This article is written by Aditi Lahiri, pursuing a Diploma in Business Laws for In-House Counsels from lawsikho.com. Here she discusses Indirect Taxes: An Introduction to GST”.
In India, the Government imposes taxes of two types- Direct taxes and Indirect taxes. Such classification in the taxation system is based on the method of collection of taxes from the taxpayer. Direct Taxes, like income tax, gift tax, corporation tax etc. are taxes that are directly applied on the income of the taxpayers and are collected directly by the Government of India from individuals and organizations. Direct taxes are governed by the Income Tax Act, 1961.
On the other hand, Indirect taxes are imposed on an intermediary in the supply chain (like a retailer or producer) initially but is eventually recovered by the intermediary from the final consumer/taxpayer as a part of the purchase price of goods and services, hence creating a distinction between the point of incidence and point of impact of these taxes. Indirect taxes, unlike direct taxes, are not levied on the income of the taxpayer but on his expenses. Indirect taxes are primarily governed by the four Acts under GST as mentioned later.
Prior to 1st July 2017, the taxes were levied through many Central indirect taxes like central excise duty, central sales tax etc. and State indirect taxes like VAT, entertainment tax, luxury tax, etc. However, under The Goods and Service Act, The Goods and Service Tax (GST) replaced many central and state indirect taxes as a single value-added indirect tax to be levied at every point of sale on most commodities and services (except petroleum products, alcoholic drinks, and electricity) sold for domestic consumption throughout the entire country. The implementation of GST reformed and revolutionised the taxation system of India to eliminate double taxation or the cascading effect (taxes paid twice on the same commodity) of the previous system which reduced the individual prices of the commodities by avoiding paying tax on tax. It is a comprehensive:
- multi-stage (levied on every stage of monetary value addition from manufacture of a commodity to final sale to the consumer, it is refunded to all parties in the various stages of production other than the final consumer),
- destination-based (tax is collected from point of consumption and not point of origin, i.e. revenue goes to the state in which the consumer is located), and
- technologically driven (all GST related activities like registration, refund application, return filing, and response to notices are done online) tax.
The idea of a single Goods and Services Tax (GST) for the entire nation was first conceived and approved in 1999 under Prime Minister Atal Bihari Vajpayee, who then set up a committee headed by Asim Dasgupta to design a GST model and a task force under Vijay Kelkar in 2002 to recommend tax reforms, which in 2005, recommended rolling out GST. After a long and arduous journey, The Constitution (One Hundred and First Amendment) Act, 2016 was passed by both Houses and approved by the President of India in 2016, paving the way for the implementation of GST. The Constitutional Amendment introduced the following main features:
- empowered the Parliament with the exclusive right to make laws with respect to GST regarding inter-State trade or commerce and empowered the Parliament and State Legislatures with the “concurrent powers” to make laws with respect to GST imposed by the Union or by the respective state (Article 246 (A)).
- GST in case of the inter-state trade will be levied and collected by the Government of India and shared between the Union and State Governments as per recommendation of the GST Council and such tax revenue received by the Union or states would not be credited to the Consolidated Fund of India and the principles for inter-State trade or commerce can be formulated by the Parliament (Article 269A).
- Provided for constitution of a GST council by the President of India within sixty days by prescribing-
- the members of the Council (the Union Finance Minister (the Chairman of the Council), the Minister of State (Revenue) and the State Finance/Taxation Ministers),
- the process of taking decisions through voting, and
- the stipulations it can recommend including:
- the taxes, cesses and surcharges subsumed in the GST,
- goods and services to be subjected to, or exempted from GST,
- Model Goods and Services Tax Laws,
- principles of levy and principles that govern the place of supply,
- apportionment of Integrated Goods and Services Tax between the Union and States,
- the threshold limit of turnover below which GST may be exempted,
- rates including floor rates with bands of GST and any special rate or rates to raise additional resources for a specified period during any natural calamity or disaster,
- special provision with respect to some States and Union Territories, and
- any other matter relating to GST, as the Council may decide (Article 279-A).
- Prescribed the goods and commodities like tobacco, alcohol and petroleum which are exempt from the ambit of GST and are under the jurisdiction of the Union Government (7th Schedule, Union List, State List).
The then Union Finance Minister, Arun Jaitley, had said that due to the implementation of GST, “There will be a check on inflation, tax avoidance will be difficult, rates will be lower compared to earlier, the country’s GDP will benefit, and the extra resources the states and the Centre will get, that will be used to serve the poor,”.
Prime Minister Narendra Modi had added that, “The scope of GST is not limited to the financial system. GST is a big boost to cooperative federalism. GST is not just a simple taxation system but will also help us fight corruption and black money. It will also help us introduce a new type of governance,” and that, “GST will not only ease the process of doing business but will also improve the way of doing business.”
Subsequently, the following four supplementary GST legislations were passed by the Houses:
- Central Goods and Services Tax Act 2017,
- Integrated Goods and Services Tax Act 2017,
- Union Territory Goods and Services Tax Act 2017, and
- Goods and Services Tax (Compensation to the States) Act 2017.
The State Legislatures of different States passed their own respective State Goods and Services Tax Bills. Such separate legislations for the Union and the states are required because the GST system adopted in India follows a dual structure, which means that the states levy a GST of its own in addition to the central GST charged by the Union, as opposed to the Union collecting the whole tax and distributing it to the states. Under the dual GST structure in India, there are 3 main applicable taxes:
- CGST: levied by the Union on an intra-state sale (when the sale and consumption are in the same state);
- SGST: levied by the State Government in addition to CGST on an intra-state sale; and
- IGST: levied by the Union on an inter-state sale (when the point of origin and point of consumption of commodity are in two different states).
As the GST is collected by both the Union and the state governments, the GST council was set up under The Constitution (One Hundred and First Amendment) Act, 2016 with the objective of smooth functioning between the states and the Union. Any dispute arising either between the centre and one or more states, or between two or more states shall be adjudicated by the GST council. The council makes its decisions through voting of a three-fourths majority. The centre has a one-third vote and each state has one vote. The Council is empowered to determine the procedure of its own functioning. Decisions of the council cannot be considered invalid merely because of a vacancy or defect in the constitution of the council, or in the appointment of the member, or due to any irregularity in the procedure that might affect the merits of the case. The GST council currently has 33 members with Union Finance Minister Nirmala Sitharaman as the Chairman of the Council.
Previous Taxes Subsumed
Hence, GST has subsumed the following Indirect taxes which existed previously:
- Central Excise Duty;
- Duties of Excise;
- Additional Duties of Excise;
- Additional Duties of Customs;
- Special Additional Duty of Customs;
- Central Sales Tax;
- State VAT;
- Purchase Tax;
- Entertainment Tax;
- Luxury Tax;
- Entry Tax;
- Taxes on advertisements; and
- Taxes on gambling, lotteries and betting.
However, with respect to resale, use in manufacturing or processing and use in the telecommunication network or in mining or in the generation or distribution of electricity or any other power, Central Service Tax is still chargeable on the following:
- Petroleum crude;
- High-speed diesel;
- Motor spirit (commonly known as petrol);
- Natural gas;
- Aviation turbine fuel; and
- Alcoholic liquor for human consumption.
One of the modern technological features of the GST system in India is its online portal called the Goods and Services Tax Network (GSTN), which is a non-profit organisation formed for the purpose of creating a sophisticated network which allows stakeholders, government and taxpayers to access information from a single source. Another technologically advanced feature is the introduction of ‘E-way bills’ for inter-state movement of goods and intra-state movement of goods in a staggered manner, under which manufacturers and transporters can generate e-way bills for the goods transported from their point of origin to their point of consumption on a common government portal with ease. This system has also reduced time at check-posts as well as checked tax leakages.
Who Pays GST and How Much?
GST applies to all businesses (trade, commerce, professions etc.) and persons (individuals, companies, trusts etc.) except agriculturists (including floriculture, horticulture, sericulture, raising of crops, but not dairy farming, poultry farming etc.). Any entity with GST registration has to pay GST if it:
- has an aggregate turnover of Rs. 20 lakhs (or Rs. 10 lakhs in some special categories),
- is making inter-state supply of goods/services,
- is a casual taxable person (a supplier of goods/services in a taxable territory with no fixed place of business),
- is a non-resident taxable person (a supplier of goods/services in a taxable territory with no fixed place of business in India),
- is required to pay tax under the reverse charge mechanism (the person receiving the goods/services is required to pay tax instead of the supplier),
- is an agent or supplier on behalf of other registered taxable persons,
- is a distributor or input service distributor (a person having the same PAN as the supplier or is an officer of the supplier),
- is an E-Commerce Operator or a person who supplies (except branded services) via an e-commerce operator,
- provides aggregator supplying services under his brand name, or
- a person supplying online information from another country to a person in India, other than a registered taxable person.
Currently, there are four GST rate slabs with lower rates for essential items and the highest for luxury commodities –
- 5 per cent– on skimmed milk powder, frozen vegetables, tea, coffee, coal, fertilizers, spices, agarbatti etc.;
- 12 per cent– frozen meat products, butter, cheese, ghee, pickles, sausage, fruit juices, etc.;
- 18 per cent– on most of the items like refined sugar, pasta, cornflakes, pastries and cakes, detergents, washing and cleaning preparations, glassware, pumps, fans, light fittings, chocolate, etc.; and
- 28 per cent– on sunscreen, pan masala, weighing machine, dishwasher, paint, cement, etc.
However, several basic essential items like milk, fruits, vegetables, salt, bread, sanitary napkins, sindoor etc fall in the category of zero taxes. GST also has anti-profiteering provisions, which means that every time there is a reduction in GST rates, the extra profit made by the businesses due to the reduction in tax is to be passed on to the final consumers.
Old Tax Structure vs GST
The central taxes applicable were central sales tax on services and commodities, custom duty/central excise duty, surcharge and cesses. The state taxes included state VAT, entertainment tax, WCT, luxury tax, tax on betting and gambling, and lottery, sales tax deducted at source, and surcharge and cesses.
All the state and central will be subsumed and a single tax will be levied on all services apart from a few exempted categories.
Point of Levy
Tax was levied at the place where goods are sold or manufactured, or the place of providing services.
A destination tax will be levied at the place of consumption.
Registration was decentralised and scattered under central and state.
There will be uniform e-registration given upon the PAN of the entity.
The system would partly validate the returns, and full verification was subject to assessments by central or state authorities.
The validation will take place on the online system, and consistency checks will be carried out on tax payments, input credit availed and utilisation.
Variation of Tax
Central excise and service tax were uniform, but VAT varied from state to state.
There are uniform dates and processes for collecting or depositing tax and filing returns.
Threshold limits for Levy of Tax
The threshold for service tax was Rs.10 lakh. The threshold for central excise was Rs.1.5 crore, and the threshold for VAT was Rs.5 lakh to Rs.20 lakh varying from state to state.
The State GST is between Rs.10 lakh to Rs.20 lakh based on recommendations of the GST Council.
Certain areas such as the North-East were able to enjoy exemptions.
There will be no such exemptions. However, an Investment Refund Scheme for certain zones may be introduced by the GST Council.
Advantages and Disadvantages
When the whole taxation system of the country is reformed it is bound to have both advantages and disadvantages. Whether a tax reform is going to have a positive impact on the economy is decided through the balance of the advantages and disadvantages. In this case, the advantages of the GST system in India are as follows:
- Removal of cascading effect of tax
The most significant advantage of GST and the main purpose of implementing it was to eliminate the cascading effect of the previous taxes. For example, if the applicable GST on a product is 20% and the manufacturing cost of the commodity is Rs. 100, the total price to be spent by the manufacturer would be 120. Now, at the next step of the supply chain, the cost price is marked up by Rs. 30 and to be sold to the consumer at a price of 150. So, the GST at this step, would be charged only on the profit difference, i.e. 20% on Rs. 30 which is equal to Rs. 6, making the final price is Rs. 156. Therefore, this reduces the final price of the commodity by avoiding tax on tax.
- Higher threshold for registration and Composition Scheme for small businesses
In the pre-GST regime, the threshold turnover beyond which a business was liable to pay VAT was around Rs. 5 lakhs, even though such threshold varied from state to state. Under GST, that threshold turnover has been increased to Rs. 20 lakhs in most cases and Rs. 10 lakhs in some special cases. Further, GST also has a simple Composition Scheme where any taxpayer whose turnover is less than Rs. 1.5 crore can get rid of tedious GST formalities and pay GST at a fixed rate of turnover. These measures have reduced that tax and compliance burden on smaller businesses significantly.
- Simple online procedure and Lesser compliances
From registration to filing, with everything related to GST having moved online, the entire process has become much simpler and more accessible to businesses without having to run from pillar to post. Compared to the earlier monthly or quarterly system of filing returns for different taxes depending on the state, GST has just one unified return to be filed, making compliance much easier.
- Defined treatment for e-commerce companies
In the pre-GST system, the taxation method for the e-commerce businesses like amazon were unclear and the compliance process was extremely complicated. In some states, they were only treated as mediators which exempted them from paying VAT. Under GST, clearly defined stipulations and compliances have been marked out for e-commerce businesses which are uniform throughout the country, hence weeding out all complications and confusions.
- Increased efficiency and uniformity and regularising the unorganised sector
With uniformity of rules and taxes throughout the country, restrictions on inter-state trade has significantly lessened and allowed businesses to set up new warehouses across the country, thus significantly reducing logistical and operational costs and hassles for businesses. Not only has it made it easier for the tax authorities to ensure tax compliance, it has also maximised profits for businesses and reduced costs of commodities. Further, GST has specific provisions for online compliances and payments for certain industries like textile and construction which were previously largely unregulated and unorganized, hence bringing in regulation and accountability to these industries.
However, this revolutionary system of taxation is not fully exempt from flaws. Its disadvantages are as follows:
- Increased costs due to software purchase and hiring experts
Due to the huge change in the taxation system, businesses have to either buy a GST software or have to update their existing software or accounting to a GST-compliant one. They will also have to train their employees for an efficient running of the new billing software and hire tax professionals to be GST-compliant. All these operational changes are bound to increase costs for small businesses as they will have to bear the additional costs to become GST-compliant.
- SMEs will have a higher tax burden
A lot of Small and medium-sized enterprises (SMEs) are liable to pay higher taxes than before as businesses whose turnover was below Rs 1.5 crore were exempt from paying excise duty but even these businesses have to pay GST now if their turnover is over Rs. 20 lakhs. Even the ones that opt for the composition scheme are not able to claim any input tax credit and hence are inconvenienced to some extent either way.
- Completely online system
Many SMEs faced significant difficulty in grasping the nuances of the GST tax regime, including issuance of GST-compliant invoices (along with GSTIN, place of supply, HSN codes, etc.), be compliant to digital record-keeping, and filing timely returns, which entailed switching from pen and paper invoicing to online methods of accounting and filing returns. This has been difficult to adjust to for several small businesses.
Even with a few temporary disadvantages and hitches, the GST system has been a game-changer tax legislation in India. Under the GST regime, more businesses are tax exempt or have to pay less taxes, businesses are easier to start due to ease of registration, compliance has become easier and prices of commodities are lesser. GST has helped in increasing ease of business and even in attracting foreign investments. Hence, ultimately GST has been a friendlier tax policy for tax authorities, consumers and businesses. However, there is still scope for improvements in the current system. There is a need for a simpler two-rate GST structure with a lower rate for inputs/raw materials and higher rates for finished products, which would thereby help in eliminating any inverted duty structure for the business. Further, huge chunks of the economy like oil & gas and electricity are not under the ambit of GST, hence retaining the cascading effect due to levy of excise duty, VAT etc. and hence continue to add to overall costs of these commodities to final consumers. These need to be brought under the common tax statute to completely reap the benefits of GST in India.
The Constitution (One Hundred and First Amendment) Act, 2016
Central Goods and Services Tax Act 2017
Integrated Goods and Services Tax Act 2017,
Union Territory Goods and Services Tax Act 2017
Goods and Services Tax (Compensation to the States) Act 2017
Integrated Goods and Services Tax – CBIC
Goods and Services Tax Council
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