THE A.B.C OF G.S.T
THE BASICS ABOUT THE NEW TAX REFORM
Former Chief Commissioner of Customs, Central Excise and Service Tax and
Additional Director General of the Directorate of the Revenue Intelligence (D.R.I)
Goods and Services Tax, or GST is touted as the most significant economic reform since independence and is to be brought about by a complete transformation of the indirect tax structure in the country. Indirect taxes are those in which the burden of the tax in a transaction is passed on to the customer. In India they are levied by the Central as well as the State Governments.
The launch of GST is in process, and the final form and content of the GST will be known only after the GST Council, newly constituted under a recent constitutional amendment, takes decisions on it. But from the work done so far, the basic framework of the GST regime, which will underlie the Council’s deliberations, can be gleaned.
The following will be the basic and significant features of the GST regime:
A) MULTIPLE TAXES WILL BE REPLACED BY A SINGLE TAX
At present, the indirect taxes levied by the Central Government include Central Excise, Service Tax, and Customs, while the State Governments taxes are VAT, Entry Tax, Purchase Tax, Luxury Tax, Entertainment Tax, and a Tax on Lotteries, Betting and Gambling.
During the movement of goods down the supply chain, several taxes are paid: taxes paid on the removal of goods from a factory, (Central Excise and VAT), on the transportation of goods across the state borders, (Entry tax), on their sale by distributors, wholesalers and retailers (VAT), and in some states, on their purchase (Purchase tax). Similarly, several taxes are paid on the provision of various Services -Service tax, Entertainment tax, Luxury tax, tax on lotteries and betting.
In the new regime, all the above taxes on goods and services will be subsumed in a single tax, the GST, which will replace them.
Except for alcohol for human consumption no goods have been excluded from the purview of GST. Petroleum and petroleum products, though covered within GST, are to be brought under the tax regime within a period of five years, on a date recommended by the Council.
B) GST - DUAL GOVERNANCE BY CENTRAL AND STATE GOVERNMENTS WILL REPLACE MULTIPLE TAX AGENCIES
At present, to administer the various indirect taxes, Central Excise, VAT, Entry Taxes, Purchase tax, Service Tax, Entertainment Tax, Luxury Tax, there are as many separate Tax Departments.
Under GST, consequent to the merger of the taxes into Goods and Services tax, the multiple agencies will be replaced by the dual governance of the Central and the State Governments operating through their GST Wings.
GST will consist of two tax components, the CGST or Central GST for the Central Government, and the State GST or SGST for the State Government. For inter-state transactions an Integrated GST or IGST, composed of both CGST and SGST, would be payable to the Union Government.
C) GST- UNIFORM TAX RATES WILL REPLACE THE MULTIPLE TAX RATES
Presently, the multiple taxes on goods and services carry multiple tax rates. Central Excise and Service Tax carry different rates, and the rates for state taxes like VAT, Entry tax etc. vary not only from the Central taxes but from state to state.
Under GST, the multiple tax rates will be replaced by uniform rates of GST throughout the country. The GST rate will be the sum of the rates of CGST and SGST. What these rates will be would be decided by the GST Council, including the exemptions and threshold limits. However, a committee formed by the Central Government has recommended a general standard rate of 18%, a merit rate of 12 percent for goods of mass consumption, and 40% demerit rate for goods like tobacco products, high-end vehicles etc. Exports would be zero-rated.
D) MANY TAXABLE EVENTS WILL BE REPLACED BY SINGLE ONE- “SUPPLY”
At present, in the case of goods, there are different taxes on different taxable events; in the case of goods- on “manufacture” (Central Excise), on sale (VAT), on entry of goods into another state or local area (Entry Tax), ), on purchases (Purchase tax). As regards services, there is service tax on general services, , Luxury Tax on luxuries , Entertainment Tax on Entertainment, and a Tax on Lotteries, Betting and Gambling.
However, under the GST governance, the different taxes on different taxable events will merge into a single taxable event - the "Supply" of Goods and Services, on which alone GST, a Destination based tax, will be levied.
E) GST- NO TAX ON TAX, ONLY ON VALUE ADDITION
Government’s intention has always been to restrict the levy of indirect taxes on the value addition that occurs down the supply chain, and not to tax the tax element in the prices of goods and services. The tax on tax cascades through all the transactions of goods and services down the supply chain and creates hidden costs.
So far, the Central and State Governments have attempted to offset this distortion, in their separate domains through separate input relief mechanisms which allow tax paid at the input/input service stage to be set off against the tax payable on the output goods/services. This benefit has remained confined within the separate tax domains of the Central and State Governments. For example, Central Excise and Service tax paid on inputs and input services can be set off against the C. Excise and Service Tax payable on output goods and services, but not against the state taxes VAT or Entry Tax; similarly, the VAT or entry tax paid on inputs cannot be utilized for payment of central excise duty or service tax on the final product.
In the GST scenario the cascading effect of tax would be fully neutralized. GST will be the single indirect tax for the Centre as well as the states, and uniformly applicable throughout the country. As such the credit of GST paid on all inputs/input services will be available for payment of GST on output goods and services. In the dual governance of Centre and States, CGST credit will be available for payment of CGST, SGST credit for SGST payment and IGST credit for payment of IGST,CGST and SGST in that order. Thus no tax paid on inputs will carry over into subsequent transactions.
With the elimination of tax on tax, the hidden costs on this account would disappear, reducing transaction costs. Transactions costs should also come down because of faster movement of goods and reduced warehousing expenses following the removal of Entry taxes at state borders. Consequently a reduction in the prices of goods and services can also be expected, and an overall increase in economic activity.
ROBUST IT BACKBONE TO GST
All tax formalities would be carried out only on an electronic platform backed by a robust IT structure, the GSTN, which will reduce manual costs and lead to higher operational efficiencies. There would be a common portal for taxpayers and the minimizing the need for personal contact with authorities, and reducing delays and harassment.
Of course, the proof of the pudding is in the eating and the proper and effective implementation of the well-intentioned GST regime will be the key to the success of this revolutionary tax reform.