Goods and Services Tax: An Evaluative Overview

Mr. Anmol Soi, Assistant Professor, Delhi Institute of Rural Development, Affiliated to Guru Gobind Singh
Indraprastha University, New Delhi

Dr. Shipra Singh, Associate Professor, Delhi School of Professional Studies and Research, Affiliated to Guru
Gobind Singh Indraprastha University, New Delhi

Introduction

With elections in five states including Uttar Pradesh on the anvil, several raging
controversies from an alleged fake encounter in Madhya Pradesh and the suicide of an ex-
serviceman, the forthcoming winter session of Parliament is set to be rocky. But government
seems to be confident of ensuring the passage of the supporting Goods and Services Tax
(GST) related Bills. This development is being touted as the single biggest economic
reform in India since liberalization- the one that promises to change the way India does
business. GST is expected to subsume around 17 central and state indirect taxes, boost
compliance, curb tax evasion and give the much needed impetus to the Indian economy. With
GST, it is believed that we are kicking off a new chapter in corporate Indias story.

Enthused by the consensus in reaching four-tiered GST structure, particularly the unanimity
achieved with Congress ruled states, senior government sources were confident that the
Central GST (CGST) and Integrated GST (IGST) Bills will be passed by both the Houses of
Parliament. Even if the Opposition were to disrupt proceedings, the government has an ace up
its sleeve. It could suggest to the Speaker of the Lok Sabha that the two Bills be designated as
Money Bills. The government has a comfortable majority in the Lok Sabha but is in
minority in the Rajya Sabha.

The Government of India is committed to replace all the indirect taxes levied on goods and
services by the Centre and States and implement GST by April 2017. The passage of the two
Bills during the winter session and of the State GST Bill by state assemblies should help meet
the GST roll-out date of April 1, 2017, government sources said. The government had
advanced the winter session by a week and so also the budget session of Parliament by about
a month, so that the April 1 roll-out deadline could be met (Business Standard,
November 4, 2016, pg. 16).
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With GST, it is anticipated that the tax base will be comprehensive, as virtually all goods and
services will be taxable, with minimum exemptions. By amalgamating a large number of
Central and State taxes into a single tax and allowing set-off of prior-stage taxes, it would
mitigate the ill effects of cascading and pave the way for a common national market.

GST will be a game changing reform for the Indian economy by creating a common Indian
market and reducing the cascading effect of tax on the cost of goods and services. It will
impact the tax structure, tax incidence, tax computation, tax payment, compliance,
credit utilization, and reporting, leading to a complete overhaul of the current indirect
tax system.

GST will have a far-reaching impact on almost all the aspects of the business operations in
the country, for instance, pricing of products and services, supply chain optimization, IT,
accounting, and tax compliance systems. For the consumers, the biggest gain would be in
terms of a reduction in the overall tax burden on goods, which is currently estimated at
25%-30%. Introduction of GST would also make our products competitive in the domestic
and international markets. Studies show that this would instantly spur economic growth.
There may also be revenue gain for the Centre and the States due to widening of tax base,
increase in trade volumes and improved tax compliance. Last but not the least, this tax,
because of its transparent character, would be easier to administer.

Understanding GST

GST is a value-added tax levied at all points in the supply chain with credit allowed for any
tax paid on input acquired for use in making the supply. It would apply to both goods and
services in a comprehensive manner, with exemptions restricted to a minimum.

GST is one indirect tax for the whole nation, which will make India one unified common
market. 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.

In keeping with the federal structure of India, it is proposed that GST will be levied
concurrently by the Centre (CGST) and the states (SGST). It is expected that the base and

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other essential design features would be common between CGST and SGST across SGSTs
for individual states. Both CGST and SGST would be levied on the basis of the destination
principle. Thus, exports would be zero-rated, and imports would attract tax in the same
manner as domestic goods and services. Inter-state supplies within India would attract an
Integrated GST (aggregate of CGST and the SGST of the destination State).

At the Central level, the following taxes are being subsumed by the CGST:

a. Central Excise Duty,

b. Additional Excise Duty,

c. Service Tax,

d. Additional Customs Duty commonly known as Countervailing Duty, and

e. Special Additional Duty of Customs.

At the State level, the following taxes are being subsumed by the SGST:

a. Subsuming of State Value Added Tax/Sales Tax,

b. Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax
(levied by the Centre and collected by the States),

c. Octroi and Entry tax,

d. Purchase Tax,

e. Luxury tax, and

f. Taxes on lottery, betting and gambling.

India finalized a four-tier GST structure ranging from 5% to 28% - taking a significant step
towards implementing the biggest reform of indirect taxes, which the government hopes will
shield the common man from price shocks. The fixing of rates by the GST Council marks a
crucial milestone towards the rollout of the single tax that will replace various state and
central levies and create a seamless national market for goods and services. The hour GST
slabs are 5%, 12%, 18%, and 28%. The fifth rate for gold and precious metals, which was
earlier proposed at 4%, will be decided later but is likely to be lower.

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The Centres original proposal of 6% as the threshold rate and 26% as the highest slab was
tweaked after states including Kerala said they want the lowest slab at 5%, the current
threshold rate for value-added tax in many states.

The Finance Minister, Shri Arun Jaitley hopes that the total indirect tax incidence on the
people would come down with the seamless input tax credit that would reduce effective tax
on goods.

Over time, the government should commit to converge to one or two rates, the
Confederation of Indian Industry (CII) said in a statement. It is also important that the bulk
of goods and services should fall within the standard rate of 18% and only as exception to go
to the higher rate of 28% and a lower rate for essential goods such as unprocessed food
items. (The Economic Times, November 4, 2016, pg 1).

Aam Aadmi Burden: The aam aadmis grocery bill may not rise as the GST Council, the
apex decision-making body for the tax, decided to exempt food items or keep most of them at
the lowest rate of 5%. More than 50% of the items in the Consumer Price Index basket
would be exempted under GST and the remainder placed in the lowest bracket.
Exempted items wont have the benefit of input tax credit.

Sports Utility Vehicles (SUVs), aerated drinks, pan masala and tobacco products are unlikely
to see any change in their overall tax burden with a new cess proposed on them. Tobacco
currently attracts a total tax of about 65% and for aerated drinks, the current rate is about
40%. These goods will be taxed at the highest rate of 28% and topped up with a cess to raise
the effective tax.

Soaps, oil, shaving kits, small cars and other goods which enter into the consumption basket
of consumed by the middle class, which faces higher tax incidence of 30-31% including state
and central taxes, could become cheaper as they are likely to be placed in the lower tax slab
of 18% and not the equivalent tax slab of 28%.

The items with cascading effect of 30-31% will now be taxed at 28%, but with a rider, and
the rider is that in this category there are several items which are now being used increasingly
by a large number of people, particularly the lower middle class. So for them, 28% or 30% or
31% will be higher and so it has been transferred to 18%.

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Impact on Inflation: Chief Economic Advisor, Dr. Arvind Subramanian said the tweaking of
the rate structure should help ease inflation. On average, this should probably serve to lower
inflation. If at all, the impact on inflation will be very small. Todays change should probably
bring it down, he said.

The cess, which would be equal to the difference between the current tax rate and
highest GST slab of 28%, would be used to create a Rs. 50,000 crore fund to compensate
states that lose revenue under the new tax regime.

A separate compensation pool would be created with a sunset clause of five years after which
the levy would be reviewed by the Council, Jaitley said. He said Kerala had suggested that
the highest tax slab of 28% be raised to 40%, but the proposal for the cess found wider
acceptance in the Council as a higher tax would have increased the overall burden on
taxpayers to Rs. 1.72 lakh crore.

Service Bracket: A decision on the services bracket would be taken later, although it would
most likely attract the standard rate of 18%, Revenue Secretary Hasmukh Adhia added that
some of the services that enjoy higher abatement would be put in the lower tax slabs of 12%
or 5%, depending on their current overall tax incidence.

A committee of officials would decide which items would go in which tax bracket, but it
would be decided keeping in mind the overall tax incidence currently, Adhia said. Exports
and special economic zones would be zero-rated, he said.

Finance Secretary Ashok Lavasa said multiple rates has been decided keeping consumer
interest in mind. Such a structure was seen as inevitable to protect consumers even though
they would complicate GST and open it to classification disputes (The Economic Times,
November 4, 2016, pg. 17).

The Confederation of All India Traders, a body of retailers, pitched for administrative
simplification. The Confederation of All India Traders has categorically demanded that
irrespective of rates, there should be one single return and single authority to control taxation
system and only then the tax net will be widened and revenue will be increased, it said in a
statement.

The proposed GST structure in India is expected to be as per the best practices across
all VAT/GST countries and some of the expectations are as follows:

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1. Tax Neutral: Tax neutrality ensures that tax ultimately collected on a particular
supply chain is proportionate to the amount of tax paid by the final consumer. A credit
mechanism that prevents breakages in credit chain anticipated under GST regime in
India is one which, with moderate rates, will be tax neutral and does not lead to any
increase in prices of goods and services, and serves the interests of producers
catering to domestic and international markets without undue advantage to one over
another.

2. Simple, efficient and uniform GST is expected to overcome the issues and
shortcomings of the existing indirect tax structure. Historically, Indirect tax regime in
India has been very complex with multiple levies at multiple taxable events. GST is
expected to introduce a simple, efficient and uniform Indirect tax structure in
India with a comprehensive tax leviable on supply of all goods and services on
the same tax base and expectations from such system of taxation are:
a. Taxable event would occur simultaneously on supply of goods and services and
taxability would not be dependent on goods or services (existing in current
regime).
b. Existing complexities relating to works contract, software, intellectual property
etc., are expected to be eliminated making taxation of such transactions simpler,
and reducing their tax burden.
c. Challenges being faced at present by sectors such as E-commerce, Telecom,
Financial services, Real Estate etc. will be addressed and resolved.
d. The complexities of the existing system concerning valuations and classification
of goods and services on account of the varied interpretations and rulings will be
eliminated.
e. Lower administrative burden and provide simplicity by standardizing GST
return/challans and payments and provide for easy access through a central web-
portal for registration, refund etc.

3. Clarity in GST legislations: Benefits of a comprehensive national GST can be best

derived with common laws and rules applicable across States and Centre, and
therefore, GST legislations are expected to be
a. Formulated with clear and specific explanations on key concepts like taxable
event; when a supply amounts to inter-state supply of goods and services;
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 determination of origin of in case of inter-state trade of goods; availment and
utilization of ITC; Transitional Provisions, List of exempted supplies of goods
and services etc.
b. Minimal use of terms, such as, in relation to, such as including to avoid
interpretational issues that may lead to litigation.

4. Conciliation and Redressal Mechanism: Conciliation is a process in which the

Conciliator plays a proactive role to bring about a settlement and is considered
to be a more informal redressal process. World over the GST laws have
conciliation mechanism whereas Indian indirect tax system is heavily reliant upon
dispensing justice through medium of Courts. In such a system the decisions are
delegated upwards by authorities who ought to be fair and equitable. It is expected
that the new legislation will have conciliation mechanism that would not
necessitate a tax payer to seek expensive and delayed justice through judiciary.

Bottlenecks of the GST rollout

There isnt, as yet, a consensus on the important issue of how to distribute the businesses
between Centre and States for tax assessment and audits, i.e., dual control.

The industry is broadly reconciled with the proposed rate structure, even though it is a
departure from the two rate structure talked about earlier.

The immediate challenge for the Council is to decide which product should fall under which
category. It also needs to decide the rate structure for services, many of which are currently
on lower than the proposed tax slabs. Real estate, aviation, goods and passenger
transportation are some such services.

On the issue of dual control, hopefully, there will be a political consensus in the informal
meeting scheduled between the Centre and state finance ministers on November 20, 2016.
It is encouraging to see that there is an agreement on the basic principle that businesses
should be required to deal with only one authority for audits and assessment (either central
or state).

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In countries where GST has been implemented, business typically gets a year to prepare, after
the law is finalized. Given the timelines of Indian GST, the industry will have to manage this
transition in 3 to 4 months. This will be a huge challenge, both for governments as well as
industry and it would be good to leverage the experiences of countries like Australia and
Malaysia, which have recently transitioned to GST. It will be good to have forums to discuss
industry specific issues and ways to deal with them. This will be especially critical for the
small and medium scale industries.

A strong IT infrastructure is the backbone of an effective GST system. GSTN (a company

responsible for creating and managing the IT infrastructure) has announced that process of
migration from VAT and other registrations to GST will start in a few days. It is important
that adequate time is given for the GSTN to conduct test runs. The government needs to think
about the end consumers and ensure that benefits as envisaged actually accrue to them
reduced prices of most products and a transparent system. Countries like Australia spent lot
of time and efforts in ensuring that the common man understands the impact of GST. A
change of such magnitude cannot happen without the support of the common man
(Times of India, November 5, 2016, pg. 26).

Other challenges in terms of implementation can be articulated as follows:

Reporting and analysis Companies will also have to conduct analysis on pricing, supply
chain networks and costs because of tax changes.

Bank and financial services Company: as compared to current indirect tax regime, in GST
determination of correct place of supply, taxability of self supplies, state-wise registrations,
taxability of interest margins and security trading gains are some of the complex challenges.

IT Company: Non availability of tax exemption in SEZ unit, state-wise compliances, multiple
points of taxation are some of the major concerns.

E-commerce Company: Tax collected at source (TCS) guidelines where payment made to
supplier would be subject to TCS at the notified rate, point of taxation rules for goods etc.
lays additional burden. Another point to be considered is that while the proposed India GST
laws and rules are similar to GST regimes in other countries in many aspects; the Indian GST
law places an additional burden on registered businesses to routinely submit financial
transaction data to GSTN and follow a reconciliation mechanism for GST filings. Working
with these requisites and challenges will be a daunting task for Corporate India. For

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corporations, therefore, a robust IT infrastructure and tax technology, which takes cognizance
of these conditions and offers a simplified solution will definitely form the backbone of
successful and effective GST implementation.

GST would bring in significant change in doing business in India. Advocacy for best
practices, gearing up for changes in processes, training teams, and developing IT
systems for being GST compliant are the key areas to be addressed to.

Conclusion

India's passage of a long-awaited Goods and Services Tax (GST) bill is an important reform
which will remove barriers to trade, improve economic efficiency, and lead to higher growth
in the long run. In addition, it also sends a positive signal of the government's ability to enact
major reforms following the passage of a National Bankruptcy Law in May this year (2016).
The GST bill is a constitutional amendment which will allow for a single national indirect tax
to replace a myriad of state and national taxes. This will result in a substantial simplification
of the indirect tax system, leading to potentially significant productivity gains and boosting
long-term growth.

It remains to be seen, though, whether the introduction of a national GST will lead to a higher
intake of tax revenue. This will depend on a number of factors, such as the tax rate levels.
The introduction of national GST, though positive from a longer-term economic perspective,
should not have a substantive effect on the fiscal account in the short term. Passage of the bill
is an important indicator of India's ability to push through transformative structural reforms.
More broadly, the GST bill is part of an ambitious policy drive which includes a series of
reforms. In addition to the GST and aforementioned bankruptcy law, the agenda includes
liberalisation of the FDI regime, financial and agriculture sector reforms, and changes to cut
red tape and improve the efficiency of administration.

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