abstract for synopsis

Goods and Service Tax in India: the changing face of economy.

Shilpa Parkhi*

Abstract

This paper is an outcome of an exploratory research carried out by researcher to understand the concept of Goods and Service Tax (GST), to be implemented in India. This changing face of Indian taxation is the way towards which developing country like India should head for. Basic objective of the study is to understand the present structure of Indirect Taxes, such as Central Excise, VAT, Central Sales Tax, Service tax etc and the method of levy and collection of GST. With federal system of levy and collection of taxes there any many point in supply chain where taxes are levied and collected which is going to be replaced with single point tax in the form of GST. Descriptive statistical tools are used to analyse and interpret the data collected through secondary sources such as official web sites of Government.

Keywords: Indirect Taxes, Federal tax structure, Goods and Service Tax (GST), Road map for India.

______________________________________________________________________

* Shilpa Parkhi, Ph.D., Fellow member of ICWAI and Associate Company Secretary.

She can be reached at Email: [email protected], Contact: 09822573800.

1. Introduction

India as worlds one of the biggest democratic country follow the federal tax system for levy and collection of various taxes. Different types of indirect taxes are levied and collected at different point in the supply chain. The centre and the states are empowered to levy respective taxes as per the Constitution of India. The Value Added Tax (VAT) when introduced was considered to be a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level. Now the Goods and Services Tax (GST) will be a further significant breakthrough - the next logical step - towards a comprehensive indirect tax reform in the country.

Understanding the need, an announcement was made by Shri P. Chidambaram, the then Union Finance Minister in the Central Budget (2007-2008) to the effect that GST would be introduced from April 1, 2010 and that the Empowered Committee of State Finance Ministers, on his request, would work with the Central Government to prepare a road map for introduction of GST in India. After this announcement, the Empowered Committee of State Finance Ministers decided to set up a Joint Working Group (May 10, 2007), with the then Adviser to the Union Finance Minister and the Member-Secretary of Empowered Committee as Co-conveners and the concerned Joint Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries of the States as its members. This Joint Working Group, after intensive internal discussions as well as interaction with experts and representatives of Chambers of Commerce and Industry, submitted its report to the Empowered Committee (November 19, 2007).

This report was then discussed in detail in the meeting of Empowered Committee (November 28, 2007). On the basis of this discussion and written observations of the States, certain modifications were made and a final version of the views of Empowered Committee at that stage was prepared and was sent to the Government of India (April 30, 2008). The comments of the Government of India were received on December 12, 2008 and were duly considered by the Empowered Committee (December 16, 2008). It was decided that a Committee of Principal Secretaries/ Secretaries of Finance/Taxation and Commissioners of Trade Taxes of the States would be set up to consider these comments, and submit their views. These views were submitted and were accepted in

principle by the Empowered Committee (January 21, 2009). Consequent upon this in-principle acceptance, a Working Group, consisting of the concerned officials of the State Governments was formed who, in close association with senior representatives of the Government of India, submitted their recommendations in detail on the structure of GST. An important interaction has also taken place between Shri. Pranab Mukherjee, the Union Finance Minister and the Empowered Committee (October 19, 2009) on the related issue of compensation for loss of the States on account of phasing out of CST. The Empowered Committee has now taken a detailed view on the recommendations of the Working Group of officials and other related matters. This detailed view of the Empowered Committee on the structure of GST is now presented in terms of the First Discussion Paper. It is important to take note of the significant administrative issues involved in designing an effective GST model in a federal system with the objective of having an overall harmonious structure of rates. Together with this, there is a need for upholding the powers of Central and State Governments in their taxation matters. Further, there is also the need to propose a model that would be easily implementable, while being generally acceptable to stakeholders.

Despite this success with VAT, there are still certain shortcomings in the structure of VAT both at the Central and at the State level. The shortcoming in CENVAT of the Government of India lies in non-inclusion of several Central taxes in the overall framework of CENVAT, such as additional customs duty, surcharges, etc., and thus keeping the benefits of comprehensive input tax and service tax set-off out of reach for manufacturers/dealers. Moreover, no step has yet been taken to capture the value-added chain in the distribution trade below the manufacturing level in the existing scheme of CENVAT. The introduction of GST at the Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade and increased compliance.

2. Literature Review:

Keeping this significance of GST in view, an announcement was made by the then Union Finance Minister in the Union Budget, as mentioned before, to the effect that GST would be introduced from April 1, 2010, and that the Empowered Committee of State Finance Ministers would work with the Central Government to prepare a road map for introduction of the GST. After this announcement, the Empowered Committee, as stated earlier, had set up a Joint Working Group which submitted a report on a model and road map for GST. After accommodating the views of the States appropriately on this report, the views of the Empowered Committee on the model and road map were sent to the Government of India on 30th April, 2008. The comments of the Government of India were received on 12th December, 2008. These comments were duly considered by the Empowered Committee in its meeting held on 16th December, 2008 and it was decided that a Committee of Principal Secretaries/Secretaries (Finance/Taxation) and Commissioners of Trade Taxes should consider the comments received from the Government of India and submit its views and also work out the Central GST and State GST rates. The Committee held detailed deliberations on 5th and 6th January, 2009, and submitted its recommendations to the Empowered Committee. The Empowered Committee considered these recommendations in its meeting held on 21st January, 2009 and accepted them in principle. The Empowered Committee also decided to constitute a Working Group consisting of Principal Secretaries/Secretaries (Finance/Taxation) and Commissioners of Trade Taxes of all States / UTs to give their recommendations on (a) the commodities and services that should be kept in the exempted list, (b) the rules and principles of taxing the transactions of services including the transactions in inter-State services, and (c) finalization of the model suggested for inter-state transaction/movement of goods including stock transfers in consultation with the State Bank of India and some other nationalized banks. It was also decided that the senior representatives from the Government of India may also be associated. The Working Group deliberated on the issues on 10th February, 2009 and decided to form three Sub Working Groups to deliberate each item in depth. The Reports of the Working Group on the three issues have already been received, and the Empowered Committee

has taken a view on these recommendations for concluding the details of GST structure.1

The unique structure of Indias Constitution comprising the Union Government at the Centre and the State Governments in the different Indian states has created a complicated and multi-layered system of consumption taxes. Under the Constitution, Central Government is empowered to impose excise duties on the production or manufacture of goods and service taxes on the provision of services. The Central Government can also authorize and regulate imposition of taxes on inter state sales of goods. However such taxes may be levied or collected by the states.2

Goods and Services Tax

The First Discussion Paper on Goods and Services Tax in India has been prepared and released by the Empowered Committee of State Finance Ministers (EC). Department of Revenue, Government of India, has sent its comments on it to the EC. The Discussion Paper and the comments of Department of Revenue sent to Empowered Committee are being placed here.3

3. Objective and Methodology:

Objectives of the study were as follows:

1. To understand the concept of GST.

2. To understand the evolution of GST in India.

3. To study the Modus Operandi of tax collection in GST regime.

Considering the above objectives the scope of the study is extended only for implementation of GST levy and collection and its impact on Revenue of the Government both at Central and State level.

Methodology:

The research is an exploratory research and the data collection is done mainly form the

1

First Discussion Paper On Goods and Services Tax In India The Empowered Committee Of State Finance Ministers, New Delhi, November 10 , 2009.

2 Goods and Service Tax, Abhishekh A. Rastogi & Aditya Kumar, Taxmann Publication. 3 http://finmin.nic.in/GST/index.html

secondary data sources such as statistical data available on the official web site of Finance Ministry of India, the books published on GST and various contemporary news articles, journals and papers.

The data so collected is used for understanding the present tax structure and for calculating the tax structure in the GST regime along with credit provisions.

The basic statistical concept such as forecasting etc is used for determining the tax liability in of GST at different proposed rates of tax.

Discussion

The present levy of taxes AT Centre and State level, as per the provisions of the Constitution are explained in the figure below:

Indirect Taxes in India

Central LeviesState Levies

Customs DutyVAT

Central ExciseEntry Tax

Service Tax

Ancillary taxes

Central Sales Tax

The Figure No. 1 Source: Authors views.

May Oct 07 Empowered

Nov 07

Feb 08

April 08

Jan 09

April 2010

Chronology for implementation of GST

The initial seeds of GST were sowed way back in 1994 in a report of the National Institute of Public Finance and Policy, led by late Amaresh Bagchi. While recommending a state VAT, the Bagchi committee report recognized that it was not a perfect solution but was a feasible option within the framework of the Constitution and would lay the foundation for an even more rational regime in future, which is now envisaged as the GST .Considering the fact that VAT went through turbulent times under various aspects in implementation, the GST will not be an easy way for a variety of reasons illustrated below:

Removal of state barriers in movement of goods

Stakeholder communications

Reorientation of administrative machinery for GST implementation

Uniform compliance requirements

Consultation with all stakeholders before finalization.

GST Introduction

Discussion of EC on CGST & SGST

EC finalized views on GST

FM announced introduction of GST in 208-09 Budget speech

Joint Working Group report to FM

Committee was formed on GST models

Jan 2007 First GST study released by Dr. Shome.

Actual Road map of GST

The Centre and the Sates are now working towards design and implementation of a uniform Goods and Service Tax across the country. The unified tax will take a form of a Dual GST, to be levied concurrently by both the levels of Government. The dual GST is already in place like Brazil and Canada.

Under dual GST system, the taxable base will be subject to following taxes:

1. Central Goods and Service Tax (CGST)

2. State Goods and Service Tax (SGST)

At the federal level, the CGST will primarily subsume the following:

a. Central Excise Duty

b. Service Tax

c. Additional duties of Customs

d. Central Sales Tax

Further, at the state level, it is proposed that SGST will primarily subsume the following:

a. State VAT

b. Entertainment tax

c. Luxury tax

d. Octroi

e. Lottery taxes

f. Electricity duty

g. Purchase tax

h. State charges relating to supply of goods and services.

Modus Operandi of GST:

Under the GST regime the dealers which include, Suppliers, Manufacturers, Service Providers, Wholesalers, Retailers etc are required to obtain registration. Alike the present system the person who is not registered will be restrained from the benefits of input tax credit and will not be able to charge the output tax.

The concept of availment and utilization of credit of GST will be as follows: Assuming the 15% unified GST rate is explained below: (However India will follow CGST and SGST structure for which three separate models are proposed at the end of the example.

A manufacturer of product requires following raw material for as inputs for the final product.

Rate of

DescriptionAmount(Rs)Tax(%)Tax Paid (Rs)

Raw Material10000151500

Stores &

Spares500015750

Services500015750

Total Input

tax of

Manufacturer3000

Rate of


Sale to

Dealer50000157500

Output tax of

Manufacturer

DescriptionAmount(Rs)

Total Output Tax7500

Less: Total Input Tax-3000

Net GST Payable4500

Rate of


Sale to

Retailer700001510500

Total Output

tax of the

Dealer10500




Net GST Payable3000

Rate of


Sale to

Consumer800001512000

Total Output

tax of the

retailer12000




Net GsT Paybale1500

DescriptionAmount (Rs)

From Seller of Raw Material1500

From Supplier of stores & spares750

From Service Provider750

From Manufacturer4500

From Dealer3000

From Retailer1500

Total GST received12000

Place of supply for inter state sale of goods

GST is a destination based consumption tax and accordingly the tax collected should go to the treasury of the State where the goods are ultimately consumed. It is certain that all State would act as both an origin State and a destination State. As a corollary, the imbalances in tax revenues may arise depending on the quantities produced and quantities consumed.

In the Indian context, there are various models which can work out. It is imperative to mention that there may not be any best solution to tackle the tax collection mechanism and accordingly the task becomes all the more difficult. It is certain that the Government will involve industry before finalizing the model for resolving the issues of inter state sale of goods. Thus, it becomes all the more important to understand in advance the models which can be laid down before the industry. The most probable models fit in the Indian context are discussed in brief below :

Model I Tax paid to the authorities by the seller

Under this model, the seller makes an inter state sale and charges tax to the purchaser. The purchaser makes the payment for both the goods and the tax .The tax collected by the seller is thereafter deposited with the branch of the designated bank. The bank provides a proof for payment of the tax. Thereafter, the collecting bank transfers the credit to the respective destination States. The branch of the designated bank in the destination State intimates the details of such credits to the State

Government. The branch also prepares the details of credit available to the respective importers who can thereafter avail the credit of the eligible amount.

The best feature of this model is that the credit is availed only after the tax is paid. Accordingly, there will be no chance for any revenue leakages.

Model II Tax paid to the authorities by the buyer

An alternative approach can also be followed wherein the tax can be paid by the importer of goods on a reverse charge mechanism. Even under this model, the tax will be charged by the seller .However, the difference is that the buyer will pay tax directly to the bank in his State and pays only the consideration towards the goods to the seller. The buyer can avail the credit on the basis of the payment of tax made by him in his State.

Further, under this model, the buyer will provide the details of the supplier and the procurements made by him .These details will be sent by the bank of the importing State to the bank of the exporting State. This will facilitate the seller to claim exemption in his State.

The best feature of this model is that there would be no requirement to transfer funds from one bank to the other.

Model III One unified tax by the federal Government

In case the CGST and SGST are 8% each, under this model an aggregate rate of 16% can be levied only by the Central Government .The Central Government will thereafter share the revenue with the State Government .In other words, this is nothing but are a revenue sharing model which is followed in Australia.

However, in the Indian context, this model may not be implemented because the Finance Minister in his Budget 2009 speech clearly stated that both the Centre and the State will levy and administer taxes. Further, the basic weakness of the model is that CGST for the buyer will be double than his SGST liability if the goods procured from outside the State are sold within the State, leading to accumulation of credits. Accordingly, this model can be successful only if there is a robust refund mechanism to refund the excess amount quickly.

It is likely that the industry will consider Model II mentioned above as a safe bet.

6. Conclusions

As India moves towards a dual GST, there would be a hoard of changes required in the system .To begin with the constitution of India would need an amendment .In any case, the first test for any tax reform in the country is to stand the test of constitutional validity. Thus, becomes imperative that the GST is implemented within the reigns of the constitution.

Currently, the Centre is precluded from taxing purchase or sales of goods. This power has exclusively been preserved in the Constitution for the States. In turn, The States are preserved in the Constitution for the States. In turn the States are precluded from the taxation of service. This division of taxation powers is time worn and goes back to the time the constitution was written with a few amendments to their credit.

Article 265 of the constitution lays down that no tax shall be levied or collected except by the authority of law .Schedule VII divides this subject into three categories:

Union list : Article 246 (1) of the Constitution specifies the Parliament has exclusive powers to make laws with respect of any matter enumerated in List I of the Seventh Schedule to Constitution

State list : As per Article 246 (3) , State Government has exclusive powers to make laws with respect to matters enumerated in List II

Concurrent list: Both Parliament and State Government can pass legislation with respect to items specified in this list.

There have been suggestions from various front that concurrent powers be given to both levels of government to tax all supplies ( or consumption ) , whether of goods or services .Since it would envisage all goods and services , the powers should extend to taxation of land and buildings without any specific distinction . To prevent extraterritorial application, state taxation should be limited to transactions within the

state.

Thus, the suggestion doing the rounds is that while making the constitutional amendment, an expert panel should be formed to draft the suitable enabling provision for the concurrent taxation powers and recommend consequential modifications to the Constitutions. The constitutional powers could then be exercised within the framework of an agreement which is also known as national harmonization agreement .This agreement would bind the Centre and the States to a common tax base, legal provisions

and administrative procedures. A vital part of the agreement could be creation of a centre state body which would be accountable to both the levels of government .This body would be responsible for only the design and policy aspects of the GST administration .Each government would be responsible for the actual operations and delivery in their respective jurisdiction.

The challenges in GST regime: After understanding the modus operandi of GST, there are certain question which are important and preparing accordingly at this juncture will facilitate the successful implementation of GST.

What changes the business processes will have to do, in particular the accounting systems, actually dealing with the charges to the treatment of transactions and reporting obligations resulting from the GST change?

What financial an IT systems to put in place to ensure that the place of supply for services continues to be determined correctly.

What changes need to be made to be ready for proper invoicing as per the GST norms?

How will e-commerce transactions be taxed in the new GST regime?

The implementation of GST is a changing face of India which is a welcome move and the government is well equipped for that which is a symptom of fast paced economy.

References and Bibliography

Books

1. Rastogi,Abhishek.A & Kumar,Aditya., 2009, Good And Service Tax, New Delhi, Taxmann Publication.Pvt.Ltd.

2. Chatterjee, Timir .Baran.,2008, An Introductory Study on Goods and Service Tax, New Delhi,Nabhi Publication.

3. Mohan, Rajat., 2010, Illustrated Guide to Goods & Service Tax, New Delhi,Nabhi Publication.

4. Rastogi, Abhishek A & Kumar, Aditya.,2009, Illustrated Guide to Goods & Service Tax (GST), New Delhi,Nabhi Publication.

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11. Datey,V.S.,2005,Hands on Guide to Excise Law, New Dehli, Taxmann Publication.

12. Sarangi, G..,2009, Central Excise Guide for Small Scale Industry, New Delhi, Centax Publications

13. Datey, V.S..,2008, Central Excise Law & Practice, New Delhi ,Taxmann

14. Kohli, D N.,2007, Manual of Central Excise, Law & Procedure in India, Noida, CEN-CUS Budget Publications

15. Govindan,N.S.,2008,Indirect Taxes Made Easy:Central Excise,Customs and Service Tax, Chennai, C.Sitaraman & Co.Pvt.Ltd.

16. Parthasarathy , C and Agarwal, Sanjiv .2009, A Handbook of Service Tax Law Practice and Procedure Vol I,2 and 3, , New Delhi,Nabhi Publication.

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18. Reddy , P Veera & Mamatha, P,2009, Guide to Service Tax, New Delhi,Nabhi

Publication

Web pages

1. halakhandi, Sudhir.,2009, Good And Service Tax, Taxpayers, ,[online],Available http://www.caclubindia.com/articles/goods-and-service-tax-ca-sudhir-halakhandi-3676.asp

2. Ramaa & Advocates, Venkatesh.2007, Service Tax in India, ,[online],Available http://www.hg.org/article.asp?id=4850

3. Gangadharan, V.2009, Goods And Service Tax - A Consumption Based Destination Tax, ,[online],Available http://www.articlesbase.com/advertising-

articles/goods-and-service-tax-a-consumption-based-destination-tax-

1216717.html

4. Goods and Services Tax/Harmonized Sales Tax (GST/HST). Canada Revenue Agency. 22 June, 2006. 1 August, 2006.

5. GST: An overview of some alternatives. Government of Canada. December 1993. 21 June, 2006.

6. How the GST/HST works. Canada Revenue Agency. 22 June, 2006. 4 July, 2006.

7. The Goods and Service Tax: The Governments Administration Costs. Government of Canada. February 1994. 21 June, 2006.

8. The Goods and Services Tax: 10 Years Later. Government of Canada.15 June, 2000. 21 June, 2006.

9. 1991 GST Introduced: A new tax on consumption. Government of Canada.17 May, 2006. 22 June, 2006.

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