Goods and Services Tax (GST) -All you need to know

1.What is the concept of GST?

Goods and Services Tax (GST) is a part of the proposed tax reforms that centre round evolving an efficient and harmonized consumption tax system in the country. The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level.

CAG Mr. Vinod Rai in his inaugural address to the National Conference on GST put forth the concept as "An integrated scheme of taxation that does not discriminate between goods and services and is a part of the proposed tax reforms that centre on evolving an efficient and harmonized consumption tax system in the country."

According to the First Discussion Paper on Goods and Services Tax in India by the Empowered Committee of State Finance Ministers dated Nov. 10th, 2009 , the five key features of the proposed plan of the Goods and Services Tax for the Indian economy, approved by the Government of India and Empowered Committee of State Finance Ministers comprises :

> Two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST) ,rates for which would be prescribed appropriately, reflecting revenue considerations and acceptability.

> The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST

> The Empowered Committee has decided to adopt a two-rate structure -a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items

> The GST will be levied on import of goods and services into the country

> The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply a reduction in unhealthy competition among the centre and the states over tax revenue that was prevalent earlier and an increase in harmonious functioning between them.

2.What are the key problems in the current taxation system for goods and services in India that the proposed GST plans to improve upon?

The key problems in the current taxation system in India can be categorized into:

Taxation at Manufacturing Level i.e. CENVAT is levied on goods manufactured or produced in India which gives rise to definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied which through judicial proceedings has been observed to be a severe impediment to an efficient and neutral application of tax

Exclusion of Services from state taxation has posed difficulties in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts, which entail a transfer of the right to use goods without any transfer of their ownership. Though these problems have been addressed by amending the Constitution to bring such transactions within the purview of the State taxation, services per se remain outside the scope of state taxation powers.
Tax Cascading - Oil and gas production and mining, agriculture, wholesale and retail trade, real estate construction, and range of services remain outside the ambit of the CENVAT and the service tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits are allowed for the inputs of the exempt sectors, which include the entire service sector, real property sector, agriculture, oil and gas production and mining. Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government.

Complexity -In spite of the improvements made in the tax design and administration over the past few years, the systems at both central and state levels remain complex. Their administration leaves a lot to be desired. They are subject to disputes and court challenges, and the process for resolution of disputes is slow and expensive. At the same time, the systems suffer from substantial compliance gaps, except in the highly organized sectors of the economy. According to Mr. Sunil Birla, Partner, Haribhakti & Co., Chartered Accountants, the implementation of GST would be a positive step towards "a strong single taxation system wherein various Central and State statutes will be subsumed into one comprehensive enactment"

3.Would the implementation of GST be an improvement over the current taxation system in India? If yes, what would be its benefits over the current system?

The implication of GST assures a single taxation system in the entire country for all goods and services making tax compliance easier and more effective. The major benefits of this proposal according to Report of Task Force on Implementation of GST on the website www.goodsandservicetax.com are

> To The Economy - It will simplify India's tax structure, broaden the tax base, and create a common market across states. This will lead to increased compliance and increase India's tax-to-gross domestic product ratio. According to a report by the National Council of Applied Economic Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per cent. Exports are expected to increase by between 3.2 per cent and 6.3 per cent, while imports will likely rise 2.4-4.7 per cent, the study found.

> To The Corporate - It will be beneficial for India Inc. as the average tax burden on companies will fall. Reducing production costs will make exporters more competitive

> To The Exporters - The subsuming of major Central and State taxes in GST, complete and comprehensive setoff of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports.

> To Industry - Manufacturing sector in India is one of the highly taxed sectors in the world. A complex and high taxation structure has the tendency to render products uncompetitive in the international market or consume large portions of the cost arbitrage available in manufacturing set-ups in low cost economies such as India. GST when enforced would eliminate complexities in the present taxation structure and consequently prevent the loss of nearly 50% of the advantage of lower manufacturing costs that India has over the western nations. "A well-designed GST is the most graceful method to get rid of distortions of the existing process of multiple taxation" Sanjay Pant, Commissioner Service Tax, Bangalore.

> To The Centre And State - Approximately $ 15 billion a year of profits are predicted by the government with the implementation of GST as it is speculated to bring about raise in employment, promotion of exports and consequently a significant boost in overall economic growth. "The implementation of a comprehensive GST in India is expected to lead to efficient allocation of factors of production thus leading to gains in GDP and exports. This would translate into enhanced economic welfare and returns to the factors of production, viz. land, labour and capital" Mr. Premnath Hegde H.N., Chartered Accountants, Premnath Hegde and Co.

Another positive aspect of this proposal is that it is aimed at equitable division of tax burden between the manufacturing and services. "GST will be the biggest reform after 1991 and its implementation alone would add 1.5-2 percentage point to India's GDP growth. It will provide a tremendous stimulus and can solve several issues like inflation and fiscal deficit" - Mr. Adi Godrej Chairman of the Godrej Group > To The Individuals And Companies - With the collection of both the central and state taxes proposed to be made at the point of sale , both components will be charged on the manufacturing costs and the individual will benefit from lowered prices in the process which will subsequently lead to increase in consumption thereby profiting companies

4.What are the major shortcomings of the proposed GST

The major shortcomings of GST according to Report of Task Force on Implementation of GST on the website www.goodsandservicetax.com can be summarized as:

> Not using the correct accounting method may result in discrepancies in tax computation and compliance

> Incorrectly claiming GST credits on bank fees

> Incorrectly claiming GST credits on government charges --such as land tax, council rates and water rates.

> Incorrectly claiming a GST credit on the 'total cost' of a business insurance policy.

> Not remitting GST on some government grants and incentives which are received inclusive of GST

> GST is not paid on the sale of cars and equipment including the trade of motor vehicles.

> Incorrectly claiming GST credits on wages and superannuation payments.

> Incorrectly claiming GST credits on GST-free purchases such as basic food items, exports and some health services.

> Claiming the entire GST credits on a car purchased for more than the luxury car limit.

> Incorrectly claiming an upfront GST credit on assets financed through a commercial hire purchase (CHP).

> Incorrectly claiming GST credits on payments for Yellow Pages advertising where the business chooses to pay for the cost of advertising by installments.

> Claiming a GST credit when the business does not have a valid tax invoice at the time of lodging the Business Accounting Standards.

5.A comparative study of GST in other countries (source: Internationally- Goods and Service Tax by C.A.Rajat Mohan B.Com (H), A.C.A., D.I.S.A.)

A Comparative Analysis

Countries	GST(%)	Goods and Services on which GST levied
France	19.6%	All services except medical supplies, postal services, education, certain financial transactions and insurance services
Russia	18%	All services except lease of premises to foreign companies accredited in Russia, medical services and certain medical products, educational services, public transportation, sale of securities, banking and insurance services, rent of apartments, sale of apartments and residential property
United Kingdom	15%-17.5%	Supplies of goods and services except financial and insurance services, education services supplied by eligible bodies, certain cultural services, betting, gaming, lotteries, subscriptions, health and welfare
New Zealand	15%	All goods and services except rents collected on residential rental properties, donations, precious metals and financial services
Bangladesh	15%	All goods and services except: · Certain food items (such as meat, fish, potatoes, vegetable and fruits); · Jute and jute goods; · Social welfare & cultural training; · Rehabilitation services; and · Agricultural development.
Mauritious	15%	Supplies of goods and services with the exception of: · Rice and wheat, · bread and butter, · milk and cream, · medical,hospital and dental services, · educational and training services provided by registered institutions · postal services, · cargo handling, · certain residential buildings
Australia	10%	Most transactions except services such as financial services, residential rent, residential services etc.
Singapore	7%	All goods and services except sales and lease of residential properties and most financial services
Japan	5%	All supplies of goods and services except social welfare services, letting off commercial buildings, postal services, non-commercial activities of no-profit making organizations etc.
Canada	5%	Supplies of goods and services purchased within the country except certain politically sensitive essentials such as groceries, residential rent, medical services and financial services

6.Will GST make compliance easier and help widen the tax base?

GST is touted to be one of the triggers that could help boost the country's economic fortune. Economists are of the view that it will unite the country economically as it will remove various forms of taxes that are currently levied at different points. GST will help in widening the coverage of tax base, improve tax compliance, remove existing unhealthy competition among states and re-distribute the burden of taxation equitably among manufacturing and services. Overall, it will result in increasing revenue at the Centre.

7.What is the current status of GST in India

In his budget speech of 2007-08, finance minister P.Chidambaram had announced the implementation of the Goods and Services Tax (GST) from April 1st 2010:

"It is my sense that there is a large consensus that the country should move towards a national level GST that should be shared between the centre and the states".

Thereafter the Empowered Committee of State Finance Ministers in agreement with the central government constituted a Joint Working Group (JWG) in May 2007to prepare a GST module. Within seven months of its constitution, in Nov.2007, JWG presented its report to the committee which was duly accepted. However it failed to be implemented at the decided date. The second deadline for this concept was set at April 2012. At present, Finance Minister in his budget speech of 2013-14 while apologizing for the failure to meet the April 2012 deadline announced further postponement of the same to April 2014.

The Empowered Committee describes the GST as "a further significant improvement - the next logical step - towards a comprehensive indirect tax reforms in the country." Indeed, it has the potential to be the single most important initiative in the fiscal history of India. It can pave the way for modernization of tax administration - make it simpler and more transparent - and significant enhancement in voluntary compliance.

For example, when the GST was introduced in New Zealand in 1987, it yielded revenues that were 45% higher than anticipated, in large part due to improved compliance thus proving that a neutral and efficient GST structure could yield significant dividends to the economy in increased output and productivity. Former Advocate General, State of Karnataka and Former member Law Commission of India, Dr. B.V. Acharya in a similar tone opines "A strong GST proposal if enforced austerely with built in checks for tax evasion and exploitation could to some extent assure improvement in transparency and tax prevarication"

As a law student pursuing masters in business laws I believe that the implementation of the GST proposal of the Union Government pertinent to all states across the country will prove to be an effective medium of simplification in paperwork and accounting processes for businesses, equitable revenue sharing between centre and states and consequent significant improvement in commerce.

> To The Individuals And Companies - With the collection of both the central and state taxes proposed to be made at the point of sale , both components will be charged on the manufacturing costs and the individual will benefit from lowered prices in the process which will subsequently lead to increase in consumption thereby profiting companies

4.What are the major shortcomings of the proposed GST

The major shortcomings of GST according to Report of Task Fo ..