- What is goods and services tax?
- Why GST?
- Tax rates under GST
- Advantages of GST
- GST Administration
- GST Council
- GST Network
- Tax Administration
- Challenges and Future
1. What is Good and Services tax?
- It is a single tax on the supply of goods and services, right from the manufacturer to the consumer
- GST essentially a tax only on value addition at each stage . This means if the value of the good increases at any stage, the increase in value will be taxed
- The input taxes paid would be carried on to the next stage but can be claimed back by the payee as the input tax credit
Example, to make a car, we need raw steel, which will be turned into different parts of the car. As the simple steel turns into a value product, tax is added. But the final consumer will bear only the GST charged by the last dealer in the supply chain, which would have subsumed all the value added taxes in the supply chain.
What is the difference between services tax and goods tax ?
Goods are the things we generally feel in the physical form. For example pizza in the restaurant is a good. In the same pizza bill one more cost will be included, it is for serving the pizza to you. Tax charged on that service cost is the service tax.
2. Why do we need new tax regime?
Presently there are many taxes in our system. Taxes exists at the central level, state level and with in a state also. Tax rates are different in same sectors in different regions. The taxes include excise duty, sales tax, service tax, octroi(entry tax), customs duty etc. Some of these taxes are levied by the centre and some by the states. All these are very confusing and we need a simple taxation system. The complex system has made compliance and tax collection difficult. Lack of proper monitoring and transparency has encouraged tax evasions. The business locations get skewed because of the different taxes and tax concessions in different states. Surprisingly, the hill state of Uttarakhand turns out to be manufacturing state, because of its tax regime.
How the GST would overcome this problem?
GST seeks to address challenges with the current indirect tax regime by
- Broadening the tax base
- Eliminating cascading of taxes
- Increasing compliance, and
- Reducing economic distortions caused by inter-state variations in taxes.
What is cascading of taxes?
It is taxation over taxes. When goods and services are passing through the supply chain, each step will be taxed separately. For example in the manufacturing of a garment, the garment maker pay taxes on the cost of the garment he or she sells. Here the cost of garment is input price for the cloth and making charges of the garment. In the input cloth price, the tax for the cloth is also included. So when garment is taxed again, the tax paid for cloth also gets taxed. This is tax over the tax. This cascading effect will increase the overall price.
Where as GST is a value added tax. It means taxation will be done only on the incremental value addition in each step of the supply chain. In the above example, if it was GST, the garment maker pays only the tax for the designing and stitching. And the cloth manufacturer pays the tax for the cloth.
In what way the GST is different form VAT?
VAT is also a value added tax. It was introduced to eliminate the problem of cascading. The union government levies the Central VAT(CENVAT). All states have adopted the concept of VAT for state sales tax. The issue of cascading taxation was partly addressed through the VAT regime. However, certain problems remained. For example, several central and state taxes were excluded from VAT. Further, goods and services were taxed differently. The central VAT and state VAT were not integrated. Therefore, sales tax of state was applicable to the already paid excise duty of centre (CENVAT) (cascading not eliminated).
Some of these challenges are sought to be overcome with the introduction of the Goods and Services Tax (GST).
In GST regime both centre and state taxes will be streamlined, so no cascading occurs across central and state taxes.
3. Tax rates under GST
Globally, common feature in GST is a single tax rate for any service or goods(ONE NATION,ONE TAX). But in India, there is no one rate formula; instead goods and services are categorised into different tax slabs.
The segregation of goods and services are based on the factors like,
- Essentiality of the goods – lower rates for essential goods, because they will not be affordable for poor if taxed at higher value
- Luxury items and goods harmful to health etc. which can be taxed at higher rates
- Tax neutrality – it means when we are shifting to new regime, the over all tax burden on public should not be increased and at the same time, the tax revenue of government should not be reduced
The different tax rates are
- Zero rated tax: Essential items including food grains and milk will be taxed at zero rate
- Five percent tax: The lowest rate of 5% would be for common use items like sugar, edible oil, tea etc
- 12% and 18% tax: There are two standard rates of 12 per cent and 18 per cent, in which will fall the bulk of the goods and services. This includes fast-moving consumer goods(FMCG) or consumer packaged goods (CPG) and capital goods.(FMCG are products that are sold quickly and at relatively low cost. Examples include non-durable goods such as soft drinks).
- 28% tax: This will be applicable to items which are currently taxed at 30-31%.Ultra luxuries, demerit and sin goods (like tobacco and aerated drinks), will attract a cess for a period of five years on top of the 28 per cent GST.
- The Clean Environment Cess is retained on the fossil fuels
Are there any tax sops for industry?
Ideally there will be no exemptions. The present law says that if any state or the Central government wants to give any incentive to industry, it would be through direct benefit by the way of reimbursement of tax, not by exempting them from the tax.
What are the products excluded from the general tax bracket?
- The Bill excludes alcoholic liquor for human consumption from the purview of GST.
- GST will apply to five petroleum products i.e.petroleum crude, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel at a later date, to be decided by the GST Council.
- Sale of land and buildings will be out of the purview of GST. Such transactions will continue to attract the stamp duty. But leasing of land, renting of buildings as well as EMIs paid for purchase of under-construction houses will come under the Goods and Services Tax.
- While solar panels and other equipment used for power production will come under GST, the final product—electricity—has been kept out.
- Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco.Thus the applicable tax would be 28 per cent plus cess.
- GST will be applicable on imports along with the Basic Customs Duty which has not been scrapped.
- Provides for appropriate countervailing duty (an import tax imposed on certain goods in order to prevent dumping at lower rates by other countries or to neutralise the export subsidies in other countries)
- The additional 1% tax levied on goods that are transported across states
- The GST rates for services are also at different slabs of Nil, 5%, 12%, 18% and 28%
Implications of an non ideal GST regime
- Deferring the levy of GST on five petroleum products could lead to cascading of taxes.
- The additional 1% tax levied on goods that are transported across states dilutes the objective of creating a harmonised national market for goods and services.
- Keeping real estate out of GST will facilitate tax evasions and black money generations.
4. Advantages of GST
A. GST ensures no tax evasion
The input tax credit mechanism ensures compliance over the whole supply chain. This can be explained through an example as follows;
The example taken here is manufacturing of a mobile phone. Tax rate is assumed to be 10% for all goods and services at all stages.
In the above example, total taxes collected amounts to 100 + 120 + 130 (Rs.350), and 100+120(Rs.220) is claimed back by the sellers. So net tax collection is Rs.130, Which is what paid by the consumer at the end. Without input tax credit mechanism, sellers at each stage will not be able to claim back the taxes already paid. Thus input tax credit mechanism helps to avoid tax over the taxes. Also, the sellers at any of these stages cannot claim input tax credit, if the person from he or she purchases, have not paid the tax. Thus a business person takes care to buy from only those people, who pay the taxes. This self checking mechanism keeps the whole supply chain under the tax net. Thus the chances of tax evasion are reduced.
B. For government
- More products comes under tax net as chances of evasions are reduced. This increases government’s income
- Simpler tax administration and lesser costs of tax collection
- Digitalisation of tax administration and increased transparency
C. For Business
- Improved transit speed as border check posts are done away with. This means lesser transportation costs
- Since tax rates are same through out India, industrial locations can be decided on other factors ( now no need of flocking in hill states like Uttarakhand)
- Simpler tax regime ensures ease of doing business
- Widening of tax base gives level playing filed for all
D. For Common man
- Costs of products can decrease if the business costs and transportation costs reduces
- The cost of some services will increase, where as that of some goods will decrease
- The overall tax burden will be most probably neutral or negative
5. GST Administration
The GST Council, that includes representatives from the centre and all states, will make recommendations on the implementation of GST. All decisions of the GST Council will be made by three- fourth majority of the votes cast; the centre shall have one-third of the votes cast, and the states together shall have two-third of the votes cast.
5.1 The GST Council
- The Union Finance Minister (as Chairman)
- The Union Minister of State in charge of Revenue or Finance
- The Ministers in charge of Finance or Taxation or any other Minister, nominated by each state government
The GST Council will make recommendations on:
- The taxes, cess, and surcharges to be subsumed under the GST
- The goods and services which may be subject to, or exempt from GST
- The threshold limit of turnover for application of GST by the firms
- Rates of GST
- Model GST laws, principles of levy, apportionment of IGST(Interstate GST) and principles related to place of supply
- Special provisions with respect to the eight north eastern states, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand
- Any other related matters
The GST Council may decide the mechanism for resolving disputes arising out of its recommendations. A central law will prescribe the manner in which the IGST will be shared between the centre and states, based on the recommendations of the GST Council
5.2 GST Network(GSTN)
GSTN is National Information Utility (NIU) which provides reliable, efficient and robust IT Backbone for the smooth functioning of the Goods & Services Tax regimen.
- Provide common and shared IT infrastructure and services to the Central and State Governments, Taxpayers and other stakeholders for implementation of the Goods & Services Tax (GST).
- Provide common Registration, Return and Payment services to the Taxpayers.
5.3 Tax Administration
- There will be dual administration, 90% of all assesses with a turnover of Rs 1.5 crore or less will be assessed for scrutiny and audit by state authorities, the remaining 10% by the Centre. Above that limit, Centre and states will assess in a 50:50 ratio.
- Each taxpayer would be assessed only by one authority. Both centre and states will have intelligence based assessment powers.
- Territorial waters extending to 12 nautical miles fall under control of the union government but the states will be empowered to collect tax on any economic activity in this zone.
6. The Challenges and Future
The Challenges include,
- Global experiences show that the GST will fuel inflation for the short term. The 18% taxation of services such as restaurants, movies etc. are bound to increase prices.
- Inclusion of the sectors exempted now into the GST network in future.
- Poor internet connectivity – particularly in north east. The implementation of GST requires high-speed connectivity between the GST server and the State VAT data centre, and also between District VAT office and State VAT office since the processing of returns, among other processes, is done online. Additionally, all dealers have to upload invoice-wise details online
- Tax buoyancy – the tax revenues must increase more than proportionately in response to a rise in national income or output, which has not happened in India till now
- Simpler and more competitive tax regime – should have parity in prices within the value chain and also Indian products could compete in global markets.
- Reduction in prices – more products should come under tax net and the tax rates should reduce.The benefits should be passed on to the customers
- Lesser compliance costs – A compliance cost is expenditure of time or money in conforming with government requirements such as registration.
- Improvement in ease of doing business