Goods & Services Tax

Goods & Services Tax An Introduction Prepared by - Swapnil Shah, Kirtane Pandit,Chartered Accountants

Points to Ponder • What is Goods & Services Tax? • GST –Global Scenario • Background in India • Constitution of the Joint Working Group (JWG) • Basic Structure of GST • Recommendations of JWG • Dual structure of GST • Likely Features Of GST • Justification of GST • Hurdles in Implementation • Administrative machinery • Way Forward • GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax.

What is Goods & Services Tax? • GST is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. • GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax.

GST –Global Scenario • More than 140 countries have already introduced GST/National VAT. • France was the first country to introduce GST system in 1954. • Most countries have a single GST rate. • Typically it is a single rate system but two/three rate systems are also prevalent depending upon the requirement of the implementing nation. • Standard GST rate in most countries ranges between 15-20% • All sectors are taxed with very few exceptions/ exemptions • Full tax credits on inputs – 100% set off • Canada and Brazil alone have a dual VAT.

Background in India • The effort to introduce the new tax regime was reflected, for the first time, in 2006-2007 Union Budget Speech. • The then Finance Minister Mr. P. Chidambaram remarked that there is a large consensus that the country must move towards a national level GST that must be shared between the centre and the states. • He proposed 1 April, 2010 as the date for introducing GST. After successful introduction of Value Added Tax (VAT) in almost all the states and continuous increase in number of services under the service tax net.

Continued… • Finance Minister Pranab Mukherjee while presenting the Budget on July 6, 2009, said that GST would come into effect from April 2010.

Constitution of the Joint Working Group(JWG) • Empowered Committee of State Finance Ministers has been working with the Central Government to prepare a roadmap for introducing a national level GST with effect from 1 April 2010. • In May 2007, Empowered Committee (EC) of State Finance Ministers in consultation with the Central Government, constituted a Joint Working Group (JWG), to recommend the GST model. • The JWG had been entrusted with the task of studying global GST models and identify alternate models for introduction in India. • Within 7 months of its constitution that is in November 2007, JWG presented its report on the GST to the EC. The EC has accepted the report on GST submitted by the JWG.

Continued… • Based on a study of the alternate models vis-à-vis India’s federal structure, the JWG had suggested the best model for introduction of GST in India. • Dual GST recommended by Joint Working Group of the EC. • EC has accepted the recommendations and submitted its report to the Government.

Basic Structure of GST • ‘Central GST’ and ‘State GST’ to operate in a parallel fashion. • Both Central and State GST to be further bifurcated into ‘Goods Tax’ and ‘Services Tax’. • The proposed rate of GST in India is 16%.

Taxes proposed to be subsumed by GST • Value Added Tax • Service Tax • Central Excise • Entertainment Tax • Luxury Tax • Octroi • Lottery Tax

Recommendations of JWG • The committee has suggested that GST, when it rolls out on 1 April 2010, have two components Central tax and a single uniform state tax across the country. • The JWG report had suggested that states must tax intra-state services while inter-state services must remain with the Centre. • Petroleum products, including crude, high-speed diesel and petrol, may remain outside the ambit of GST. • Central cess like education and oil cess may be kept outside the dual GST structure to be introduced from April 2010. • Diesel and petrol, may remain outside the ambit of GST.

Recommendations • Besides central cess, the EC of State Finance Ministers has also recommended to keep purchase tax and octroi, which are collected at state and local levels, outside the GST framework. • The report has also recommended keeping stamp duty, which is a good source of revenue for states, out of the purview of the GST. Stamp duty is levied on transfer of assets like houses and land.

How will the dual structure work? • Central GST and State GST would be levied on different services. • State GST would be levied on services of ‘local nature’. • Single periodical return would be filed under the dual structure. • Export of goods and services would be zero rated, meaning exporters of goods and services need not pay GST on their exports.GST paid by them on the procurement of goods and services will be refunded. • their exports. GST paid by them on the procurement of goods and services will be refunded.

Continued…. • Any economic activity which is not supply of goods is supply of services. • All services to be taxed with few exceptions. • Central GST on services relatively easy to collect. • State GST on services will be far more complex – particularly on cross border services. • Cross border Services • Taxed at the place of consumption of services

Continued… • GST paid on imports (goods as well as services) would be available as credit. • Input tax Credits ( ITC) • full credits under the Central and the State GST that will operate in parallel • cross utilization of credits between Central GST and State GST not permitted • refund of unutilized accumulated ITC. • Inter-State transactions • goods to be taxed in the destination/importing State • services to be taxed in the State of consumption • zero rating in the originating State

Continued… • Difficult to determine the actual place of effective use/enjoyment of services. • Rules for place of supply of services to be framed. • Currently no uniform practice exists. • Administrative convenience & convenience of the trade & industry to be factored to determine the place of collection of service tax.

Likely Features of GST • Credit of tax paid on purchases would be allowed across the supply chain • Credit of State GST may not be allowed against Central GST or vice versa. • State GST paid in one State would be creditable against State GST liability of another State. • Requirement of ‘C’ forms and ‘F’ forms would be abolished. • Certain specified goods may be subject to a lower State GST rate or be exempted.

Continued… • Manufacturers, traders and service providers having turnover more than the threshold limit to register under Central and State GST. • A single Tax Identification Number (TIN) would be allotted for both Central and State GST. • Both Central as well as State GST would be levied at every point of sale.

Why GST ??? • A simple tax structure with only one or two rates of taxes. • Uniform single tax across the supply chain. • Reduced transaction cost in the hands of the tax payers. • Increased tax collections due to wider tax base and better compliance. • Improvement in international cost competitiveness of indigenous goods and services.

Continued… • Enhancement in efficiency in manufacture and distribution due to economies of scale. • GST encourages an unbiased tax structure that is neutral to business processes, business models, organization structure, product substitutes and geographical locations. • The prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods.

Continued… • replacing the cascading effect [tax on tax] created by existing indirect taxes.

Hurdles in Implementation • Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. • Such amendments may virtually transform the Indian federation into an economic Union much along the lines of the European Union. • It is important to note that states will have to be given constitutional powers to tax services. At present, states do not enjoy the power to tax services. • The various levies of the Union and the states are also to be harmonized. In the current scenario it is difficult to visualise constitutional amendments of such far reaching implications.

Continued… • Drafting of the Goods & Services Tax Act ( expected by October,2009). • Ideally GST model should have been finalised at least 12 months prior to implementation. • Services have to be appropriately integrated in the tax network. • Fate of various area based exemptions/concessions provided by Central as well as State to be decided • Treatment of inter-state branch transfers under the GST scenario to be identified.

Continued… • Transition from present indirect taxes towards the Dual GST structure. • Whether unadjusted tax credits would be refunded by the State as applicable under the present VAT system. • Treatment of closing stock of finished goods, inputs, input services and capital goods with respect to tax credits on the date of implementation. • Protecting and balancing the present and future revenues of the Centre and the States. • The Centre is expected to put in place a mechanism to compensate states for any revenue loss due to GST.

Continued… • consultation with all stakeholders including trade and industry associations before finalisation, administrative preparedness to implement the new tax regime and resolution of all other issues under discussion.

Administrative Machinery • Standardization of systems and procedures • Uniform dispute settlement machinery • Training • Re-organization of administrative machinery for GST implementation is the key • Building information technology backbone – the single most important initiative for GST implementation

Ensuring uniform implementation • Uniform Implementation of GST should be ensured across all states(unlike staggered implementation of VAT). Many issues might crop up in case of transactions between states who comply with GST & states who are not complying with GST.

Way forward…. • The dual structure should be simple to understand and implement. • Creating consumer and supplier awareness before introduction of the dual structure. • The cost of compliance should be minimum i.e. reporting and compliance procedures should be identical across all the States. • The format of periodical returns should be identical across all the States.

Way forward…. • Dispute settlement machinery should be uniform under the State GST • Lower level tax authorities should have adequate understanding of the fundamentally different law • States should have powers to increase/decrease the rate of State GST on certain specified goods within a permissible limit • Introduce electronic State GST and Central GST refunds.

Let’s hope GST is Great & Simplified Tax !!! Thank you.

Goods & Services Tax