[UPSC Interview prep feed Vol.22] Goods and Services Tax Basics

Topic discussed: GST

THE GOODS AND SERVICES TAX (GST) BILL  [122nd AMENDMENT BILL]

The introduction of the GST would be a significant step in the field of indirect tax reforms in India.

WHY THERE IS NEED OF GST IN INDIA?

(1) By subsuming a large number of central and state taxes into a single tax, it would mitigate cascading effect or double taxation in a major way and

(2) Pave the way for a common national market.

(3)From the consumer’s point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25 per cent- 30 per cent. Although it might take some time to materialize as the initial rates of taxes are expected to be around 24-27%.

(4)Introduction of the GST is also expected to make Indian products competitive in domestic and international markets.

(5)Studies show that this would instantly spur economic growth. Because of its transparent character, it is expected that the GST would be easier to administer.

(6) Practical example, trucks waiting on inter-state borders, http://www.theguardian.com/world/2015/jan/31/india-economic-growth-new-national-tax

"Two-thirds of India’s freight travels by road. But only 40% of the travel time is consumed by driving, according to the World Bank. The rest is spent on waiting at state border checkpoints, paying state government levies and dealing with regulatory bureaucracies that vary from state to state."

(7) Another point may be added: Complexity due to multiplicity , Small scale industries, entrepreneurs face hard time dealing with about 20 different taxes collected by different authorities. GST will simplify this complexity, http://www.indiafilings.com/learn/gst-advantages-for-startups-and-small-businesses/

In simple words, GST will improve ease of doing business.

THE BROAD FEATURES 

(i)       GST would be applicable on supply of goods or services as against the present concept of tax on the manufacture or on sale of goods or on provision of services.

(ii)       GST would be a destination-based tax as against the present concept of origin-based tax.

(iii)      It would be a dual GST with the centre and the states simultaneously levying it on a common base. The GST to be levied by the centre would be called central GST (CGST) and that to be levied by the states would be called state GST (SGST).

(iv)      An integrated GST (IGST) would be levied on inter-state supply (including stock transfers) of goods or services. This would be collected by the centre so that the credit chain is not disrupted.

(v)       Import of goods or services would be treated as inter-state supplies and would be subject to IGST in addition to the applicable customs duties.

(vi)     A non-vatable additional tax, not exceeding 1 per cent on inter-state supply of goods would be levied by the centre and retained by the originating state at least for a period of two years. 

(vii)  CGST, SGST, and IGST would be levied at rates to be recommended by the Goods and Services Tax Council (GSTC) which will be chaired by the Union Finance Minister and will have Finance Ministers of states as its members.

(viii)    GST would apply to all goods and services except alcohol for human consumption.

(ix)      GST on petroleum products would be applicable from a date to be recommended by the GST Council.

(x)      Tobacco and tobacco products would be subject to the GST. In addition, the centre could continue to levy central excise duty.

(xi)       A common threshold exemption would apply to both CGST and SGST. Taxpayers with a turnover below it would be exempt from GST. A compounding option (i.e.to pay tax at a flat rate on turnover without credits) would be available to small taxpayers below a certain threshold. However, a taxable person falling within the limit of threshold or compounding could opt to pay tax at the normal rate in order to be part of the input tax credit chain.

(xii)    The list of exempted goods and services would be kept to a minimum and it would be harmonized for the centre and states as far as possible.

(xiii)    Exports would be zero-rated.

(xiv)   Credit of CGST paid on inputs may be used only for paying CGST on the output and the credit of SGST paid on inputs may be used only for paying SGST. In other words, the two streams of input tax credit (ITC) cannot be cross utilized, except in specified circumstances of inter-state supplies, for payment of IGST.

(xv)   It subsumes all the central indirect taxes ,levies and central sales tax and state value added tax and sales tax.

(xvi)   It brings petroleum crude,high speed diesel,motor spirit,natural gas,aviation turbine fuel and tobacco products within the purview of UNION LIST AND STATE LIST.

(xvii)    It proposes an additional tax on supply goods,not exceeding one percent ,in the course of inter state trade will be levied and collected by the UNION FOR A period of two years and apportioned to the states.

(xviii) Over the past four decades, the value added tax (VAT) has been an important instrument of indirect taxation, with 130 countries having adopted it, resulting in one-fifth of the world’s tax revenue. Tax reform in many of the developing countries has focused on moving to VAT. Federal countries like Canada, New Zealand, and Australia have successfully adopted the GST into their structure.

(xix)   Implementation of a comprehensive GST in India is expected, ceteris paribus, to lead to efficient allocation of factors of production thus bringing about gains in GDP and exports. This would translate into enhanced economic welfare and higher returns to the factors of production, viz. land, labour, and capital. However, in the near term, as GST replaces a number of state-level and central taxes, revenue gains may not be significant.

(xx)   And interestingly, a recent study by the Tax Force (headed by Vijay Kelkar) has estimated that the GST will provide gains to India’s GDP from 0.9% to 1.7%.

Changes in the Constitution

THE 122nd AMEnDMENT BILL seeks to inserts article 246 A,269A,279A and omits ARTICLE 268A which was inserted by the constitution (88 th amendment act), 2003. It also omits entry 92, 92C from the Union and entry 52 and 55 from the state list.

Besides ,it amends article 248,249,250,268,269,270,271,286,366,368,SIXTH SCHEDULE and the ENTRY 84 of the UNION LIST and ENTRY 54 and 62 of the state list of SEVENTH SCHEDULE  of the CONSTITUTION.

ARTICLE 246 A : empowers legislature of every state to make laws with respect to goods and services tax imposed by the union or by such state provided that these powers are subject to laws made by the parliament in accordance with the article 246A (2)

ARTICLE 246A(2) : Parliament has the exclusive power to make laws with respect to GST where the supply of goods ,or services ,or both take place in the course of inter state trade or commerce.

ARTICLE 269A: Provides that GST on supplies of the goods and services taking place in the course of interstate trade will be levied and collected by the union and apportioned between the UNION and the states  in the manner provided by the Parliament by law on the recommendations of the GST council.

ARTICLE 279A: Empowers president of INDIA to constitute a Goods and Service Tax (GST) Council within sixty days of the commencement of the 122 nd constitution amendment act.

GST COUNCIL

The GST council comprises of following members

Union finance minister: chairperson

Union minister of state in charge of Revenue or Finance :member

Minister in charge of finance of taxation  or any other minister nominated by each state government: members

The GST council should choose one amongst them to be the vice chairman of the council for such period as they may decide.

FUNCTIONS OF GST COUNCIL

(1)TO MAKE recommendations to union and state on the taxes,cesses and surcharges levied by UNION ,STATE or local bodies that can be subsumed in the GST.

(2)TO make recommendations on goods and services that may be subjected to,or exempted from the GST.

(3) TO propose a model GST laws, principles of levy ,apportionment of Integrated GST and the principles that govern the place of supply.

(4) Recommend the threshold limit of turnover below  which goods and services may be exempted from GST

(5) Recommend the rate including floor rates with bands of GST.

(6) Recommend any special rate or rates for a specified period to raise additional resources during any natural calamity or disaster.

(7) Recommend special provisions with respect to the states of Arunachal Pradesh, Assam, Jammu and Kashmir , Manipur, Meghalaya, Mizoram, Nagaland, Sikkim,Tripura,Himachal Pradesh and Uttarakhand.

(8) Every decision of the council shall be taken by a majority not less than three –fourth of the weighted votes of the members present and voting in accordance with the following principles.

(A) The vote of the union government shall have a weightage of one third of the total votes cast.

(B) The votes of all the states government taken together shall have a weightage of TWO_THIRD of the total votes cast in the meeting.

(c) One half of the total number of members of the GST council shall constitute the QUORUM as its meeting.

RESOLUTION OF DISPUTES

 The GST council may decide upon the modalities for the resolution of disputes arising out of it’s recommendations.

RESTRICTIONS ON IMPOSITION OF TAX

The constitution imposes certain restrictions on states on the imposition of tax on the sale or purchase of goods. The bill amends this provision to restrict the imposition of tax on the supply of goods and services and not on its sale.

ADDITIONAL TAX ON SUPPLY OF GOODS

 An additional tax(not to exceed 1%) on the supply of goods in the course of inter state trade or commerce would be  levied and collected by the centre, such additional tax shall be assigned to the states for two years  ,or as recommended by the GST council.

COMPENSATION TO STATES

The parliament may, by law , provide for compensation to states for revenue losses arising out of the implementation of the GST ,on the GST councils recommendations. This would be up to a five year period. FIRST THREE YEARS 100%,FOURTH 75 %,AND FIFTH YEAR 50 % COMPENSATION SHOUND BE PAID TO STATES.

GOODS EXEMPT

ALCOHOLIC LIQUOR for human consumption is exempted from the purview of the GST.FURTHER ,the GST council is to decide when GST would be levied on  (1) petroleum crude (2) high speed diesel (3) motor spirit (petrol) (4) natural gas (5) aviation turbine fuel.

ISSUES RELATED TO GST(CHALLENGES)

(1)    Fear of potential losses in tax

(2)    Apprehension of states generating high revenues from state vat

(3)    Threshold limits are not clear

(4)    Department of revenue in the ministry of finance and empowered committee of state finance ministers differ on certain proposals. common products in this issue are alcoholic items and petroleum products.

(5)    Lack of clarity on certain topics like

(a)    Effective date of implementation

(b)   Taxation of certain key services – hospitals, education sector, aviation sector,(which are not covered under current tax rules)

(c)    Taxation of real estate and housing,financial and information technology sector

(d)   Specification of the list of exempted goods and services.

(e)   How to tax telecommunication sector? Because in this sector

(1)    Services are generated somewhere ,and they are purchased elsewhere and consumed in some is other location

(2)    The payment for the services  made in a different location.

  

   6) Issues of Manufacturing states like Gujarat,TN:

http://articles.economictimes.indiatimes.com/2014-12-26/news/57420384_1_gst-council-anti-dumping-duty-gst-regime
http://www.thehindu.com/business/Economy/gujarat-raises-red-flag-on-gst/article6342161.ece
"there would be permanent loss of revenue to manufacturing states due to destination principle in GST, while net consuming states would have permanent revenue gains with the introduction of GST regime."

7) Centre-state distrust, past record : delayed compensation due to lowering CST from 4 % to 2 % , http://www.thehindubusinessline.com/economy/macro-economy/states-paid-rs-32800-as-cst-compensation-sinha/article6990647.ece

8) It will rob State governments of their fiscal powers to decide on taxation issues and rates.

   

  STICKY ISSUES RELATED TO GST ON STATE LEVEL

(1)    Petroleum constitutes 26% of state revenue .It is easy to collect,Therefore state wants to keep it out of GST ambit.

(2)    Dual control may become cumbersome for small traders ;state wants legal control of traders with turnover below RS 1.5 crores.

(3)    Producing states fear losses due to destination based tax.States want provision to compensate for losses for five years.

(4)    Entry tax imposed by states on goods entering local areas-states want that entry tax in lieu of octroi should not be subsumed in GST.  

 5)The states expressed their disapproval over various issues: one major worry is the abolition of the CST, levied on inter-state sales, which is a major source of revenue for states.