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. This is expected to help broaden the tax base, increase tax compliance, and reduce economic distortions caused by inter-state variations in taxes.
Thus hereby providing the complete critical analysis of the GST under following heads:
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:
What are the features of the GST Bill?
The salient features of the Bill are as follows:
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.
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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:
Applicability of GST
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:
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:
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.
Though Indian states have achieved Political Integration in 1950's with the integration of Princely states in Indian Union, economic Integration was still missing. Passing of GST is a shining example of cooperative federalism where States and Centre have ceded their power to tax and come up with a single tax system to realize the dream of one Economic India with ‘One Market’. Thus, GST once again has shown Unity in Diversity of Indian Society. However, Economic integration is still not achieved as Constitution needs some changes in this regard.
GST: a shining example of Cooperative federalism
In our Federal System both Centre and States have power to impose taxes. The division of such taxation powers is given in Union and State List under 7th Schedule. With the spirit of cooperative federalism, under GST, both Centre and States have given up taxation powers and as a product following taxes have been eliminated.
Central taxes that would be subsumed under the GST are |
State taxes that would be subsumed under the GST are |
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The Constitution of India has also been amended accordingly. This fundamental reordering of federal fiscal relations for the cause of common good shows the strength and resolve of the federal structure.
This convergence for the cause of larger public good has been made possible, initially due to the mechanism of the Empowered Committee of Ministers (EC) and later the GST Council. Under the GST regime, the Centre & States will act on the recommendations of the GST Council. GST Council comprises of the Union Finance Minister, Union Minister of State for Finance and all Finance Ministers of the States. 2/3rd of voting power is with the States and 1/3rd with the Centre which reflects the accommodative spirit of federalism.
Though the Constitution provides for decisions being taken by a 3/4th majority of members present and voting, all decisions till now (before july, 1, 2017) have been taken unanimously by consensus. The very fact that there has been no need to resort to voting to take any decisions taken till now in 18 meetings held so far reflects the spirit of "One Nation, One Aspiration, One Determination". In this context it is important to note that credit for the new law does not go to one party or one government but it's a shared legacy of all.
The participation of all States and Centre in the framing of GST laws has led to the following features in the GST Laws. These features signify spirit of cooperative federalism.
Economic Integration
Under GST regime the entire country will become one market and it will be an economic integration of India. India would become one uniform market with seamless transfer of goods and services.
GST: Economic Integration of Jammu and Kashmir With the implementation of the Goods and Service Tax in Jammu and Kashmir, an important chapter has been opened in the history of centre-state relations - a chapter that has completely integrated the state with India in economic terms, though political integration has happened 70 years ago. While other states of the union draw their power to tax from Article 246 of the Indian Constitution, Jammu and Kashmir draws it from Section 5 of its own constitution. However, recently State Assembly has adopted the 101st Constitutional Amendment and enacting a State GST law rendering Section 5 of the Jammu and Kashmir Constitution ineffective for all practical purposes. |
However, Constitution still provides room for states to levy tariff and non-tariff barriers. Article 302 gives Parliament the power to restrict free trade between and within states on grounds of public interest. Similarly, Article 304 (b) allows state legislatures to restrict trade and commerce on grounds of public interest. Of course, states can only impose restrictions in areas that are either on the state or concurrent list. The gist of these provisions is that both the Centre and the States have considerable freedom to restrict trade and commerce that hinder the creation of one India. Such Strong power is not found in other International experiences.
The United States has a very strong interstate commerce clause in the Constitution. In US, residuary powers are reserved to the states (and not the Union, as is the case in India), states are constitutionally barred from regulating interstate trade and commerce as it was felt that such power would fundamentally hamper free trade and movement.
Even under European Common Market, it is now accepted that countries within the EU must not, except under narrow circumstances, restrict the four freedoms of movement: of goods, services, capital, and people.
Under WTO which has a membership of 164 countries with widely varying income levels and political systems, and more diversity then Indian states such powers as given in Indian Constitution are not found.
The contrast between Articles 302 and 304 (b) of the Constitution and Article XX of the General Agreement On Tariff and Trade (GATT) WTO show that, reasons for invoking departures from free trade principles are more clearly and narrowly specified in the WTO than in the Constitution which instead refers to an open-ended "public interest". Thus for true economic integration clauses have to be amended
Conclusion
The phrase Unity in Diversity has been the hallmark of Indian Society which embraces diversity in terms of Caste, Creed, Colour, Culture, Customs, Cuisine and Clothing (7C). The new chapter of cooperation has been added within this diversity by implementation of GST through cooperation between Centre and States which economically integrates India and strengthen its unity.
However, economic integration is still not real on the question of creating one economic India, technology, economics, and politics have been surging ahead. Perhaps, it is time for the Constitution to catch up to further facilitate this surging internal integration i.e. Article 302 and 304(b) should be amended. Here again such amendment requires coming together of States and Centre with the spirit of cooperative federalism.
GST is the biggest tax reform since 1991 when India opened its market first. Potentially one of the most dynamic economies in the developing world, India is hampered by a bewildering array of state-by-state tax codes that discourage doing business across state borders. The GST is widely viewed as a breakthrough that will allow the authorities to confront the problem, eventually creating a more unified economy that will allow businesses to expand nationwide far more easily.
Far from being only a tax reform, design of GST would have far reaching Macro-economic effects. It is expected that in long run Tax to GDP ratio will improve both for centre and states. As a consequence it will improve fiscal health of Centre and States and provide them with wherewithal to improve state capacity in delivery of basic services, augment infrastructure, etc. Another impact will be on ease of doing business which will improve many folds by this reform. Last but not the least, Logistic sector will see far reaching changes which will reduce cost of transportation and increase in competitiveness.
Tax to GDP ratio
A country's tax-GDP ratio is an important indicator that helps to understand how much tax revenue is being collected by the government as compared to the overall size of the economy. A higher tax-GDP ratio gives more room in a government's budget so that it can spend more without borrowing. However, despite many years of high growth, India's tax-GDP ratio continues to remain low. The cursory look at indirect tax-to GDP ratio shows that indirect tax to GDP ratio is around 5% and Direct tax to GDP ratio is at 5.5%. In this context, GST shall increase tax ratio.
It has also been noticed at times that businesses report a different data in their annual VAT return as compared to their Income Tax return. Many businesses deflate the value of profit to attract less income tax liability. Tax evaders who windowdress their books at the year end to lessen their tax liability will find it harder to do so. Such actions were possible before, as the Income Tax Department did not have any access to the data which is filed under the state VAT laws. However, under the new regime, GSTN will be the single repository to all these transactions and the Income Tax Department will have access to such data thus having a clear picture of the total sales and purchases, and eventually the overall profitability, of every business. In this way Direct tax to GDP ratio will improve.
Under the GST law, every sale invoice will get uploaded on the Goods and Services Tax Network's common GST portal. GSTN will ensure a 100% reconciliation of sale invoice of the supplier and the purchase invoice of the buyer. So far, returns filed under the VAT law or CST law do not require validation from the buyer, so we can expect more accurate value being reported under the new regime. This will increase the indirect tax to GDP ratio.
So, new regime makes it tough to evade taxes. This likely to improve the overall compliance rate and would also reduce the size of black economy.
Fiscal Health of States
The successful implementation of GST will result in additional revenue through simpler and easier tax administration, supported by robust and user-friendly IT (information technology) systems and improvement in tax compliance.
Thus the GST is expected to reduce administrative costs for collection of tax revenue and improve revenue efficiency while uniformity in tax rates and procedures will lead to economy in compliance cost.
Revenue Efficiency - It is the amount spent by government to realize a rupee of tax. Expenditure includes expenditure on tax compliance system like salary of revenue officials, establishment cost etc. As compliance under GST is through IT platform, cost of collecting revenue will decline thereby increasing revenue efficiency. |
The GST regime will also increase the shareable pool of resources, resulting in transfer of large funds to the states for developmental works. Such an outcome will also ensure debt sustainability of states in the long term. This will be an important outcome because according to recent RBI report on State debt, two states have breached fiscal deficit threshold of 3% as mandated in State level FRBM.
Under GST central cess will be subsumed into the GST and in turn increase the divisible pool of resources which is to the advantage of states. This is because Cess is levied by central government for a specific purpose like education cess to fund SSA. The proceeds go only to Central Government, but these cess are subsumed under GST and GST is collected by both Centre and States hence state revenue shall increase. Similarly, revenue of States will increase as earlier Excise duty on production and Service Tax on services were assigned to Centre but now GST on production and Services will go to States too.
Another aspect of GST which is that GST is a destination based tax. This means that proceeds from tax collection are appropriated by state in which final sale is made irrespective of state in which the product is manufactured. This aspect of GST will improve the fiscal health of the poorest States - for example, Uttar Pradesh, Bihar, and Madhya Pradesh - who happen to be large consumers. These states are expected to generate resources to augment their state capacity in delivering basic services like law and order, Education and Health Services and improve physical infrastructure to attract manufacturing.
Ease of doing Business
Presently, the Central Government levies gamut of taxes like Central Excise duty, Service Tax, CST and states levy tax on retail sales (VAT), entry of goods in the State (Entry Tax), Luxury Tax, Purchase Tax, etc. Large number of taxes created high compliance cost for the taxpayers in the form of number of returns, payments, etc. In fact, it is said that our tax laws have created a situation where business decisions are based on tax considerations rather than logical economical factors. All these issues created a need for one tax that will be able to mitigate number of these problems to a large extent and ease the way business in which is done.
GST impact on Ease Of Doing Business Ranking The Ease of Doing Business Index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights. A nation's ranking on the index is based on the average of 10 sub-indices, which among other includes "Paying Taxes" Index. New GST regime would improve India's rank under this sub-index and consequently ranking in overall Index would improve. India is currently placed at 130 out of 189 countries. The Prime Minister hopes to bring India amongst the top 50 countries on the rankings and GST is a step in this direction. |
Specifically, ways in which GST would facilitate ease of doing business are as follows:
Logistics
Logistics is considered to be the backbone of manufacturing and trading activities in the economy. It has a critical role to play for developing countries like India. It can be fairly assumed that a well organized and mature logistics industry has the potential to leapfrog the "Make In India" initiative to its desired position.
So far, logistics players in India have been maintaining multiple warehouses across states to avoid CST levy and state entry taxes. Most of these warehouses are operating below their capacity and thus adding to their operational inefficiencies. On the other hand movements of truck carrying goods take a lot of time mainly due to stoppage at state check- posts for payment of taxes. India has approximately 600 check posts.
According to a Ministry of Road Transport and Highways (MORTH) study, a typical truck spends nearly 16% of the time at check posts. A truck in India covers an average annual distance of only 85,000 km as compared to 150,000 to 200,000 km in advanced countries. Goods carriage vehicles in India barely travel 280 km per day against a world average of 400 km per day.
However, under GST, most of the current challenges of this industry will be a story of the past as India will become one single market wherein goods can move freely inter-state without any levy. Many companies are expected to migrate from a current strategy of 'multiple warehousing' to the 'hub and spoke' model as tax treatment across India will be same. GST will further bring warehouse consolidation across the country and we can witness mega logistic hubs and high investments in infrastructure wherein 100% FDI has already been allowed. As an outcome of GST, warehouse operators and e-commerce players have already shown interest in setting up their warehouses at strategic locations such as Nagpur, which is the zero mile city of India and is well connected throughout. Another favourable outcome would be seamless movement of Truck across India thus cutting delivery time and cost.
Boost to Make in India
GST will give a major boost to the Government of India's 'Make in India' initiative by making goods or services produced or provided in India competitive in the national and international markets. The currently prevalent Counter-veiling Duty (CVD) on imported goods will be replaced under GST regime by the integrated tax (IGST) which is simply the sum total of Central GST +State GST. This will bring parity in taxation on domestic and imported products, and thereby provide protection to domestic industry.
Under the GST regime, exports will be entirely zero rated, unlike the present system where refund of some taxes is not allowed due to fragmented nature of indirect taxes between the Centre and the States. This means that input tax credit of tax paid on input supplies would be available to the exporter even though no tax is required to be paid on final export supplies. The exporters also have an option to pay IGST on export supplies and claim refund for the same for which a fast track mechanism has been provided. This will boost Indian exports thereby improving the balance of payments position.
Conclusion
It is clear that GST is not only a tax reform but a structural reform which will change the trajectory of growth. It will improve the fiscal capacity of states which would ensure that they do not have to fall back on borrowings to fill the fiscal deficit and for businesses it will make doing business relatively easy which along with changes in logistic sector will improve export competitiveness of Indian products and may put India on the path of 'Export led Growth'.
The Goods and Services Tax is the biggest tax reform since independence, according to NITI aayog CEO Amitabh Kant GST will help India achieve 9 per cent growth rate. Several experts have also said that GST is estimated to boost GDP by 1-2 per cent and bring down inflation by 2 per cent over the long term.
The Proposed Benefits of GST are:
Impact on Agriculture
In the agriculture sector we shall look at how GST will impact cost of agriculture inputs, Supply chain of agriculture products and unification of agriculture in one national market.
a) Agricultural Inputs
Any input taxes placed on inputs used in the farm sector such as seeds, fertilisers, pesticides, tractors etc, contribute to increase in cost of farm output. On the other hand, farm output prices are controlled by market forces on which farmer has little control. As the input price rises and output price remains stagnant, the farmer will have no option but to absorb the cost, thus increasing his burden. Indian farmer is already reeling under tremendous pressure from many ends and the increased burden of taxes will create a crater in his income. In this context let's look at tax incidence on some major inputs
Seeds - Seeds were exempted both under earlier tax structure and under new GST regime.
Tractors - The tax incidence on Tractor's inputs combined with VAT on final product takes the total tax incidence for the industry to levels of ~ 12-13%. The fixation of a GST rate of 12% on tractors and on tractor inputs@18% would allow the manufacturers to take credit of the cumulative input duties and taxes. Thus, the total tax incidence on tractors would remain at broadly similar levels and its implementation is neutral for the tractor industry.
Fertilizers - Fertilisers an important element of agriculture was previously taxed at 6% (1% Excise + 5% VAT). In the GST regime, the tax on fertilisers has been reduced to 5%. Thereby reducing cost for farmers
Pesticides - Pesticides currently attract an excise duty of 12.5 per cent. But under GST regime, crop protection products like pesticides are taxable at 18%. So, this might increase tax burden on farmer.
So, by and large either tax incidence under GST regime is similar to incidence under earlier tax structure.
Agriculture Input |
Tax burden under previous Tax Regime |
Tax burden under GST Tax Regime |
Seeds |
Nil |
Nil |
Tractors |
12-13% |
12% |
Fertilizers |
6% |
5% |
Pesticides |
12.5% |
12% |
Sr. |
Name of the |
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Sales Tax |
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No. |
State |
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1 |
Andhra |
All Commodities (except Maize, |
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Pradesh |
Jowar, Ragi, Bajra, Coarse grains) 4 % |
2 |
Assam |
All commodities (except rice, wheat, pulm, |
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f&v, fish, gur, atta, maida etc.)-4-8 % |
3 |
Delhi |
F & V- nil Oilseeds-3 % Methi-7 % |
4 |
Gujarat |
1.Spices --3%, 2.Aniseed-- 2%, 3.Cotton |
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--4%, 4. Isabgol—2 %, 5. Cummin-2%, |
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6. Ajwain—2 % |
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5 |
Goa |
1.Betelnut –2% |
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2.Cashewnut – 2% |
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Coconut, F&V, Cattle & Milk exempted |
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from Sales Tax |
6 |
Haryana |
F&V – nil, Food grains—4 % |
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Pulses—4 %, Oilseeds—4 % |
7 |
Karnataka |
1.Foodgrains-nil |
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2.Pulses -2% 3.Oilseeds-4% |
8 |
Rajasthan |
F & V—nil, Foodgrains—4 % |
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Pulses & Oilseeds—2% |
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Coarse grains--nil |
9 |
Uttar |
Foodgrains-4 % |
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Pradesh |
Pulses-2 % |
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Oilseeds & Others- 4 % |
The implementation of GST is a move towards making One National Agricultural Market on account of subsuming all kinds of taxes/cess on marketing of agricultural produce.
Impact on Industries
Industrial sector mainly consist of Manufacturing, Construction, Mining and Utilities (electricity, gas water etc.). Manufacturing is the main sub-sector among these and we shall analyze the impact of GST on Manufacturing.
The share of Manufacturing in GDP is stagnant at 16%, however the share is 42% in China. Some of the reasons for such a low share are multiple indirect tax legislations which have led to significant compliance and administrative costs, classification and valuation disputes. So, tax reforms are critical and necessary to give a boost to an already flagging sector.
There will be reduction in tax burden on majority of manufactured goods post GST implementation. A look at important components of manufacturing like automobiles sector reveal that effective tax rate would reduce in Automobile sector the biggest benefit would go to SUV segment. Under FMCG, by and large tax burden would reduce. The biggest relief would be in Soap and Hair oil segment.
Automobiles
Segment | Total pre GST rate | GST |
Cess |
Effective GST | Change |
Two/ three wheelers | 30.2% | 28.0% |
With GST the government intends to achieve the two major goals: Reduce tax evasion & Simplify compliance for tax payers.
In the prevailing tax systems, there are several cases where the government has not been able to detect evasion and loss of tax revenues. As a result, it has become a challenge for the department concerned to track the input claims against the liability of the seller. There have also been numerous cases of duplication of claims on input tax, fraudulent claims, input tax claims that do not correspond with tax liability declared by the seller, or seller who has not furnished his tax liability.
In order to overcome this, GST has introduced technology. It seeks to establish a uniform interface for the taxpayer and a common and shared IT infrastructure between the center and states. It will thereby integrate multiple tax department websites, bringing all the tax administrations (center, state, and union territories) to the same level of IT maturity, with uniform formats and interfaces for taxpayers and other external stakeholders. Unlike the present-day taxes, GST is going to be on a digital platform from its inception.
Institutional mechanism
For the implementation of the technology associated with the GST, the Goods and Services Tax Network (GSTN) has been established. It is a non-profit, public private partnership company. Its primary purpose is to provide IT infrastructure and services to central and state governments, taxpayers and other stakeholders, thereby facilitating the implementation of the Goods and Services Tax (GST).
GSTN will perform the overall functions of GST IT system which are mentioned below:-
The salient features are:
About GST Suvidha Provider (GSP)
GST Suvidha Provider (GSP) and Application Service providers (ASP) will be the significant players in the success of the tax regime.
GSP is an acronym of GST Suvidha Provider. Through GSP, it allows user or taxpayers to execute the provisions of GST through the online platform. A GSP is considered as an enabler for the taxpayer to comply with the provisions of the GST law through the web platform. Through GSP, Tax Payers or Individuals can file their returns.
GSP's are controlled by the government and it operates as per the MoU. An agreement is signed between GSTN (a government body) and GSP. Through GSP and ASP, users or taxpayers file their returns online. In GSP and ASP, users or taxpayers have to fill their necessary details and automatically returns will be calculated. It also focuses on taking out the details of the tax payer and convert them into the GST Returns. These GST Returns are then filed on behalf of the taxpayer with GSTN via GSP.
About Application Service Providers (ASP)
ASP is an acronym of Application Service Provider. Taxpayer or users can file their GST taxes with the support of ASP partners or existing software. ASPs can develop an end- to-end solution for corporates, consultants, and taxpayers. Through ASPs, the taxpayer and consultants can manage the sale or purchase of goods and services and GST filing.
A large number of companies have an options to file return via Application Service Provider (ASP). In ASP, organizations or businesses must have to share the detailed data of sales and purchase of Goods and Services to the ASP. After then ASP providers will prepare the GST Returns and file the returns through GSP (GST Suvidha Provider).
ASP will play the vital role in filing returns as well as it saves the time of users. It collects all data or information from the taxpayers or users and then converts them into tax returns. ASP will take care of five roles which are mentioned below:-
Conclusion
Use of technology will also enable efficient tax administration for registration, returns filing, data exchange, and effective investigation, monitoring, auditing and performance analysis with little or no human intervention. It will also provide several user-friendly features such as offline capabilities, alerting capabilities, mobile/tablet interface, and additional mechanisms to avoid duplicity of data.
As this tax system is being implemented for the first time in India, businesses will encounter several challenges during the initial stages of implementation. However, once systems are streamlined, the two important objectives envisaged - curbing tax evasion, and increasing tax revenue and ease of compliance for taxpayers will be achieved.
The success of this transformation will help our nation create history in the world of GST compliance.
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.
Anatomy of GST rates
At classification level around one-fifth of the items are in GST exempted category, around one-fifth under 28% rate category and one-sixth under 12% category.
Most of the item shall come under 18% tax rate. Most of the food items have been exempted or fetch lowest rate of 5% which is important given high poor percentage in society.
Within services category luxury services and services considered to be anti-social like gambling are under 28% category.
Under the goods category, petroleum products, alcohol, electricity, real estate and several food subcomponents have been kept outside GST ambit.
Under services, health and education, amongst some others, have been excluded.
Four products luxury cars, aerated drinks, tobacco and related 'paan' products would also fetch additional Cess.
The council has recently revised rates on 66 items such as pickles, sauces, fruit preserves, insulin, cashew nuts, insulin, school bags, colouring books, notebooks, printers, cutlery, agarbattis and cinema tickets, following representations from industry.
Restaurants, manufacturers and traders having a turnover of up to Rs 75 lakh can avail of the composition scheme with lower rates of 5%, 2% and 1%, respectively, with lower compliance, against Rs 50 lakh previously. A GST rate of 5% will be applicable on outsourcing of manufacturing or job work in textiles and the gems and jewellery sector. Bleaching and cleaning of human hair, a big industry in Midnapore, will not face any tax.
Implications on various sectors of GST rates
The progressive tax structure would make sure that states do not face any revenue shortfall due to GST. It is likely that more comprehensive service tax coverage increases their revenues. Then, if any shortfall does remain, the Centre will take care of it.
Moreover, with a view to keep inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate. The cess is expected to provide additional resources to the central government to compensate states for losses incurred. This will be based on the compensation formula.
Impact on Important sectors
Criticism of rates according to some experts
Conclusion
A well-designed GST in India is expected to simplify and rationalize the current indirect tax regime, eliminate tax cascading and put the Indian economy on high-growth trajectory. The proposed GST levy may potentially impact both manufacturing and services sector for the entire value chain of operations, namely procurement, manufacturing, distribution, warehousing, sales, and pricing.
GST is a structural reform which will change the entire taxation landscape. However, any reform has its own set of opportunities as well as benefits; on the other hand reforms also bring with them new set of concerns. In this article, we shall look at some of the important concerns that the new GST regime has raised.
Some of the concerns have been discussed below:
a) Formation of Anti-profiteering Authority
Primary objection to anti-profiteering is additional compliance burden, increase in litigation and potential harassment at the hands of the taxman. Australia and Malaysia are closest international examples where such authority was created post GST rollout. However, in Malaysia, it led to widespread litigation and was found to be administratively difficult to implement. Overseas experience indicates that anti-profiteering provisions are only effective if there is a significant lead-in time to allow the relevant authority to educate consumers and businesses as to their respective rights and obligations. It is this education process that has the greatest impact on consumer confidence and business behaviour.
Anatomy of Anti-profiteering Authority Section 171 of the CGST Act creates the obligation on businesses to pass on to the recipients any reduction in the rate of tax or the benefit of input tax credit by way of commensurate reduction in prices. It provides enablement to the central government to set up the Authority or authorise an existing Authority to monitor and enforce compliance with the requirements of the provision. Under this provision, a five-member anti-profiteering authority will be set up to decide on levying penalty if businesses do not pass on the benefit of price reduction to consumers under the goods and services tax regime. The authority, to be headed by a retired secretary-level officer, can take suo motu action, besides acting on complaints of profiteering. The authority will have a sunset date of two years and will decide on penalty to be levied. It would ask the businesses to refund the price reduction on a proportionate basis to consumers. As per the structure, the complaints of profiteering would first come to the Standing Committee comprising tax officials from states and the Centre. It would forward the complaint to the Directorate of Safeguards (DGS) for investigation, which is likely to take about 2-3 months to complete the inquiry. On completion of investigation, the report would be submitted to the anti-profiteering authority which would decide on the penalty. |
b) Digital literacy and Internet Penetration
Under GST, around 37 returns have to be filled in a year on GST portal. This kind of arrangement requires access to internet and being digitally literate. However, India performance on these two aspects is very low; deficiencies are severe in rural India. Today, the digital divide in India is real - illiteracy rate is 25-30 per cent and digital illiteracy is even higher. According to some estimates, computer literacy in India is just 6.5%. In terms of internet penetration, the estimated internet penetration has reached only 27% in 2016.
c) Increase in compliance cost for Multi-location Goods and Services Provider
Multi-location service providers such as banks, telecom operators, airlines and insurance companies are staring at huge compliance burden with the Goods and Services Tax (GST). These service providers would need to take State-wise registrations in place of current centralised registration, file monthly returns instead of six-monthly increasing the compliance manifold. For ex- Currently, a service provider operating in 20 States can operate with one centralised registration and is required to file two returns in a year. Against this, under GST, they need to get registered in 20 States and file close to 740 returns in a year. A similar manifold increase in the compliances is expected for a supplier of goods as well.
d) Conflict between Centre and State tax authorities
Under GST regime, State authorities will scrutinise 90 per cent of all assesses with turnover of Rs.15 million or less. The remaining 10 per cent will be assessed by the Centre. For turnover above Rs.15 million, Centre and states will assess 50 per cent each. Such a division of assessment power will increase conflict between Centre and states taxing authority. One related issue is that, earlier taxation and assessment of services was in the realm of Central government but now, any firm either dealing in goods or services would also come under state authorities as per above mentioned formula. This would be troublesome in short run as states authorities may not have capability to handle service providing businesses.
e) No Parliamentary approval needed for CGST rates
The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament. Under the Constitution, the power to levy taxes is vested in Parliament and state legislatures. Though the proposal to set the rates through delegated legislation meets this requirement, the question is whether it is appropriate to do so without prior parliamentary scrutiny and approval.
The Constitution does not allow a tax to be levied or collected except by authority of law. Currently, most laws which levy taxes such as income tax, and service tax specify tax rates in the principal law, and any changes in these rates requires the approval of Parliament.
f) Exclusion of petroleum from GST
The Central government will continue to impose excise duty on five petroleum products (petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel), while the State governments will continue to impose VAT on these petroleum products.
Currently, credit of excise duty paid on specified petroleum products is available. However, exclusion of petroleum products from GST will add to the cost of manufacture as excise duty on such products would not be creditable under the GST regime. Petroleum products such as high speed diesel, are common fuels used in various manufacturing processes, as also for transportation of inputs and final products.
Therefore, industries that consume petroleum products as their main inputs (such as the fertilizer industry which use natural gas as an important input) will get significantly impacted by this exclusion.
g) Increased working capital
Working capital is a common measure of a company's liquidity, efficiency, and overall health. It is the cash available for day-to-day operations of an organization. Impact on working capital may be significant for the manufacturing sector. Under the current regime, stock transfers are not subject to tax. However, under the GST regime, stock transfers are deemed to be supplies and are subject to GST. Though GST paid at this stage would be available as credit, realization of this GST would only occur when the final supply is concluded. This would likely result in cash flow blockages and therefore companies would have to rethink their supply chain management strategies to minimize this impact on their cash flows. This would be worrisome for MSME sector as this sector is typically capital constrained.
What are stock transfers? - Stock transfer refers to moving of goods from one part of the distribution chain to another of same legal entity. Since stock transfer happens between units of the same legal entity, there shall not be any sale. How stock transfer treatment would differ for intra-state and inter-state transfers - In GST regime, payment of tax on stock transfer depends on whether the supplying and receiving units are in the same state or not. In case both the units are in the same state and have same GSTIN, then no GST is payable. On the other hand, if the units are situated in different states, then each unit to register separately in the respective states and therefore GST payable on such supplies. |
h) Impact on Municipal Finance
Income from taxes constitute about two-third of the revenue accounts of the municipalities and over one half of the total income from all the sources. A variety of taxes are levied by the urban local government in different states. The most common taxes are property tax/house tax, profession tax, vehicle tax, Octroi, tolls.
GST will subsume Octroi and Entry tax which are main sources for local bodies. While GST is expected to be divided between the Centre and states based on a mutually acceptable formula, urban local bodies will have to deal with a huge fiscal gap once these taxes are scrapped to make way for the new taxation system. There is no provision given by 14th finance commission as how ULB/PRI would be compensated in the wake of GST. This depletion of revenue would have serious implication on city rejuvenation programs.
i) GST Council decisions Non-Binding
The GST Council will decide very important aspects of the tax, including the base, rates, allocation of tax base among the States, administrative architecture and compliance procedures. However, Centre and the States retain the power to design taxes as they consider appropriate within the defined framework. The GST Council's decision will not be binding on them and will only be recommendatory. What happens when States deviate from the collective decisions?
It is in this context that the role of the dispute resolution mechanism becomes crucial. It is not clear at this stage how the mechanism will function and whether the decisions of the dispute resolution authority will be binding.
j) Registration Issue
The first area of concern lies in the registration of users for the website. According to the most recent numbers, 60 percent of the taxpayers from State Tax databases have registered themselves on to the platform.
Yet, only 6.5 percent of taxpayers from the Central Tax databases had registered seven days before the 31st March registration deadline.
Inadequate outreach on the part of the central government can be pointed out to be the main culprit for the lack of registered users.
A lack of timely migration can cause serious issues for the viability of the GST as the IT infrastructure is the only possible way to track and properly implement the nascent tax system.
k) Auditing Issue
Along with the registration challenge, the GSTN has also been dealing with an auditing issue. Ascertaining and verifying the accuracy of the data within the GSTN would seem to be a Herculean task, given its 70 million expected users.
In order to do so, the Comptroller and Auditor General of India (which has been tasked with the audit), would need access to all GSTN data. Yet, the GSTN has refused data access to the CAG for auditing purposes, citing its private entity status (51 percent of the organisation is owned by private Indian financial institutions) and stating that it is only acting as the holder of the information.
Without a proper audit of the data within the platform, there is no way to ascertain the functionality of the GSTN.
Trust in the GSTN has already been brought up as an issue, with the lack of transparency into the majority privately owned organisation being cited as a crucial concern.
Goods and Services Network (GSTN) The process of tracking inter State transactions will be extremely complex and will require an infallible IT system. The clearinghouse mechanism envisaged in the dual model GST will handle humungous data. Designing and developing an IT infrastructure of such a size and complexity will be a herculean task. For this purpose, a Special Purpose Vehicle (SPV) called the Goods and Service Tax Network (GSTN) has been set up by the Government to create enabling environment for smooth introduction of GST. |
Conclusion
The Goods and Services Tax is a much needed tax reform, and if implemented correctly, can do wonders for India's economy. Along with eliminating double taxation and lowering product price, the GST can also assimilate the informal sector into the greater Indian economy and provide a much needed boost for India's lagging export market.
Yet there are implementation issues that could be problematic for India's small businesses and, perhaps more importantly, undermine public trust in the GST. The issues surrounding the GSTN can be managed if more time is given for continued enrolment of taxpayers and thorough testing of the IT infrastructure. Additionally, giving time for the CAG to conduct a thorough audit would allow for any functionality issues with the GSTN to be brought to light, preventing costly public trust issues.
Similarly, the problems with the anti-profiteering clause can be ironed out with more time and the implementation of widespread education and price monitoring policies in the lead-up to the GST. The formation of a committee to handle all complaints, creation of an audit unit specifically geared towards anti-profiteering testing, and putting in place regulations outlining what specifically constitutes anti-profiteering can help build corporate and public trust in the GST.
Government has launched National Digital Literacy Mission for addressing the challenge of Digital Literacy. It is also important to relook at the targets given that GST is a reality. It is only when these concerns are addressed GST shall achieve the Goal of 'One Nation, One Tax and One Market'.
Verifying, please be patient.