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India is at the cusp of introducing Goods and Service Tax (GST), a destination-based consumption tax, replacing several Central and State levies.
The proposed GST framework would subsume a majority of Indirect taxes levied by Central and State Governments like Central Excise Duty, Service tax, State Value Added Taxes, Central Sales Tax, Entry tax, Purchase tax, Entertainment tax, Luxury tax, etc.
The introduction of GST heralds a much awaited transformational change of the Indirect tax landscape.
GST will have a business wide impact on the entire value chain of operations viz. procurement, manufacturing, sales and pricing, information technology, supply chain and warehousing etc.
Goods and Services Tax and Make in India
One of the key components needed to enable success of Make in India campaign is to eliminate red tape, ambiguities in tax laws and procedures thereby enhancing ease of doing business.
GST would achieve the desired objective of creating a pan India market for goods and services, eliminating the cascading effect of taxes, providing seamless credit across goods and services.
GST would also seek to simplify the processes of registrations, filing returns by increased reliance on automation thereby enhancing the ease of doing business in India.
Goods and Services Tax: Preparing for a new era
Important milestones
GST would be the biggest tax reform the country has seen since Independence and has the potential to increase the country’s GDP by one to two percentage points.
The discussion for the introduction of GST started as early as in the year 2000. An Empowered Committee was set up with the objective of designing the GST blue print and technological preparedness for its smooth roll out with consensus of all stakeholders.
The Empowered Committee released its First Discussion Paper in late 2009 after consultations with the Central and the State Governments. This discussion paper laid down the basic model of GST and has been the focal point of discussion between the Centre and the States so far.
After several discussions amongst the stakeholders, the Constitution (122nd Amendment) Bill, 2014 (‘Constitution Amendment Bill’) was finally tabled in the Parliament and has since been passed by the lower house of Parliament (Lok Sabha) on 6 May 2015. On being tabled for discussion in the Upper House of Parliament (Rajya Sabha), the same was referred to a Select Committee which has since submitted its recommendations.
The Constitutional Amendment Bill will be required to be passed by both the houses of the Parliament by a majority of the total membership of the House and two-third majority of members present and voting, and ratified by at least one half of the State Legislative Assemblies before it can come into effect.
Goods and Services Tax architecture
India will adopt the dual GST approach with taxes imposed by Central Government and State Government simultaneously in form of Central GST (CGST) and State GST (SGST) on supply of goods, services or both. Integrated GST (IGST) would be levied for inter-state transactions.
In addition to the above, for first two years, upto one percent additional tax is proposed to be levied on inter-state supplies of goods as a
measure of compensation for the origin States against possible loss of revenues.
It has been proposed to include all goods and services except petroleum products, natural gas, tobacco, narcotic products, alcoholic beverages. Petroleum products, natural gas could be brought within the ambit of GST at a later date.
A GST Council would be established consisting of the Union Finance Minister and State Finance Ministers to take decisions on various matters.
Key features of Constitution Amendment Bill
The Constitution Amendment Bill proposes the following:
• Concurrent powers to Central and State governments to make laws on the taxation of goods and services
• Exclusive powers of Centre to make laws for levy and collection of GST on inter-state trade or commerce
• Constitution of GST Council
The GST Council will be an important platform converging the interests of the Centre and State. It will be empowered to make recommendations on:
• Central/state taxes to be subsumed, goods/services to be exempted, model GST laws, principles of levy and place of supply rules, threshold limits, band of GST rates, special provision for certain States etc
• Date of levy of GST on petroleum products, natural gas
• Extended period for levy of Additional tax (not exceeding 1%) on inter-state supply of goods by origin states beyond two years
• Compensation to states arising out of implementation of GST upto five years
Decisions will be taken by at least three-fourth majority with Centre and States having defined voting rights having differential weightage.
GST Rates
The determination of revenue neutral rate has occupied the centre stage of various discussions. The rates earlier proposed by the government for goods were zero (for exports), one percent (for precious metals), twelve percent (lower rate for basic importance goods) and twenty percent (standard rate) and sixteen percent rate for services in the first year of introduction. The GST rate on goods was proposed to converge to sixteen percent rate in a given timeframe to bring it at par with the service tax rate.
Various studies have been commissioned after the release of the first draft paper. One of the recent studies undertaken by National Institute of Public Finance and Policy proposed the revenue neutral rate anywhere between 18.53% to 26.68% derived based on various combinations.
Introduction of GST with moderation in existing tax rates would become one of the key parameters of successful implementation.
IT Infrastructure
SPV called GSTN (Network) has been created to provide IT infrastructure and service support for implementation of GST. The GSTN will implement PAN-based registration, returns filing and payments processing for all States on a shared platform.
The SPV is owned by the Centre, States and a few partner banks.
Way forward
As an organisation, it would be critical to lay down the road map for the smooth implementation due to changes brought about on introduction of GST taking into account several impact areas. Readiness and gearing up for the transition would encompass -
• Initiating impact study on various business and operational processes to identify the tax impact
• Identifying areas which require representations to enable smooth implementation by reducing ambiguities and unintended tax consequences
• Identifying areas requiring change in IT systems
• Internal Training and setting up of standard process manuals
This information contained herein is in summary form and is therefore intended for general guidance only. This publication is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. This publication is not a substitute for detailed research and opinion. Before acting on any matters contained herein, reference should be made to subject matter experts and professional judgment needs to be exercised. Dhruva Advisors LLP cannot accept any
responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.
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