Tax is a Latin word and derived from the word “Taxo” means rate. Tax is a financial charge levied by the government (central / state / local body) for meeting the public expenditure like road, dams, army for safeguarding the borders etc. the dictionary meaning of tax “A compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions: higher taxes will dampen consumer spending”.
In day to day life, every individual or businessman / woman pays various types of taxes. These taxes are the direct tax in nature like Tax Deducted at Source i.e levied when income we earn and we receive the net amount like salaries wherein the employer deducts the tax and the pays / deposits the net amount. In the case of business when an individual or body of persons or company earns money on the supply of services, the service receiver deducts tax and pays the net amount. Indirect tax, the individual pays the tax directly to the tax authorities. Indirect taxes are taxes which are paid indirectly by the individual like when one goes to the supermarket and buys groceries or any electronic goods Value Added Tax is charged, the tax is collected by the supermarket or store keeper from us and deposits the tax on behalf us to the tax authorities, this is called indirect tax.
Currently, we have Central Excise on removal manufactured goods from factory, Value Added Tax on the sale of goods within in the states, Customs & Counter Vailing duties on import of goods into India, Service Tax on services and Central Sales Tax on sales in case of interstate sales. These are the major taxes applicable on most of the transactions, apart from these transactions we also have industry specific cess like mineral cess, clean energy, etc. Some of the above taxes are administered by the central government like Central Excise, Service Tax and Customs and some by State Governments like Value Added Tax, Entertainment tax, luxury tax etc. and Octori by local by Municipality or village or town. Central Sales Tax levied by the central government and administered by the state government.
Tax Point or the tax applicability are different for different taxes, for Central Excise it is at the moment of goods, for Service Tax it is on the invoicing or completion of service whichever is earlier. Apart from these structural differences, the items are not taxed across the states equally, under VAT we have exemption less than 100 and under central excise, the list of items is around 250. Added to this complexity, the items are taxed at different rates in different states and also in some states exempted from VAT and for Excise and VAT different treatment. These differences increase the compliance cost of an organization and also allow room for the users to make mistakes thereby inviting the wrath of the tax administration.
Record keeping is different for different taxes like RG registers ( RG1 for production, RG 23 A Part I & Part II, RG 23 C – Part I & II) for VAT Purchase Register, Sales Register, etc all these add burden to the business house as well as for the financial software providers. When it comes to reporting again there are lot of challenges as multiple reports have to be filed with different tax authorities various ER Reports ( ER 1, ER2, ER 3 etc) under Central Excise at different time periods, under VAT various other reports which differ from state to state (Form 231, 232, 234, etc. under the Maharashtra Value Added Tax, Form 1, monthly return in Tamil Nadu, Form 201 monthly return in Gujarat), ST -3 for Service Tax etc.
All the above complexities add compliance cost and increase the pain in doing the business, and another major factor is some of the taxes are not recoverable in nature like Central Sales Tax, Clean Energy Cess etc thereby adding to the cost of goods. The cost of goods also increase as the taxes are computed on the principle of Tax on Tax, I,e say for computation of Value Added Tax, item price, and Central Excise are added and on that Value Added Tax is computed. This method of tax computation increases the cost to the user /consumer leading to higher inflation.
Introduction to Goods and Service Tax (GST)
Goods and Service Tax (GST) is a comprehensive tax on supply of goods or services or both. It eliminates the cascading effect of taxes as it is taxed at every point of business and the input credit is available in the value chain. It is also known as Value Added Tax in some countries as in the Europe Union. The uninterrupted credit in the supply chain ensures that the end consumer purchases goods and services at a lower rate as there is no tax on tax and the end consumer bear the tax burden.
Another feature of GST is that goods and services are taxed in the same manner. In GST, the tax is charged at every level and the end consumer pays the tax. It is implemented in about 160 countries across the globe. It has not been implemented in a full-fledged manner in India. Another feature of Goods and Service Tax is, during the interstate transactions, the taxes will be passed on to the destination state i.e the consuming state unlike the current taxes like CST which is enjoyed by the originating state. This principle is called destination-based taxation. Another feature of GST is uninterrupted flow of credit in the whole supply chain process which is not there in the current taxation like CST
GST in India
The process for GST implementation in India started when the Bagchi Report was constituted way back in 1994 for reforming Sales Tax in India. In India preparation for GST has started in 1999 when the empowered committee has been formed for Value Added Tax (VAT). Pre-introduction of VAT, there was Sales Tax and the same was not uniform across the states and moreover, the same was not recoverable in nature. Sales Tax being not uniform in nature lead to unhealthy competition among the states. Harayan was the first state to implement VAT and by 2006, all the states have moved to VAT. In 2007, then the Central Finance Minister Shri Chidrambram announced in budget speech about the introduction of GST. In 2208, Empowered Committee of State Finance Ministers has released the first Discussion paper. In 2011, “THE CONSTITUTION (ONE HUNDRED AND FIFTEENTH AMENDMENT) BILL, 2011” was introduced by the UPA II government and after that, there was not much activity in the Parliament. This has ensured that the bill got lapsed and the NDA Government has introduced the revised bill in 2014 “THE CONSTITUTION (ONE HUNDRED AND TWENTY- SECOND AMENDMENT) BILL, 2014 was introduced” and the same was passed in Lok Sabha and the same was referred to Select Committee. The Select Committee has submitted its report but the same was not taken up for discussion in the Rajya Sabha as the current government does not have the majority.
Limited number of taxes
As per the constitutional provisions in India, taxes will be levied by the Central Government and State Government, due to this unique feature, India has adopted Dual GST. In Dual GST, the taxes are levied by the Central Government and State Government, as a result, we are having only four taxes under GST
- Central Goods and Service Tax
- State Goods and Service Tax
- Inter-State Goods and Service Tax
- Additional Tax
Central Goods and Service Tax
The Central Goods and Service Tax (CGST) will be levied by the Central Government on the supply of goods and service or both replacing some of the existing central taxes
- Central Excise duty
- Duties of Excise (Medicinal and Toilet Preparations)
- Additional Duties of Excise (Goods of Special Importance)
- Additional Duties of Excise (Textiles and Textile Products)
- Additional Duties of Customs (commonly known as CVD)
- Special Additional Duty of Customs (SAD)
- Service Tax
- Cesses and surcharges insofar as far as they relate to supply of goods or services
State Goods and Service Tax
The State Goods and Service Tax (SGST) will be levied by the Central Government on the supply of goods and service or both replacing some of the existing central taxes
- State VAT
- Central Sales Tax
- Purchase Tax
- Luxury Tax
- Entry Tax (All forms)
- Entertainment Tax (not levied by the local bodies)
- Taxes on advertisements
- Taxes on lotteries, betting and gambling
- State cesses and surcharges insofar as far as they relate to supply of goods or services
Under GST in India, now the states will also be empowered to levy and collect tax on services which is under the Central Government till now.
Inter-State Goods and Service Tax
The Integrated Goods and Service Tax (IGST) levied by the Center on the supply of goods and services or both for Interstate transactions. The Central Sales Tax will be now called IGST and this will be applicable to the service also. IGST is nothing but a sum of CGST and SGST. Under GST for the interstate supply of services, IGST is being made applicable.
In the proposed GST, the taxation is being moved from origin-based taxation to destination-based taxation. Many of the heavily industrialized States objected to this on fear of losing revenue as goods are sold from these States to other States. States like Gujarat, Maharashtra, Tamil Nadu and other States have objected as the IGST will go to the consuming State. To meet their revenue loss concerns the Finance Minister, Shri Arun Jaitely has agreed to incorporate the clauses proposed by the State Governments. The new constitutional amendment bill where the State will be compensated for the revenue loss for the first five years and the quantum of the compensation will be decided by the GST Council. Apart from this, he has also agreed to the principle of levying the additional tax of maximum 1% on the sales for Interstate supply of goods for which consideration is received and this tax will be retained by the selling State. This tax is non-recoverable in nature, like the current CST, on Interstate sale of goods. This additional tax is for a period of only two years.
Under the current tax regimes we have different registration numbers for different taxes like ECC number at the location level for Central Excise, Service Tax registration number at the country level or based on dealers requirements, TIN number for VAT at State level. This is very complex and tough for the business to maintain them. In the Business Process document released by the Joint Committee it is being proposed that the GST registration number will be based on PAN number with a logical structure. The registration number is common for CGST, SGST, and IGST and it based on state.
In the current taxation requirements in India, the threshold limits vary based on the tax. Say, for example, the threshold for registration under VAT in many of the States, it is rupees 10 lakhs, under Service Tax it is rupees 10 Lacs, for Excise it is rupees 200 lakhs. And as per the Income Tax Act 1961, the books of account to be maintained are mandatory if the turnover is above rupees 80 lakhs. This leads to a lot of confusion and is very difficult for the small traders.
It is being proposed under GST that the minimum limit for the threshold is rupees 25 lakhs, for which many of the States are not agreeing. The basic reason is that small traders may not have the infrastructure for maintaining records and filing of returns. The Centre wanted to have the threshold fixed based on the registration number across India but the States are reluctant. If the threshold is fixed based on the State, then most of the organizations will be out of the GST net. Say for example, if the threshold is fixed at rupees 25 lakhs and the business has a presence in around 20 States then he will register in 20 States for CGST and SGST but his actual turnover is rupees 500 lakhs. Many subcommittees have been formed to discuss the threshold limit but there is still no consensus on it.
There is uninterrupted credit in the whole value chain for the Taxes under GST / VAT. In India, the taxes which are purposed under GST expect for Additional Tax, all the other three taxes i.e CGST, SGST and IGST are eligible for credit. The un interrupted flow of credit in the whole business process helps in reduction of the cost of production there by reducing the final amount paid by the end consumer. In the current tax regime, if we see some of the taxes like CST, Entry Tax etc are not eligible for the credit, being expense taxes in nature, these taxes are added to the landed cost and when the goods are used in the process of manufacturing, the cost of production goes up automatically.
The above example in the current tax structure. In the value addition, have taken Rs 100 in each stage plus the amount of non-recoverable taxes i.e in the first stage the Manufacturer pays input tax of Rs 140 but on that he is not eligible to take credit as it is excise taxes and output tax being CST, as result the excise taxes are added to the value addition. In the second stage and the third stage the distributor, retailer and consumer are in the same state, Value Added Tax of 15% is considered.
Now we will see the same example when GST is implemented
In the proposed GST for ease of computation purpose considered the taxes like CGST, SGST and IGST @ 15% only for ease of computation and explaining the impact on the taxes and the final price for which the consumer buys. We could see that all the taxes are recoverable in nature, as a result, there is no impact on the value addition to the non-recoverable taxes. The final price which the consumer pays under GST is Rs 2033.34 as against Rs 2,145.30 pre-GST. The price difference is not due to uninterrupted credit in the whole supply chain.
No Tax on Tax
Under GST/VAT, there is only one tax and the same is taxed on the transaction/value of the goods or services being sold. In India, we have multiple taxes. Illustrated below is an example of purchases made by a manufacturer with-in the same State:
|Item Price||Rs. 10,000|
|Excise Duty @ 14%||Rs. 1,400|
|Value Added Tax @ 15%||Rs. 1,710|
In the above example, we can see that the Value Added Tax is computed on the item price + Excise duty, i.e. (10000+1400) x15%. Under GST/VAT, we will not have a scenario like this as it is a uniform tax and the tax base amount is also same.
|Item Price||Rs. 10,000|
|CGST @ 15%||Rs. 1,500|
|SGST@ 15%||Rs. 1,500|
SGST and CGST will be computed only on the item price only unlike in the current taxation where VAT is computed on item price plus Excise Duty
In the current tax regimes, we cannot cross utilize the credit like VAT with Service Tax or Excise and vice versa. We can cross-utilize Excise with Service and vice versa. This rigidness can create some cash flows impact to the business houses as they are not utilized for offsetting the liability of another tax and thereby forced to pay in cash. In the proposed GST the taxes can be offset with some conditions.
Credit utilization between various GST taxes
- CGST credit should be first utilized for offsetting the CGST liability and then if anything is left, it can be used for offsetting IGST Liability.
- SGST Credit should be first utilized for offsetting the SGST liability and then if anything is left, it can be used for offsetting the IGST liability.
- IGST Credit should be first utilized for offsetting the IGST liability and then CGST liability and still if any credit is leftover it can be used for offsetting the SGST liability.
The above conditions are laid down so that the fund distribution between the Centre Government and Sate Government can be done seamlessly.
There is also a change in the credit availment process under GST, till now the credit on taxes for Excise, Service Tax and VAT is claimed on receipt of the goods but under proposed GST it can be claimed only when the seller pays the taxes. This is being done to avoid the revenue loss as there are black sheep in the system. The seller does not pay the taxes but the buyer’s takes the credit, in this way the tax authorities are losing revenue in two ways. To plug this, the new process is being proposed. This has been confirmed by the Business Process documents on GST released by the Joint Committee. As the tax availment process is changed there can be some impact on the working capital as output tax has to be paid in cash to the extent of credit held up due to seller’s payment and then confirmation of the same by the tax authorities. It is also being proposed to blacklist the dealers who fail to pay taxes.
In the current tax regime, there are lot of reports to be filed under Central Excise like ER 1, ER-2, ER-3 etc. for service tax it is ST-3, for Valued Added Tax, various returns for each State like Form 231, 232, 234, etc. under the Maharashtra Value Added Tax, Form 1, monthly return in Tamil Nadu, Form 201 monthly return in Gujarat. For all these returns, the data requirements and formats are different and they have to be filed with different tax authorities. All these returns or reports have to be filed electronically. In the proposed GST based on the Business Process document released by the Joint Committee, there will be three reports to be filed every month one for declaring the sales, one for declaring the purchases and the third one for determining the liability and payment of taxes. For all the taxes there will be only one report and the data will be shared by the Central Government and State Governments. Apart from these three reports, there will be on two more reports to be filed on a quarterly basis and annually.
Challenges for the business houses
Goods and Service Tax is being dubbed to be one of the biggest and major tax reform in India Post Independence. This tax reform is expected to increase the GDP of India about 1% to 2%. As it is being dubbed as major tax reform, the industry has to do a lot of planning and adopt itself to brace the changes. Some of the areas in which the industry has to adopt changes so that the business process is uninterrupted
Training of the teams – as it is a new law and there will be some teething troubles expected, the concerned teams should be trained well in advance for the Finance and the Supply Chain Management Teams along with the Sales Team.
Contract Renegotiations – some of the business contracts are based on inclusive taxes and with the implementation of GST, these contracts have to be evaluated and renegotiated so that there is not impact on the bottom line.
IT Systems – In today’s dynamic and the competitive world almost all the corporates use various financial accounting packages or enterprise resource planning tools for the smooth running of the business. Most of the systems are designed in such a way to cater the current tax requirements like availing cevat credit on receipt basis and also updating various registers, these are not required under GST. These systems have to be upgraded well in advance and train the users accordingly else smooth rollout of GST will turn into a nightmare.
Working Capital – under the current tax regime the credit is available on the receipt of goods but in proposed GST, it is available only when the supplier pays the tax. There will be a time lag between the receipt of the goods and the supplier paying the taxes. During this time lag, the output tax has to be paid in cash, it means an additional impact on the cash flows means more demand for the working capital. This has to be assessed by the finance teams much in advance and make arrangements for payment of output tax else in default in the payment of taxes can lead to black listing and which in turn reduces the credibility in the market and impact on the overall business.
Warehousing – Most of the consumer durable companies and fast moving consumer goods companies establish warehouse based on the tax planning as CST is applicable under current tax regulations and not recoverable in nature. Going forward, the same is not applicable as GST is a tax at country level and recoverable in nature. This means that companies have to re design or relocate warehouses based on the area of consumption and production to minimize the transportation cost and inventory holding costs.
Future business expansion – in the current tax regime most of the business decisions are based on the tax incentives offered by the Central and State Governments rather than based on the availability of raw materials or place of consumption. Going forward in proposed GST these exemptions will be minimized and as per the revised Constitutional Amendment Bill it is applicable for the list of states specified in the bill and moreover the cost of these incentives will be borne by the departments or respective ministries which are announcing it. The existing incentives will continue till the sunset clause. All the future business decisions should be based on business advantage rather than tax incentives.
The road ahead
Adoption and embracing of change are always tough and this is evident in the case of GST in India. Even though the discussion for implanting GST is for almost a decade we are not able to see any result on it may it be for political reasons or another. For GST to be adopted and implemented by 1st April 2016 is a challenge as the Constitutional Amendment bill for GST has to be passed by the Rajya Sabha where the current ruling party does not have the majority. The same was passed in the budget session in the lower house but could not be passed in the upper house as it does not have the majority. To get consensus the bill was referred to the Select Committee and it submitted its report and placed for discussion in upper house during the monsoon session but could not be passed. For GST to be implemented, first it has to be passed in the Parliament and then the same has to be approved by at least 50% of the states and then the actual bill for GST has to be passed. The winter session is started from 26th of Nov,2015 and Central Government has reached all political parties including the Congress for passage of the bill in the Rajya Sabha.
The infrastructure for implementation of GST also has to be in place as it is highly dependent on the IT systems and all the states commercial tax departments IT infrastructure is not at the same level. These have to be upgraded and brought to the same level. Though the same is in the process it is not yet completed.
Though the government is committed to pass the bill and implement it by 1st of next fiscal year time is running short.
The whole world is watching for GST to be rolled out as it improves the business confidence in India and we can expect more FDI into India.
Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.