Salient Features of upcoming Goods and Service Tax (GST) in India

Some Points
The Good and Services Tax is the biggest indirect tax reform since 1947. This will be levied on manufacture sale
and consumption of goods and services. In the words of the Finance Minister Arun Jaitley, the GST bill will lead
to the economic integration of India.
The main function of the GST is to transform India into a uniform market by breaking the current fiscal barrier
between states. Thus the GST will facilitate a uniform tax levied on goods and services across the country.
Currently, the indirect tax system in India is complicated with overlapping taxes levied by the Centre and the State
separately.
Framework of the GST will replace indirect taxes
The GST will have a 'dual' structure, which means it will have two components- the Central GST and the State
GST. They will both have separate powers to legislate and administer their respective taxes. Thus equally
empowering both.
Taxes such as excise duty, service, central sales tax, VAT ( value added tax), entry tax or octroi will all be
subsumed by the GST under a single umbrella.
With passing of the GST bill, we can expect a climate of improved tax compliance.
Thus, the GST will basically have only three kinds of taxes, Central, State and another called the integrated GST
to tackle inter-state transactions.
The GST regime is intended to be functional from 1st April, 2016.
The first mention of the bill was in 2009 when the previous UPA government opened a discussion on it. They
were successful in introducing the bill but failed to get it passed.
On 17th December 2014, the NDA government made slight changes to it and redefined it in the Lok Sabha. The
bill got cleared on May 6th this year.
However the current challenge facing the bill is that it needs two-third majority of both houses and 50 percent of
the state assemblies will have to ratify it.
The bill is now stuck in the Rajya Sabha, because the current government does not hold a majority here.
Goods and Services Tax: Salient features
The present essay looks at the salient features of the proposed GST and how it is different from the current system of
taxation of goods and services. The information herein is drawn from the official paper on GST on the website of the
Central Board of Excise & Customs, which has played a vital role in the formulation of the GST model.
The journey to GST
(i) Amendment of Constitution
The 100th Constitution Amendment Bill, which aims to change the taxing powers of the states and union to enable GST,
has been passed by the Lok Sabha and is now with a Parliamentary committee for scrutiny. It is a long journey for an
amendment of this nature to actually be made, as laid down in Article 368 of the Constitution 1. After passing by both
houses of Parliament, the Bill has to be ratified by at least half the states before it becomes law. This is required because
the lists in the Seventh Schedule are being amended, which changes the balance of power in the federation of states. (The
federal structure of the Indian nation is declared in the very first Article of the Constitution, which opens with Article 1
saying, India, that is Bharat, shall be a Union of States.)
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(ii) GST law to be enacted by centre and each state

As will be seen below, an important feature of GST will be that tax paid on inter-state transactions will be available as
input tax credit. For this purpose the taxing statutes of each state would have to incorporate this provision, as it will not
work without complete synchronisation. Therefore the next step after the Constitutional amendment will be that the GST
Council (explained below) will provide draft enactments to the states and centre and these will have to be passed by each
of the states and by Parliament respectively.
What is GST: how the levy will be different?
GST is Goods and Services Tax:
a dual tax to be levied on the same taxable event by both the states and the union government 2.
The taxable event will be supply of goods or services 3.
The states will levy the tax on such supplies of goods / services made within the state, while the union will levy
the tax on inter-state supplies, but the state will collect it as in the present case of CST.
Thus on each supply of goods / services, there will be a state tax as well as a central tax. These will be called
state GST and central GST respectively.
There will be a single document for tax purposes, and a single return filed with a central registry, from which the
information will be split between the centre and the relevant states.
The differences in the levy from the current scenario will be as follows.
At present:
(i) Currently the centre alone can tax services. When service tax was introduced in 1994, this was an item not mentioned
anywhere in Lists 1, 2 or 3 of the Seventh Schedule and was therefore covered under the residual entry number 97 in List
I (union list). An item 92C has subsequently been inserted in List I, but not been operationalized.
(ii) Currently, different stages in the progression of goods in the supply chain are levied to different taxes, and there is no
input tax relief for most of these, so that the price of goods gets correspondingly inflated. The taxes on goods include
excise duty, VAT / CST, purchase tax (if applicable), entry tax (in various forms and names), and state cesses and
surcharges. While a manufacturers invoice does reflect both excise duty and VAT / CST even now, this is only because
both are indirect taxes and are collected from the customer. However they are sequentially collected, excise duty on
manufacture and then VAT / CST on sale, and are charged on different values (as elaborated elsewhere in this paper). It
can also be seen that VAT / CST is not charged on transfer of goods that is not a sale, like stock transfer; and excise duty is
not charged on sale transactions but is charged only on manufacture.
(iii) Because manufacture, sale and service are at present taxed differently, there is much ambiguity and litigation over
legal concepts of what constitutes
Manufacture
Sale
Service [as distinct from deemed sale under Article 366(29A) of the Constitution 4]
In future (during GST regime):
(i) In GST it is proposed to delete entry 92C (tax on services) from List I so that the states as well as the centre can tax
services. Also, both centre and states are to be explicitly empowered to levy goods and services tax, which is defined as a
tax on the supply of goods or services or both. Thus the Constitution, upon amendment, will support levy of tax on
services as well as goods by the states as well as the centre.
(ii) GST will replace a multiplicity of taxes on goods, like excise duty on indigenous manufacture and on imports, VAT,
CST, purchase tax, entry tax, and various cesses and surcharges. It will also replace entertainment tax (other than by local
bodies), luxury tax, taxes on advertisements and taxes on lottery, racing and gambling. Furthermore, GST will be available
as input tax credit.
(iii) The single tax on supply will render redundant the decades-old debates on what constitutes manufacture, what
constitutes sale, and how to tax composite transactions of service and sale. A greater degree of clarity regarding taxability,
and a corresponding reduction in uncertainty will result.
GST: chargeable by states and centre on the same taxable value
The levy of GST will be simultaneously made on the same transaction by the states and centre. Consequently, the taxable
value will be the same for the purpose of both state & central GST. This is different from the present scenario in the
following ways:
At present:
Even today, a manufacturers commercial invoice reflects both central excise duty and state VAT on the same goods. This
is because both are indirect taxes and are collected from the customer. Conceptually, however, at present the centre taxes
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manufacture, and thereafter the state taxes sale of the goods. The result is that the central excise duty is imposed first
on the goods, and the state tax comes after that, on a value that is price plus central excise duty. If the goods are priced at
Rs 100, and excise duty is 10% and VAT is 14%, the present scenario is that the invoice will read as follows:
Goods
Rs. 100.00
C. Excise duty @ 10%Rs. 10.00
Sub-total
Rs. 110.00
VAT @ 14%
Rs. 15.40
In future (during GST regime):
When the same transaction of supply is being taxed by both centre and states, the taxes are levied simultaneously on the
same value. The rate of GST in the above transaction will be 24%, split as 10% central GST and 14% state GST. The
transaction will then be taxed as follows:
Goods
Rs. 100.00
C.GST @ 10%Rs. 10.00
S.GST @ 14% Rs. 14.00
Thus there will be a reduction in the amount of VAT (to be known as SGST) payable if the rate remains the same. (The
same result could have been achieved by changing the method of valuation in VAT / CST law, but there was no incentive
for the states to do this or agree to it, as it involves reduction in their revenue.)
GST will provide input tax relief in inter-state transactions
The major gain from GST will be extension of input tax relief to inter-state sale of goods.
At present:
At present, there is a pan-India input tax relief mechanism for only the central taxes on goods and services, in the form of
Cenvat credit. As for the state taxes, each state charges VAT on sale of goods within the state and provides input VAT
credits for taxes paid within the state. Inter-state sales are subject to CST, levied by the centre but collected by the states.
No credits are available for such inter-state transactions. The obvious reason for the absence of tax credits in inter-state
sales is loss of revenue that would ensue by allowing tax paid to another state to be reduced from tax payable.
In future (during GST regime):
The breakthrough achieved by the GST model is the central clearing house to mediate inter-state credits, with central
compensation built into the system. CST will be replaced by integrated GST (IGST), which the originating state will
charge on the sale. IGST can be taken as a credit in the destination state. Its use will be to pay IGST, CGST or SGST, in
that order of preference. The transaction will be electronically routed through the central clearing house, which will also
track the use of IGST to pay SGST and will compensate the state to that extent. In other words, the loss caused to the
destination state by tax paid in another state being adjusted against tax payable to the destination state will be made up by
the centre. The rationale for this is to encourage growth of the market, which in turn is expected to spur production and
increase revenue. This system of input tax credit in inter-state sales is a major salutary feature of the proposed GST model.
Differential treatment for alcohol, tobacco and petroleum products
(i) Alcoholic liquor for human consumption has been excluded from the purview of GST. The definition of goods and
services tax in the proposed clause (12A) to be inserted in Article 366 of the Constitution is tax on the supply of goods or
services or both (except tax on the supply of alcoholic liquor for human consumption). The manufacture and sale of the
product will continue to be taxed by states.
(ii) Tobacco and tobacco products will be subject to central excise duty in addition to GST. While not excluded from GST,
it is retained in entry 84 of List I (union list) also.
(iii) Petroleum products are excluded from GST for the present, and will continue to be taxed in the present mode
central excise duty on manufacture and VAT / CST on sale. However, the proposed Constitutional amendment requires the
GST Council to fix the date by which these products will be brought into the purview of GST. This is in clause (5) of the
proposed Article 279A.
Additional 1% for originating state on interstate supply of goods non-VATable In addition to GST, an amount of 1% on
inter-state supply of goods will be charged by the centre and assigned to the originating state, as per section 18 of the
Constitution amendment bill. What is the originating state will be determined in terms of the rules for place of supply,
which will be framed by Parliament in terms of the same section. This tax of 1% on inter-state supply of goods will not be
available as input tax credit. The tax will be levied for an initial period of two years and may be extended on the
recommendation of the GST Council (see below).
Operational mechanism
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At the level of centre-state coordination on policy and implementation, the proposed Article 279A in the Constitutional
amendment provides for the creation of a GST Council consisting of the union and state Finance Ministers and other
designated functionaries, who will take decisions by majority vote in the manner provided. The role of the Council will be
to make recommendations to the centre and the states on, inter alia, exemptions including threshold exemption, rates of
tax, date of tax to be levied on petroleum products, special provisions for specified states.
However, the manner of operation of the levy on the ground is far from clear. Perhaps the GST Council will decide issues
like, who will have jurisdiction to audit the assesse, what will be the enforcement mechanism for cases of evasion, what
will be the mechanism to prevent input tax fraud, and so on.
Uniform rates of GST across states?
Part of the vision of the government in bringing GST is that it will transform India into one integrated market and greatly
enhance the ease of doing business. To this end, uniform rates of GST across states are considered desirable, as a measure
of simplification. However the states are understandably reluctant to surrender their discretion to tax; as a compromise it
is understood that the GST Council will give them a range within which they can raise or lower the rates.
There is a school of thought that is opposed to uniform rates on the ground that such a provision will be eventually
detrimental to business. The states use rates of tax and exemptions from tax as an incentive to attract business. In this
sense there is competition among the states, and business benefits. In case of uniformity, the tax rates are a fait accompli
that will have to be faced by the potential investor without alternative recourse.
References
1
Article 368 of the Constitution can be perused at http://indiankanoon.org/doc/594125/.
2
In terms of the proposed Article 246A of the Constitution, Parliament as well as the legislatures of every state shall have
power to make laws with respect to goods and services tax imposed by the Union or by such state.
3
In terms of the proposed clause (12A) to be inserted in Article 366 of the Constitution, goods and services tax means
tax on the supply of goods or services or both (except tax on the supply of alcoholic liquor for human consumption).
4
Article 366(29A) of the Constitution was inserted in the pre-service tax period, to deem certain transactions as sale. The
transactions included works contract, catering, hire purchase, aspects of which are now subject to service tax.

Motives behind the GST:

Subsume all indirect taxes at the centre and the state level
One-Country-One-Tax

Reduce the cascading effect of taxes on taxes.

Increase productivity and transparency; increase tax-GDP ratio.

Reduce/Eliminate tax evasion and corruption

How is it going to happen?

Currently a businessman (includes manufacturers, whole-sellers, retailers), purchaser and even a salaried person
has to pay variety of taxes when they get engaged in transactions of an item. You might wonder how a salaried
person comes into the picture. Remember Central Surcharges you pay as a tax assessee and Service Tax you
have to pay in restaurants and other places?
GST envisages following amendments in the Tax Regime:
1. The GST regime seeks to subsume the following taxes into a single one:
Taxes levied by Central Govt. : Central Exercise. Service Tax. Service Tax. Central Surcharges. Central Cesses.
Taxes levied by State Govt. : VAT/Sales Tax. Entertainment Tax. Luxury Tax. State Taxes and Cesses.
2. There will be minimum three rates, namely Standard Rate (covers most items), Merit Rate (Lower than
Standard Rate for essential goods) and Special Rate (higher than Standard Rate for jewellery and precious
metals)
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3. Cooperative Federalism States and the Centre will have concurrent power to levy taxes. As of now, Centre
mainly collects Service Tax, while the states tax the retailing process. With GST their roles will be extended.
Anyone can tax anything. However, the states will see their arena extended, the Centre's will be shrunken.
4. Taxes on consumption but not on production. The final consumer will bear all the taxes, and this tax will have
Centre's as well as the States' share in it. Taxes will also be paid by intermediaries, however this amount will be
paid back to them!
Merits of the GST Regime:
Reduce the cascading effect of taxes on the final price of the product. Eliminate tax-on-tax effect. No
more Tarikh pe Tarikh pe Tarikh...ooops Tax pe Tax pe Tax pe Tax.
Moderate prices and increase consumption.

Uniform and Stable Tax Regime. One-Country-One-Tax.

Simplify Tax Structure. Reduce the hassles of filing tax forms by merchants.

Increase GDP, tax-GDP ratio and revenue surplus.

Demerits of the GST:

Doesn't include petroleum and alcohol products. Heavy loss to the exchequer.
Instead of blurring out the difference between goods and services tax, it highlights them. An aam aadmi
(common man) filing the tax-returns will have to suffer.

It requires strong IT (Information Technology) infrastructure at grass-root levels. India essentially lacks
this. This factor is going to be the bottleneck, if not addressed well in advance.

Very high rates 16% compared to current 12.5 % VAT.

Tax-sharing between states and the Centre was another bottleneck. Nice to see that there is a consensus
now.

The GST Bill has been pending for long: since 2004. With the UPA Govt. at centre, the BJP-controlled states
were against it. As the GST bill requires amendment to the Constitution (Amendments to the clauses relating to
Centre's and states' power to levy and collect taxes), the states feared loss of autonomy. The experts tried to ally
this false apprehension, but it was largely due to lack of political will that the Bill couldn't see the light for this
long. F*ck you BJP.
The Bill as brought up by the newly elected Central Govt. is basically the same old wine in new bottle, with
minor changes:
Centre to compensate for the states' loss - 100% in first 3 years, 75% for the fourth year and 50% for the
fifth year.
Formation of GST council for deciding the GST Rates.

States with manufacturing activities to enjoy protection for a little while.

Mostly uniform rate, but little flexibility permissible.

In my opinion, there are more positives to the GST Bill than negatives. The negatives are mostly minor, arising
out of the structural problem in the country. This should have been done long back, which otherwise created
more confusion, helped merchants evade taxes and accumulate black money. Happy to see that the govt. with
such a strong mandate is pushing forward the agenda.

The Ideas Behind the GST

Countries that have gone to a GST generally do so as a means of consolidating various taxes into a single tax on
all goods and services. The GST often replaces some combination of excise taxes, duties and taxes on behavior,
which include taxes on betting, luxury goods, entertainment and entry into the country.
GST is imposed at every stage of the supply chain. A 6 percent tax, for example, may be imposed on the
suppliers of raw materials, again upon the manufacturer who uses those materials and then successively on the
distributor, retailer and consumer. While this appears at first to be a burdensome accumulation of taxes, because
each payer of the GST is also tax-credited for that payment, the actual burden is significantly lower.
The fundamental ideas underlying the GST are:
Equity: Everyone pays. Countries, such as Spain and Greece, that have attempted to impose many different
kinds of taxes often end up with many wealthy tax cheats and many tax-burdened urban poor.
Efficiency: It replaces the time-consuming and manpower-intensive imposition of several different taxes with
a single tax, thus lowering overhead expenses for government, producers and consumers.
Accountability: Many countries have many relatively high taxes -- for example on ownership of real estate or
even specific entities such as swimming pools -- but in the confusion of many different taxes and avenues of
collection, these taxes are often uncollected. Because a record of payment must be made at every transaction in
the sequence from origin to consumer, the GST is relatively easy to police and therefore to collect.
The Difference between GST and VAT
Although explanations of the difference between the two taxes are plentiful on the Internet, most government
ministries treat them as one tax with two names. In a 2006 position paper, "International VAT/GST
Guidelines," the International Organisation for Economic Cooperation and Development begins by noting that
the VAT is "also called the Goods and Services tax." Other countries' finance ministries, such as Malaysia's and
Botswana's, make similar assertions. No country has both a VAT and GST.
Nevertheless, pursuing the difference or its lack may be a linguistic dead end. Since the implementations of this
tax, whatever it is called, vary so significantly from one country to another, it is relatively easy to discuss the
difference between one country's VAT and another country's GST. But it is equally easy to discuss the
differences in the taxes of two countries, both of which call their tax a VAT, or between the taxes in two other
countries, both of which call their tax a GST.
There is, however, a difference between the GST/VAT and a sales tax. Sales taxes are not necessarily
imposed at every stage of the supply chain and may be imposed only on the consumer. Many countries have
both a comprehensive GST/VAT and a sales tax. In Canada, for example, some provinces have what the Canada
Revenue Agency calls a "harmonized GST and HST," the latter being a provincial sales tax that is harmonized
with the country's federal GST. In provinces that have not elected to combine the two, there are two separate
taxes -- the federal GST and a provincial sales tax.