GST Explained : Understanding The New Generation Tax Regime

What is GST?

The Goods and Services Tax is meant to be a unified indirect tax across the country on
products and services. In the current system in India, tax is levied at each stage separately, by the Centre and the State, at varying rates, on the full value of the goods. But under the Goods and Services Tax system that is set to be introduced, tax will be levied only on the value ADDED at each stage. It is a single tax (collected at multiple points) with a full set-off for taxes paid earlier in the value chain.
Thus, the final consumer will bear only the GST charged by the last dealer in the supply
chain with set-off benefits at all the previous stages.

Why was GST established?

The GST was established to subsume various indirect taxes levied at different levels,
reducing the red-tape, plugging leakages and paving the way for a transparent indirect tax regime.

What are the benefits of implementing the GST?

For business and industry
Easy compliance: A robust and comprehensive IT system is to be the foundation of the GST regime in India. Therefore, all services such as registrations, returns, and payments would be available to the taxpayers online, making compliance easy and transparent.
Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax-neutral, irrespective of the choice of place of doing business.
Removal of cascading: A system of seamless tax-credits throughout the value-chain, and
across boundaries of States, would ensure that there is minimal cascading of taxes. This
would reduce hidden costs of doing business.
Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to improved competitiveness for the trade and industry.
Gain to manufacturers and exporters: The subsuming of major Central and State taxes in
GST, complete and comprehensive set-off 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. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.
For Central and State governments
Simple and easy to administer: Multiple indirect taxes at the Central and State levels are
being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler
and easier to administer than all other indirect taxes of the Centre and State levied so far.
Better controls on leakage: GST will result in better tax compliance due to a robust IT
infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.
For the consumer
Single and transparent tax proportionate to the value of goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency  of taxes paid to the final consumer.
Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the
overall tax burden on most commodities will come down, which will benefit consumers.

What are disadvantages of GST?

The main disadvantage is that tax on services is likely to go up. The second disadvantage
as feared by manufacturing States such as Maharashtra, Gujarat and Tamil Nadu, is that
they will lose a major chunk of revenue earned from taxes on manufacturing. Since the tax structure will be uniform in the entire nation, States that traditionally attract investments may now lose some since manufacturers may turn to other States as well.

How will it impact inflation?

The impact of GST on inflation can be assessed only when the government decides the rate at which various goods and services will be taxed. Going by the definition of GST in the Bill, the tax burden on products will come down because only value addition will be taxed. In  the case of services, taxes are likely to go up since both State and Centre will levy tax, while presently only Centre charges tax for services.

What will be the impact of GST on GDP of the country?

According to Nomura, the short term impact of GST could be mixed. It could temporarily
hurt growth owing to an increase in taxes on services, which account for 60% of
India s GDP. It could also drive up headline CPI inflation by 20-70bps in the year of
implementation due to incomplete pass-through of tax savings by firms, while it could also raise general government (Centre + State) tax collection with the central government s share (within the GST tax base) most likely rising and that of the State falling. However, in the long term, the GST will be clearly positive as gains from a more efficient tax system, greater price competitiveness (reduced costs), and the removal of interstate tax barriers should boost growth via higher exports and investments, structurally lower inflation, and higher government (Centre + State) tax revenues, enabling greater general government fiscal consolidation.

How will GST affect the Common Man?

The impact of GST on the prices of goods and services will largely depend on the item in
question. It will also depend upon the respective State governments and their intervention with respect to controlling prices of essential commodities. Milk, for example, which is likely to see a spike in prices after GST is implemented, can still be sold at cheaper rates, if the state government offers a subsidy on it.
Whether the GST will be beneficial for the poor or not only time can tell. Prices of vegetables and fruits are likely to rise under the GST regime and services such as eating at restaurants will get more expensive. What will likely get cheaper are items such as clothes, as cascading taxes at various stages of manufacturing would no longer apply to them.

Is GST going to benefit people below the poverty line?

With respect to people living below the poverty line, while there might not be a direct
impact of GST as such since basic necessities like food are unlikely to attract GST, increased collections of GST with a larger tax base shall provide an impetus to the Government to allocate more money toward social and poverty alleviation programmes. Thus, GST should benefit all sections of the society.
Additionally, GST, being a nationwide tax, could lead to possibly higher inflation in the first few years of its introduction but would gradually increase the overall GDP.

 

What are the international lessons from GST implementation?

As of now, 160 nations have implemented VAT/GST. We have a company in China, which is yet to implement a uniform GST.
According to a Crisil report, when implemented in many countries, GST caused a spike in
inflation with the impact lasting 10-12 months. The duration of the impact on retail sales
varied, with consumer spending growth normalising within 3 months in Japan, Australia
and China, but taking as long as a year in Singapore. Also, most countries witnessed a
pre-GST spending rush. Malaysia, which implemented it in April 2015, saw a spending
rush — but not on big-ticket items. Sales of electronics & telecommunications equipment,
departmental and general stores, jewellery and watches, furniture, and apparel rose. This was reflected in the rise in credit card transactions and rise in narrow money supply, which captures the transactions demand for money. Consumer spending also surged in Australia, Japan, China and Singapore just before GST kicked in.

What are the issues that other countries have faced while implementing
GST?

Countries have faced initial bottlenecks, such as finding the VAT model to be very
complicated on account of huge diversity in application of exemptions. In the European
Union, there was a problem of reduced rates among member states. There have also been challenges pertaining to interpretation. Canada s challenge was the presence of a variety of tax rates under the GST/harmonised sales tax regime. There were post-implementation issues in Malaysia. Canada s British Columbia, after having harmonised its provincial retail sales tax with the GST in July 2010 rolled back to its earlier tax regime in 2013.
Despite these challenges, GST/VAT has emerged as the preferred form of indirect tax
system, being tax neutral, and offering a larger and more stable source of revenue. It is also potentially self-enforcing in nature. Gross domestic production of major economies such as New Zealand, Canada, Singapore, Australia, and so on, have reported annual increases in gross domestic production by 2.43%, 0.87%, 7.02% and 2.57%, respectively.

Would the implementation of GST impact the federal structure?

 

The GST structure proposed for India is synchronised with the constitutional framework of the country, enabling concurrent levy and collection of GST by the Centre and the States. Therefore, considering the constitutional amendments carried out by the government, autonomy of the States is not expected to be impacted by the implementation of GST.

Is the GST Bill a Constitutional Amendment or a Finance
Bill or Tax Bill or Money Bill?

The Indian Constitution enumerates the taxation powers of the Centre and State under List I and List II of the Seventh Schedule. The Centre can pass laws on the heads mentioned under List I such as income tax and the States can pass laws on the heads mentioned in List II such as sales tax. To introduce the GST, which will subsume many of these taxes, hence requires amendment of the Constitution. The Bill that will include the exact form and processes of the GST will be drafted and moved in both Houses after consulting with the States.

Now the Government presented & passed the GST bill as a a Money Bill in Lok Sabha.

What are the differences between VAT and GST?

VAT is Value Added Tax, which is considered the first step towards moving to a GST
regime. VAT is charged on the increase in value of an article at each stage of its production or distribution. This is exactly how GST will be levied on products. However, VAT applies to goods sold and not services, which comes under service tax. GST is applicable for both goods and services, and at a uniform rate.
Also, a host of other indirect taxes are levied at various levels along with VAT. When GST is introduced, all of them will go.

What are the benefits and demerits of GST in comparison to the current
VAT regime?

Principally, GST is going to be a destination-based consumption tax and shall operate on
the premise that value addition shall be taxed and input tax credit can be claimed at each stage of the economic supply chain. If a comparison of GST is done with the current State VAT/CST regime, there are multiple benefits, and some of the key benefits have been stated
below:
• Uniform tax law across the States
• Elimination of tax cascading effect; no tax on tax
• Elimination of the concept of concessional forms (like Form C, Form I, Form H )
• Minimisation of rate classification disputes
• No CST cost to buyers in other States
• No input tax credit reversal in cases of stock transfers from one State to another
• More credits to businesses as compared to now (i.e. a service provider can claim input
GST credit on goods, which isnt allowed today)
• Simpler compliances

Why should there be an SGST and CGST, and not one GST governed
by a single body?

The Indian Constitution has a federal structure that gives the Centre and States powers to
legislate and govern on several subjects. Under this structure, the Centre and States have
been empowered to levy taxes on goods and services under different indirect tax laws. The dual GST that is proposed in India would give equal powers to both the Centre the States to levy GST. This will ensure that the fiscal autonomy of the States and the overall spirit of cooperative federalism are maintained.
Given the fact that a dual GST shall be implemented in India on account of the federal
structure of the Constitution, it is not possible to have a single body administering the levy and collection of GST across the country.

What will happen to various cesses such as Swachh Bharat cess and
Krishi Kalyan cess?

Cesses such as the Swachh Bharat cess and Krishi Kalyan cess, which are in relation to
supply of goods and services, are proposed to be subsumed by the GST. This also emerges
from a reading of the GST Constitutional Amendment Bill passed by both Houses of
Parliament.

What are the taxes that will be eliminated after implementation of
GST?

The following taxes will go:

At the Central level:
• Central Excise Duty
• Additional Excise Duty
• Service Tax
• Additional Customs Duty commonly known as Countervailing Duty, and
• Special Additional Duty of Customs
At the State level:
• State Value Added Tax/Sales Tax
• Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax
(levied by the Centre and collected by the States)
• Octroi and Entry tax,
• Purchase Tax,
• Luxury tax, and
• Taxes on lottery, betting and gambling.
• Fat tax imposed in Kerala

How will the Centre distribute the collected tax to the states?

The tax collected as CGST goes to the Centre, while SGST goes to States. Only in the case of
inter-State transactions, the Centre will intervene. In such cases, the Centre will levy and
collect the Integrated Goods and Services Tax (IGST).
The inter-State seller would pay IGST to the Central Government on the sale of his goods
after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The
exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.

Why are some States worried about compensation, and why is compensation
needed?

Under the proposed GST regime, the foremost amongst the continuing worries of various
State Governments is the potential loss of revenues. Manufacturing States are most worried regarding loss of revenues, since the current taxation regime which is an origin-based tax will shift to being a destination-based tax. In an origin-based tax system, tax is collected where the supplier of goods is located while in a destination based system, tax in collected where the consumer of a product is located. Thus, States with a greater manufacturing setup fear a big revenue loss on account of movement of goods from their States.
Further, the States currently levy taxes like VAT, entry tax, luxury tax, and so on, on the sale of goods which will get subsumed under GST. Under GST, the States may not have complete autonomy to introduce any new tax at will. Further, any change to tax rates would have to be within a narrow band prescribed by the GST Council and will need to be agreed to with three-fourth majority at the GST Council. On account of the above reasons, many States fear a fall in their revenues and, thus, are seeking to be compensated for such loss.

What is going to be the effect of GST on the States?

States are going to experience a major change in the entire tax administration and levy
structure due to the advent of GST. Introduction of GST will have the following major
effects on the States:
• Movement of GST revenues from the origin States to the destination States.
• Loss of revenue due the abolishment of State levies like VAT, entry tax, luxury tax, and
so on, which will get subsumed under GST.
• Dilution of fiscal autonomy, as the States will not be allowed to introduce any new taxes,
change rates of tax, or give exemptions to any class of goods or services as they will.
• A potential increment in the State revenues on account of collection of GST on services
being received in their States, as also with IGST being applicable on import, and interState
trade, the State portion of which will belong to them.
• States will need to learn taxation of services. It would be particularly relevant for state
authorities to educate themselves with the place of supply rules for services and the
principles governing intra-state and inter-state supply of services. Ensuring no evasion
and dual taxation of service transactions across state boundaries could be a colossal task
for the States.

How one can say that government revenue will increase once GST is
implemented?

The proposed GST structure in India is expected to be broad based. GST is expected to
harmonise and consolidate multiple indirect taxes in India by widening the tax-base and
cutting down exemptions, lowering the exemption thresholds particularly for central excise from Rs 1.5 crore to Rs. 10 lakh, mitigating cascading and double taxation, and promoting voluntary compliances through the lowering of the overall tax burden. GST is expected to tax services which are not being taxed at present and also encourage voluntary compliance, which on the other hand would encourage sectors currently under parallel economy to become part of the mainstream. All these factors are expected to boost tax revenues.

Under the present indirect tax regime, the Central Government levies tax on services at the rate of 15% whereas the Centre and the State Governments together charge taxes (excise duty, value added tax, entry tax, and so on) on goods at a variable range of 6 to 40%.
Under the GST regime, it has been proposed that the GST Council will decide GST rates
with the consensus of the Centre and the States. Presently, there is no clarity on the GST
rates that are likely to be proposed by the GST Council. In this regard, reference can be
made to the report issued by the chief economic advisor (Arvind Subramanian). The report suggests a revenue neutral rate of 18% (the rate at which the Government would continue earning what it has been earning under the existing tax regime), a standard GST rate in the range of 15 to 15.5%, and a lower rate of 12% on certain goods. Further, a higher rate of 40%  has been proposed on certain de-merit goods such as aerated beverages, luxury cars, and so on. Therefore, one can infer that the standard GST rate is likely to be in the range of 16-18% with a lower/higher rate on certain goods.

Given that most of the taxes presently being charged are likely to be subsumed under the
GST, it is being expected that the revenues earned by the governments will increase for the following reasons:
• Exemptions under the GST regime will be substantially reduced to allow free flow of
credits in the supply chain. Presently, numerous goods and services enjoy exemptions,
resulting in lower tax revenues to the exchequer.
• GST will broad base the tax-paying population. It is pertinent to note that even at the
time of the introduction of VAT (value-added tax), tax revenues of the states actually
went up instead of falling. Tax evasions are currently prevalent in the form of fallacious
claim of exemptions or lower duty rates or as attempts to escape the levy of noncreditable taxes. Since GST will have the same rate for almost all the products and
services, with no or least exemptions and free flow of credits, it is likely to encourage
compliance.
• The revenues from services sector are likely to increase. The sector presently attracts a
lower rate of 15%, which is expected to go up.
• Further, the State Governments which were only entitled to earn taxes arising on sale of goods in their respective States will now earn GST on the services being received by the assesses in their States.
• States will be entitled for their portion of SGST on the Integrated GST ( IGST) applicable
on all inter-State trade. This will include IGST on import transactions, which presently
belongs to the Central Government only. Further, a part of CGST and Centre s share of
IGST will also be apportioned to the States.