In August 2016, the Indian Constitution was amended to empower both the center and the states to levy and collect goods and services tax (GST). The GST Council is a constitutional body created to steer the GST implementation; it is made up of Finance Ministers from the center and the states, and it is chaired by the Union Finance Minister. The GST Council recently announced that GST will be rolled out on 1 July 2017.
India has decided to adopt a Dual GST model wherein both the center and the states will levy and collect GST on a common tax base, and the taxpayer will have to interface with only one of the two tax administrations. GST will be a destination-based consumption tax subsuming 17 current indirect taxes – the principal ones being Excise, Countervailing Duty of Customs, and Service Tax of the center and state VAT.
Supplies within a particular state will have two components administered by the center and states respectively – Central GST (CGST) and States GST (SGST). In the case of interstate supplies, the Integrated GST (IGST) will basically be a summation of CGST and SGST. Being a destination-based tax, the state’s share of IGST would accrue to the destination state. IGST will be broadly administered by the center. GST will essentially be a joint venture between the centre and more than 31 states.
In the GST regime, there will be a multipoint levy throughout the supply chain with full credit of input tax paid at each stage of business-to-business transactions. Consequently, there will be no cascading of tax, and the replacement of multiple tax authorities with only two tax authorities will bring down the compliance costs. Subsuming the interstate Entry Tax in the GST and eliminating interstate trade barriers will make India a common economic market; it will also drastically reduce the travel time of goods and lower the logistics cost of moving goods across the states. Essentially, a substantial reduction of the cost of goods will help to lower inflation.
Additionally, GST will enhance the revenue of the industrially backward, high-consumption states. The extra revenue will enable these states to spend more on developing roads and other infrastructure (including power plants), thus leading to equitable distribution of industries across the country, and boosting the country’s manufacturing base.
GST will bring within its ambit all goods except alcohol, five basic petroleum products, and all services barring a few that would figure in the negative list. Cigarettes and tobacco products will be within GST, but with a separate excise duty in addition to the GST. The threshold exemption has been kept at an annual turnover of two million rupees. Small taxpayers with turnover up to five million can opt for composition levy.
The seamless flow of Input Tax Credit for both intra-state and inter-state supplies will be the hallmark of GST. Implementation of IGST for taxing inter-state supplies will also be a challenge. It is essential to understand the basic concepts (e.g. scope of supply, place and time of supply, taxable event and taxable person, flow of credit, etc.) and follow the procedural provisions relating to registration, payment, filing of returns, claim of refund, audit and enforcement, etc.
Implementation of GST will be preceded by a few legislative CGST Acts and IGST Acts to be passed by the Parliament, and SGST Acts to be passed by the respective state legislatures. Draft Model GST Laws have been placed in the public domain. Based on the response from the stakeholders, these model laws have been revised, and the final template is expected to be announced at the February GST Council meeting. Based on the final template, all the aforementioned laws are expected to be cleared by Parliament and state legislatures by the end of March, thus providing a three-month period for preparation by the taxpayers and tax authorities.
The GST has been backed by GST Net, a robust IT infrastructure. The GST Net portal will provide engagement opportunities between the taxpayers and the two tax authorities, and facilitate basic functions in the tax collection process: registration, self-assessment and payment of tax, and filing of returns. The functions of GST Net will also include forwarding the returns to the network of central and state authorities; matching tax payment details with banking networks; running the “matching engine” for invoices relating to output supply; corresponding input supply to ensure proper availment of credit; providing various MIS reports; and analyses of taxpayer’s profiles; etc. The GST Net will also integrate the common GST portal with the IT systems of the center and the states for audit, refunds, adjudication, etc., and will build interfaces for taxpayers.
Four GST rates have been decided: 18% for the standard rate; two reduced rates of 12% and 5% for items of use by common man and the poor; and the demerit goods (e.g. tobacco and cigarettes, aerated water, luxury cars, etc.) that will be assessed the peak rate of 28%. In addition, there will be a central excise on some demerit goods. Lastly, some goods will be exempted and others zero-rated. The list of exemptions will be common for the center and the states. However, the Council has not yet decided which goods will fall in the four rate groups.
Legal and procedural requirements mean that the Enterprises, Resource, Planning (ERP) of taxpayers are being reworked. Their IT software is also being customized for appropriate interaction with the GST Net. For the tax authorities, GST will bring about a huge change in field formation functionality. The emphasis will now be on audit, enforcement and dispute resolution, and the administrations will have to restructure themselves to suit the requirements of business operations in the GST regime.
In summary, GST will not merely be an indirect tax reform, it will have far-reaching impact on the economy in various ways. It will change the way business is conducted in India. Issuing invoices, payment through banks, and maintenance of records will be compulsory for availment of credit. Further, all records of receipt and supply will be maintained electronically. GST will also impact the fortunes of tax professionals, consultants and lawyers. Almost all economic sectors (including manufacturing; services; trading and retailing; logistics and transportation; telecommunications; IT; banking and financial services; and E-commerce) are going to benefit from GST. Although the GST in India is not perfect due to certain constraints between the center and states ruled by different political parties, its implementation will be a win-win proposition for all sectors of the economy.
Sumit Majumder is a former Chairman of India’s Central Board of Excise and Customs and currently a Senior Advisor to ITIC.