Updation on GST

GST is India’s most far reaching tax reform and aims to integrate the country into a common market by dismantling fiscal barriers between states. The introduction of GST is expected to lower the cost of doing business, which will eventually translate into lower prices for the customers.

GST, known as Goods & Service Tax has already been adopted by 140 countries in the world. Most of the countries has a unified GST system. Brazil and Canada follow a dual system where GST is levied by both the Union and State governments. France was the first country to introduce GST system in the year 1954.

In India, the  common tax on goods and services known as “ Goods & Service Tax “ has been accepted in principle to replace and subsume Indirect taxes in the nature of –

Central Excise Duty, Additional Excise Duties, The Excise duty levied under the Medicinal and Toiletries Preparation Act, Service Tax, Additional Customs Duty, Special Additional Duty of Customs, Surcharges and Cess;

On State level, it will subsume –

VAT/Sales Tax, Entertainment tax, Luxury tax, Taxes on Lottery/betting/gambling, State Cesses and Surcharges on goods and services, Entry tax  and Purchase tax;

The empowered committed headed by former Chief Minister of West Bengal has already released its first discussion paper on GST on November 10, 2009 after lot of deliberations amongst the State Finance Ministers and study of various models of GST.

A meeting of the empowered committee of the State finance ministers on the proposed GST was held on 19.08.2011 under the Chairmanship of Shri Sushil Modi, Dy. Chief Minister of Bihar, who is now the Chairman of the Empowered Committee. Issues on the compensation package resulting from the reduction of CST rate were discussed. In this meeting the proposed amendment in the Constitution was also discussed. Some of the States expressed their concerns over fiscal autonomy of the States.

The constitutional amendment is currently with the standing committee of finance, chaired by the BJP’s Yashwant Sinha, former Union Finance Minister.

Shri Sushil Modi expressed the hope that if every body cooperates, the GST would be rolled on 1^st April, 2012. Next meeting of the empowered committee is scheduled to be held in the last week of September to discuss the provisions of the constitutional amendment threadbare.

States have expressed their concerns on the issue of appointment of dispute settlement authority, power given to the local bodies for collection of tax, inclusion of declared goods and compensation package resulting from the reduction of CST from 4 to 2%.

A presentation was made by Shri Nandan Nilekani before the empowered committee on the GSTN (GST network) and the members gave an in principle approval on the same.

Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST.  Sales Tax/VAT can be continued to be levied on alcoholic beverages as per the existing practice. In case it has been made Vatable by some States, there is no objection to that. Excise Duty, which is presently being levied by the States may not be also affected.

Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre may be allowed to levy excise duty on tobacco products over and above GST without ITC.

Tax on Petroleum Products: As far as petroleum products are concerned, it was decided that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is the prevailing practice in India. Sales Tax could continue to be levied by the States on these products with prevailing floor rate.  Similarly, Centre could also continue its levies.  A final view whether Natural Gas should be kept outside the GST will be taken after further deliberations.

Both the Centre and the States will have concurrent power to levy tax on all goods and services.

The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.  The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases.

For the sake of simplicity and easy to administer, a common PAN based tax payer ID, a common return and a common challan for tax payment have been agreed by the States and Centre.

Some of the issues like tax rates, revenue sharing between States and Centre, framework for exemption, threshold limit and functioning of the Dispute Resolution Authority are still to be resolved.

On the Information Technology, there has been a consensus that there will be a common portal providing three core services – registration, returns and payments. It is being ensured that filing of returns should be simple and easy.

It is being envisaged that adequate preparations must be done to ensure smooth migration for small taxpayers to GST. For small tax payers extensive consultations, education and training would be imparted and facilitation centers would be set up around the country.

While State tax authorities would be responsible for collecting SGST and common file formats and frame assessments, Central Board of Excise & Customs would be responsible for collecting CGST and IGST. RBI will facilitate the interface with various banks to facilitate movement of state’s and centre’s funds and fund settlement.  Banks will accept tax from the tax payers and process challans.

A provision for Tax Return Preparers (TRPs) is also being made. It means more employment opportunities for professionals.

Under the GST, inter-state trade will be subjected to IGST. Under IGST, the tax paid by the selling dealer in the exporting state will be available as ITC to the purchasing dealer in the importing state. This would require verification of ITC claims and transfer of funds from one state of another. Further, in an interstate business to consumer transaction, tax collected in one state has to be transferred to another state.

GSTN, called Goods & Service Tax Network portal is being designed to build intelligence in the system to plug leakages and this would a pass through device. The tax payer files the returns with GSTN which keeps a copy of the return for analysis and forwards it to the respective state and CBEC. After the tax payer pays the actual duty or tax in the bank, the bank will upload the challan details into the GSTN.

GSTN portal would reconcile the returns and challans. It will also act as tax booster, matching the input tax credit in the challans to detect tax evasion. It can also integrate with various other systems at MCA and CBDT for corporate details and PAN verification.

Suddenly the GST has come to the forefront and appears to be on the fast track. If the issues raised by few States on the Constitutional amendment are resolved, it will catch the proposed date of April, 2012.

The Constitutional Amendment Bill is currently with the Standing Committee headed by former Union Finance Minister, Yashwant Sinha. If this committee, after taking opinions from the

stakeholders, submits its recommendations, the Bill can be passed in Winter session of Parliament.

The Central GST Bill could be presented in the Budget session of the Parliament and passed. Simultaneously all the 28 States can introduce their State GST Bills in assemblies and get these passed.

Our Central Excise Tariff and various Schedules of the States have numerous Heads and Entries and inspite of this, lot of litigation arises on account of ill-drafted entries. Many disputes and litigation go up to the Apex Court and are decided after a long legal battle.

After studying the various models of GST functioning around the world, a new mechanism of  “ Negative List”  is being mooted. This is being followed globally in which the exempted goods and services are listed in the Negative List and rest of the goods and services are made taxable service. If this approach is accepted and adopted, then litigation would only be restricted to negative list. Currently the Central Excise Tariff runs into around 650 pages and 120 services are taxable services.

Negative list of goods and services would make it easy to identify the goods and services which would be covered by GST.

The finance ministry has prepared a list of 27 essential services, which will be exempt from tax. Similarly a negative list of goods, which would be exempt from tax is also being prepared.

This approach of preparing negative lists is a very good step for minimizing the litigation and improving the revenue collection. Let the negative list be initially wide but the entries could be deleted if the Government would like tax any goods or services in due course of time.

This approach would also minimize the corruption in the system when the authorities try to forcibly tax the dealers and assessees by stretching the meaning of an entry in the schedule.

It is expected that if the GST is implemented, there could be annual increase of revenue of around 1.2 lakh crore at the current level.

The Union government has proposed a study tour of state’s finance ministers to study the indirect tax regime prevailing in the Europe. As many as 20 finance ministers are participating in this tour. The group is leaving India on 7^th September. The group will fly to Paris and Spain to study how GST works there. The group, then would proceed to Belgium and Luxembourg to look at their dispute resolution.

The work on GST is likely to pick up the speed in coming weeks. Shri Sushil Mody is also due to meet Yashwant Sinha, Chairman of the Standing committee on finance that is studying the constitutional amendment Bill on GST after the September meeting of the empowered committee.

The States have been asked to gear up for implementing an information technology network that will help leakages. The States are expected to move to the new IT network even if GST is not implemented on April 1, 2012.