By Vasundhara Rastogi
The goods and services tax (GST), regarded as India’s biggest tax reform, will be implemented from July 1, 2017. The new single tax system will transform India’s present indirect tax regime, and is expected to have far reaching implications for the country’s economy, business, and society at large.
Despite the importance of the GST, many business managers still remain confused about key aspects of the forthcoming tax system. From the taxes that will be subsumed by the GST to technical dimensions of the GST model, this article serves as a complete guide to what will change on July 1.
The Goods and Services Tax
The GST is a single value added tax levied on the manufacture, sale, and consumption of goods and services at the national level. As per the Indian Constitution (One Hundred and Twenty Second Amendment) Act, 2016, it will subsume all federal and state levies (see table below) and create a single, uniform market across India.
The GST promises to simplify the current tax structure, reduce procedural hurdles, increase the tax base, reduce tax avoidance, and bring down the final cost of goods and services to benefit businesses, consumers, and the government.
According to several studies and the experience of countries such as Canada, Australia, and New Zealand, the implementation of destination-based consumption tax is largely positive. GST in these countries has not only been able to boost tax revenues, but has also been beneficial for their long-term macroeconomic growth.
Technical dimensions of India’s GST model
Dual Tax: The GST will be a dual levy, which is in keeping with the constitutional requirements of fiscal federalism. It will have two concurrent components: one, a State/Union territory GST (SGST/UTGST) that will be levied and collected by the state or union territory (UT) and two, a Central GST (CGST) that will be levied and collected by the federal government (commonly referred to as “the center” in India).
Integrated Goods and Services Tax (IGST): Inter–state supplies between any two states and imports to the country will be subject to the IGST, which will be levied and collected by the federal government. The IGST will be the aggregate of the CGST and SGST; the SGST will be appropriated from the state where the supplies were consumed.
Tax on supply: The GST will be applicable on the “supply” of all goods and services; presently, tax is applicable on the manufacture, sale, or provision of goods and services. The liability to pay CGST or SGST will arise at the time of supply. Depending on whether the transaction is ‘inter-state’ or ‘intra-state’ (between states or within a state, respectively), separate GST provisions will be applicable to help a business determine the place of supply for goods and services.
Destination based tax: The GST will be based on the principle of destination-based consumption taxation as against the present principle of origin-based taxation.
Exemptions: Alcohol for human consumption has been kept outside the purview of the GST. Petroleum products – petroleum crude, high speed diesel, motor spirit, aviation turbine fuel, and natural gas will be brought under the ambit of the GST from a date to be notified on recommendation of the GST Council.
Input tax credit (ITC) mechanism: The ITC forms the backbone of the GST regime in India. The GST is essentially a tax on value addition at each stage of the supply chain; every supplier, who is the person supplying the goods and/ or services or an agent acting as such on behalf of such a supplier, can claim credits (over input taxes paid at each stage of supply chain) in the subsequent stage of value addition. The end consumer will, therefore, bear only the GST charged by the last supplier in the supply chain.
No cross utilization of the ITC will be permitted: the credit of CGST paid on inputs may be used only for paying CGST on the output, while the credit of SGST on inputs may be used only for paying SGST, except in the case of inter-state supply of goods.
Exports will be treated as zero-rated supply: Zero rated supply refers to supply of any goods and/or services that are taxable, but their rate of tax is nil. Input tax credits relating to such supply of goods and services can be availed.
Goods and Services Tax Network (GSTN): A not-for-profit company, which has the federal government, state and union territory governments, leading Indian financial institutions like ICICI Bank, HDFC Bank, HDFC Ltd, LIC Housing Finance, the National Stock Exchange Strategic Investment Corporation Ltd, and taxpayers as its shareholders. GSTN’s role is to provide information technology (IT) support to ensure a smooth transition from the current indirect tax system to procedures under GST.
Invoice matching system: The GST allows for a seamless flow of ITC across the supply chain. One of the essential features of the GST is to check ITC claims by the tax payer to prevent any leakages. For this purpose, an invoice matching system has been developed under GSTN to match the purchase and sale invoices of taxpayers. Accordingly, every registered taxable person under GST is required to issue a tax invoice, which will be uploaded on the invoice matching system. After the sale and purchase invoices of a tax payer have been matched, the ITC will be conferred.
GST compliance rating system: It is a unique form to rate whether a taxable person in India has been compliant. In this system, every taxable person will have a rating based on his/her record of tax compliance. The score will be updated at periodic intervals and will be placed in the public domain to ensure transparency.
Anti-profiteering clause: This clause allows businesses to pass on the benefit of a reduced tax rate on goods or services, or both, to the consumers. This is to prevent any rise in price of commodities following the GST implementation.
GST Council: It is a federal forum that includes federal, state, and union territory governments on its board. The GST Council comprising of the federal Finance Minister as the chairman, the federal Minister of State (Revenue), and the state and union territory finance ministers will make recommendations to the federal, state, and union territory governments on issues like tax rates, exemption lists, threshold limits, and all other matters relating to the GST.
The GST Council is also empowered to decide how to resolve disputes arising out of its recommendations. Decisions by the GST Council will be made based on a three-fourth majority of the votes cast: the federal government will cast one-third of the votes, while the state and union territories will cast two-third of the votes. Each state and union territory will have one vote, irrespective of its size or population.
Editor’s Note: Read our follow up article on how the forthcoming GST regime will impact businesses in India here.
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