The GST law is India’s biggest and most anticipated tax reform in recent history. It aims to improve compliance, consolidate a trove of central and local taxes, create a level playing field for businesses and increase the governments’ revenue. In fact, it is estimated that the implementation of the GST will increase GDP by 2%.The features of the GST are as follows:
1. 122nd Constitutional Amendment: The GST law is India’s 101st Constitutional Amendment Act. Presently, only the central government can tax ‘services’ because services are currently a part of the Union List (List 1).The GST law proposed the deletion of services and ‘tax on services’ from the Union List, so that service tax can be levied by state and the central governments. Thus, to implement the GST, an amendment to the constitution was required because the GST law changes the lists under the Seventh Schedule of the Constitution of India. This will result in a change in the balance of power among the federation of states that make up India.
2. Dual tax system: Under the GST, the good and services produced and supplied within a state will pay the State GST (SGST) and Central GST (CGST) while inter-state supplies will be subject to the central GST and Integrated GST (IGST). Thus, every supply of goods and services will attract two taxes.
CGST will subsume the following indirect taxes: Central Excise Duties (CENVAT), countervailing duties (like SAD, CVD), Service Tax, cess and surcharges levied by the Union, and additional excise duties as specified in the Additional Duties· of Excise (Goods of Special Importance) Act, 1957.
SGST will subsume: VAT, State Excise Duty (barring the levy on liquor), Octroi Entry Tax, Purchase Tax, Entertainment Tax and taxes on Betting, Lottery and Gambling.
IGST will replace Central Sales Tax (CST). Furthermore, IGST will be levied on all imports. The IGST will go to the state where the good is imported.
3. Simultaneous taxation by state and central government on common value: Today, the manufacture and supply of a god are taxed in a sequential manner: first, the central government taxes the manufacturing process of a product and then the state levies a tax on the sale of the product. Thus, the while the excise duty is levied on the price of the product, state tax is levied on the price of the product plus central excise duty. This inflates the price of the product. Under the GST regime, the SGST/IGST and CGST will be levied on the same value, simultaneously i.e. both the SGST/IGST and CGST on the price of the product.
4. Taxation based on supply of goods: Presently, the taxation is based on production and sale/provision of goods and services. Goods manufactured in India are subject to CENVAT. Taxation based on manufacturing is narrow, inefficient and non-neutral taxation. Under GST, taxation will be applicable only on the supply of goods.
5. Destination based tax: Currently, taxation in India follows the origin based tax model. Under GST, India will adopt a destination based tax model.
6. Input tax credits for intra and inter-state transactions: The input tax credit provision allows suppliers (manufacturers, distributors and retailers) to set-off the GST paid by them during the purchase of products and services against the GST paid on the supply of the same across the value chain. This means that tax will be charged on the value added at each stage of processing. This eliminates the cascading effect that the current tax system has. As a result the prices of goods will decline.
Presently, input tax credits are available only for central taxes (CENVAT credit) and intra-state sales (VAT credits). However, no input tax credit is provided on CST for inter-state transactions. However, under the GST, input tax credits will be available on both inter and intra state sales. This will be made possible through the creation of a central clearing house for mediating inter-state credits and providing central compensation. IGST will be levied on sale by the state of origin and will be availed as a credit in the state of sale. Inter-state transactions will be routed electronically through the central clearing house. The IGST credit will be used to make the following payments in the following order of preference: IGST, CGST or SGST. The clearing house will track when SGST is paid using IGST and will provide compensation to the state to that extent. Thus, the loss incurred by the destination state (due adjusting the tax paid in another state against the tax payable to the destination state) will be compensated by the center.
7. Streams of input tax credit cannot be mixed: SGST tax credits can only be used to pay SGST and CGST input tax credits can only be used to pay CGST. That is SGST tax credits cannot be used to pay CGST and CGST tax credits cannot be used to pay SGST.
8. 1% charge on inter-state supply of goods and services: According to section 18 of the Constitution amendment bill, along with the prevailing GST rate, an additional 1% will be charged on the inter-state supply of goods by the center. The charge so levied will be given to the state where the product originated. Input tax credit cannot be claimed for this 1% tax. The same shall be levied for the first two years of the implementation of the GST. The extension of this tax will depend on the recommendation of the GST Council.
9. Concept of ‘furtherance of business’: Furthermore, the concept of input tax credit has been broadened to any input used as an intermediate product in the production of goods for “furtherance of businesses”. This will have a negative impact on prices.
10. End of double taxation: In India, under the current tax regime, a single transaction is classified as both a sale and as a provision of service. As a result, every transaction is taxed both as a good and as a service. However, under GST, a single transaction will be classified either as a supply of goods or as a supply of services. This will eliminate double taxation and thus reduce the prices.
11. Broad reduction in tax rates: Under the current tax regime excise duty is levied at the standard rate of 12.5% on the manufacture of good while VAT is levied at about 14.5% on the sale of goods. Thus, the end user pays about 27-28% of tax per product. However, the GST stipulates a four tire tax structure of 0%, 5%, 12%, 18% and 28%. Thus, there will be an overall reduction in tax rates which will reduce the cost of goods and services.
12. Anti-profiteering clause: To ensure that the benefit afforded by input tax credits trickles down to the end user by means of a reduction in price, an anti-profiteering clause has been inserted in the GST.
13. Creation of common market: Under the GST, India will be converted into one common market by the removal of geographical trade barriers. This will result in a more level playing field and allow business to expand beyond state boundaries. Consequently, new players will emerge, which will increase competition in the market as a result of which prices will decline.
14. Increase in service tax: Currently, the service tax stand at 15% and is applicable to all services barring cultural activities, certain pilgrimages, and ambulance services and sports events. However, GST would make services costlier by increasing the tax rate to 18%.
15. Increase in tax for sin goods: Sin goods include tobacco products, cigarettes and aerated drinks. These will be taxed at rates higher than other goods to discourage their consumption. Tobacco based products will be subject to the GST and central excise duty. However, alcohol is not taxable under the GST.
16. Essential items exempt from GST rates: Greater than 50% of the item in the CPI (Consumer Price Index) will be exempt from GST tax rates. The remaining items will fall under the lowest tax bracket.
17. Petroleum exempt from GST: Petrol and petroleum based products will be exempt from GST in its initial phase. Manufacturing of petroleum (and related products) is subject to central excise duty and the sale of petroleum (and related products) is subject to CST/ VAT.
18. Zero rated products: Exports and all products supplied to special economic zone will be zero rated and exempt from central and state taxes and levies.
19. Giving states the ability to fix service tax: Under GST, states will be allowed to fix the taxes on service. Thus, they are likely to increase service taxes to increase their revenue. This will result in a rise in prices of services.
20. Bringing e-commerce into the tax net: Under the GST tax regime, e-commerce companies will come under the tax net and will have to pay tax deducted at source for each product that they buy from their suppliers. This means that e-commerce companies will lose their current tax advantage. As a result their profit margins will decline. This will decrease their ability to give discounts and freebies. As a result, the prices of products sold on online platforms will rise.
21. GST Network: Under the new tax regime, it is required that GST returns be filled monthly, thus necessitating robust accounting software capable of doing the same in an error free fashion. Infosys has capitalized on this opportunity by winning a contract worth `1,380 crore from the Central Government to create and service the technology network (dubbed the GST Network) required to implement GST across the county.
22. GST Council: To facilitate co-ordination between the state and the central governments for the formulation and implementation of GST, the creation of the GST Council is provided for in the constitutional amendment. The GST Council will consist of state and union finance ministers and other functionaries. Decisions will be made according to a majority vote (to be carried out according to the provisions of the GST law). The council will be required to make recommendations to the states and the center on: exemptions and threshold for exemption, rate of tax to be levied, date on which petroleum products will be subject to the GST, other special provisions.