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GST:Understanding the Bill

GST is one indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Lok Sabha unanimously passed the 122nd Constitutional Amendment Bill  on GST  on August 8 2016 as amended by the Rajya Sabha with all 443 members voting in favour. The Bill was passed by Lok Sabha on May 6, 2015 and transmitted to Rajya Sabha for concurrence. Rajya Sabha passed the Bill with amendments at its sitting held on the August 3, 2016 and returned it to Lok Sabha. In total, nine changes were made to the bill and it was passed in Rajya Sabha.

Following are the salient features of the GST Constitutional Amendment Bill:

  • Insertion of new Article 246A conferring simultaneous power to the Union and the State legislatures to legislate on GST.
  • Insertion of new Article 279A for the creation of a Goods & Services Tax Council, which will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister.
  • To do away with the concept of ‘declared goods of special importance’ under the Constitutional.
  • Central Taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD), etc. will be subsumed in GST.
  • At the State level, Taxes like VAT/ Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax, etc. would be subsumed in GST.
  • The Centre will compensate States for loss of revenue arising on account of implementation of the GST for a period up to five years (The compensation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year).
  • All Goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, i.e., Sales Tax/VAT, CST and Excise duty only, will continue to be levied in the interim period.
  • Both Centre and States will simultaneously levy GST across the value chain. The Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
  • The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of Goods and Services. There will be seamless flow of input tax credit from one State to another. Proceeds of IGST will be apportioned among the States.
  • GST is a destination-based tax. All SGST on the final product will ordinarily accrue to the consuming State.
  • GST rates will be uniform across the Country. However, to give some fiscal autonomy to the Centre and States, there will a provision of a narrow tax band over and above the floor rates of CGST and SGST.
  • It is proposed to levy a non-vatable Additional Tax of not more than 1% on supply of goods in the course of inter-State trade or commerce for a period not exceeding 2 years, or further such period as recommended by the GST Council. This Additional Tax on supply of goods shall be assigned to the States from where such supplies originate.
  • The term “Services” is proposed to be exhaustively defined as “anything other than goods”.

Which taxes at the Centre and State level are being subsumed into GST?

At the Central level, the following taxes are being subsumed:

  1. Central Excise Duty,
  2. Additional Excise Duty,
  3. Service Tax,
  4. Additional Customs Duty commonly known as Countervailing Duty, and
  5. Special Additional Duty of Customs.

At the State level, the following taxes are being subsumed:

  1. Subsuming of State Value Added Tax/Sales Tax,
  2. Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),
  3. Octroi and Entry tax,
  4. Purchase Tax,
  5. Luxury tax, and
  6. Taxes on lottery, betting and gambling.

What’s Out of GST

  • Alcoholic liquor for human consumption
  • Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel
  • GST Council will decide until when to bring them in GST

The levy of GST

  • Both Parliament, state Houses will have the power to make laws on the taxation of goods and services.
  • Parliament’s law will not override a state law on GST.
  • Exclusive power to Centre to levy, collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST).
  • Central Law will prescribe manner of sharing of IGST between Centre and states, based on GST Council’s views.
  • Parliament will have to pass legislation on central GST (CGST) and Integrated GST (IGST)
  • All 29 states and 9 UTs will have to pass their state GST (SGST) Acts
  • Dates of implementation of CGST, SGST and IGST have to be negotiated and synchronized

How would GST be administered in India?

  • Keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST).
  • Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services.
  • Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
  • The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage.
  • Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.
  • The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.
  • Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of Central Excise.

How will be Inter-State Transactions of Goods and Services be taxed under GST in terms of IGST method?

  • In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services under Article 269A (1) of the Constitution.
  • The IGST would roughly be equal to CGST plus SGST.
  • The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another.
  • The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order).
  • The exporting State will transfer to the Centre the credit of SGST used in payment of IGST.
  • The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State.
  • The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
  • Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.

The GST Council

  • It will consist of the union Finance Minister (chairman) and MoS in charge of Revenue; Minister in charge of Finance or Taxation, or any other Minister, nominated by each state.
  • Decisions be made by three-fourths majority of votes cast; Centre shall have a third of votes cast, states shall together have two-thirds.
  • Mechanism for resolving disputes arising out of its recommendations may be decided by the Council itself.

The GST Council shall make recommendations on:

  • Taxes to be subsumed
  • Exemptions
  • Model GST laws, Principles of Levy, etc.
  • Threshold for exemption
  • Rates, including floor and bands
  • Special rate/rates for specified period
  • Date from which GST to be levied on crude, high speed diesel, natural gas, aviation turbine fuel and petrol
  • Special provisions for the Northeast, J&K, etc.

Consensus on GST Rates

GST had been eluding consensus on many issues since the last government brought a tentative proposal and the present government brought it once again to the table as one of the important policy initiatives. The two key issues out of several points of difference between the ruling party and the opposition as well between the Centre and States were the rate of GST and administrative control over the assessee. The issue of rate of GST gained further prominence with a demand that upper cap limit of 18 per cent of GST be entrenched in the Constitution per se. With the passage of  (One Hundred and Twenty-Second Amendment) Bill, 2014 and given the ambitious deadline of April 1, 2017 for the roll-out of GST, it was imperative that the GST Council took a stance and decided on the rate slabs at the earliest, which the GST Council seemed to have achieved in its meeting on November 3, 2016.

The multiple rates: The GST Council, at the recent meeting, decided and agreed upon the GST rates of 0, 5, 12, 18 and 28 per cent. In an attempt to compensate States for loss of revenue on account of change in indirect taxation regime from origin based to destination, certain goods in the peak rate bracket would be susceptible to an additional levy of cess for five years from implementation of GST.

Present tax rate will generally prevail in the GST rate Structure– It is expected that the GST rates would be assigned based on the prevalent effective rate of taxes on the products. For instance goods which are expected to attract a tax rate of 18 to 28 per cent currently attract an excise duty of 12.5 per cent and VAT of 14 to 14.5 per cent. Besides, based on the Finance Minister’s statement, all goods presently attracting about 27 per cent tax rate are not expected to be automatically taxed at the peak rate of 28 per cent. The products which are commonly used by the lower middle class are expected to be taxed only at 18 per cent.

The rates would be reflecting ‘ability to pay– The lowest rate of 5 per cent proposed to be levied on mass consumer goods would ensure that the common man is not saddled with additional tax burden under the GST regime.

The burden of Cess yet not decided– The quantum of cess cess that is likely to be imposed on goods are yet to be decided..

Specific tax for goods & services– On services, while the rates are yet to be finalised, it is emerging that the GST rate of 18 per cent would apply on all services other than the ones which presently enjoy some form of exemption or abatements, which would translate into higher working capital requirements. It is further expected that the essential services are taxed at a lower standard rate of 12 per cent.

The product list for different tax slabs yet to be decided– While the broad GST rate slabs have been agreed by the GST Council, the list of goods and services that fall under GST rate slab would determine the winners and losers on account of GST.

Advantages of GST

  • Currently, we have Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT or CENVAT mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production. CENVAT does not extend to value addition by the distributive trade below the stage of manufacturing; even manufacturers cannot claim set-off against other central taxes such as additional excise duty and surcharge.
  • Since GST is a value added tax it will improve compliance as tax burden on manufacturer and sellers fall.
  • Tax evasion in GST regime would fall because there is provision of credit for taxes paid on inputs.
  • GST would turn the Indian economy in one big market. Once GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components: a central GST and a state GST.
  • Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes imposed within the states such as luxury and entertainment tax, octroi, etc.
  • GST will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it, there will be tax only on value addition at each stage, with the producer/seller at every stage able to set off his taxes against the central/state GST paid on his purchases.
  • Consumer’s welfare would also increase. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Disadvantages of multiple tax rates

  • White goods and consumer durables are proposed to be taxed at a peak rate of 28 per cent, notwithstanding the mass consumption of the same and consequently, the effective rate of GST on such goods would increase. The instant industry was anticipating that such goods would be taxed at 18 per cent and proposal to tax at 28 per cent has taken the industry by surprise.
  • Multiple rates of GST are not supposed to give an optimum solution to cascading effect on prices as well cost of living. With multiple tax structure being ingrained under the GST regime, it is expected that rate of GST specifically in respect of goods is aligned to Harmonised System of Nomenclature. However, the litigation around classification of goods and services appears to be imminent.
  • The provision of cess may lead to price distortion and disincentive to certain industries.

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