Goods and Services Tax
Goods and Services Tax (GST) refers to the single unified tax created by amalgamating a large number of Central and State taxes presently applicable in India. The 101st constitution Amendment Act of September 2016 made in this regard, inserted a definition of GST in Article 366 of the constitution by inserting a sub-clause 12A. As per that, GST means any tax on supply of goods, or services, or both, except taxes on supply of the alcoholic liquor for human consumption. And here, services are defined to mean anything other than goods.
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 (set-off means making good the payments on account of prior-stage taxes for the transactions across the entire value chain). In other words, it follows a multi-stage collection mechanism. In this, tax is collected at every stage and the credit of tax paid at the previous stage is available as a set off at the next stage of transaction. This shifts the tax incidence near to the consumer and benefits the industry through better cash flows and better working capital management.
Implementation of GST is one of the major indirect tax reforms in India and was put in place on 1 July 2017 during a special midnight session of the Parliament. The aforesaid Constitutional Amendment Act for introducing GST was passed in the Parliament on 8 August 2016 and notified on 8 September 2016. The Various other GST laws were passed on 6 April 2017 and notified on 12 April 2017.
The 14th Goods and Services Tax (GST) Council Meeting, held at Srinagar, Jammu and Kashmir on 18 May 2017 broadly approved the GST rates for goods at nil rate, 5%, 12%, 18% and 28%. The Council has also broadly approved the rates of GST Compensation Cess to be levied on certain goods. More details may be seen here. On 3 June 2017 GST council declared that Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal, and articles thereof; imitation jewellery; coin etc. would attract 3% GST while rough diamond will attract 0.25%.
Context & Genesis of GST
Currently, fiscal powers between the Centre and the States are clearly demarcated in the Constitution of India with almost no overlap between the respective domains. The Centre has the powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics etc.) while the States have the powers to levy tax on the sale of goods. In the case of inter-State sales, the Centre has the power to levy a tax (the Central Sales Tax) but, the tax is collected and retained entirely by the States. As for services, it is the Centre alone that is empowered to levy service tax. Since the States are not empowered to levy any tax on the sale or purchase of goods in the course of their importation into or exportation from India, the Centre levies and collects this tax as additional duties of customs. This duty counterbalances excise duties, sales tax, State value added tax (VAT) and other taxes levied on the like domestic product. Introduction of the GST would require amendments in the Constitution so as to concurrently empower the Centre and the States to levy and collect the GST.
The tax unification process has been going on in India for some time now. There have been efforts to improve upon the Central excise duty and States sales tax regime starting with the introduction of MODVAT in 1986. CENVAT which replaced MODVAT, at the central level, is a valued added tax that provided credit on tax paid on inputs and it was an improvement over Central excise duty. At state level, the state VAT was an improvement over sales tax regime. However, there have been some problems associated with the present taxation system like; the CENVAT is confined only to the manufacturing stage and it has not included several Central taxes. Similarly, the State VAT is paid on the value of goods that includes the CENVAT already paid. It is thereby a “tax on tax”. There is also burden of Central Sales Tax (CST) on the inter-state movement of goods. Further, ‘setting-off’ service tax has been a difficult proposition especially at the state level and taxes like luxury tax, entertainment tax etc. are still out of the purview of State level VAT. The GST is thus an overarching and overhauling effort in the Indian taxation system to unify the process and reduce the multiplicity of taxes.
The idea of moving towards the GST was first mooted by the then Union Finance Minister Shri P. Chidambaram in his Budget for 2006-07. This was based on the 2003 Report of the Kelkar Task Force on indirect taxes. Initially, it was proposed that GST would be introduced by 1st April, 2010. The Empowered Committee of State Finance Ministers (EC) which had formulated the design of State VAT was requested to come up with a roadmap and structure for the GST. Joint Working Groups of officials having representation of the States as well as the Centre were set up to examine various aspects of the GST and draw up reports specifically on exemptions and thresholds, taxation of services and taxation of inter-State supplies. Based on discussions within and between it and the Central Government, the EC released its First Discussion Paper (FDP) on the GST in November, 2009. This spells out the features of the proposed GST and has formed the basis for discussion between the Centre and the States so far.
The GST implementation took a lot of time as some States have been apprehensive about surrendering their taxation jurisdiction while others wanted to be adequately compensated.
In the Union Budget 2014-15 the Finance Minister indicated that the debate whether to introduce a Goods and Services Tax (GST) must now come to an end. Following the Budget presentation in July 2014, the Constitution Amendment Bill was placed in the Parliament in December 2014. This was passed by the lower House of the Parliament - Lok Sabha - on 6 May 2016. It was then referred to the Select Committee of Rajya Sabha (the upper house of the Parliament) which submitted its report on 22 July 2015. The Bill was passed with certain amendments in the Rajya Sabha on 4 August 2016. The amended bill was finally passed by Lok Sabha on 8 August 2016 and notified the same on 8 September 2016.
Suitable legislation for the levy of GST (Central GST Bill and State GST Bills) drawing powers from the Constitution can be introduced in Parliament or the State Legislatures only after the enactment of the Constitution Amendment Bill. Unlike the Constitutional Amendment, the GST Bills would need to be passed by a simple majority. Obviously, the levy of the tax can commence only after the GST law has been enacted by the respective legislatures. Also, unlike the State VAT, the date of commencement of this levy would have to be synchronized across the Centre and the States. This is because the IGST model cannot function unless the Centre and all the States participate simultaneously.
A road map published by the Government subsequent to passage of Constitution amendment bill may be seen here.
The Various other GST laws were passed on 6 April 2017 and notified on 12 April 2017 and rates for various commodities were fixed in May 2017.
Advantages of GST
Adam Smith, father of economics, has laid down four canons of taxation which are equality, certainty, convenience and economy. A tax can be tested on these four criteria. The Good and Services Tax (GST) qualifies for these four canons in a better manner. By amalgamating various taxes into a single tax, GST would mitigate cascading or double taxation (tax upon tax situations) in a major way and pave the way for a common national market. If implemented rightly, it can ensure that there is a single rate for a particular commodity across the states thereby increasing the ease of doing business. If the benefits are passed on fully, for consumers, this would mean 25%-30% reduction in the prices they pay, as tax burden on goods comes down. This can reduce the overall costs of production and hence, introduction of GST would also make Indian products more competitive in the domestic and international markets, with beneficial effects on economic growth. According to the implementing agency, Central Board of Excise and Customs (CBEC), this tax, because of its transparent character, would be easier to administer.It is designed in such way that all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent. Union Budget 2014-15 admitted that GST will streamline the tax administration, avoid harassment of the business and result in higher revenue collection, both for the Centre and the States. GST also helps in better tax collections, better tax compliance, less cases of tax evasion and litigation, more transparency, less harassment and corruption, according to Union Finance Minister, Shri Arun Jaitly. GST is estimated to increase the GDP growth by 1.5 to 2% (Source: PIB release dated 25 April 2017).
Salient Features of GST as proposed in India
The salient features of GST are as under:
- GST comes under the broad spectrum of what is known as Value Added Tax which provides for input credits and taxes only the value addition that happened in the process of production / provision of service.
- 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.
- GST would be a destination based tax as against the present concept of origin based tax. i.e, tax is imposed at the point of consumption.
- 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). This is to protect the fiscal federalism of this country as both the levels of government have the constitutional mandate to levy and collect specific taxes. SGST would be applicable only if both the buyer and seller are located within the state. CGST does not have any such restriction regarding location.
- The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. There will be seamless flow of input tax credit from one State to another. Proceeds of IGST will be apportioned among the States.
- CGST and SGST would be levied at rates to be mutually agreed upon by the Centre and the States.
- 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 cannot be mixed except in specified circumstances of inter-State sales.
- However, 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. However, the cross utilization of CGST and SGST would not be allowed except in the case of inter-State supply of goods and services under the IGST model.
- All goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST (To include alcoholic liquor, which is a major source of revenue for the states, another constitution amendment would be required). Crude Petroleum and some petroleum products have also been Constitutionally brought under GST. However, it is provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, i.e., Sales Tax/VAT, CST and Excise duty only, will continue to be levied in the interim period.
- Tobacco and tobacco products would be subject to GST. In addition, the Centre could continue to levy Central Excise duty and the States can levy sales tax / VAT.
- Exports would be zero-rated.The exporter shall have an option to either pay tax for his output and claim its refund or export under bond without tax and claim refund of Input Tax Credit.
- Import of goods or services would be treated as inter-State supplies and therefore, would be subject to IGST in addition to the applicable customs duties. In other words, all imported goods will be charged integrated tax (IGST) which is equivalent to Central GST + State GST. This will bring equality with taxation on local products.
- The list of exempted goods and services is attempted to be kept to a minimum and it would be harmonized for the Centre and the States as far as possible.
- A common threshold exemption would apply to both CGST and SGST. Dealers with a turnover below it would be exempt from tax. A compounding option (i.e.to pay tax at a flat rate without credits) would be available to small dealers below a certain threshold. The threshold exemption and compounding provision would be optional. For instance, taxpayers with an aggregate turnover in a financial year up to Rs.20 lakhs would be exempt from tax. Aggregate turnover will be computed on all India basis. For eleven Special Category States, like those in the North-East and the hilly States, the exemption threshold will be Rs. 10 lakhs. All taxpayers eligible for threshold exemption will have the option of paying tax with input tax credit (ITC) benefits. Taxpayers making inter-State supplies or paying tax on reverse charge basis shall not be eligible for threshold exemption. Similarly, small taxpayers with an aggregate turnover in a financial year up to Rest. 50 lakhs shall be eligible for composition levy. Under the scheme, a taxpayer shall pay tax as a percentage of his turnover during the year without the benefit of ITC.
- GST rates will be uniform across the country. However, to give some fiscal autonomy to the States and Centre, there will a provision of a narrow tax band over and above the floor rates of CGST and SGST.
- The laws, regulations and procedures for levy and collection of CGST and SGST would be harmonized to the extent possible.
- A Goods & Services Tax Council which will be a joint forum of the Centre and the States will be created. This Council would function under the Chairmanship of the Union Finance Minister and will have Ministers in charge of Finance/Revenue or Minister nominated by each of the States & UTs with Legislatures, as members. Members have differential voting powers with votes of the central government having 1/3rd weightage and rest 2/3rd with states. Decisions can be taken only if it has more than 3/4th majority (i.e. Votes in Favour = 1/3 *Votes in favour by Center + [(2/3 * 1/No. of states present and Voting)*Votes in favour by States]). Such decisions will be immune from the deficiencies in the constitution of the GST council or appointment of its members or any procedural irregularity. The Council will make recommendations to the Union and the States on important issues like
- taxes, cesses and surcharges levied by the Union, States and local bodies which may be subsumed in the GST
- the goods and services that may be subjected to or exempted from GST
- apportioning of the revenue between center and states in case of IGST
- Framing of model GST laws
- deciding the principles that govern the determination of place of supply, based on GST laws
- decision on threshold limits of turnover below which goods and services may be exempted from GST,
- creating special provisions for states like Jammu& Kashmir, North Eastern States including Assam, and hilly states like Himachal Pradesh and Uttarakhand,
- decision on the date on which GST will be levied on crude petroleum, high speed diesel, petrol, natural gas, and ATF.
- tax rates including the floor rates and bands, special rates /rates for a specified period to raise additional resources during a natural calamity or disaster
- framing dispute resolution modalities. Rajya Sabha made this provision mandatory while passing the Bill in 2016. The GST Council will have to establish a mechanism to adjudicate any dispute arising out of its recommendations. Disputes can be between: (a) the centre vs. one or more states; (b) the centre and states vs. one or more states; (c) state vs. state. This implies that there will be a standing mechanism to resolve disputes.
- GST levied and collected by Union Govt. except the tax apportioned with states in case of IGST shall also be distributable between Union and States as per the recommendations of the Finance Commission.
- Union Government cannot impose surcharges (which usually goes to the consolidated fund of India) on articles which are covered under GST laws.
- Centre will compensate States for loss of revenue arising on account of implementation of the GST for a period up to five years. (The compensation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year).Rajya Sabha while passing the Bill made the amendments in such a way to make it mandatory that center must provide compensation; compensation cannot be provided for more than five years, but allows to decide a shorter time period.
Valuation of goods will be done on the basis of transaction value i.e. the invoice price, which is the current practice under the Central Excise and Customs Laws. E-Commerce companies are required to collect tax at source in relation to any supplies made through their online platforms, under fulfilment model, at the rate notified by the Government. An anti-profiteering measure has been incorporated in the GST law to ensure that any benefits on account of reduction in tax rates results in commensurate reduction in prices of such goods/services.
It was proposed in the 2014 bill to levy a non-vatable additional tax of not more than 1% on supply of goods in the course of inter-State trade or commerce, except on those goods which are specifically exempted by the Central Government. This tax will be for a period not exceeding 2 years, or further such period as recommended by the GST Council. This additional tax on supply of goods will be assigned to the States from where such supplies originate. (Since GST is a destination based tax where the consuming state would receive the revenue, this provision has been built in to compensate the producer / manufacturing states, like say in case of petroleum products whose production constitutes a substantial portion of revenue for a few states). However, this provision was removed by the Rajya Sabha while passing the bill in August 2016.
Taxes subsumed in GST
GST would replace the following taxes currently levied and collected by the Centre:
- Central Excise duty
- Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act 1955,
- Additional Excise Duties (Goods of Special Importance)
- Additional Excise Duties (Textiles and Textile Products)
- Additional Customs Duty (commonly known as Countervailing duties or CVD)
- Special Additional Duty of Customs (SAD)
- Service Tax
- Cesses and surcharges in so far as they relate to the supply of goods and services
- Taxes on the sale or purchase of newspapers and on advertisements published therein.
State taxes that would be subsumed within the GST are:
- State VAT/ Sales Tax
- Central Sales Tax (levied by the Center and collected by the States)
- Luxury Tax
- Entry Tax i.e, taxes on the entry of goods into a local area for consumption, use or sale therein. (other than those in lieu of octroi)
- Purchase Tax
- Entertainment Tax which are not levied by the local bodies; i.e. panchayats, municipalities and District councils of autonomous districts can impose taxes on entertainment and amusements
- Taxes on general advertisements
- Taxes on lotteries, betting and gambling
- State cesses and surcharges insofar as they relate to supply of goods or services
GST does not subsume stamp duties and custom duties.
Constitution Amendment Bills of 2011 & 2014
The assignment of concurrent jurisdiction to the Centre and the States for the levy of GST would require a unique institutional mechanism that would ensure that decisions about the structure, design and operation of GST are taken jointly by the two. For it to be effective, such a mechanism also needs to have Constitutional force.
To address all these and other issues, the Constitution (115th Amendment) Bill was introduced in the Lok Sabha on 22.03.2011. The Bill was referred to the Parliamentary Standing Committee on Finance for examination and based on its report, certain official amendments were prepared. Subsequent to general elections and formation of a new Government, the Union Cabinet under Prime Minister Shri Narendra Modi approved on 17th December, 2014 the proposal for replacing the earlier bill of the erstwhile government with a similar bill alongwith some more amendments -The Constitution (122nd Amendment) (GST) Bill, 2014- to facilitate the introduction of GST. The Union Finance Minister Shri Arun Jaitley introduced the said Bill in the Lok Sabha on 19th December 2014.This was passed by the lower House of the Parliament - Lok Sabha - on 6 May 2016. The Bill was passed with certain amendments in the Rajya Sabha on 4 August 2016. The amended bill was finally passed by Lok Sabha on 8 August 2016.
Constitution Amendment Bill confers concurrent powers to Parliament and the state Legislatures to make laws governing GST.
The Constitution Amendment Bill needs to be passed by a two-third majority in both Houses of Parliament and subsequent ratification by at least half of the State Legislatures. After passage of the Bill by both Houses of Parliament, ratification by State legislatures and receipt of assent by the President, the process of enactment would be complete. The first state to ratify the Constitution Amendment Bill was Assam. The 101st Constitution Amendment Bill was notified on 8 September 2017.
Every Union Budget since its introduction of the idea in 2006-07 has been expressing the Government's commitments to go ahead with the GST implementation. GST is now expected to be implemented by April 2016. However, the work is still in progress.
Goods and Services Tax Network (GSTN) was formed as a Section 25 (not for profit), non-Government, private limited company on March 28, 2013 to provide IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders for implementation of the Goods and Services Tax (GST). The Government of India holds 24.5% equity in GSTN and all States of the Indian Union, including NCT of Delhi and Puducherry, and the Empowered Committee of State Finance Ministers (EC), together hold another 24.5%. Balance 51% equity is with non-Government financial institutions.
The Central Board of Excise and Customs (CBEC) is involved with the drafting of GST law and procedures, particularly the CGST and IGST law, which will be exclusive domain of the Central Government. CBEC also addresses the implementation challenges. A GST Cell has been created within CBEC which functions under the Joint Secretary TRU –II. The draft Model GST Law was released in June 2016.
In 2013, four Committees were constituted by the Empowered Committee of State Finance Ministers (EC) to deal with the various aspects of work relating to the introduction of GST. The Committees are:
- The Committee on the Problem of Dual Control, Threshold and Exemptions in GST Regime;
- The Committee on Revenue Neutral Rates for State GST & Central GST and Place of Supply Rules (A Sub-Committee has been constituted to examines issues relating to the Place of Supply Rules);
- The Committee on IGST & GST on Imports (A Sub- Committee was set up to examine issues pertaining to IGST model);
- The Committee to draft model GST Law (Three Sub-Committees were constituted to draft various aspects of the model law).
A Committee headed by the Chief Economic Adviser Dr. Arvind Subramanian on Possible Tax rates under GST submitted its Report to the Finance Minister on 4 December 2015. On the Revenue Neutral Rate (RNR), the Committee recommended the same in the range between 15 percent and 15.5 percent (Centre and states combined) with a preference for the lower end of that range.
The GST law is still evolving and the dialogue continues between the Centre and the States on related issues. A number of procedural, legal and administrative issues relating to GST are under active discussions in various Committees / Sub-committees constituted by the EC and in various Groups constituted by the CBEC.
The following four GST related Acts were passed by the Parliament on 6 April 2017 and notified on 12 April 2017:
- The Central Goods and Services Tax Act 2017 (The CGST Act)
- The Integrated Goods and Services Tax Act 2017 (The IGST Act)
- The Union Territory Goods and Services Tax Act 2017 (The UTGST Act)
- The Goods and Services Tax (Compensation to the States) Act 2017 (The Compensation Act)
The major features of these Acts may be seen here.
The 14th Goods and Services Tax (GST) Council Meeting, held at Srinagar, Jammu and Kashmir on 18 May 2017 broadly approved the GST rates for goods at nil rate, 5%, 12%, 18% and 28% to be levied on certain goods. The Council has also broadly approved the rates of GST Compensation Cess to be levied on certain goods. More details may be seen here.On 3 June 2017 GST council declared that Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal, and articles thereof; imitation jewellery; coin etc. would attract 3% GST while rough diamond will attract 0.25%.
- FAQ on GST
- CBEC site for GST
- Discussion Paper by Empowered committee
- Thirteenth Finance Commission, Chapter 5, “Goods and Services Tax”, pp-63-76
- Internal status note of CBEC
- PIB release dated 22 December 2014
- The Frequently Asked Questions on the features of GST issued by the Government on 3 August 2016