KCG- Portal of Journals

Page 1

Continuous issue-14 | May - August 2015

An Illustrated framework for GST implementation in India Abstract In the light of the empirical conclusions developed in this paper, it seems appropriate to conclude by

briefly noting the policy implications of the results. In the first place, the macroeconomic impact of a

change to the introduction of the GST is significant in terms of growth effects, price effects, current

account effects and the effect on the budget balance..Secondly, in a highly developed open economy

with a high and growing service sector, a change in the tax mix from income to consumption-based taxes

is likely to provide a fruitful source of revenue. Thirdly, the aggregate consumer price impact of the

introduction of the GST in India on the macro-economy was both limited and temporary. Finally, despite

falling outside the limited focus of this short note, we should record that some impact has also occurred

in the administrative component of the compliance cost of the GST as well as a likely increase in tax

revenue from the “underground” or “black” economy.

Introduction

The introduction of Goods and Services Tax (GST) would be a significant step in the

reform of indirect taxation in India. Amalgamating several Central and State taxes into a single

tax would mitigate cascading or double taxation, facilitating a common national market. The

simplicity of the tax should lead to easier administration and enforcement. As India is a federal

republic GST would be implemented concurrently by the central government and by state

governments.

The Country is at the behest of implementing Indian Goods and Services Tax, which is

said to be by far the most radical reform which the Government of India would have ever

implemented. The current taxation system in India is laced with complexity, multiplicity and

KCG- Portal of Journals

Page 2

ambiguity. The plague of cascading effect of taxes, was to some extent, mitigated with the

introduction of CENVAT. in the year 1986 at the Central level and further with the introduction

at the State level, with a Value Added Tax system for most part of the Country, in the year

2005. Considering multiple taxes levied by the Centre and the State and absence of the facility

to offset the incidence of one tax with another in most cases, the effect of cascading gets built

into the transaction cost.

Present indirect taxation structure

India has a dual tax system for taxation of Goods And Services. The tax system is described by

Central Taxes and State Taxes, which may be further subdivided into Excise Duty, Service Tax,

VAT and Customs Duty. In 2005 VAT was introduced for intra-state transactions, using the input

tax credit principle.

History in Parliament and Empowered Committee

In 2000, the Vajpayee Government set up a committee headed by Asim Dasgupta, the (Finance

Minister of the Government of West Bengal) to design a model for GST and oversee IT

preparations.

An announcement was made by P. Chidambaram, the Union Finance Minister, during

the central budget of 2007–2008 that GST would be introduced from April 1, 2010 and that the

Empowered Committee of State Finance Ministers, on his request, would work with the Central

Government to prepare a road map for introduction of GST in India.

After this announcement, the Empowered Committee of State Finance Ministers

decided to set up a Joint Working Group on May 10, 2007, with the Adviser to the Union

Finance Minister and the Member-Secretary of Empowered Committee as co-conveners and

the concerned Joint Secretaries of the Department of Revenue of Union Finance Ministry and

all Finance Secretaries of the states as its members. The Joint Working Group, after intensive

internal discussions as well as interaction with experts and representatives of Chambers of

Commerce and Industry, submitted its report to the Empowered Committee on November 19,

2007.

This report was then discussed in detail in the meeting of Empowered Committee on

November 28, 2007. On the basis of this discussion and the written observations of the states,

KCG- Portal of Journals

Page 3

certain modifications were made, and a final version of the views of Empowered Committee at

that stage was prepared and was sent to the Government of India (April 30, 2008). The

comments of the Government of India were received on December 12, 2008 and were duly

considered by the Empowered Committee (December 16, 2008).

Basic idea of GST

Justification in Implementation of GST

iDespite the success with VAT, there are still certain shortcoming in structure in the levy

of VAT both at Central level and State level. The shortcoming in CENVAT of the Government of

India lies in non-inclusion of several taxes in the overall framework of CENVAT such as VAT,

ACD, Surcharge etc. Moreover, in the present State-level VAT scheme, CENVAT load on the

goods remains included in the value of goods to be taxed under State VAT, and contributing to

that extent a cascading effect on account of CENVAT element. Furthermore, any commodity, in

general, is produced on the basis of physical inputs as well as services, and there should be

integration of VAT on goods with tax on services at the State level as well, and at the same time

there should also be removal of cascading effect of service tax.

Further, by removing cascading effect, layers of taxes and simplifying structures, the GST

would encourage compliance, which is also expected to widen the tax base. But virtually every

media report that mentions the GST says that the tax reform has the potential to add up to 2

percent to India’s GDP. iiIf VAT is considered to be a major improvement over the pre-existing

Central excise duty at the national level and the sales tax system at the State level, then GST

will be a further significant breakthrough – the next logical step – towards a comprehensive

indirect tax reform in the country. However, the paper makes some crucial assumption such as

pegging the revenue-neutral rate in the range of 6.2 percent and 9.4 percent. The revenue-

neutral rate is the rate for GST that will not make a net difference to the overall tax collection of

centre and states.

Salient Features of GST

The GST Framework could easily be one of the most important tax reforms to be tabled for

discussion in the Parliament. It does bring with some problems, like division of taxation power

between Centre and State. The GST will be applicable on the basis of Destination principle.

So the GST has two components:-

KCG- Portal of Journals

Page 4

One levied by Centre (hereinafter referred to as Central GST) and the other levied by the States

(hereinafter referred as State GST)

However, the basic features of law such as chargeability, definition of taxable event and taxable

person, measure of levy including valuation provisions, basis of classification etc. will be

uniform across these statutes as far as practicable.

The GST would be levied in 3 different forms.

CGST SGST

This is applicable in the case of Inter-State

sale of goods and provision of service

In case of sale of goods Intra-state then

tax will be charged as per this form.

Taxes/Duties Covered

under CGST

Taxes/Duties Covered

under SGST

Central Excise Duty Entry tax (not octroi)

Service Tax Entertainment tax

CVD, SAD VAT/Sales Tax

Excise duty on M&TP etc. Luxury tax etc.

Integrated GST (IGST)

The scope of IGST Model is that centre would levy IGST which would be CGST plus SGST on all

inter-state transactions of taxable goods and services with appropriate provision for

consignment or stock transfer of goods and services. IGST will be combination of CGST and

SGST and the same will be collected by the Centre in the Origin State.

Tax Credit Mechanism

Time bound refund of credit will be allowed in cases such as exports and inverted duty

structure.It is clear that cross utilization of CGST and SGST is not allowed generally but the IGST

mechanism will make this credit fungible.

KCG- Portal of Journals

Page 5

Following example will give clear idea above utilisation of credit and costing under present

system & GST.

Example:-

Assumption:- (1) Rate of Excise Duty – 8%; (2) VAT Rate – 12.5%; (3) Central GST Rate – 12%; (4)

State GST Rate – 8%; (5) Profit Margin – Rs. 5,000/- fixed (6)All parties are located in one state.

Particulars Under Present

Scenario Under GST

(I) Manufacturer (D1) to Wholesaler (D2)

Cost of Production 45000

45000

Input Tax Credit (Assuming nil) –

–

Add : Profit Margin 5000

5000

Producers Basic Price 50000

50000

Add: Central Excise Duty @ 12% 6000

–

Add : Value Added Tax @ 12.5% on Rs. 56,000/- 7000

–

Add : Central GST @ 12% –

6000

Add : State GST @ 8% –

4000

Sale Price 63000

60000

(II) Wholesaler (D2) to Retailer (D3)

Cost of Goods to D2 56000

50000

Available Input Tax Credit for set off 7000

10000

Add : Profit Margin 5000

5000

Total 61000

55000

Add : Value Added Tax @ 12.5% 7625

–

Add : Central GST @ 12% –

6600

KCG- Portal of Journals

Page 6

Add : State GST @ 8% –

4400

Total Price to the Retailer 68625

66000

(III) Retailer (D3) to Final Consumer (C)

Cost of Goods to D3 61000

55000

Input Tax Credit 7625

11000

Add : Profit Margin 5000

5000

Total 1,32,000 1,20,000 66000

60000

Add : Value Added Tax @ 12.5% 8250

–

Add : Central GST @ 12% –

7200

Add : State GST @ 8% –

4800

Total Price to the Consumer 74250

72000

Total Tax Payable in All Transactions 14250

12000

Verification:- VAT @12.5% [74,250 * 12.5 / 112.5] = 8250 +

6000 (CENVAT) = 14250

– D1 (6000 +7000)

– D2 (7625 – 7000) –

D3 (8250 – 7625)

13,000

625

625

Verification:- GST @20% [72000 *20 / 120] =12000

– D1 (6,000 + 4,000)

– D2 (11,000 – 10,000) –

D3 (12,000 – 11,000)

10,000

1,000

1,000

KCG- Portal of Journals

Page 7

Cost Benefit

In the current Tax scenario credit of surcharge, VAT, ACD is not available which increases cost.

With the introduction of GST credit of these taxes is available with cascading effect which will

help in reduction in cost. From the above example is will clear that Tax Payable in GST is less

than Current Situation.

Stock Transfer

Another important aspect is stock transfer. Because in GST, tax will be levied on the dispatch.

Every dispatch will be taxable under GST, so at every stage i.e. factory, warehouse etc.

registration is necessary.

Place of Supply

The main challenge in introducing GST is defining the place of supply in respect of certain

services. In existing tax regime it is not a problem as Service Tax is chargeable by Centre only.

But in GST place of supply has to be defined clearly to avoid dispute among states and in case of

inter-state transaction.

Place of Taxation – Inter-State Transactions

An important question in the context of the Dual GST is whether these rules for international

cross-border supplies can be adopted for domestic inter-state supplies also. It is recognized that

the place where the supplier or the recipient is established cannot be defined uniquely at the

sub-national level within a common market.

Tax-Rate under the proposed GST

The tax-rate under the proposed GST would come down, but the number of assesses would

increase by 5-6 times. Although rates would come down, tax collection would go up due to

increased buoyancy. The government is working on a special IT platform for smooth

implementation of the proposed Goods and Services Tax (GST). The IT special purpose vehicle

KCG- Portal of Journals

Page 8

(SPV) christened as GST N (Network) will be owned by three stakeholders—the centre, the

states and the technology partner NSDL, then Central Board of Excise and Customs (CBEC)

Chairman S Dutt Majumdar said while addressing a "National Conference on GST". On the

possibility of rolling out GST, he said, "There was no need for alarm if GST was not rolled out in

April 1, 2012."

Renewed GST concerns

With heterogeneous State laws on VAT, the debate on the necessity for a GST has been

reignited. The best GST systems across the world use a single GST, while India has opted for a

dual-GST model. Critics claim that CGST,

SGST and IGST are nothing but new

names for Central Excise/Service Tax,

VAT and CST, and hence GST brings

nothing new to the table. The concept of

value-added has never been utilized in

the levy of service, as the Delhi High

Court is attempting to prove in the case

of Home Solution Retail, while under

Central Excise the focus is on defining

and refining the definition of

manufacture, instead of focusing on

value additions. The Revenue can be very

stubborn when it comes to refunds, as

the Maharashtra Government proves, and software entities that applied for refunds on excess

service tax paid on inputs discovered.

The all-new Cenvat Credit Rules, 2014 do little to clarify eligibility for input credits, by

using general terms such as “ any goods which have no relationship whatsoever with the

Figure 1 need for GST

KCG- Portal of Journals

Page 9

manufacture of a final product” and “ services used primarily for personal use or consumption

of any employee”. Before penning the GST Act and Rules, the Empowered Committee would do

well to take a hard look at all the present laws that GST subsumes and their complexities. It

could tempt them to rethink on the necessity to draft even the preamble.

This change in the tax structure is going to have a huge impact in the current supply

chain of India. It is currently sub-optimal, and has been structured in such a fashion to avoid

taxes. The supply chain tax structure of India can be broadly classified in the following

categories. Threshold limit of traders, with turnover below 10 lakhs, need not register, is a

concept brought from VAT system. This can cause ambiguity. The argument that small traders

cannot be handled by the system is not true. A country that can give a Unique ID to every

citizen, can as well give registration service to small traders. They should not be eliminated

from the Tax system. Even the compounding system, of charging 0.5% for the traders with

below 50 lakhs turnover, can cause undesirable results. They also should not be eliminated

from the tax system. It is not fair to restrict them from certain trade activities, such as selling to

other states. The registered trader will have to face loss of input tax, if he buys either from

threshold trader or compounded traders.

GST in other countries

While countries such as Singapore and New Zealand tax virtually everything at a single

rate, Indonesia has five positive rates.a zero rate and over 30 categories of exemptions. In

China, GST applies only to goods and the provision of repairs[citation needed], replacement and

processing services. It is only recoverable on goods used in the production process, and GST on

fixed assets is not recoverable.

iiiThere is a separate business tax in the form of VAT. For example, when the GST was

introduced in New Zealand in 1986, it yielded revenues that were 45 per cent higher than

anticipated, in large part due to improved compliance. It is more neutral and efficient structure

could yield significant dividends to the economy in increased output and productivity. The GST

in Canada replaced the federal manufacturers’ sales tax which was then levied at the rate of 60

per cent and was similar in design and structure as the CENVAT in India. It is estimated that this

replacement resulted in an increase in potential GDP by 24 per cent, consisting of 12.4 per cent

increase in national income from higher factor productivity and 50 per cent increase from a

KCG- Portal of Journals

Page 10

larger capital stock (due to elimination of tax cascading). The Canadian experience is suggestive

of the potential benefits to the Indian economy. This means gains of about US$15 billion

annually. This is indeed a staggering sum and suggests the need for energetic action to usher

the GST regime at an early date. GST rates of some countries are given below.

Country Rate of GST

Australia 10%

France 19.6%

Canada 5%

Germany 19%

Japan 8%

Singapore 7%

Sweden 25%

India 27% [a]

New Zealand 15%

Pakistan 18%

Malaysia 6%

Denmark 25%

Positive impact on Indian economy

Speeds up economic union of India

Better compliance and revenue buoyancy Replacing the cascading effect [tax on tax]

created by existing indirect taxes Tax incidence for consumers may fall Lower

transaction cost for final consumers

By merging all levies on goods and services into one, GST acquires a very simple and

transparent character

Uniformity in tax regime with only one or two tax rates across the supply chain as

against multiple tax structure as of present

Increased tax collections due to wide coverage of goods and services

Improvement in cost competitiveness of goods and services in the international market

KCG- Portal of Journals

Page 11

Points to be reviewed

Taxation of inter-state services and their method of taxation

o Difficulties in defining Place of supply, place of delivery

Road Permit and Check posts

Stock Transfer

Integration of certain Central and State taxes (Various Cess, Electricity duty etc.)

Constitutional amendment authorizing state to collect and retain tax on service

like Group Health Insurance, Consulting services. However most of the B2B

services not a problem because of availability of credit

Disputes even with regard to classification of goods

Jurisdictional Issues with regard to registration and SCN / Assessments

Latest updates on GST

Constitutional (115th Amendment) bill on the GST

Automatic compensation mechanism

Concept of GST Council

Dispute Settlement Authority

Conclusion

In the light of the empirical conclusions developed in this paper, it seems appropriate to

conclude by briefly noting the policy implications of the results.

In the first place, the macroeconomic impact of a change to the introduction of the GST is

significant in terms of growth effects, price effects, current account effects and the effect on

the budget balance.

Secondly, in a highly developed open economy with a high and growing service sector, a change

in the tax mix from income to consumption-based taxes is likely to provide a fruitful source of

revenue.

KCG- Portal of Journals

Page 12

Thirdly, the aggregate consumer price impact of the introduction of the GST in India on the

macro-economy was both limited and temporary. Finally, despite falling outside the limited

focus of this short note, we should record that some impact has also occurred in the

administrative component of the compliance cost of the GST as well as a likely increase in tax

revenue from the “underground” or “black” economy.

The task of fiscal consolidation for this government will not be easy. There will be little scope to

cut overall expenditure, as it has already been trimmed sharply in the last 2 years. The

government must instead focus on switching expenditure from unproductive subsidies towards

spending on sector such as health, education and infrastructure. The only way to reduce fiscal

deficit, therefore, is to raise revenues as a share of GDP. To do so, the government must

implement structural tax reforms such as GST, improve tax compliance and widen tax coverage.

The scope to lower fiscal deficit in fiscal 2015 is limited given large roll-over of subsidies from

last fiscal and little possibilities of implementation of GST within this year. Beyond that,

however, implementation of GST could facilitate a much needed correction in fiscal deficit. In

the base case, it is believed that partial GST – one that excludes petroleum goods is most likely.

Even with this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017. On the downside, a

complete failure to implement GST would result in the fiscal deficit being higher at around 4-

4.2% in fiscal 2016-2017.

References

I. Poddar, Satya, and Eric Hutton, (2001)

II. Poddar, S. and M. English (1997) Poddar, S. and M. English (1997)

III. McLure, Charles (2000): “Implementing subnational VATs on internal trade: The

compensating VAT (CVAT).” International Trade and Public Finance, Vol. 7,

IV. Barrand, Peter (1991), “The Treatment of Non-Profit Bodies and Government Entities

under the New Zealand GST”, International VAT Monitor, January 1991.

KCG- Portal of Journals

Page 13

V. Bird, Richard and Gendron (1998), “Dual VATs and Cross-border Trade, Two Problems

and One Solution”, International Tax and Public Finance 5(3), 1998

VI. Canada Department of Finance (1987), Federal Sales Tax Reform, Government of

Canada, 1987.

VII. Empowered Committee of State Finance Ministers (2008), A Model and Roadmap for

Goods and Services Tax in India, New Delhi.

VIII. Keen, Michael and Stephen Smith (2000), “Viva VIVAT!”, International Tax and Public

Finance, Vol. 7, 741-751

IX. Kelkar, Vijay, et al (2004), “Report on Implementation of the Fiscal Responsibilityand

Budget Management Act, 2003 ”, Ministry of Finance, Government of India, New Delhi.

X. Kuo, C.Y., Tom McGirr, Saya Poddar (1988), “Measuring the Non-neutralities of Sales

and Excise Taxes in Canada”, Canadian Tax Journal , 38, 1988.

XI. Poddar, Satya, and Eric Hutton, (2001): "Zero-Rating of Inter-State Sales Under a Sub-

national VAT: A New Approach", Paper presented at the National Tax Association, 94th

Annual Conference on Taxation, Baltimore, November 8-10, 2001.

XII. Poddar, Satya (2003): “Consumption Taxes, The Role of the Value Added Tax”, in Patrick

Honohan (ed.) Taxation of Financial Intermediation: theory and practice inemerging

economies, (World Bank and the Oxford University Press).

XIII. Poddar, Satya (2007), “VAT on Financial Services – Searching for a Workable

Compromise”, in Krever, Richard and David White (ed): GST in Retrospect and Prospect,

Brookers Ltd, New Zealand.

XIV. Poddar, Satya and Amaresh Bagchi (2007), “Revenue-neutral rate for GST”, The

Economic Times, November 15, 2007.

XV. Poddar, Satya (2009), “Treatment of Housing under VAT”, mimeograph, presented at

the conference on VAT organized by the American Tax Policy Institute, Washington, Feb.

18-19, 2009

XVI. Rao, M. Govinda (2001), Report of the Expert Group on Taxation of Services,

Government of India, March 2001.

KCG- Portal of Journals

Page 14

XVII. Rao, M. Govinda (2008), “Unfinsihed Reform Agendum: Fiscal Consolidation and

Reforms – A Comment” in Jagdish Bhagwati and Charles W. Colomiris,

XVIII. Sustaining India’s Growth Miracle” Columbia Business School, 2008 pp. 104-114

XIX. www.icai.org. KCG-Portal of Journals

********************************************************************

Prof. Kesarisinh S. Parmar I/c. Principal & Assistant Professor at Government Arts and Commerce College - Kadoli

Copyright © 2012- 2016 KCG. All Rights Reserved. | Powered By : Knowledge Consortium of Gujarat