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1. Gst Regime -A Fillip To Make In India

  • Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition.

  • In simple words, GST is an indirect tax levied on the supply of goods and services. GST Law has replaced many indirect tax laws that previously existed in India.

  • GST will be levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services. But it will be collected at the destination only.

  • GST aims at- ONE NATION ONE TAX ONE MARKET

  • Origin versus destination-based tax

  • Origin Based Taxation as the name suggests is the taxation based on origin or source where the goods and services are produced. This principle seeks to tax the goods and services on the basis of the principle that the goods and services should be taxed at the stage where their production or origination takes place rather than where their consumption takes place. Therefore, in case of origin based taxation, the revenue accrues to the jurisdiction where goods and services are produced.

  • For Example If A in Gujarat produces the goods and sells the goods to B in Rajasthan, then in such case the tax should be levied and collected in the State of Gujarat and not in the State of Rajasthan. The revenue in the case of origin based taxation should accrue to the place, where the goods or services are produced and not to the State where they are consumed.

  • Destination Based Taxation as the name suggests is the taxation based on destination or consumption of the goods or services.  This principle seeks to tax the goods and services on simple theory that the goods or services should be taxed at the stage where their consumption takes place rather than the point where their origin takes place i.e. production and the entire revenue relating to the goods or services should accrue in the jurisdiction where they are being ultimately consumed.

  • For Example If A in Gujarat produces the goods and sells the goods to B in Rajasthan, then in such case the tax should be levied and collected and should accrue on the goods in the State of Rajasthan and not in the State of Gujarat. The revenue in the case of destination based taxation belongs to the place, where the goods are finally consumed and not to the State where the goods are produced.

  • GST is a destination based tax i.e. it will be levied at the point of consumption only.

  • GST was chosen to be a destination based tax.

  • In destination-based taxation, exports are allowed with zero taxes whereas imports are taxed on par with the domestic production. This will increase competitiveness of India's exports in international market as our exports will be zero rated. Also, taxation of imports equivalent to domestic taxes ensures protection of domestic industry from intrusive foreign goods.

  • In the long-term aspect the destination-based taxation is a boon for less developed States who consume more than what they produce.

  • Origin based taxation system is tough to monitor as the location of production can be extremely difficult to figure out. This is because production processes stretch across numerous jurisdictions and include not only physical processes, but also intangible ones that are difficult to price. For example- production of a car involves various processes like mining of the iron-ore and bauxite in say Odisha, manufacturing of Aluminium and Iron & Steel in Jharkhand, processing of these metals into a frame of car in Haryana, production of rubber in Kerala, making of tyres in say Tamil Nadu. Apart from these goods, there is input of services like transportation etc. So it is difficult to keep a track of all these inputs of goods and services and tax them at every stage

  • This creates problems of high costs of tax administration for government as well as problems like evasion of taxes.

  • Compared to this Destination based taxation system simply taxes goods at the destination of their consumption thereby preventing any evasion and reducing administrative burden for administering taxes.

  • All these years, taxes were collected at various levels right from the place of origin of the goods to the final destination. So, very often, goods or services were taxed multiple times leading to what has been called "Cascading Effect" which increased the cost of final goods for consumers as well as for exports.

  • Goods which had to move across States were often stopped at borders for hours together just to pay various taxes resulting in huge losses in terms of damaged goods and high transportation costs.

  • The new regime aims to transform the tax scenario of the country by streamlining the system through a single tax for supply of all goods and services across the country. Heralded as a destination tax', the GST is a tax on goods and services which will be paid at the point of receiving.

 

1.1. History of GST

  • The GST has already been introduced in nearly 160 countries and France was the first to introduce GST in the year 1954. The idea of GST was first mooted in the year 2000 and a committee was set up headed by the then West Bengal Finance Minister to design a GST model. The Constitution (122nd Amendment) Bill, 2014 was introduced in Lok Sabha on December 19,2014 and was passed by Lok Sabha in May 2015. The bill was taken up in the Rajya Sabha and was then referred to the Joint Select Committee of the Rajya Sabha and the Lok Sabha on May 14, 2015. The Committee submitted its report on July 22,2015.

  • Based on the consensus, the revised constitutional amendment bill was moved on August 1, 2016. The bill was passed by the Rajya Sabha on August 3, 2016 and in the Lok Sabha on August 8,2016. After ratification by required number of state legislatures and assent of the President, the Constitutional amendment was notified as Constitution (101St Amendment) Act 2016 on September 8, 2016. The Constitutional amendment paved the way for introduction of Goods and Services Tax in India.

  • The Constitutional amendment empowers the Centre and the States to levy and collect the Goods and Services Tax (GST). The GST has been defined as a tax on supply of goods or services or both, except supply of alcoholic liquor for human consumption. Thus, alcohol for human consumption has been kept out of the GST by way of definition of the GST in the Constitution. On the other hand, five petroleum products viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel have temporarily been kept out and the GST Council can decide the date from which they shall be included in GST.

  • On inter- State supply of goods and services, an Integrated GST (IGST) would be levied and collected by the Centre. It will ensure that the GST is truly a destination based consumption tax, and there is seamless flow of input tax credit, even when goods are moving from one state to another.

 

1.2. Constitutional amendment

  • In the countries where GST has been introduced, barring rare exceptions, GST is unitary in character and is levied either by the Central Government or by the State Governments. The introduction of GST in India required amendment in the Constitution as prior to the Constitutional amendment the fiscal powers between Centre and the states were clearly demarcated as per the entries in the Union List and the State list. (For example Excise on manufacturing, Central Sales Tax and Services tax was levied by the Centre while sales tax by states)

  • As both the levels of Government have distinct responsibilities to perform, according to the division of powers prescribed in the constitution, both the states and the centre needed resources to be raised. Therefore, amendment was required in the Constitution so as to concurrently empower the centre and the states to levy and collect GST.

  • GST Council comprises

  • Union Finance Minister (Chairman of the Council),

  • The Union Minister of State (Revenue) and the

  • State Finance/Taxation Ministers of 29 states and two union territories with legislature (Delhi and Puducherry).

  • The Secretary (Revenue) will be appointed as the Ex-officio Secretary to the GST Council.

 

2. Creating a unified taxation regime

2.1. Functions of GST Council

  • The guiding principle of the GST Council is to ensure harmonization of different aspects of GST between the Centre and the States as well as among States with a view to develop a harmonized national market for goods and services within India. The Council is tasked to make recommendations to the Union and the States on the following:

  • The taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be subsumed under GST;The goods and services that may be subjected to or exempted from the GST;The date on which the GST shall be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation  turbine fuel;Model GST laws, principles of levy, apportionment of IGST and the principles that govern the place of supply

  • The threshold limit of turnover below which the goods and services may be exempted from GST.The rates including floor rates with bands of GST; Any special rate or rates for a specified period to raise additional resources during any natural calamity or disaster; Special provision with respect to the North-East States, J&K, Himachal Pradesh and Uttarakhand;

  •  The compensation to be paid to manufacturing states any other matter relating to the GST, as the Council may decide How the GST Council can be seen as a new model of cooperative federalism.It is a big gamble that the states have given up their constitutional power to levy taxes. Their ability to raise resources as per their unique conditions and problems stands compromised. The faith the states have shown in the GST Council as the final deciding authority on matters of indirect taxation is indeed a mark of enhanced trust and cooperation between the states and the Union.

  • The Constitutional amendment provides that every decision of the GST Council shall be taken at a meeting by a majority of not less than 3/4th of the weighted votes of the members present and voting. The vote of the Central Government shall have a weightage of 1/3rd of the votes cast and the votes of all the State Governments taken together shall have a weightage of 2/3rd of the total votes cast in that meeting. One half of the total number of members of the GST Council shall constitute the quorum at its meetings.

  • The weightage of voting has been so assigned that it is not possible for either the Centre or the states to take any decision unilaterally. As the Centre only has 33 per cent weightage in voting, support of majority of the states is also required for any decision to be taken by the Council. However, till now all the decisions in the Council have been taken by consensus and there has not been any occasion for voting. (This is another mark of cooperative federalism between the federal units)

 

2.2. Compensation to the manufacturing states

  • As GST is a destination based tax, there was apprehension amongst some states, particularly manufacturing states, that implementation of GST may result in loss of revenue for them. Therefore, the Constitution (One Hundred and First Amendment) Act, 2016 provides for compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period of five years. Based on the recommendations of the GST Council, the Goods and Services Tax (Compensation to States), Act 2017 has been enacted. The Compensation Act has fixed the revenues of the year 2015-2016 as the base year revenues and further a nominal annual growth rate of 14 per cent has been provided. The Act provides for levying of a cess, which shall be used for compensation to the states in case there is loss of revenue. (Cess over the peak rate of 28% on specified luxury and sin goods)

 

3. GST -DAWN OF NEW ERA

3.1. Features of GST

  • The territorial spread of GST is whole of the country including Jammu and Kashmir

  • GST is applicable on supply of goods or services as against the earlier concept of tax on manufacture or sale of goods.

  • It is a destination based tax i.e. GST will be levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services. But it will be collected at the destination only.

  • The GST in India is a Dual GST i.e. both centre and states will levy GST. (One tax rate by all states)

  • GST has four slabs of 5%, 12%, 18% and 28% (this will be equally divided between the Union and the states). Then there is a special rate of 0.25% for rough precious stones and 3% on gold.

  • Under GST, agriculture and food products, like food grains, pulses, fruits, vegetable and milk have been exempted along with education and health care. All of these combined together contribute close to 40-45 per cent of expenses of an average household, as measured in the consumer price index. While other necessary items like coal, sugar, edible oil, coffee are placed at 5 per cent.

  • However, the standard rate for services has been kept at 18 per cent which is higher than the pre-GST rate of 14-15 per cent.

  • The 18% slab has maximum items. (almost 81% of commodities are under the 18% slab)

  • Taxes/Items kept out of purview of GST

  • o   Tax on alcohol for Human Consumption

  • o   Tax on sale and purchase of Electricity

  • o   Tax on Petroleum products

  • o   Customs Duty

  • o   Real Estate

  • o   Stamp Duty

  • o   Taxes levied by the local governments

  • It subsumes 17 indirect taxes and 22 cesses

  • Import of goods as well as services is treated as inter-State supplies and would be subject to IGST in addition to the applicable customs duties.

  • Exports and supplies to SEZ are Zero-rated

  • Electronic filing of returns to ease compliance and reduce interaction with tax officials.

  • Credit of CGST paid on inputs may be used only for paying CGST on the output and the credit of SGST/UTGST paid on inputs may be used only for paying SGSTIUTGST. In other words, the two streams of input tax credit (ITC) cannot be cross utilized.

 

Audit of registered entities in order to ensure compliance

  • Advance Ruling Authority in States in order to enable the taxpayer to seek a binding clarity on taxation matters from the department. Centre would adopt such authority under CGST Act.

  • An anti-profiteering clause has been provided in order to ensure that business passes on the benefit of reduced tax incidence on goods or services or both to the consumers.

  • The provision of input tax credit to prevent cascading of taxes

 

GSTN - Goods and Service Tax Network

  • GST envisages credit of Input tax credit (ITC) of 80 lakh taxpayers to be processed within ten days after filing of monthly returns which is expected to contain 2.6 to 3.0 billion business to business invoice data. This feat is impossible without strong IT Infrastructure. Thus, it would not be incorrect to say that GST is incomplete without a strong IT backbone. The IT backbone has come up in the form of GST System consisting of GST Portal and IT platform — the highly advanced technological infrastructure that has made the timely roll out of the new tax regime possible.

  • The GSTN has successfully developed a common GST Portal that acts as a one stop shop for all businesses, taxpayers and other stakeholders involved in the indirect taxation system.

  • The Government of India and State Governments came together to create the Goods and Services Tax Network (GSTN), a Special Purpose Vehicle as non-government, not-for profit Company where Centre holds 24.5 per cent shares and all States collectively hold 24.5 per cent. The remaining shares are held by five private financial institutions. This structure brings flexibility of private sector while ensuring that strategic control remains with the government.

 

Features of GSTN

  • A section 25 private limited company with Strategic Control with the Government

  • To function as a Common Pass-through portal for taxpayers-

  • submit registration application

  • file returns

  • make tax payments

  • To develop back end modules for 25 States (MODEL—Il)

  • 34 GST Suvidha Providers (GSPs) appointed ( Digital interface between GSTN and taxpayers)GSTN has partnered Infosys as its Managed Service Provider (MSP) for the next five years.

  • The Common GST Portal is the single interface for all taxpayers from any part of the country. Only in case where a taxpayer is picked up for scrutiny or audit, he will interface with the respective tax authority. For all other cases, which is expected to be around 95 per cent, the Common GST Portal will be the only interface for taxpayers.

 

GST on Aids and Assisting devices for the Disabled

  • Recently the new GST regime was subjected to criticism from certain sections over the issue that the Aids and Assisting devices for the disabled were taxed at 5% instead of keeping them tax free due to their social utility.

  • First, it needs to be clarified that under the GST, the most beneficial rate of tax on any item is 5 per cent. Aids and appliances for disabled people, like wheelchairs, talking books, assistive listening devices and implants for the severely physically challenged, are taxed at this rate. This allows the suppliers of these items to claim an input tax credit for the GST paid on the inputs (raw materials) and input services used for supplying these items.

  • Most of the inputs (raw materials) and input services are in the 18 per cent GST rate category. Some of the sophisticated electronic inputs are under the 28 per cent rate. Thus, effectively, the entire 5 per cent GST levy on the aids and appliances for the disabled people will be offset against the input taxes, leading to zero effective tax on these items.

  • No supplier of these items will pay GST from his pocket and the input tax credit will always be more than sufficient for discharging the GST liability. Not only that, as most of the inputs and input services have a GST rate of 18 per cent, the supplier will always have surplus credit available in her/his account and he/she will be able to claim a cash refund for such input tax credit lying in his account every quarter. So, in fact, GST will become a money spinner for the suppliers of these items.

  • It also needs to be understood that under the GST, input tax credit or refund is not available for those goods on which the GST rate is zero percent. Thus, if the GST rate had been kept at zero per cent for these items, the suppliers of these items would not have been able to avail of the input tax credit. This would have made these items expensive, as the GST component of the cost of inputs and input services would have been added to the cost of the aids and appliances for the disabled by manufacturers and traders

  • Secondly, if such goods were exempt from GST, then on imports of similar items too, the corresponding integrated GST would have to be kept at zero per cent. This will increase the competition for domestic manufacturers of these items, as they will not be able to avail the input tax credit on the inputs and input services used for the manufacture of items for the disabled, which in turn will increase their cost and make them non-competitive with respect to imported aids and appliances. This is against national interest, against Make in India and would result in a loss of jobs in the units of the Indian manufacturers.

 

GST and Fiscal Federalism

  • It is a big gamble that the states have given up their constitutional power to levy taxes. Their ability to raise resources as per their unique conditions and problems stands compromised. The State of Tamil Nadu, which opposed many clauses in the GST had a point when it said that it had implemented wide ranging social sector reforms on the back of cash generated from its taxation programme.

  • In most countries where deferral authorities have the right to determine indirect taxes and enjoy the right to raise them, provinces have the right to direct taxes. In Canada where the GST was introduced in the last century, the provinces have the power over direct taxes, while the federal Government has the power to tax indirect taxes, which is why the changeover to GST did not entail any impact on state powers. In India, however, the Centre not only enjoys sole rights over direct taxes, a portion of which it may give to states, but it also now enjoys the exclusive right to nearly half of the GST proceeds.

  • However, officials also point out that 45 per cent of the indirect taxes are not covered by GST such as items like real estate, petroleum products, alcoholic beverages etc., and the state will have the ultimate right to tax them and even increase taxes on them.

  • Also, the taxes levied by local bodies has been kept out of the purview of GST thereby giving them rights to increase or decrease these taxes and thus build greater financial independence from state governments. While the reverse will be true for the states that would who be bound by the decisions of the GST Council as far as the bulk of their revenues is concerned.

 

4. GST Ease Of Doing Business

  • Currently, India is placed at a lowly 130th position out of 190 countries in the World Bank's Doing Business report 2017.

  • GST aims at improving this rank by improving several aspects of doing business in India

  • Tax Reforms - In 'Paying Taxes' in the World Bank's Doing Business Report, India ranks poorly at 172 out of 190 economies.  GST is expected to  improve the ease of doing business in

  • tax compliance, (the need to avail input tax credit will lead to registration)

  • reduce the tax burden by eliminating tax-on-tax or cascading effect,

  • improve tax administration,

  • mitigate tax evasion,

  • broaden the organized segment of the economy and

  • boost tax revenues for the exchequer.

  • Easier Compliance- In the previous tax regime, businesses had to file several returns for multiple taxes, face multiple authorities and suffer long bureaucratic delays for assessment of different indirect taxes. GST, by merging all indirect taxes into one single tax, has made the compliance much easier for businesses.

  • Using the IT platform of GST Network (GSTN) taxpayers can register, file, make payments and claim refunds online at anytime from anywhere without having to interface with tax officials. This not only makes the compliance process easier, transparent and free from corruption.

  • Easier interstate movement of goods- Transport vehicles would earlier get inordinately delayed during inter-state movement of goods for paying taxes at check posts in different states. GST has done away with this requirement by amalgamating several indirect taxes including Entry tax and Octroi duty. This would bring down the logistics costs (in money as well as time terms) for businesses and prices for consumers. (As per an estimate, check posts at state borders consumed around 60% of the truck transit time leading to loss of time as well as loss of perishable goods)

  • Single Interface for All - The GSTN provides a single interface of tax-payers with tax authorities and a single platform for resolving differences.

 

5. Creating a strong IT Backbone

  • The GST System Project is a unique and complex IT initiative. It is unique as it seeks, for the first time to establish a uniform interface for the tax payer and a common and shared IT infrastructure between the Centre and States.

  • This strong IT Infrastructure and Service back bone enables capture, processing and exchange of information amongst the stakeholders including tax payers, States and Central Governments, Accounting Offices, Banks and RBI.

  • The Common GST Portal is the single interface for all taxpayers from any part of the country. Only in case where a taxpayer is picked up for scrutiny or audit, he will interface with the respective tax authority. For all other cases, which is expected to be around 95 per cent, the Common GST Portal will be the only interface for taxpayers.

  • What is GSTN?

  • GST envisages credit of Input tax credit (ITC) of 80 lakh taxpayers to be processed within ten days after filing of monthly returns which is expected to contain 2.6 to 3.0 billion business to business invoice data. This feat is impossible without strong IT Infrastructure.

  • The Goods & Services Tax Network or GSTN was conceived as the IT backbone of GST— an organization that would put in place the IT infrastructure for the new regime and enable the transition of taxpayers from the multiple existing systems to a single one.

  • The Government of India and State Governments came together to create the Goods and Services Tax Network (GSTN), a Special Purpose Vehicle as non-government,

  • not-forprofit Company where Centre holds 24.5 per cent shares and all States collectively hold 24.5 per cent. The remaining shares are held by five private financial institutions.

  • The GSTN has been designed to work as a one-stop shop for all indirect tax stakeholders providing services like common registration, creation of challan for payment through designated banks and upload of business to business invoice data to create return.

  • Payment of taxes has also started taking place using one Challan for all types of taxes which are prepared on the GST portal. Once the Challan is created with GSTIN, name of taxpayer, amount under various tax heads and sub-heads etc, the taxpayer has two options to pay the tax.

  • He can either use net-banking facility out of 25 authorized banks or print the challan and take it to an authorized bank for payment over the counter (OTC).

  • GSTN, have crafted a series of services and technological tools to ensure that paying taxes and filing returns becomes convenient for the last common denominator.

  • GSTN has also designed an offline tool and a simple excel based template that will facilitate the taxpayers in preparing and filing their monthly returns with maximum ease and minimal cost.

  • The GSTR excel template workbook can be used to prepare the GSTR return without connecting to internet in offline mode. This also benefits taxpayers in remote areas where Internet connectivity might not be good.

  • GSTN, designed as a self-service mode, which is simple and adaptable for mobile systems as well, the interface will play a major role in empowering business and entrepreneurs and easing their tax paying procedures.

 

6. Removing Cascading Effects

6.1. Reduction in Tax burden by removing cascading effect

  • Creates Common Market - Manufacturers will be able to take more rational decisions regarding sourcing of raw materials, location of manufacturing and warehousing facilities and sale of output, as India becomes one big common market post implementation of GST. Uniformity in the process and centralized registration will make expansion of businesses across states much simpler.

  • Enhancing Export competitiveness-   In the previous tax regime, we exported a portion of taxes owing to double taxation, which, combined with higher transaction cost related to tax compliance, lowered India's competitiveness in the global market. Now the goods for export will be Zero rated thereby making them competitive on the foreign market.

  • Reducing Bias - Businesses have tendency to allocate resources in a state and sector offering favorable tax compliances and rates, disregarding other indirect factors /advantages. This leads to distortions in allocation of resources as well as supply chain, eroding the overall competitiveness of a firm. GST, by helping doing business in the country tax neutral, irrespective of the location of the business, addresses this issue by minimizing the sector and state variation in compliances as well as rates.

  • Improves Ease of Doing Business for MSMEs by providing exemption to firms having a turnover of less than 20 lakhs per annum and 'Composition Scheme' for firms with a turnover of less than 75 lakhs

 

Challenges

  • First, the need to get registered to avail input tax credit will increase the compliance costs for small firms thereby reducing their competitiveness.

  • The need to file multiple returns (three times in a month) could lead to enhanced compliance costs and time.

  • It is also important that going forward, the model must do away with separate registrations and tax filings in all states of operation for businesses that  work in different states.

  • Measures such as these will be vital for further unshackling the potential for improvement in the ease of doing business in India and enhancing the overall competitiveness in the global arena, which is crucial for the success of 'Make In India' program of the government.

  • Also, there should be a platform for regular feedback from industry and other stakeholders so that reforms can be introduced to further improve the Ease of Doing Business.

  • If these challenges are addressed then India will also become a favoured destination for foreign investors.

 

Provisions for MSMEs

  • 1. The law provides for an exemption threshold where by it is not mandatory for a business whose aggregate turnover in a financial year is less than Rs. 20 lakh (Rs.10 lakh for special category States) to register. Such small enterprises would be exempt from paying GST.

  • 2. Composition scheme-

  • The composition scheme is an alternative method of levy of tax designed for small taxpayers whose turnover is up to Rs 75 lakh — Rs 50 lakh in the case of eight north-eastern states and the hilly state of Himachal Pradesh. The objective behind it is to bring simplicity and reduce the compliance cost for small taxpayers.

  • Under the Composition Scheme, the manufacturer will pay tax at the rate of 1 per cent; restaurant sector at the rate of 2.5 per cent and traders at the rate of 0.5 per cent of the turnover each under CGST Act and SGST Act.

  • As per the Central GST Act, businesses are eligible to opt for the composition scheme if

  • o   Not engaged in any inter-state outward supplies of goods and

  • o   Not into making any supply of goods through an electronic commerce operator who is required to collect tax at source.

  • While a regular taxpayer has to pay taxes on a monthly basis, a composition supplier is required to file only one return and pay taxes on a quarterly basis. Also, a composition taxpayer is not required to keep detailed records that a normal taxpayer is supposed to maintain.

 

Benefits of Registering under GST Composition Scheme

  • Reduced tax liability: The biggest benefit of registering under compounding scheme is the reduction in taxes. Tax rates under composition scheme are expected to be in the range of 1% to 3% which is considerably lower than standard tax rates under regular GST scheme.

  • Limited compliance: Another major advantage of composition scheme is that it promises to reduce the number of documents and processes required for compliance under GST law. Where a normal taxpayer will be required to file a minimum of 3 returns in a month, a compounding dealer will be asked to file only 1 return every quarter of a year.

  • Ease of doing business: Reduced tax liability and limited compliance will make it easy for small businesses to grow and flourish. On one hand reduced taxes will result in surge of profit margin while on the other limited compliance will reduce hassles allowing a party to focus more on his business

 

Limitations of GST Composition Scheme

  • No inter-state business: Tax benefits of GST compounding scheme are only given if a taxpayer carries his business within the boundaries of a state. A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot affect import-export of goods and services. Thus, he is compelled to carry only intra-state transaction and limits the territory of his business.

  • No Credit of Input Tax: Composition scheme does not have any provision of input credit on B2B transactions. Therefore, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading effect.

  • Pay tax from your own pocket: Although the rate of composition/ compounding tax is expected to be very low, a taxpayer under this scheme is not allowed to recover such tax from his buyer. The taxpayer is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket.

  • Penal provisions: While taking advantage of GST Composition scheme, one needs to take utmost care as the penalty is severe. If taxpayer is found wrongly registered under this scheme while not fulfilling eligibility criteria and therefore avoiding normal taxes. Then the person will have to pay taxes along with penalty equal to 100% of taxes levied upon him.

  • Currently, a disproportionately large number of business entities in India operate under the informal economy, which basically means that they escape regulatory and taxation obligations. This escape or evasion, though, also helps in keeping the overall costs down for such entities. Under the Input Tax Credit system, however, one entity can avail its benefit only if it buys from an entity that is registered with the GST network and also has paid taxes accordingly. Due to this provision, there is a strong likelihood that a buyer will buy only from a GST compliant seller, and this can lead to a large part of business entities previously operating outside regulations to register, and hence bear the appropriate regulatory and taxation cost. (This entry into the formal sector will allow such firms to access formal credit, formal marketing linkages, enhanced competition etc.)

  • The negative side is that even for those enterprises already complying with the existing regulations,

  • First, it made tax compliance harder for tax payers and also provided opportunities for tax evasion.

  • Secondly, since each new tax was applied on the selling price that also includes tax paid in the previous stage, it basically meant a tax on the amount of tax paid at the previous stage, a phenomenon known as the cascading effect of taxes.

  • Cascading leads to increased tax burden and increased cost of the final good/service for the consumers.

  • GST has the input tax credit system or ITC. The meaning of ITC can be easily understood when we take the words ‘input’ and ‘tax credit’. Inputs are materials or services that a manufacturer purchases in order to manufacture his product or services which is his output.

  • Tax credit means the tax a producer was able to reduce while paying his tax on output.

  • Input tax credit means that when a manufacturer pays the tax on his output, he can deduct the tax he previously paid on the input he purchased. Here, while paying the tax on his output, take credit for the tax he paid while purchasing inputs.

  • Goods and Services Tax (GST) is an indirect tax which will replace almost all other indirect taxes levied by central and state governments.

  • However, it is noteworthy that there are a few sectors, such as petroleum, alcohol and real estate, which have been kept outside GST and will continue under the previous taxation framework.

  • Barring such exemptions, all indirect taxes in India that were applicable earlier are going to be replaced by GST. Some of the major indirect taxes being subsumed under GST are — Excise duty, Service tax, Special additional duty of customs, State VAT, State sales tax, Entertainment tax, Entry tax, Luxury tax.

  • The multiplicity of taxes and complex incidence on multiple stages created two problems — first, it made tax compliance harder for tax payers and also provided opportunities for tax evasion. Secondly, since each new tax was applied on the selling price that also includes tax paid in the previous stage, it basically meant a tax on the amount of tax paid at the previous stage, a phenomenon known as the cascading effect of taxes.

  • Under the new GST regime, a particular good/service will attract only one tax rate, and it will be same in all the states. Also, eachmanufacturer/ seller/business entity will be able to avail the benefits of a scheme known as 'Input Tax Credit' (ITC).

  • The direct and immediate impact of GST will be a new 'effective' tax rate on each of the goods and services. Depending on how different the new 'effective' tax rates are as compared to the pre-GST period, prices will increase or decrease accordingly.

  • An indirect impact of GST, which is likely to be visible only in the medium to long term, can come through changes in production and supply chain processes.

  • The process of Input tax credit mechanism reduces the total tax incidence, reduces the overall cost for the manufacturers/ sellers. This reduction in cost is expected to ultimately bring down the final price paid by consumers.

  • To deal with firms not passing on the benefits of reduced cost to the consumers, Government has introduced a clause in the GST bill known as 'Anti-Profiteering Rules' which mandates the firms/businesses that any reduction in cost due to Input Tax Credit has to be passed on to the consumer by way of commensurate reduction in prices.

  • There may be potential increase in prices is possible due to increased compliance cost, especially for small and medium enterprises, which brings us to the next part that how GST can affect consumers through its impact on production, businesses and supply chain processes.

  • Abolition of check posts at interstate borders and this uninterrupted movement of goods across the country is likely to have a significant reduction in terms of transportation cost as well in terms of time requirement, thereby bringing the overall cost down.

 

7. Profiteering, a GST implementation challenge

7.1. Effect on GST Consumer Prices

  • The general perception is that GST will lead to fall in prices as it will lead to -

  • Removal of the cascading effect

  • Reducing cost of transportation and also loss of goods during transportation

  • But still it is hard to say what the exact impact of GST will be. It may increase or decrease depending on the slab in which a particular good is going to fall. But definitely it is going to increase transparency for the consumers by showing the actual incidence of taxes on them unlike the old system in which there were several hidden taxes/costs of which the final consumer was unaware of.

 

7.2. Anti-Profiteering Authority

  • Central GS TAct specffies that "Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices."

  • Post GST Rollout, the biggest concern of the policy makers is to make sure that consumers get the benefit of reduced tax burden on goods and services that the new indirect tax code offers. This concern is significant considering that countries like Malaysia and Australia had reported cases of profiteering during their shift to GST.

  • The steps are being taken to make sure that businesses and traders pass on the benefits to the consumer—

  • setting up an anti-profiteering authority and

  • creating awareness among traders and consumers

 

Need for Anti-profiteering Authority

  • Apart from the global experience (case of Australia and Malaysia), there is another reason which calls for need for such an authority.

  • Under the earlier system, consumers could only see the value added tax (VAT) charged by states at the retail level or the service tax levied by the central government but not the taxes that get built into the product or service at previous stages of production or supply. Examples include excise duty levied at factory gate or the duty paid by a telecom company on the equipments it uses.

  • Unlike the convoluted and opaque indirect tax system that existed before, GST is transparent and lets the final consumer know the actual tax incidence on a commodity or service, which gives the impression that the tax rate has gone up.

  • But the system of input tax credits at times leads to actual fall in prices for certain goods and commodities.

  • The GST rate on telecom services, for example, has gone up to 18 per cent from the earlier 15 per cent service tax rate. This, the telecom services industry fears, will lead to increase in telephone bills. The government has clarified that tax credits available to companies from the service tax paid earlier on spectrum payments and import of equipment will more than offset the tax rate hike. "All of these (tax credits) would reduce the telecom companies' liability to pay GST through cash to about 87 per cent of what they paid in the last fiscal," the clarification said.

  • Hence, there is need for anti-profiteering authority to make sure that such reduced benefits are passed on to consumers.

 

National Anti-profiteering Authority

  • According to the rules, the Authority will have a 3 tier structure, including a Standing Committee on Anti-profiteering, State-level Screening Committees, and a National Anti-profiteering Authority.

  • The proposed anti-profiteering authority chaired by a secretary-level official to enforce this provision will refer suspected cases of profiteering to the director-general of safeguards, a body under the Central Board of Excise and Customs (CBEC) for detailed investigation. 

 

The main functions of this authority are -

  • To ensure that the benefits that accrue to entities due to reduction in costs is passed on to the consumers. Also, entities that hike rates inordinately, citing GST as the reason, will be checked by this body.Once the registered entity, which has profiteered illegally, is identified, it can be asked to.One, reduce prices if it has hiked prices too much and ,Two, if price reduction due to GST has not been passed on to consumers, to return to the consumers the sum equivalent to the price reduction along with 18 per cent interest from the date the higher sum was collected.The authority can impose penalty on the profiteer or cancel its registration in extreme cases .Its orders can be appealed in High Court only.

  • While this sounds a stringent provision, the idea of the government is to have an effective deterrent and use it only in large scale profiteering across an industry or product rather than getting into micromanagement of prices in a free market economy.

  • The Council's focus on anti-profiteering measures stems from the desire that lower prices thanks to reduced tax burden will cool retail inflation which will help in boosting demand in the economy and improve tax buoyancy. Higher tax revenue will, in turn, help central and state governments to spend more on welfare measures and infrastructure.

  • To a great extent, competition in the market is likely to make sure that businesses pass on any benefit to consumers, as no firm would like to lose market share.

 

Transitional Challenges in GST

  • IT Preparedness and Infrastructure: GST is an IT driven law and it cannot be assured whether all the States and Union Territories in India are currently equipped with infrastructure and requisite manpower to embrace this law. Except few States like Karnataka, Maharashtra and Gujarat, who have pioneered the E-Governance model, we have not heard about this trend in other States and Union Territories. In some States, even today only manual VAT returns are in vogue.

  • Officers Training: In any new law, the old law as well as the new thought process of trust needs to be imbibed. The unlearning of the old law and learning GST provisions is imperative. All central and state government officers whether in VAT, service tax, excise or customs would have to learn the GST provisions and possible implications viz, a viz present gamut of taxes.

  • Further, GST law heavily banks on Information Technology and hence proper training has to be given to the departmental officers for effective usage and implementation.

  • New Registrants: GST is expected to bring within its fold many new registrants, who have been hitherto kept outside the purview of tax mainly due to exemptions and also since the taxable event is wider in scope in GST. Transition of existing registered assessees and registration of new assessees and resolving of migration issues is a big challenge.

  • Transitional Issues: There are many areas, which have to be addressed as a part of transition to GST. There are concerns about registration, carry forward of credits and taking new credits, pending refund/rebate claims, review of contracts, change in taxable event for incomplete transactions, pending assessments, job work transactions, treatment of stock in hand, filing of returns etc.

  • Pending Cases/ Past Disputes: There are many disputes pending in the context of present indirect tax laws (both Centre and State), which are at various stages viz., adjudication or appellate level. With GST now implemented, the Government should find ways and means to resolve these disputes. A possibility of introducing a dispute settlement scheme on the lines of 'Kar Vivad Samadhan Scheme' needs to be explored, which would enable the litigants to resolve pending matters under earlier laws.

  • If the past disputes are allowed to continue then the adjudicating/appellate authorities and Courts/Tribunals would be pre-occupied with old cases and would not have time to resolve any issues/disputes cropping up under GST law.

  • Tax Administration (Alignment/Merger): With GST structure in place both the Centre and State level officers are expected to work under one roof and in tandem by giving up their differences and non-alignment in the old

Yojana August 2017

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