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Vol. 11 Issue 2.6 February 27, 2015
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Making headway to the GST Zone
Introduction
With the 122nd Constitution Amendment Bill, 2014 (‘Constitution Amendment Bill’ /
‘the Bill’) having been tabled in the winter session of the parliament and with the
budget session on, hopes of GST seeing the light of the day have revived. The
Government seems geared to move progressively in leading the nation towards its
biggest indirect tax reform. The nation is sitting on a high expectation that the
Government will meet its declared deadline of April 1, 2016 for implementation of
GST.
However, except for the Constitutional Amendment Bill and a broad outline of the
dual GST mechanism, there is little information available on the overall GST
structure and its administrative framework. There are widespread speculations
amongst all stakeholders on various key aspects of GST including variance in rates
of tax for goods and services across States, differential rate of tax for goods and
services, tax on interstate supplies, credit mechanism, compliance obligations etc.
The Fourteenth Finance Commission (‘FC-XIV’) has tabled its report before the
Parliament on February 24, 2015 providing its recommendations on the mechanism
of compensation, in case of any revenue loss to the States.
This newsletter provides a synopsis on the journey thus far on GST, the path to
implementation of GST and the key aspects to watch out in the progress towards
GST regime.
The journey thus far
The progress on GST since the first discussion paper was circulated in November
2009 is as follows:
First discussion paper on November 10, 2009
13th finance commission report on December 30, 2009
The Constitution (One hundred and fifteenth Amendment) Bill, 2011 on March
22, 2011 (this lapsed due to dissolution of Lok Sabha)
Standing committee report on August 7, 2013
The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014
on December 19, 2014
FC-XIV report tabled before the Parliament on February 24, 2015
The path to GST implementation
The budget session has commenced and the Bill is in the agenda for
discussion. The major steps towards GST implementation include:
Approval of the Bill by more than half of total strength of each house of
Parliament with 2/3rd of members present and voting;
Approval of the Bill by simple majority of State Legislatures (at least 50% of
the States to approve);
TheBill to get Presidential assent;
States and the Centre to enact legislations on GST;
Roll out of GST (expected from April 1, 2016)
The most critical next step is the passing of the Bill by both the houses of the
Parliament and ratification of the same by the States.
The GST council has been given wide powers for decision making on matters such
as determining the rates of tax and exemptions, threshold limits and framing model
laws and principles of levy and apportionment of IGST.
The main concern of the States has been compensation for loss of revenue and
loss of fiscal autonomy. There needs to be a consensus from the States on the
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Deni Shah
Poonam Harjani
Shashank Gupta
compensation plan with a sunset clause of 5 years. As a part of the said scheme
the Central government is likely to compensate the States for 100 percent of the
losses in the first three years, 75 percent in the fourth year and 50 percent in the
fifth year. An Additional tax of 1 percent is also proposed on interstate supply of
goods to address the concern of manufacturing States (this tax would accrue to the
State of Origin).
FC-XIV Report on GST compensation
The Terms of reference to FC-XIV was to consider the impact of the proposed GST
on the finances of the Center and the States and the mechanism of compensation,
in case of revenue loss.
FC-XIV expects that the final GST design would have all the characteristics of a
good tax system such as broad base, low rate, minimum rate differentiation, low
compliance cost and reduced distortions to the economy. However, in the absence
of clarity on the design of GST and the final rate structure, the report does not
provide estimates of revenue implications. FC-XIV has made the following
suggestions/recommendations:
Re: GST Compensation
Union may have to initially bear an additional fiscal burden arising due to the
GST compensation; this burden is to be treated as an investment which is
certain to yield substantial gains to the nation in the medium/ long run
The compensation for revenue loss to States, if any, should be 100 per cent
compensation in the first, second and third years, 75 per cent compensation in
the fourth year and 50 per cent compensation in the fifth and final year
Create an autonomous and independent GST Compensation Fund through
legislative actions in a manner that it gives reasonable comfort to States, while
limiting the period of operation appropriately
Re: Universal Application of GST Regime
The Constitutional legislative and design aspects of GST should enable
transition towards universal application of GST over the medium to long term,
while making necessary provisions for smooth transition through temporary
arrangements
The acceptance of FC-XIV recommendations by the Center would address the
apprehensions of revenue uncertainty raised by the States.
Rajeev Dimri, Gurgaon
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Malini Mallikarjun, Mumbai
+91 22 6135 7025 [email protected]
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Sivarajan K, Chennai
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Amit Jain, Pune
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Shankar Sreenivasan
GSTN Network
Timely implementation of GST before April 2016 is also highly dependent on the
information technology infrastructure. The responsibility is to be shouldered by
Goods and Services Tax Network (GSTN), which is a quasi-government company
that has been incorporated to build, set-up and operationalize the GST common
portal. The States need to be prepared with the relevant infrastructure and
approach to be able to ensure GST implementation by April, 2016. The
preparedness of the States with reference to information technology infrastructure
is highly varied; States like Kerala and Maharashtra are at a fairly advanced stage,
while States like Bihar, West Bengal and Delhi still have a long way to go. Though
some States may opt for the grace period of one year to implement GST, this is
only a transitory provision and all States will have to eventually implement GST.
Framework of GST legislations
While the basic GST model and structure is in place, a lot of aspects would
become clear once the framework of the key components of taxation is laid
out. This includes:
Definition of taxable event
Classification of goods and services across States
Rates of tax for goods and services across States
Valuation mechanism
Credit rules
Determination of place of supply of goods/ services
Compliance requirements – registration, returns, payment of taxes and audits
Advance ruling and dispute resolution mechanism
Transitional provisions including transfer of credits, past period assessments
BMR Comments
Most of the sectors are highly optimistic about the impact GST could have
on their businesses. This is on the expectation that the GST in its full state
is likely to liberalize credits norms, increase levels of transparency and
reduce compliance and tax policing and more importantly, unify India into a
single common market. GST is expected to unleash a new era of greater
investments and better infrastructure and also significantly contribute to the
GDP growth.
Although the centre and many States are keen in undertaking necessary
steps to speed-up the process of implementation of GST, there are still
several open points that need to be resolved before GST becomes a reality.
The present government has shown immense grit and determination in
bringing GST by tabling the Bill, discussions with State government, giving
favorable statements during press releases etc. The acceptance of FC-XIV
recommendations by the Center would also address the apprehensions of
revenue uncertainty raised by the States. Due to this, large number of
companies expect that GST related announcements are likely to feature in
the budget proposals. The industry also feels hopeful regarding roll out of
road map / whitepaper / model legislations (like Place of Supply Rules, etc)
for implementation of GST.
While GST system is prevalent in many countries and it is useful to learn
from international experience, it is also important for the legislators to
consider the applicability of these systems to the Indian context. It is really
a tough task for the Government to implement a GST regime balancing the
requirements of various stakeholders; however, in its endeavor, it is
imperative that the laws are laid out within the framework of the sound
taxing principles, viz (i) Neutrality, (ii) Efficiency, (iii) Certainty and
simplicity, (iv) Effectiveness and Fairness, and (v) Flexibility.
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Disclaimer:
This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of
preparation and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no
responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be
accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This
newsletter does not substitute the need to refer to the original pronouncements.
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