from Mumbai to Nagpur, since it is a sale within the state (intra-state sale), both Central GST and State GST will be levied. The collection will go to the Central Government and State Government respectively. Again, those goods are sold from Nagpur to Chennai, since it is a sale outside the state (inter-state sale), Integrated GST will be levied where the collection will go the Central Government. Since, the sale price of the good is increased so the tax liability also increases. In case of re-sale outside the state (inter-state sale), both the credits of input Central GST and State GST are available against output Integrated GST. But, as we can see that the collection from State GST never went to the Central Government, still the input State GST credit is available. This is the crux of bringing Goods and Services Tax. As, it will be amounting to loss to the Central Government, the State Government compensates the Central Government by transferring the credit of input State GST to the Central Government.

Case 3. Sale outside the sale (Inter-state Sale), resale in that state (Intra-state Sale).

             For example, if goods are sold from Chennai to Mumbai, since it is a sale outside the                state (inter-state sale), Integrated GST will be levied and collected by the Central Government.Again, those goods are sold from Mumbai to Pune, since it is a sale within the state (intra-state sale), both Central GST and State GST will be levied and collected by the Central Government and State Government respectively. Since, the sale price of the good increases, the tax liability will also increase. In case of re-sale within the state (intra-state sale), the credit of input Integrated GST will be available against both the outputs of Central GST and State GST. The credit of input Integrated GST is claimed against output State GST for not bearing to loss to the State Government, the Central Government compensates the State Government by transferring the credit of input Integrated GST. This is one of the most essential feature of bringing Goods and Services Tax.

Thus, Goods and Services Tax (GST) is the need of the hour.

1. Pros of GST

1. GST will avoid multiplicity of tax. Almost all indirect taxes at the Centre and State levels will be subsumed into GST. At the Central level, indirect taxes like central excise duty (except in cases of liquor, drugs and narcotics), additional excise duty, service tax, central cesses and surcharges, etc. as well as state-level indirect taxes like State VAT/sales tax, central sales tax, central excise duty for liquor, drugs and narcotics, octroi and entry tax, luxury tax, purchase tax, electricity duty, taxes on lottery, gambling and betting, taxes on land and building, taxes on advertisements, state cesses and surcharges, etc. will be dissolved, once GST comes into effect.[7]

2. GST will also avoid cascading effect of tax. Registered dealers will have a benefit of input tax credit so the GST which is paid on previous purchase, they will have a right to deduct it from the GST which is being collected by the Government from the consumers and tax which is remaining, the consumer will be obliged to pay to the Government.

 

3. Calculation and payment of GST will become much easier than current system of indirect taxation. Once GST comes into force, the assesse will not be required to go before the different authorities and assess the tax before its payment. There won’t be any separate records to be maintained for Central GST, State GST and Integrated GST.

 

4. By bringing GST, it will definitely reduce the evasion of tax and unaccounted money. Due to dual GST control, it will be difficult for evading tax. The benefit of input tax credit will be available only to the dealer who is registered under GST and shows the proper transaction on paper.

5. GST will reduce the price of goods. As there won’t be multiplicity of tax and cascading effect of tax, it will help for the reduction in the price of the goods.

 

6. GST will replace almost all indirect taxes with a simple levy, lowering tax on goods and services and converting the entire nation, India as a unified single market. It has been proposed to bring a uniformity in tax rates based on the principle ‘One Country, One Tax Rate’. It will eliminate all the statutory forms like Form C, Form D, Form F, Form J, etc.[8]

 

7. GST will be a destination based tax where, the destination state will get the tax revenue and the producing state will get the profit on goods sold. Since, increase in profits will surely increase the consumption in the state and due to increase in the consumption, the tax revenue will also increase. Hence, due to this, both the states will end up happily.[9]

 

8. GST can bring increment in the GDP of India by 1-2%. It is an estimation that it will boost up the economy of India. This is because it will promote more exports and create more employment opportunities.[10] The exclusion of ‘tax on tax’ will significantly improve inter-state sales and make India more competitive in global trade market.[11]

 

9. Certain items including liquor, tobacco, diesel and petroleum have been exempted from Goods and Services tax for providing the support to the states.[12]

 

10. GST will increase the collection of revenues for both Central as well as State Government.[13]

 

11. Certain zero-rated items including groceries, products from agricultural sectors, medical devices, livestock, fish for consumption and some transportation services used by common people would be exempted from the purview of tax.[14] The lowest tax rate of 5% would be on supply of common use goods. At present, items including luxury items (such as SUV cars), demerit and white goods are taxed at 30-31% (excise plus VAT). After the implementation of Goods and Services Tax, it would be taxed at 28% plus cess for luxury cars, tobacco, pan masala and aerated drinks.

 

1. Cons of GST

 

1. Due to dual control of GST on every business by Central as well as State Government, compliance cost will significantly go up which will lead to harassment to businesses.[15]

2. All credit will be available on/from online connectivity with GST Network. Due to this, small businesses may find it difficult to use the online system.[16]

3. Initially, GST Network may not work for quite some time.[17]

4. GST tax structure to bring down inflation.[18]

5. Once GST derive its power, it will affect the collection of revenue of states in the short run.[19]

6. Entertainment tax is not included in GST structure. This means if anyone plans to watch a movie in multiplex or PVR, the ticket price would not reduce.[20]

 

1. Do Banks will pay GST?

• Banks have been exempted from the purview of GST. But since, they provide services to weaker sections of the society, they will have to pay tax.
• In case, if any banks sell any physical assets such as vehicles hypothecated for the recovery of dues, in such case, they will pay tax.

 

• What would be the GST Rate?

As per the decisions passed by all will of GST council on the 3^rd day of November, 2016. The tax rates would be at four slabs of 5%, 12%, 18% and 28%.[21] Zero tax on 50% of items including groceries such as bread, milk and produce; products from agricultural sectors such as food grains, tobacco leaves and prescription medications. Necessary medical devices such as hearing aids and dental prostheses are exempted from the purview of GST.[22] Livestock, fish for consumption and some transportation services are also exempted from tax.[23] The lowest tax rate of 5% would be for common use items. Both 12% and 18% would be standard rates for soaps, shampoos, shaving kits, etc. At present, items including luxury items (such as SUV cars), demerit and white goods are taxed at 30-31% (excise plus VAT). After the implementation of Goods and Services Tax, it would be taxed at 28% plus cess for luxury cars, tobacco, pan masala and aerated drinks.[24]

As per the new decisions passed by the GST council on the 26^th day of November, 2016, Cess and Clean Energy Cess together form a compensation pool which will compensate states for first five years for any loss to the states due to the transition to the new GST.[25] The pool will be lapsed after five years. Eighty thousand crore rupees (Rs. 80,000 crore) would be needed to compensate states in first year for the role of GST.[26]

 

• What makes GST different from the existing system?

At present, there are multiple indirect taxes which are taxed separately on goods by different authorities at different sectors at different rates within the country. Let’s say, whenever we check out from a hotel or whenever we pay a bill at restaurant, the invoice bill which is offered to us contains indirect taxes such as service tax, VAT, luxury tax, etc.

But now, once Goods and Services Tax comes into effect, it will combine all such taxes into GST and the commodity will be taxed only once under GST.[27] The tax rates would be at four slabs for GST of 5%, 12%, 18% and 28%. Zero-rated items including groceries and produce; products from agricultural sectors, necessary medical devices, livestock, fish for consumption and some transportation services are exempted from tax.[28] 5% is the lowest rate which would be levied on the supply of goods used for mass consumption. Due to cascading burden of ‘tax on tax’, certain commodities including luxury cars, demerit and white goods are taxed at 30-31% (excise plus VAT), such items will be taxed at 28% plus cess after the implementation of Goods and Services Tax.[29] Due to uniformity in tax rates, it will become easier for calculating and paying of tax. It will reduce the margin of error and problems caused by the tax authorities in maintaining separate records for different taxes. There wouldn’t be any separate records to be maintained for GST.[30]

Goods and Services Tax (GST) in India would follow a destination-based principle. Hence, both cascading burden of ‘tax on tax’ and multiplicity of tax will be avoided and hence, production costs will be cut down.[31] Thus, Goods and Services Tax has been proposed for improving inter-state sale and making India more competitive in global trade market.[32]

 

1. Conclusion

It could be concluded from the above discussion that it will provide relief to both producers and consumers by providing input tax credit set-off, service tax set-off and replacing multiple taxes. It would lead to increase in revenue for both Central as well as State Government.

However, there is still uncertainty for the implementation of the GST. Though, the GST is worldwide accepted system. The GST structure has been proposed in India to evade both cascading burden of ‘tax on tax’ and multiplicity of taxes as well as wide the tax base. It would be advantageous for the nation or not that couldn’t be finalized now. But, as some economists say, there is nothing new in the GST system and it wouldn’t be able to achieve its objectives such as reduction in the cost of production, boost in productivity, growth of economy, etc.

[2]“Tax Laws and Practice” – The Institute of Company Secretaries of India

[3] dor.gov.in/sites/upload-files/revenue/files/GST_FAQ.pdf

[4] Garg, Girish (2014), “Basic Concepts and Features of Goods and Services Tax in India”, International Journal of Scientific Research and Management, volume 2, issue 2.

[5] Tiwari, CA. Manindra K., “GST in India”.

[6] https://www.cbec.gov.in/resources//htdocs-cbec/deptt_officer/faq-on-gst.pdf

[7] CA Gaurav Gupta. “GST India, Service tax, News, FAQ, Reference, Presentations, Reports”. gstindiaguide.com

[8] http://articles.economictimes.indiatimes.com/2009-12-25/news/27659069_1_gst-model-services-tax-gst-system

[9] Jain, Anshu (2013), “An Empirical Analysis on Goods and Services Tax in India: Possible Impacts, Implications and Policies”, International Journal of Reviews, Surveys and Research, volume 2, issue 1.

[10]Id at 3.

[11] Shah, Kumar (2014), “Goods and Services Tax (GST) in India: Challenges and Opportunities”, Global Journal of Multidisciplinary Studies, volume 3, issue 9.

[12] http://www.pradhanmantriyojana.in/gst-bill-explained-What-is-it-benefits-pdf-latest-news/

[13] Khan, Mohd. Azam&Shadab, “Goods and Services Tax (GST) in India: prospect for states”, Budgetary Research Review, volume 4.

[14] https://www.investopedia.com/terms/g/gst.asp

[15]“On Notes Ban, Firm Warning From West Bengal To Centre: GST Now At Risk”, NDTV, 30^th November, 2016

[16]Ibid..

[17] Supra note 2.

[18] https://www.gstindia.com/faq-on-gst

[19] pib.nic.in/newsite/PrintRelease.aspx

[20] Supra note 2, at 4.

[21] Supra note 2.

[22]Ibid..

[23] Supra note 1.

[24] Supra note 7.

[25] https://www.bankbazaar.com/tax/goods-and-services-tax.html

[26]“Challenges and Opportunities of GST in India”, Taqvi, Syed Mohd. Ali, Srivastava, Amit Kumar and Srivastava, Ravindra Kumar (2013), Indian Journal of Applied Research, volume 3, issue 5.

[27] Blogs.tallysolutions.com/how-gst-different-from-current-tax-structure/

[28] Supra note 6.

[29] Supra note 7.

[30] https://gst.caknowledge.in/difference-present-tax-structure-gst-structure/

[31] Kumar, Nitin (2014), “Goods and Services Tax in India: A way forward”, Global Journal of Multidisciplinary Studies, volume 3, issue 6.

[32]Ibid.