— by Tejaswi K., PGP Student, IIM Ahmedabad
The word tax is derived from the Latin word ‘taxare’ meaning ‘to estimate’.
Taxation has four main purposes or effects: Revenue, Redistribution, Re-pricing and Representation. The primary purpose of Taxation is revenue generation. Taxes raise funds to spend on roads, schools, hospitals, and on other indirect government functions like market regulation or legal systems. The second purpose is redistribution, which means transferring wealth from the richer sections of society to poorer sections. Third purpose is re-pricing of certain goods to increase or decrease their consumption. Taxes are levied to discourage consumption of certain items like say tobacco. The fourth effect of taxation is representation, where the citizens by paying taxes demand accountability in return from the rulers or governments. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects. They are defined as follows:
- a) Direct Tax – It is the tax paid to the government directly by the assesse. The Income Tax, Wealth Tax and Corporate Tax are classical examples of direct taxes in India.
- b) Indirect tax – The taxes are paid indirectly and this tax is levied on goods or services rather than on persons or organizations. The excise duty, customs duty, sales tax and service tax are examples of indirect taxes.
Majorly, taxes in India are levied by the Central Government and the State Governments and some minor taxes are also levied by the local authorities such the Municipality or the Local Council. The authority to levy a tax is derived from the articles made by the Constitution of India and the Union List, State List and the Concurrent List enumerated in the Seventh Schedule of the Constitution.
Goods and Services Tax
Goods and Services Tax is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. GST is levied at every stage of the production-distribution chain with applicable set offs in respect of the tax remitted at previous stages. It is basically a tax on final consumption. In simple terms, GST may be defined as a tax on goods and services, which can be levied at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service.
Need For Goods and Services Tax in India:
Kautilaya’s Arthasastra said that the best taxation regime is the one which is “liberal in assessment and ruthless in collection”.
The present system allows for multiplicity of taxes being collected through an inefficient and non-transparent system, the introduction of GST is likely to rationalize it and thereby plug the loop holes in this system. This will enable the government to stop pilferage and rationalize the overall taxation regime. While many areas are either under-taxed or non-taxed or over-taxed, the GST will help reduce overall tax burden of many organizations.
Introduction of an integrated Goods and Services Tax (GST) to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice versa. Separate taxation of goods and services often requires splitting of transactions value into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs.
Further, Indian economy is opening up to the global markets and many Free Trade Agreements (FTAs) were signed, which allows imports into India at no duties or at very low duties. Hence, there is a need to have a nation-wide simple and transparent system of taxation to enable the Indian industry to compete not only internationally, but also in the domestic market. Integration of various Central and State taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions caused by present complex tax structure and will help in development of a common national market.
Many countries, provide tax exemptions to all goods and services that are exported so as to be competitive in international markets and also to encourage exports. This would not be possible in India right now, due to the opaque indirect taxation system present which will make it difficult for us to measure what is the true cost of production for the good/service and what is the tax that was levied on it. Due to this, India has historically been at a disadvantage compared to other countries in International markets.
A basis pre-requisite for introduction of GST meaningfully is that both the Centre and the State should replace existing taxes like Excise, State Sales Tax/ VAT, CST, Entry Tax and all other cascading-type Central/ State levies on goods and services. Any losses on account of abolition of multiple taxes are likely to be balanced by the additional GST revenues that will obtain from taxation of services and from access to GST on imports. Moreover, India would obtain full efficiencies of a single national VAT, while retaining a federal structure. This would also be the logical conclusion of the efforts that have been made in the country during last 2 decades in moving towards VAT
Benefits of GST:
The benefits of GST legislation will be uniformity of laws across the board, greater transparency, neutrality in tax rates on various products; credit availability on interstate purchases and reduction in compliance requirements. If GST is implemented in the true spirit, it will have many positives for the stakeholders and will lead to a better tax environment.
The implementation of GST would ensure that India provides a tax regime that is almost similar to the rest of the world. It will also improve the international cost competitiveness of native goods and services. Further it will also encourage an unbiased tax structure that is neutral to business processes and geographical locations.
Implementation of GST will also remove several roadblocks in the existing taxation system in India. Some of these are:
- a) Tax cascading: The Goods and Services Tax Act will overcome the problem of tax cascading through input tax credit mechanisms. Under this system, sellers or vendors of goods and services are eligible to avail tax credits on the amount of GST paid to eligible procurements. Manufacturers can avail credits for the GST paid to procure inputs, capital goods and services used in the manufacturing process. In the same way, wholesalers and retailers can avail credits for the GST paid on procurement of stock. But the final customer who purchases the product for consumption will not be able to avail and utilize any tax credit.
- b) Complexity: Presently in India, for taxing sale of goods, there is Central Sales tax and respective VAT Acts for each state and Union territory. The Goods and Services Tax will remove this complication by having a unified code for implementation of State GST in different states. The GST will not only subsume a large number of indirect taxes but also solve the classification issues by introducing only one or two rates of tax. Other than this there would be categories that are exempted or zero rated.
- c) Double taxation: The GST will not make any difference between goods and services as GST will be levied at each stage in the supply chain. This will help in solving the problem of double taxation. The issue is not only between the taxes of customs duties, excise duties and service tax but also between service tax and VAT. The implementation of GST will resolve the dilemma of a large number of assesses who are not sure of application of the type of tax on certain specified transactions like software development, sale of sim cards by telecom operators, online subscription of newspapers, value added services provided by telecom operators, right to distribute movies etc.
- d) Composite contracts: There are a large number of works contracts which involve the supply of goods and services which are available to customers under different supply chain arrangements. Such situations arise in a gap or overlapping in taxation of goods and services as the States do not have the power to impose tax on services and the Centre does not have the power to impose tax on sale of goods within the state. In such cases, a comprehensive solution can be provided only by implementation of GST. The introduction of GST along with prudent accounting policies, transparency and supported by a robust electronic controls will bring down the peak rates of taxation and enhance revenue growth.
Salient features of GST:
- It would be applicable to all transactions of goods and service.
- It is paid to the accounts of the Centre and the States separately.
- 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.
- GST will be levied on import of goods and services into the country.
- The rules for taking and utilization of credit for the Central GST and the State GST would be aligned.
- Cross utilization of ITC (Input Tax Credit) between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods.
- The Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.
- The taxpayer would need to submit common format for periodical returns, to both the Central and to the concerned State GST authorities.
- Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits.
Taxes to be subsumed under the GST:
Taxes or levies to be subsumed will be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services. The subsumation should result in free flow of tax credit in intra and inter-State levels.
The following central taxes will be subsumed under the GST:
- Central Excise Duty
- Additional Excise Duties
- The Excise Duty levied under the Medicinal and Toiletries Preparation Act
- Service Tax
- Additional Customs Duty, commonly known as Countervailing Duty (CVD)
- Special Additional Duty of Customs – 4% (SAD)
- Surcharges and Cesses
The following state taxes will also be subsumed under the GST:
- VAT / Sales tax
- Entertainment tax (unless it is levied by the local bodies).
- Luxury tax
- Taxes on lottery, betting and gambling.
- State Cesses and Surcharges in so far as they relate to supply of goods and services.
- Entry tax not in lieu of Octroi
Problems with GST:
The GST which has been pending since 2006, is stuck at a crucial stage where states have been proposing to keep products such as petroleum, tobacco and alcohol out of GST ambit and had demanded that the exemption list be included in the Constitutional Amendment Bill. As regards the compensation structure, the states have sought a five year compensation mechanism from the Centre and demanded the same be included in the Constitutional Amendment Bill.
Some States believe that they will suffer revenue losses for example, Maharashtra, earns more than 13,000 crore annually from octroi. Gujarat, on the other hand, earns about 5,000 crore from the CST. Agrarian States such as Punjab and Haryana earn more than 2,000 crore from purchase tax. Each of these States fear that they will lose these revenues once these levies get subsumed under GST. If there is a loss in revenue, how will states be compensated?
To pass GST, a third category of constitutional amendment is required, which follows a very rigid process for constitutional amendment. To pass such a constitutional amendment, the bill has to pass in both houses by a special majority (by majority of total membership in the house and also by “two-thirds” of the members of the house “present and voting”). After passing in both houses, it should also be ratified in at-least one-half of the state legislatures before sending it for the President’s assent. Later the Centre and State will have to pass separate bills so that the new tax regime takes effect. This would be the 122nd amendment for the constitution.
Challenges in implementation of GST:
- What preparations are required at the level of Central Government and State Government for implementing GST?
- Is the Government machinery in place for such a mammoth change?
- Are the tax-payers are ready for such a change?
- What impact can it have on the revenue of the government?
- In what respect, it will affect the manufacturers, traders and ultimate consumers?
- How will it benefit the small entrepreneurs and small traders?
- Which type of administrative work will be involved in complying with the GST requirements?
The threshold limit for levy of GST on goods and services is fixed at ₹ 10 lakh of annual turnover (this is to avoid levying tax on very small traders whose annual turnover is smaller than ₹ 10 lakh) ; the threshold limit for compounding scheme is fixed at ₹ 50 lakh with a floor rate of tax at 0.5 per cent, i.e. All traders whose annual turnover is between ₹ 10 lakh and ₹ 50 lakh need not apply for input tax credits and pay the GST but only pay 0.5% of annual turnovers as tax. This is to facilitate easier collection from small traders. Alcohol consumption is exempted from the bill. The Centre will levy an additional 1% tax on supply of goods in the course of inter-state trade. The states will be compensated fully for revenue loss in next three years and partially for fourth and fifth year.
The bill seeks to establish GST council which would be taxed with optimization of tax collection for goods and services by Centre and state. The council will consist of Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government. The GST Council will be the body that decides which taxes levied by the Centre, States and local bodies will go into the GST; which goods and services will be subjected to GST; and the basis and the rates at which GST will be applied. It will be up to the council to decide when GST would be levied on various categories of fuel including crude oil and petrol
Finance minister Arun Jaitley proposes to roll out the bill from April 1, 2016. Lok Sabha has passed the bill on May 6th 2015. Now all eyes are on Rajya Sabha as Government does not have majority vote there. Rajya Sabha has asked a 21 member committee to submit its report in the first week of monsoon season.
The taxation of goods and services in India has, hitherto, been characterized as a cascading and distortionary tax on production resulting in mis-allocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance. It is well recognized that this problem can be effectively addressed by shifting the tax burden from production and trade to final consumption. A well designed destination-based value added tax on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass through, and the tax essentially ‘sticks’ on final consumption within the taxing jurisdiction.
A ‘flawless’ GST in the context of the federal structure which would optimize efficiency, equity and effectiveness.
Further Reading: gstbharat.co.in/home