GST is an indirect tax for whole nation which will make India one unified common market by replacing various taxes levied by central and state Govt.
Why in news ?
GST (one hundred and twenty-second-122 constitutional amendment) bill has finally, been passed in the Lok sabha and the Rajya sabha.
It is India’s most sweeping indirect tax reform in in the last thirty years http://m.economictimes.com/news/economy/policy/gst-is-a-win-win-for-all-consumers-businesses-and-government-venkaiah-naidu/articleshow/59378055.cms
The constitution ( 122nd amendment ) bill , 2016
Procedure of constitutional amendment has been laid down in Art 368
Indian constitution can be amended in three ways :
● Amendment by simple majority of the Parliament ( are not deemed to be amendments of the Constitution for the purpose of Art 368 )
● Amendment by special majority of the Parliament
● Amendment by special majority of the Parliament and ratification of half of the state legislatures ( GST bill has been passed under this procedure )
Why do we need GST ?
● Evolution of businesses has lead to blurred taxation lines between centre and state leading to double taxation
● Cascading effect due to multiplicity of taxes and their non- creditable nature
● Extreme disparities in the tax rates levied by States
● Amendment in State VAT laws, leading to multiple compliance requirement
● Tax system needs to be destination based, rather than origin based
Indirect taxes can be either origin based or destination based. Origin based tax (also known as production tax) is levied where goods or services are produced. Destination based tax (consumption tax) are levied where goods and services are consumed.
In destination-based taxation, exports are allowed with zero taxes whereas imports are taxed on par with the domestic production.
GST is said to be destination-based or consumption-based tax. Hence, the place of consumption will decide the State that will collect tax. The parody behind destination-based taxation is, the producing/selling state gets nothing while the consuming states receive complete share of revenue.
WHY GST IS BEING DESTINATION BASED TAX
In the long-term aspect the destination-based taxation is a boon for less developed States who consume more than what they produce.and in present scenario it seems the only reason of being destination based tax because govt seeking for the long term growth of the economy.otherwise there are many disadvantages of this destination based tax system but for short period of time.and this is one of the reasons why GST being hard to implement because the selling states are likely to try to put restriction on interstate sales to avoid flow of revenue outside own state. This could hamper the progress of trade and overall growth of India.
Evolution of GST
● GST was first recommended by KELKAR committee task force
In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) subsuming central, state taxes, and interstate taxation based on VAT principle.
● an Empowered Committee of State Finance Ministers (EC) was constituted for designing a road map
● The first attempt to pass GST was made in 2011 by introducing the Constitution (115th Amendment) Bill in the Lok Sabha, which lapsed due to dissolution of 15th Lok Sabha.
● The Bill was again introduced as 122nd constitution amendment bill and now stands passed by both Lok Sabha and Rajya Sabha.
Year 1986 : Jha Committee first introduced value added taxation in India.
This was called as MODVAT (modified VAT).
The foremost objective of MODVAT was:
● Removal of cascading burden,
● Rationalization and,
● Avoiding double taxation.
It was renamed as CENVAT later. However CENVAT was VAT levied on central excise duties only.
State level VAT/sales tax and interstate tax were not altered.
Features of GST
● No differentiation between goods and services tax. One rate for both goods and services
● Simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax
● Tax will be levied on every supply of goods and services
● Subsumes most of the Indirect taxes at state and central level
State taxes that would be subsumed
b. Central Sales Tax
c. Luxury Tax
d. Entry Tax (all forms)
e. Entertainment and Amusement Tax (except when levied by the local bodies)
f. Taxes on advertisements g. Purchase Tax
h. Taxes on lotteries, betting and gambling
i. State Surcharges and Cesses so far as they relate to supply of goods and services.
Central taxes that would be subsumed by GST
a. Central Excise duty
b. Duties of Excise (Medicinal and Toilet Preparations)
c. Additional Duties of Excise (Goods of Special Importance)
d. Additional Duties of Excise (Textiles and Textile Products)
e. Additional Duties of Customs (commonly known as CVD)
f. Special Additional Duty of Customs (SAD)
g. Service Tax
h. Central Surcharges and Cesses so far as they relate to supply of goods and services
● multitiered system
The goods and services tax is currently fixed under 4 slabs: 5%. 12%. 18%. 28%
● there will be two major components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will
simultaneously levy GST across the value chain.
● Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
● The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods ( milk, unpackaged cereals jaggery , salt, newspaper, contraceptives,) and services(postal services, healthcare,legal services,education,electricity,animal slaughters, lottery, funeral services) , goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.
● Cross utilization of credit of CGST between goods and services would be allowed.
Similarly, the facility of cross utilization of credit will be available in case of SGST. (except utilization of credit of CGST for SGST and vice versa )
● The IGST would roughly be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another.
Input tax credit – “Input Tax Credit” is an aggregate total amount of tax paid by a registered dealer on the total purchases made by him within the State from other dealers.
Salient features of input tax credit
● It can be adjusted against the tax payable by the purchasing dealer on his sales.
● It is available for purchase of goods made within the state by a registered dealer from another registered dealer.
● It is allowed for both manufacturers and traders
● Even for stock transfer/consignment transfer/branch transfer of goods out of the State, input tax paid in excess of 2% will be eligible for tax credit
● In case of common goods used for taxable goods and tax free goods, ITC is allowed proportionately to the extent the purchases are used for the purpose of taxable goods.
● Thus, credit relating to the goods used in manufacture of exempted goods has to be reversed.
● The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting 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 dealer who imports would claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State.
● The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.
● 1% additional tax for Integrated Goods and service tax (IGST) tax for 2 years was proposed However this provision was deleted in the amended bill passed in Rajya Sabha.
● Similarly, the demand for constitutional cap on the rate of GST has also been done away with.
● Law made by parliament in relation to GST will not override state laws on GST.
● Compensation will be provided to loss making states for the first 5 years.
Taxing the imports under GST:
● The Additional Duty of Excise or CVD and the Special Additional Duty or SAD presently being levied on imports will be subsumed under GST.
● IGST will be levied on all imports into the territory of India.
● Unlike in the present regime, the States where imported goods are consumed will now gain their share from this IGST paid on imported goods.
GST is governed by GST council:
Mechanism of GST:
Who will pay?
There is exemption upto INR 20 Lakhs turnover upto which no GST is payable for non-special states and INR 10 Lakhs for special states.
Who will gain?
- Economy :
● Easy compliance: A robust and comprehensive IT system would be the backbone of the GST regime in India. Therefore, all taxpayer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
● Uniformity of tax rates and structures: Indirect tax rates and structures would be uniform across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
● Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
● Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
● will provide the adequate thrust and driving force for the success of Make in India and Skill India.
2. Central and state government:
● Simple and easy to administer
● Better control on leakage
● Higher revenue efficiency
● Widen tax base
● Lower tax burden, improve profit margins
● No distinction between service and product tax
● Uniform tax , ease of doing business
● Smooth movement of products
● Most products will be less expensive over time
● Relief in overall tax burden
1. Hardware/ manpower
● Centre and states officials to be trained on GST and IT- Framework
● Workshops to be organised across the country
2. Software / GST network
● GSTN is a pvt. Company – 2013
● Is a Infosys product
● Will build and maintain GST network
● Will be a portal named “ GSTIndia”
● Manufacturer , traders will get ‘gst ID code”
● Project ” saksham”
● The fitment of thousands of commodities and services into the four GST rate slabs (5%, 12%, 18% and 28%) could be the trickiest for the GST Council.
● Taxes yet to be announced for Gold , footwear, beedis/ cigarettes, petroleum/ diesel, agriculture implements
● The rate fitment process is more susceptible to lobbying not just from different sections of industry, but also States that would like a favourable tax treatment for products and services they excel in.
● Giving lakhs of enterprises just about few months to switch to the GST regime could lead to a messy start.
Problems of SMEs:
Of the estimated 8 million registered businesses under the VAT regime, around 90% are Small and medium enterprises.
But, SMEs appear to be the weakest link in corporate India’s efforts to be GST-compliant by the July 1, 2017.
While large companies have experts to help them transition to the GST regime, SMEs are still struggling to assess the impact on their businesses.
● Problems with input tax credit :
Under the GST, the buyer of a good or service is totally dependent on the seller for any input tax credit.
The tax credit available to a buyer is dependent on the return furnished, tax collected and deposited by the seller in the course of a sale transaction.
There are provisions in the GST law that mandate input tax credit will be available to a buyer only if the supplier has paid tax within a given time-frame.
● Any break in the tax chain will mean non-availability of input taxcredit for all the players involved.
● Cess ( education, Krishi Kalyan, Swachh Bharat) and surcharges charged by centre are currently not part of GST. States might have an issue over this.
● Further, GST will not apply to Petroleum crude, High speed diesel, Motor spirit (petrol), Natural gas, Aviation turbine fuel. These have a very high inter-connectivity with both manufacturing and service costs which might hinder seamless application of GST across sectors.
National Anti-Profiteering Authority
The National Anti-Profiteering Authority, to be set up under the Goods and Services Tax (GST) regime, will have wide-ranging powers, including the power to issue notices to anybody that it feels warrants a “fair enquiry,” as per the rules finalised by the GST Council.
The powers of the authority include the ability to order a reduction in prices, impose a penalty, and even cancel the registration of a company deemed to have not passed on a tax rate reduction to consumers. The rules, which are yet to be gazetted or made public, state that the authority is to be chaired by either a retired High Court judge or a member of the Indian Legal Service who has at least three years of experience at the level of Additional Secretary or higher.
The rules mandate a three-step procedure, from the detection of anti-profiteering to the decision of the authority.
They provide for the creation of a standing committee, which would receive written complaints from anyone about anti-profiteering practices.
GST is quite different from the existing indirect taxation system in the country. But as rightly said by Martin Luther king, “The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy. ”
For effective implementation of GST, tax administration staff – both at central and state levels – would require to be trained properly in terms of concept, legislation and procedure. The tax administration staff would also need to change their mindset, approach and attitude towards the taxpayers. And for this, they would have to ‘learn, unlearn, and relearn’ the GST not only in letter but in spirit too. It has been estimated that roll out of GST would boost the India’s GDP growth by 1 percent to 2 percent. It has also been reported that GST is the best way to mobilise revenue and reduce the fiscal deficit. GST has been commonly accepted by more than 140 countries in the world. Looking at the magnitude, GST is going to impact all sections of the society – from small time businessmen to huge conglomerates and from a developing state to a developed state in this country. The implementation of GST will give a boost to the growth engine pursued by the government.
Other useful links
For UPSC approach
GS Paper II:
Indian Constitutional amendments Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein. Parliament and State Legislatures – structure, functioning, conduct of business, powers & privileges and issues arising out of these.
GS Paper III:
Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. Government Budgeting.
GST represents a paradigm shift in the federal relations between centre and states. Critically discuss. (250 words)