This article is written by Meenal Sharma, a student of Vivekananda Institute of Professional Studies. The author, in this article, has discussed the concept of Goods and Services Tax.
Table of Contents
The structure of indirect taxes in India up to 30-6-2017 was based on three lists in the Seventh Schedule of the Constitution of India, which came into effect on 26-1-1950. These provisions were based on the situation prevailing in 1935 and were based on the Government of India Act, 1935. Due to changes in the functioning of society, this structure had become outdated. Most of the countries have moved towards the common tax structure long ago. However, for India, GST is the tax for the twenty-first century.
The foundation of GST in the country was laid down in the Budget Speech of 28th February 2006 by the then Finance Minister. Since then, there has been a constant endeavor for the introduction of the GST in the country whose culmination has been the introduction of the Constitution (122nd Amendment) Bill in December 2014.
The government requires funds for carrying out numerous tasks like maintenance of law and order, defense, healthcare, social services, etc. The main source from which the government obtains these funds is taxation. Justice Holmes of the US Supreme Court has rightly said that ‘tax is the price we pay for a civilised society’.
Taxes are classified into Indirect Taxes and Direct Taxes. Direct Taxes include those assessed upon income, property, business, etc. of those who pay them. Indirect taxes are levied upon commodities before they reach consumers and are paid by those upon whom they ultimately fall, not as taxes, but as part of market price commodity.
Earlier structure of indirect taxes (up to 30.06.2017)
Article 1(1) of the Constitution of India states that India, that is Bharat, shall be a Union of States. Thus, India has a federal structure of governance, like the USA, Australia, UAE etc. i.e. Union Government and State Governments. In the presence of two authorities, the bifurcation of power is necessary between Union and State to avoid conflicts and ambiguities. Article 246(1) of the Constitution provides that the Parliament has exclusive powers to make laws with respect to any of the matters enumerated in List II (State List).
In respect of matters enumerated in List III (termed as ’Concurrent List’), both Parliament and State Governments have the power to make laws. Major taxes covered in Union List (up to 30.06.2017) were Central Excise, Customs Duty, Income Tax, Corporation Tax, a tax on the sale of goods from one State to another (Central Sales Tax). Major taxes in the State List (up to 30.06.2017) were tax on the sale of goods within the State (VAT), tax on land and buildings, excise duty on alcoholic liquor, entertainment tax, Entry tax.
Till 30.06.2017, the structure of indirect taxes was as follows:
- Central Excise duty on manufacture of goods, levied and collected by the Central Government.
- State Vat was levied on the sale of goods within State, levied and collected by individual State Government.
- Central Sales Tax (CST) on inter-State sale of goods i.e. sale from one State to another, was levied by the Central Government but collected and retained by State Government at a place from where goods were dispatched outside the State.
- Service tax on services levied by Central Government.
- Entry tax on entry of goods within the State levied and collected by State Government.
Besides, there were many cesses.
Major defects in the previous structure of indirect taxes
The major defects in the structure of indirect taxes, existing up to 30.06.2017 are as follows:
- Central Sales Tax (CST) was payable @ 2% for every movement of goods from one State to another. Even in cases of stock transfers or branch transfers, there was an incidence of tax as input service credit (set off) of input taxes was not fully available.
- In the European Union, the movement of goods from one country to another is exempt from taxation. However, that is not the case in India. Here, the movement of goods from one state to another was not tax-free.
- There was a cascading effect of taxes, i.e. the same goods getting taxed again and again, which could not be avoided because of CST and Entry Tax. State VAT was payable on central excise element also.
- There was an absence of national market in India due to a lot of visible (CST, State VAT and Entry Tax) and invisible barriers (like various check posts).
- A huge amount of time was lost standing in long queues at check posts. Also, huge corruption is involved.
- Central Government could only impose tax on goods till the manufacturing level. State Government could not impose service tax, it was only done by the Central Government
- Over the years, the distinction between goods and services had become hazy, due to which there is overlapping of State VAT and CST on transactions like work contract, food related services, software, IPR related services, lottery, SIM cards, operating lease/ renting of goods etc.
- Every State had its State VAT laws with different provisions, VAT rates, forms and procedures. As a result, taxable persons having business in more than one State found it extremely difficult to keep pace with the tax laws of each state.
- Competing among States to give sales tax reliefs to attract industries, which badly affect tax revenues of State Governments. Most of the State Governments are now in debt trap.
Why was there a need for GST?
The most important question that arises here is that what is the need for GST? To understand that, we first need to observe the previous structure of indirect taxation which has been in existence. There were various taxes levied: the Central Government levied Central Excise duty on manufacture, Service Tax on provision of services, CST on interstate sale of goods but collected by the appropriate State Government and the State Governments levied VAT on retail sales, Entry Tax on entry of goods in the State, Luxury Tax, Purchase Tax, etc. There were various apparent multiplicity of taxes which were being levied on the same supply chain.
Thus, there was cascading of taxes. Also there were certain taxes levied by the State Governments were not allowed as set off for payment of other taxes being levied by them. Further, due to the presence of numerous VAT laws there was a difference in the tax rates and tax practices, which divided the country into separate economic spheres. Due to creation of tariff and non- tariff barriers, there was a hindrance in the free flow of trade throughout the country. Furthermore, the large number of taxes created high compliance cost for the taxpayers in the form of number of returns, payments etc.
Article 279 A in Constitution of India provides for the constitution of a GST Council. GST Council, constituted vide Notification No. SO 2957(E) dated 15.09.2016, is the Apex Constitutional Authority to decide the policies of GST. It shall make recommendations to Union and States relating to GST. The Chairman of the Council is the Union Finance Minister. Following are the members of the Council:
- The Union Minister of State in charge of Revenue or Finance; and
- The minister in-charge of Finance or Taxation or any other Minister nominated by each State Government.
The Vice Chairperson of GST Council shall be taken with at least 75% of weighted average voting in favour of the decision. The Union Government shall have 33.33% voting power and States shall have 66.67% voting power.
What is GST?
A single tax subsuming all the previously mentioned taxes is called the Goods and Services Tax (GST). It shall be levied on the supply of goods or services or both at each stage of supply chain starting from manufacture or import and till the last retail level. So basically, any tax that is presently being levied by the Central or State Government on the supply of goods or services is going to be converted into GST.
GST is a dual levy where the Central Government shall levy and collect Central GST (CGST) and the State shall levy and collect State GST (SGST) on intra-state supply of goods or services. The Centre shall also levy and collect Integrated GST (IGST) on inter-state supply of goods or services. Therefore, GST is set to integrate various taxes being levied by the Centre and the State at present and provide a platform for forging an economic union of the country.
GST shall lead to the creation of a single national market, common tax base and common tax laws for the Centre and States. Another very important feature of GST will be that input tax credit will be made available at every stage of supply for the tax paid at the earlier stage of supply. This feature would also alleviate cascading or double taxation in a major way. Moreover, it will be supported by the extensive use of Information Technology through Goods and Services Tax Network (GSTN), which will eventually lead to greater transparency in tax burden, accountability of the tax administrations of the Centre and the States and also ameliorate compliance levels at reduced cost of compliance for taxpayers.
Overall structure of Goods and Services Tax
- Goods and Services Tax (GST) is applicable on ‘supply’ of goods or services or both, in India w.e.f. 01.07.2017 (including Jammu and Kashmir w.e.f. 08.07.2017). Area up to 200 nautical miles inside sea is ‘India’ for GST.
- For supplies within a State or Union Territory-
- Central GST (CGST) will be payable to Central Government; and
- State GST (SGST) or Union Territory GST (UTGST) will be payable to State Government or Union Territory (as applicable). Area up to 12 nautical miles inside sea is part of State or Union territory which is nearest.
- For inter-State supplies, Integrated tax (IGST) will be payable to Central Government. IGST is payable if supply is beyond 12 nautical miles but up to 200 nautical miles.
- GST Compensation Cess shall be payable on tobacco products, pan masala, coal, aerated waters, motor cars etc.
- Basic customs duty, Education Cess of customs and Secondary and Higher Education Cess of Customs, IGST and GST Compensation Cess on goods where Compensation Cess is applicable shall be payable on imports of goods.
- Distinction between goods and services will be mostly eliminated, this will eliminate the problem of dual taxation presently faced by various industries.
- GST is based on VAT concept of allowing input tax credit of tax paid on inputs, input services and capital goods, for payment of output tax.
- GST is a consumption-based tax i.e. tax will be payable in the State where goods or services are finally consumed.
- The rates of IGST-Nil, 0.1%, 0.25%, 3%, 5%, 12%, 18% and 28%. In case of supply within State, CGST will be 50% of IGST Rates and SGST/UTGST for supply within the State or Union Territory will be 50% of IGST rates.
- Though GST is payable to both Central Government and State Government/Union Territory Administration, the control will be exercised either by State Government/Union Territory Authorities or Central Government Authorities to avoid dual control as well as disputes amongst them.
- Petroleum products, i.e. petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel are out of GST at present and may be brought under GST later.
- Tobacco products will be subject to excise duty plus GST.
- Alcoholic liquor will be subject to State duty. This product is out of GST.
- GST Council is Apex Constitutional body which will determine policies of GST.
Rates of GST
The IGST and CGST Acts do not indicate GST rate structure.
According to section 9 of CGST Act, rate of CGST will be as notified by Central/ State Government. The rate shall not exceed 20%. Same provisions will be in SGST Act of each State. The total GST rate for inter-State supplies will not exceed 40% [20% CGST and 20% SGST].
According to section 5 of IGST Act, rate of IGST will be as notified by the Central Government. The rate shall not exceed 40%.
CGST and IGST rates will be common all over India. SGST rates are also expected to be common all-over India. The State Governments have sovereign powers to levy GST as a result of which different States may have different rates.
Broadly the IGST rates are as follows [for supply within State/Union Territory, 50% of IGST rate is CGST rate and 50% of IGST rate is SGST/UTGST rate] [as amended up to 15.11.2017].
NIL: Fresh meat, fish, chicken, eggs, fresh milk, buttermilk, live animals, live poultry, curd, natural honey, unpacked wheat, unpacked rice, fresh fruits and vegetables, coffee beans, wheat, rye, rice, flour, besan, bread, jaggery, papad, prasad, salt, bindi, sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom, pooja equipment, jute, khadi, national flag, raw silk, electrical energy, human blood, human hair, hearing aids, passenger baggage,, duty credit scrip.
- 0.1%: Supply of goods by Domestic Tariff Area unit to Merchant Exporter who is going to export the goods supplied by DTA unit (w.e.f. 23.10.2017).
- 0.25%: Rough diamonds, rough precious or semi-precious stones falling under 7102, 7103 and 7104.
- 3%: Gold, silver and jewellery, platinum, imitation jewellery, pearl, diamonds, synthetic stone, precious stones.
- 5%: Packaged food (wheat, barley, oats, maize, rice, rye, aata, maida, jawar, corn, honey), fish, fillet, cream, skimmed milk, powder, eggs, branded paneer, frozen vegetables, coffee, tea, spices, pizza bread, rusk, cashew nuts, edible oils, sabudana, kerosene oil PDS, coal, oreos, specified medicines, stent, lifeboats, handmade safety matches, newsprint, footwear below Rs 500, sugar, cotton yarn, natural fiber, silk yarn, silk woven fabric, cotton fabrics, embroidery, readymade garments up to Rs 1000, readymade locomotives and parts, e-waste, khakra, plain chapatti or roti, unbranded namkeens, bhujia, mixture, chabena and similar edible preparations ready for consumption form, other than those put up in unit container- inserted w.e.f. 13.10.2017.
- 12%: Live horses, condensed milk, butter, cheese, ghee, dry fruits in packaged form, animal fat, sausage, fruit juices, branded namkeens, bhujia in unit containers, ayurvedic medicines, tooth powder, tableware and kitchenware of wood, colouring books, picture books, corrugated paper, cartons, exercise books, calendars, yarn, carpets, textile fabrics, umbrella, sewing machine, table kitchen articles, knives, LED lamps, cell-phones, readymade garments above Rs 1000, agricultural machinery, permanent transfer of IPR (except software).
- 18%: Flavored refined sugar, pasta, sugar confectionery, cornflakes, pastries and cakes, preserved vegetables, jams, sauces, soups, ice cream, instant food mixes, mineral water, ethyl alcohol, slag, perfumes, fireworks, steel products, printed circuits, camera, speakers and monitors, biscuits, footwear Rs 500 and above, tendu leaves, artificial fibre, synthetic yarn like nylon, polyester, computers, hand tools, machinery for industrial use, machine tools, ball bearings and roller bearings, CCTV, printed circuits, spectacles, clocks, watches, permanent transfer of IPR of software, all other goods not elsewhere specified.
- 28%: Molasses, pan masala, aerated waters, tobacco products, Portland cement, paints, tyres, IC Engines, refrigerators, air conditioning machines, water heaters, washing machines, motor vehicles, motorcycles, aircrafts for personal use, revolvers, video games. [List as pruned on 15.11.2017]
GST Compensation Cess
There shall be GST cess of 1% applicable on small cars, 3% on mid-sized cars and 22% on luxury cars. Motorcycles above 350cc will attract 3% GST compensation cess. GST Compensation cess is also payable on aerated waters, cigarettes and pan masala.
Motor vehicles purchased prior to 01.07.2017 and sold or given on financial lease after 01.07.2017
If motor vehicles purchased before 01.07.2017 and Cenvat credit was not availed, the tax rate is 65% of normal rate. Similarly, if such vehicle was given on financial lease, tax rate will be 65% of normal rate.
GST rate will be 12% in the case of State run lotteries and 28% in case of lotteries authorized by State and run by private persons. Tax on lottery will be collected at first stage under reverse charge. Later, there will be no GST on subsequent sale of lottery tickets. The valuation will be 100/112 or 100/128 of face value.
Goods supplied for petroleum operations have been exempted.
Advantages of GST
Advantages for the government
- It will help to create a unified national market for India, thus, giving a boost to foreign investment and the “Make in India” campaign;
- It will lead to harmonization of laws, procedures and rates of tax between Centre and the States and across States;
- Improved environment for compliance as all returns are to be filed online, input credits to be verified online, encouraging more paper trail of transactions at each level of supply chain;
- Similar uniform SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighbouring States and that between intra and inter-state sales;
- There will be increased certainty in the taxation system due to various common procedures for registration of taxpayers, refund of taxes, uniform formats of tax return, common tax base, common system of classification of goods and services;
- Use of Information Technology will help to reduce corruption as it will decrease human interface between the taxpayer and the tax administration.
- It will boost exports and manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive economic growth;
- It will help in creating more financial resources and employment which will ultimately help to eradicate poverty.
Advantages to Trade and Industry
- There will be a simpler tax regime with fewer exemptions;
- Increased ease of doing business;
- There will be simplicity and uniformity in various procedures as a result of reduction in multiplicity of taxes;
- Elimination of double taxation on certain sectors;
- There will be a reduction in compliance costs leading to lesser records and hence less use of manpower and resources for maintaining records;
- There will be a boost in the exports of Indian products in the international market due to neutralization of taxes;
- There will be an increase in consumption leading to an increase in production as a result of a decrease in the average tax burden. This will help in the growth of the industries manufacturing in India.
Advantages to Consumers
- There will be transparency in the price of commodities as a result of seamless flow of input tax credit between the manufacturer, retailer and service supplier;
- The price of commodities will be reduced in the long run due to reduction of cascading effect;
- Small retailers will either be exempted or will suffer with very low tax rates;
- Generating more employment and more financial resources, will help to eradicate poverty.
Advantages to States
- There will be an expansion in the tax base as the entire process from manufacturing till the last retail level will be taxed;
- Since the States will also have the power to tax the services, it will boost revenue and give States the access to the fastest growing sector of the economy;
- Since GST will be a consumption based tax, the consuming States will be favoured;
- The overall investment climate will be improved which is bound to benefit the States in their development;
- Since the SGST and IGST rates will be uniform, the incentive for invasion will be reduced.
GST is set to bring a change in the system of indirect taxation by bringing transparent and corruption-free tax administration, removing the current shortcomings in indirect tax structure. GST is bound to be business-friendly as well as consumer-friendly. In India, it is set to drastically improve the positions of each of these stakeholders. There has been a need to improve the previous structure of indirect taxation due to various shortcomings in it like the cascading effect of taxation. This need for change leads us to the need for GST. GST will allow India to better negotiate its terms in international trade forums. It aims at increasing the taxpayer base by bringing the small and medium enterprises and the unorganized sector under its compliance. This will the Indian markets more stable and they will be able to compete in the international market.
- Retrieved from, ”http://www.gstcouncil.gov.in/about-gst”
- Parashuram Pottery Works Co. Ltd v. ITO (1977) 106 ITR 1 (SC)
- Union of India v. Nit dip Textile Processors P. Ltd (2012) 1 SCC 226
- Article 1, The Indian Constitution
- Retrieved from, http://www.gstcouncil.gov.in/about-gst
- GST Law and Practice with Customs & FTP, Taxmann, V.S.Datey
- Retrieved from, ”http://www.gstcouncil.gov.in/about-gst”
- GST Law and Practice with Customs & FTP, Taxmann, V.S.Datey
- Vide Notification No.37/2017-CT (Rate) dated 13.10.2017
- Vide Notification No. 38/2017-IT (Rate) dated 13.10.2017
- Vide Notification No 3/2017-CT(Rate) dated 28.06.2017 and No. 3/2017-IT (Rate) dated 28.06.2017
- Retrieved from, ”http://www.gstcouncil.gov.in/about-gst”
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