Goods and Services Tax (GST)

India's biggest tax reform was launched at midnight at Parliament's historic Central Hall, by President Pranab Mukherjee and Prime Minister Narendra Modi. With the stroke of the gong, current tax rates are replaced by GST rates. It is the fourth time since Independence that an event was held there at midnight. The last three celebrated India's Independence and that is among the reasons that the Congress had listed for boycotting the GST launch. Several other opposition parties too stayed away. GST, which replaces a slew of indirect taxes with a unified tax, is set to dramatically reshape the country's 2 trillion dollar economy.

 What is GST

GST is one indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Timeline of GST

After 17 tumultuous years, a nationwide Goods and Services Tax (GST) will roll out from midnight tonight, overhauling India’s convoluted indirect taxation system and unifying the USD 2 trillion economy with 1.3 billion people into a single market.

GST, which will replace more than a dozen central and state levies like factory-gate, excise duty, service tax and local sales tax or VAT, is India’s biggest tax reform in the 70 years of independence and will help modernise Asias third largest economy.

Here is a look at the timelines that shaped one nation, one tax system:

·     February 1986: Finance Minister Vishwanath Pratap Singh proposes a major overhaul of the excise taxation structure in the budget for 1986-87.

·     2000: Prime Minister Atal Bihari Vajpyee introduces the concept, sets up a committee headed by the then West Bengal Finance Minister Asim Dasgupta to design a GST model.

·     2003: The Vajpayee government forms a task force under Vijay Kelkar to recommend tax reforms.

·     2004: Vijay Kelkar, then advisor to the Finance Ministry, recommends GST to replace the existing tax regime.

·     February 28, 2006: GST appears in the Budget speech for the first time; Finance Minister P Chidambaram sets an ambitious April 1, 2010 as deadline for GST implementation. He says the Empowered Committee of finance ministers will prepare a road map for GST.

·     2008: Empowered Committee of State Finance Ministers constituted.

·     April 30, 2008: The Empowered Committee submits a report titled A Model and Roadmap Goods and Services Tax (GST) in India to the government. November 10, 2009: Empowered Committee submits a discussion paper in the public domain on GST welcoming debate. 

·     2009: Finance Minister Pranab Mukherjee announces basic structure of GST as designed by Dasgupta committee; retains 2010 deadline. BJP opposes GST basic structure.

·     February 2010: Finance Ministry starts mission-mode computerisation of commercial taxes in states, to lay the foundation for GST rollout. Pranab Mukherjee defers GST to April 1, 2011. 

·     March 22, 2011: UPA-II tables 115th Constitution Amendment Bill in the Lok Sabha for bringing GST.

·     March 29, 2011: GST Bill referred to Parliamentary Standing Committee on Finance led by Yashwant Sinha. Asim Dasgupta resigns, replaced by the then Kerala Finance Minister KM Mani.

·     November 2012: Finance Minister P Chidambaram holds meetings with state finance ministers; decides to resolve all issues by December 31, 2012 for GST rollout.

·     February 2013: Declaring UPA governments resolve to introducing GST, Chidambaram in his Budget speech makes provision for Rs 9,000 crore to compensate states for losses incurred because of GST.

·     August 2013: Parliamentary standing committee submits report to Parliament suggesting improvements on GST. GST Bill gets ready for introduction in Parliament.

·     October 2013: Gujarat Chief Minister Narnedra Modi opposes GST Bill saying state would incur losses worth Rs 14,000 crore every year due to GST.

·     2014: GST Bill cleared by Standing Committee lapses as Lok Sabha dissolves; BJP-led NDA government comes to power.

·     December 18, 2014: Cabinet approves 122nd Constitution Amendment Bill to GST.

·     December 19, 2014: Finance Minister Arun Jaitley introduces the Constitution (122nd) Amendment Bill in the Lok Sabha; Congress objects.

·     February 2015: Jaitley sets April 1, 2016 as deadline for GST rollout.

·     May 6, 2015: Lok Sabha passes GST Constitutional Amendment Bill.

·     May 12, 2015: The Amendment Bill presented in the Rajya Sabha. Congress demands the Bill be sent to Select Committee of Rajya Sabha; demands capping GST rate at 18 per cent.

·     May 14, 2015: The GST Bill forwarded to joint committee of Rajya Sabha and Lok Sabha.

·     August 2015: Government fails to win the support of Opposition to pass the bill in the Rajya Sabha where it lacks sufficient number. 

·     July 2016: Centre opposes capping GST rate at 18%; gets states around. 

·     August 2016: Congress, BJP agree to pass the Constitution Amendment Bill.

·     August 3, 2016: Rajya Sabha passes the Constitution Amendment Bill by two-thirds majority.

·     September 2, 2016: 16 states ratify GST Bill; President Pranab Mukherjee gives assent to the Bill.

·     September 12: Union Cabinet clears formation of GST Council.

·     September 22-23: Council meets for first time.

·     November 3: GST Council agrees on four slab tax structure of 5, 12, 18 and 28% along with an additional cess on luxury and sin goods.

·     January 16, 2017: Jaitley announces July 1 as GST rollout deadline. Centre, states agree on contentious issue of dual control and taxing rights on goods at high sea.

·     February 18: GST Council finalises draft compensation bill providing to make good any revenue loss to states in first five years of GST rollout.

·     March 4: GST Council approves CGST and Integrated-GST bills.

·     March 20: Cabinet approved CGST, IGST and UT GST and Compensation bills.

·     March 27: Jaitley tables CGST, IGST, UT GST and Compensation bills in Parliament. Lok Sabha and Rajya Sabha pass all the four key GST Bills - Central GST (CGST), Integrated GST (IGST), State GST (SGST) and Union Territory GST (UTGST).

·     May 18: GST Council fits over 1,200 goods in one of the four tax slabs of 5, 12, 18 and 28%. Over 80% of goods of mass consumption either exempted or taxed under 5% slab. GST Council fixes cess on luxury and sin goods to create kitty for compensating states.

·     May 19: GST Council decides on 5, 12, 18 and 28% as service tax slabs.

·     Jun 21: All states except Jammu and Kashmir pass SGST law.

·     June 28: Mamata Banerjee announces her partys decision to skip midnight launch of GST.

·     June 29: Congress, Left too decide to skip launch.

·     June 30: GST set to roll out at midnight.

Benefits of GST

For business and industry

o Easy compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.

 o Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and 2 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.

 o 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.

 o Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.

o Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

· For Central and State Governments

 o Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.

o Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an inbuilt mechanism in the design of GST that would incentivize tax compliance by traders.

o Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the 3 Government, and will therefore, lead to higher revenue efficiency.

 · For the consumer

o Single and transparent tax proportionate to the value of goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.

 o Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.

Disadvantages of GST

Higher Tax Burden for Manufacturing SMEs 

Small businesses in the manufacturing sector will bear most of the brunt of GST implementation. Under the existing excise laws, only manufacturing business with a turnover more than Rs. 1.50 crores have to pay excise duty. However, under GST the turnover limit has been reduced to Rs. 20 lakh thus increasing the tax burden for many manufacturing SMEs.

Increase in Operating Costs

Most small businesses do not employ professionals and prefer to pay taxes and file returns on their own to save costs. For GST though, as it is a completely new tax system, they will require professional assistance. While this will benefit the professionals, the small businesses will have to bear the additional costs of hiring experts.

Also, businesses will need to train their employees in GST compliance increasing their overhead expenses.

Change in Business Software

Most businesses use accounting software or ERPs for filing tax returns which have excise, VAT, and service tax already incorporated in them. The change to GST will require them to change their ERPs, too, leading to increased costs of purchasing new software and training employees.

GST Will be Implemented During the Middle of the Year

The  GST implementation date is 1st July 2017. So, for the fiscal year, 2017-18 business will follow the old tax structure for the first 3 months, and GST for the rest of the time. It is impossible to cross over from one tax structure to the other in just a day, and hence businesses will end up running both tax systems in parallel, resulting in more confusion and compliance issues.

Increase in Taxes will Increase Prices

Currently, some sectors like the textile industry are exempted from taxes or pay low tax. GST has only 4 proposed tax rates of 5%,12%,18%, 28%. Thus, for many sectors the tax burden will increase which in turn will increase the price of the final goods.

Petroleum Products Are Not Part of GST Yet

Petroleum products are being kept outside the scope of GST as of now. States will levy their own taxes on this sector. Tax credit for inputs will therefore not be available to related industries like the plastic industry which are heavily dependent on petroleum products. Petrol and diesel are required to run factory machinery and unavailability of input tax credit on petroleum products will most probably push up the final price of all manufactured goods.  

Recently the Finance Minister Arun Jaitley said that GST will apply on petroleum only after all the states, through the GST Council, are agreed on it. So, an inclusion of petrol in GST is expected but there is no deadline on the horizon yet.

Registration in Multiple States

GST requires businesses to register in all the states they are operating in. This will increase the burden of compliances.

Problems Faced by E-commerce

Nowadays, many SMEs operate through their own online shopping websites or through third party websites to sell to different parts of India. Under GST, they will be required to register for all the states. Not only that, they will not be eligible for composition scheme and will be required to pay taxes like any large organization. E-commerce facilitators are now required to collect TCS under GST which will lead to increased complications and compliances.

Composition Scheme is Not Available for Many Businesses

Composition scheme is available for only businesses selling goods. It is not available to service providers or for online sellers. This sets SMEs at par with large organizations in an unfair move.

No Anti-Inflationary Measures

Every country that follows GST experienced a hike in inflation when they first introduced it. They countered the inflation by keeping tabs on prices and initiating anti-profiteering measures at the retail level to protect consumers from price swindling.

While there have been similar discussions in the GST council, India still does not have concrete anti-inflationary measures to curb the inflation that is an inevitable outcome of GST.

Conclusion

Change is definitely never easy. It is important to take a leaf from global economies that implemented GST and overcame the teething troubles to experience the advantages of having a unified tax system, easy input credits, and reduced compliances.

Once GST is implemented, most of the current challenges of this move will be a story of the past. India will become a single market where goods can move freely and there will lesser compliances to deal with for businesses.

Taxes at Centre and State level to be subsumed into GST

 At the Central level, the following taxes are being subsumed:

a. Central Excise Duty,

 b. Additional Excise Duty,

 c. Service Tax,

 d. Additional Customs Duty commonly known as Countervailing Duty, and e. Special Additional Duty of Customs.

 At the State level, the following taxes are being subsumed:

 a. Subsuming of State Value Added Tax/Sales Tax,

 b. Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),

c. Octroi and Entry tax,

d. Purchase Tax, 4

e. Luxury tax, and

f. Taxes on lottery, betting and gambling.

How would GST be administered in India?

 Keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. 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 input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.