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INTRODUCTION TO GST

GST is one indirect tax for the whole nation, which will make India one unified common market. The GST intends to subsume most indirect taxes under a single taxation regime. 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 stages 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. This is expected to help broaden the tax base, increase tax compliance, and reduce economic distortions caused by inter-state variations in taxes.
Why GST has been proposed?
Our Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas.

This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry. In order to simplify and rationalize indirect tax structures, Government of India attempted various tax policy reforms at different points of time. A system of VAT on services at the central government level was introduced in 2002. The states collect taxes through state sales tax VAT, introduced in 2005, levied on intra-state trade and the CST on inter-state trade. Despite all the various changes the overall taxation system continues to be complex and has various exemptions.

This led to the idea of "One nation One Tax" and introduction of GST in Indian financial system. This is simply very similar to VAT which is at present applicable in most of the states and can be termed as National level VAT on Goods and Services with only one difference that in this system not only goods but also services are involved and the rate of tax on goods and services are generally the same.

What are the major chronological events that have led to the introduction of GST?

GST is being introduced in the country after a 13 year long journey since it was first discussed in the report of the Kelkar Task Force on indirect taxes. A brief chronology outlining the major milestones on the proposal for introduction of GST in India is as follows:

  • In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle.
  • A proposal to introduce a National level Goods and Services Tax (GST) by April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07.
  • Since the proposal involved reform/restructuring of not only indirect taxes levied by the Centre but also the States, the responsibility of preparing a Design and Road Map for the implementation of GST was assigned to the Empowered Committee of State Finance Ministers (EC).
  • Based on inputs from Govt of India and States, the EC released its First Discussion Paper on Goods and Services Tax in India in November, 2009.
  • In order to take the GST related work further, a Joint Working Group consisting of officers from Central as well as State Government was constituted in September, 2009.
  • In order to amend the Constitution to enable introduction of GST, the Constitution (115th Amendment) Bill was introduced in the Lok Sabha in March 2011. As per the prescribed procedure, the Bill was referred to the Standing Committee on Finance of the Parliament for examination and report.
  • Meanwhile, in pursuance of the decision taken in a meeting between the Union Finance Minister and the Empowered Committee of State Finance Ministers on 8th November, 2012, 'Committee on GST Design', consisting of the officials of the Government of India, State Governments and the Empowered Committee was constituted.
  • This Committee did a detailed discussion on GST design including the Constitution (115th) Amendment Bill and submitted its report in January, 2013. Based on this Report, the EC recommended certain changes in the Constitution Amendment Bill in their meeting at Bhubaneswar in January 2013.
  • The Empowered Committee in the Bhubaneswar meeting also decided to constitute three committees of officers to discuss and report on various aspects of GST as follows:- (a)  Committee on Place of Supply Rules and Revenue Neutral Rates; (b) Committee on dual control, threshold and exemptions; and (c) Committee on IGST and GST on imports.
  • The Parliamentary Standing Committee submitted its Report in August, 2013 to the Lok Sabha. The recommendations of the Empowered Committee and the recommendations of the Parliamentary Standing Committee were examined by the Ministry in consultation with the Legislative Department. Most of the recommendations made by the Empowered Committee and the Parliamentary Standing Committee were accepted and the draft Amendment Bill was suitably revised.
  • The final draft Constitutional Amendment Bill incorporating the above stated changes were sent to the Empowered Committee for consideration in September 2013.
  • The EC once again made certain recommendations on the Bill after its meeting in Shillong in November 2013. Certain recommendations of the Empowered Committee were incorporated in the draft Constitution (115th Amendment) Bill. The revised draft was sent for consideration of the Empowered Committee in March, 2014.
  • The 115th Constitutional (Amendment) Bill, 2011, for the introduction of GST introduced in the Lok Sabha in March 2011 lapsed with the dissolution of the 15th Lok Sabha.
  • In June 2014, the draft Constitution Amendment Bill was sent to the Empowered Committee after approval of the new Government.
  • Based on a broad consensus reached with the Empowered Committee on the contours of the Bill, the Cabinet on 17.12.2014 approved the proposal for introduction of a Bill in the Parliament for amending the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the country. The Bill was introduced in the Lok Sabha on 19.12.2014, and was passed by the Lok Sabha on 06.05.2015. It was then referred to the Select Committee of Rajya Sabha, which submitted its report on 22.07.2015.
  • Lok Sabha and Rajya Sabha has unanimously passed the 122nd Constitutional Amendment Bill in August, 2016 which later got the assent of the President.

What are the features of the GST Bill?

The salient features of the Bill are as follows:

  1. Conferring simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax;
  2. Subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs;
  3. Subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling;
  4. Dispensing with the concept of 'declared goods of special importance' under the Constitution;
  5. Levy of Integrated Goods and Services Tax on inter-State transactions of goods and services;
  6. GST to be levied on all goods and services, except alcoholic liquor for human consumption. Petroleum and petroleum products shall be subject to the levy of GST on a later date notified on the recommendation of the Goods and Services Tax Council;
  7. Compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period of five years;
  8. Creation of Goods and Services Tax Council to examine issues relating to goods and services tax and make recommendations to the Union and the States on parameters like rates, taxes, cesses and surcharges to be subsumed, exemption list and threshold limits, Model GST laws, etc. The Council shall function under the Chairmanship of the Union Finance Minister and will have all the State Governments as members.

    Taxes Going to Subsumed Under 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.

 

Why is Dual GST required?
India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of Government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will, therefore, be in keeping with the Constitutional requirement of fiscal federalism.

Bills for implementation of GST regime
Bills passed for the implementation of GST regime:

  1. The Central Goods and Services Tax Bill 2017 (The CGST Bill)
  2. The Integrated Goods and Services Tax Bill 2017 (The IGST Bill)
  3. The Union Territory Goods and Services Tax Bill 2017 (The UTGST Bill)
  4. The Goods and Services Tax (Compensation to the States) Bill 2017 (The Compensation Bill)
  • The CGST Bill makes provisions for levy and collection of tax on intra-state supply of goods or services or both by the Central Government.
  • IGST Bill makes provisions for levy and collection of tax on inter-state supply of goods or services or both by the Central Government.
  • The UTGST Bill makes provisions for levy on collection of tax on intra-UT supply of goods and services in the Union Territories without legislature. Union Territory GST is akin to States Goods and Services Tax (SGST) which shall be levied and collected by the States/Union Territories on intra-state supply of goods or services or both.
  • The Compensation Bill provides for compensation to the states for loss of revenue arising on account of implementation of the goods and services tax for a period of five years as per section 18 of the Constitution (One Hundred and First Amendment) Act, 2016.

Applicability of GST 

  1. GST is applicable on the supply of goods and services.
  2. GST  is not levied (initially) on:
  •  Petroleum crude
  • High speed diesel
  • Motor spirit(petrol)
  • Natural gas
  • Aviation Turbine fuel
  1. Alcoholic liquor for human consumption is exempted from GST.
  2. Tobacco and tobacco products will be subjected to GST. The centre may apply excise duty on tobacco.

Examples - GST at work
Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs.3 after setting-off Rs.10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs.13. The manufacturer sells the goods to the whole-seller. When the whole-seller sells the same goods after making value addition of (say), Rs.20, he pays net GST of only Rs.2, after setting-off of Input Tax Credit of Rs.13 from the gross GST of Rs.15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs.10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to whole-seller. Thus, the manufacturer, whole-seller and retailer have to pay only Rs.6 (= Rs.3+Rs.2+Re.1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less.
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.
How would GST be administered in India?
GST Council will be tasked with optimizing tax collection for goods and services by the State and Centre. The Council will consist of the Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government.
The GST Council will be the body that decides which taxes levied by the Centre, States and local bodies will go into the GST; which goods and services will be subjected to GST; and the basis and the rates at which GST will be applied.

Composition of GST Council
GST council consists of:

  1. The Union Finance Minister (as Chairman),
  2. The Union Minister of State in charge of Revenue or Finance,
  3. The Minister in charge of Finance or Taxation or any other Minister, nominated by each state government.

All decisions of the GST Council will be made by three-fourth majority of the votes cast; the centre shall have one-third of the votes cast, and the states together shall have two-third of the votes cast.

The GST Council will make recommendations on:

  1. Taxes, cesses, and surcharges to be subsumed under the GST,
  2. Goods and services which may be subject to, or exempt from GST,
  3. The threshold limit of turnover for application of GST,
  4. Rates of GST,
  5. Model GST laws, principles of levy, apportionment of IGST and principles related to place of supply,
  6. Special provisions with respect to the eight north eastern states, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand,
  7. And related matters.

How will IT be used for the implementation of GST?
For the implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders. The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/UT governments. GSTN is working on developing a state-of-the-art comprehensive IT infrastructure including the common GST portal providing front end services of registration, returns and payments to all taxpayers, as well as the backend IT modules for certain States that include processing of returns, registrations, audits, assessments, appeals, etc. All States, accounting authorities, RBI and banks, are also preparing their IT infrastructure for the administration of GST. There would no manual filing of returns. All taxes can also be paid online. All mis-matched returns would be auto-generated, and there would be no need for manual interventions. Most returns would be self-assessed.

This Act has the potential to usher in monumental changes in the indirect tax regime in India.

 

 

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