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India's GST - One Nation, One Tax Regime


By Tax-News.com Editorial
November 7, 2018


Nigh on 17 years in the making, India's nationwide Goods and Services Tax (GST) regime was finally introduced on July 1, 2017, and rolled out nationwide a week later when the state of Jammu and Kashmir adopted the law. This special feature summarizes the GST regime and how the first year of its implementation has progressed.

Why The Need For GST?

GST is intended to be a growth-enhancing tax reform. It replaces a complex array of indirect taxes levied at both federal and state level which were widely thought to discourage inter-state trade and commerce.

Almost a dozen taxes have been subsumed by the GST regime. At federal level, these are central excise duty, additional excise duty, service tax, additional customs duty and special additional customs duty. State-level taxes replaced by GST include state value-added tax, entertainment tax, octroi, entry tax, purchase tax, luxury tax and taxes on lotteries, betting and gambling.

According to several analyses of the reforms, the GST will boost India's economic growth prospects considerably. Standard & Poor's for instance, has said that GST "is arguably the most important structural reform to date by the Modi Government, and will improve efficiency, cross-state trade, and tax buoyancy."

Why did it take so long?

It is not particularly surprising that such a comprehensive reform to a country's indirect tax regime would take a long time to complete. Nevertheless the road towards the introduction of GST in India has been a particularly long, hard slog.

The delays were largely due to the fact that the central Government and the more than two-dozen states had to agree to the removal of existing taxes, as well the finer points of the tax regime that would replace them. And with several influential states fearful that GST would deprive them of some revenue-raising powers and lead to them collecting lower amounts of tax revenue, the negotiations between the federal and state governments took considerably longer than expected. Indeed, the central Government eventually had to compensate the states for a period time after the introduction of GST.

Furthermore, legislation to change the Indian Constitution needed to be agreed and passed by parliament before GST could be introduced. This was when opposition parties exploited their majority in the upper house of parliament, the Rajya Sabha, to frustrate the BJP Government, which made the introduction of GST a top priority when elected in 2013.

The GST Constitutional (122nd Amendment) Bill 2014 was only finally endorsed by the upper house on 5 August 2016. The bill then received presidential assent on 8 September2016, to become the GST Constitutional (101st Amendment) Act 2016.

However, in a sense, the passage of the constitutional amendment bill was only half the job done. Certain key elements of the GST regime still needed to be agreed, such as rates and registration thresholds.

This was done under the auspices of the GST Council, formed after the passage of the constitutional amendment bill in September 2016. Chaired by the Union Finance Minister Arun Jaitley and with state governments forming its membership, the GST Council was created to push through a compromise between state and federal representatives, allowing the debate surrounding the settings for GST to take place largely behind closed doors and largely free from political interference.

A Summary Of The GST Regime

Like similar regimes elsewhere in the world, India's GST is a single tax on the supply of goods and services from the manufacturer to the consumer. Businesses can claim a tax credit for tax incurred on acquiring inputs when they make an onward sale. Therefore, only the final consumer bears the GST, charged by the last dealer in the supply chain.

However, India's GST system is distinctive in that it has three elements, as summarized below.

A Three-Tier System

Three laws govern the regime: the Central Goods and Services Tax (CGST) Act 2017, which provides for rules on the taxation of supplies of goods or services within a state (intra-state supplies); the Integrated Goods and Services Tax (IGST) Act 2017, which covers the same for supplies between states (inter-state supplies); and the Union Territory Goods and Services Tax (UTGST) Act 2017, which covers the rules on intra-union Territory supplies.

Although there will be three component parts to the GST, supplies will not be subject to multiple taxation. All supplies, except exempt supplies, will simultaneously be subject to both CGST and state GST (SGST).

With regard to inter-state transactions, central government is to levy and collect the IGST – equal to CGST plus SGST – on all inter-state supplies of goods and services.

Under the IGST system, the inter-state seller pays IGST on the sale of their goods to the central government after adjusting IGST, CGST, and SGST credits on their purchases (in that order). The exporting state then transfers the credit of SGST used in payment of IGST to the central government.

The importing dealer claims an IGST credit while discharging his output tax liability (both CGST and SGST) in his own state. The central government then transfers to the importing state the IGST credit used in payment of SGST.

Since GST is a destination-based tax, all SGST on the final product ordinarily accrues to the consuming state. CGST revenue generally goes to central government.

Rates

The regime features five main rates. The two most important are 12 percent and 18 percent – these are levied on most goods and services. A reduced 5 percent rate applies to some common, non-essential items, and a 28 percent rate is levied on 'luxury goods' and tobacco products. A further cess (supplementary tax) maybe levied on top of the 28 percent rate, potentially meaning that the indirect tax levies on certain supplies could exceed 28 percent.

Goods considered essentials are subject to a zero rate, and most services are rated at 18 percent. Exports are subject to a zero rate, in line with international norms.

On 10 November 2017, certain food items, machine parts and various other items were moved from the 18 percent to the 12 percent category. In addition, a large number of items were moved from the 28 percent to the 18 percent category.

On 18 January 2018, scientific and technical instruments, wickerwork and various other goods were moved to the 5 percent GST category. In addition, certain goods including bio-diesel and various chemicals were moved to the 12 percent category.

Registration Thresholds

The general GST registration threshold at INR2m (US$26,500), and INR1m in the north-eastern states.

Collection

Tax collection is divided between the states and the central government. States alone assess taxpayers with a turnover below INR15m, while businesses with turnover equal to or greater than this are assessed by central government and the states. Revenue is split 50:50 between the states and central government.

GST Returns

Most taxpayers are required to file four returns, covering their supplies and purchases, and monthly and annual returns. Others will file up to eight returns. Small taxpayers are permitted to file on a quarterly basis. Returns must be filed electronically.

New dealers are required to file an application for registration online with the Goods and Services Tax Network (GSTN) – the IT network underpinning the GST system. There is a single application for all tax authorities. Each dealer is given a unique ID – a GSTIN. Registration applications are approved within three days, although post-registration verification will be carried out where there is a risk of non-compliance.

Reverse Charge

The law also provides for the introduction of reverse-charge GST. A reverse charge – typically applied to counter non-compliance and fraud – requires the recipient to account for both output and input tax and to remit the amount to the tax authority. It is intended to ensure that a supplier cannot charge VAT and then disappear with the revenue without remitting it to the tax authority.

The Central Board of Excise and Customs issued a notice on 28 June 2017, outlining the types of supplies where the reverse change must apply. These include:

  • Certain services provided by a goods transport agency;
  • Services supplied by an individual advocate;
  • Services supplied by an arbitral tribunal to a business entity;
  • Services provided by way of sponsorship to any body corporate or partnership firm;
  • Certain services supplied by the central government, state government, Union territory or local authority to a business entity;
  • Services supplied by a director of a company or a body corporate to the said company or the body corporate;
  • Services supplied by an insurance agent to any person carrying on insurance business;
  • Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company; and
  • Services supplied by an author, music composer, photographer, artist or similar by way of transfer of, or permitting the use or enjoyment of, a copyright.

Reverse charge rules came into force on July 1, 2017.

Recent Developments

One thing that some people were fearing is that the implementation of GST would cause inflation to rise. This has not happened to any significant extent.

Checkpoints at state borders were abolished, and along with them went long queues of trucks waiting at the border for their goods to be processed. In parallel with this, the implementation of a single tax across the country has eased and encouraged inter-state business. This is largely due to the substantial benefits to storage and distribution.

Furthermore, the increased formalization of the economy has led to a greater level of compliance, which concurrently brings in more tax revenue. Nevertheless, there is still a long way to go for compliance to be fulfilled. More than 11.2 million businesses have now registered for GST – though the registration process has come under criticism for its laboriousness.

Partly to address the concerns of related businesses, many goods and some services have changed their rate category (in most cases it has been lowered.) It is thought that the rate categories will continue to be rationalized, and that the 12 percent and 18 percent tranches may at some point be merged.

Conclusion

The Central Government says that everybody wins with GST. The system is simpler and cheaper for the tax authorities and taxpayers to administer, in general, prices are expected to fall and become more transparent for consumers and the reform encourages inter-state trade, which should ultimately benefit the whole economy.

However, in some ways the new system hasn't got off to the most auspicious of starts, as evidenced by the publication of guidance after the introduction of the new law. The fact that the legislative delays truncated the amount of time that the GST Council spent on drawing up the GST framework probably hasn't helped matters.

Other criticisms have centred on the complex four-tier GST rate framework, which smacks of an uneasy compromise between central government and the states on the matter. In countries with similar consumption taxes, one standard rate is the norm, with one or two lower rates common.

Given the scale of the reforms and the Indian federal structure, GST was never going to go off without a hitch. And to say that this is one of the most important economic reforms since independence in 1947 is by no means over-selling its importance.

 

Tags: tax | India | services | business | Tax | law | compliance | trade | insurance | banking | tax authority | Other | excise duty | tax reform | legislation | commerce | copyright | food | luxury tax | Finance | gambling

 

 

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