Welcome GST Indian GST: Goods and Services Tax – Overview & Framework

  1.        Introduction

1.1.      Goods and Services Tax (“GST”) is a
landmark indirect tax reform knocking at our doors. The framework for the
proposed GST Law is provided through the Constitution (101st) Amendment Act,
2016. Section 12 of the said Act dealing with the constitution of the GST
Council was notified on 12.09.2016 and the balance sections of the said Act
have been notified with effect from 16.09.2016 vide Notification No. F. No.
31011/07/2014-SO (ST). In view of sections 17 and 19 of the said Amendment Act,
many of the existing indirect taxes can continue only up to a period of one
year from the above notified date i.e. Existing levies like central excise
duty, value added tax, central sales tax, etc. cannot continue after
16.09.2017. The Union Finance Minister has therefore reiterated the commitment
to introduce GST w.e.f. 01.07.2017.

1.2.     In June 2016, the Empowered Committee of
the State Finance Ministers released a draft of the proposed GST Law for public
comments. Based on the public comments received, the GST Council Secretariat
released a revised draft of the proposed GST Law for education of the trade.
The revised draft of the proposed GST Law is the basis of this article.

2.        Dual Model of GST

2.1.     GST is proposed to be a comprehensive
indirect tax levy on manufacture, sale and consumption of goods as well as on
the services at a national level. In an utopian situation, the tax has to be a
singular tax on all supplies with a uniform rate and seamless credits for taxes
paid at the earlier stage. The current distinction between goods and services
and between concepts of manufacture, sale, deemed sales, etc. should be
subsumed in such a utopian GST.

2.2.      However, considering the federal structure
of India, the Empowered Committee of State Finance Ministers have worked out a
dual GST model for India. In this model, both the Central and the State
Governments would levy Central GST (“CGST”) and State GST (“SGST”) respectively
on the same comprehensive base of all supplies, thus eliminating the
distinction between goods and services for the purpose of levy of tax.

3.        Destination Based Consumption Tax

3.1.     Since the State Governments would also
have jurisdiction to levy tax on supplies, the need for addressing issues
related to interstate supplies arises. GST is designed to be a destination
based consumption tax and therefore in case of interstate supplies, the tax on
the interstate supply must accrue to the destination State. This would also
enable seamless flow of credit in case of interstate supplies for business
purposes.

3.2.      Extending the principle of destination
based consumption tax, supplies imported into the country would attract GST
whereas supplies exported from the country need to be zero rated (i.e. not
liable for payment of GST with unfettered input credit).

3.3.    To enable a smooth implementation of the
above propositions, the interstate supplies, imports and exports are governed
by an Integrated GST(“IGST”). The IGST rate is proposed to be determined by
considering the CGST and SGST Rates. Effectively, in IGST, there would be two
components i.e. CGST and SGST, out of which, the portion of CGST will be held
by the Central Government and the portion of SGST will be transferred to the
destination State Government. Thus, for IGST, the Central Government will work
as a clearing house for the states where consumption takes place. IGST will
also enable smooth flow of credits between the origin and the destination
States.

3.4.   In order to ensure smooth flow of credit
and reduce the documentation requirements, IGST is proposed not only on
interstate sales but also on interstate supplies including branch transfers.

4.        Salient Features of Constitution
Amendment Act

4.1.     The term ‘GST’ is defined in Article
366(12A) of the Constitution of India to mean “any tax on supply of goods or
services or both except taxes on supply of the alcoholic liquor for human
consumption”.

4.2.    Article 366(26A) of the Constitution of
India provides that “services means anything other than goods”.

4.3.     Various Central and State taxes will be
subsumed in GST. All goods and services, except alcoholic liquor for human
consumption, will be brought under the purview of GST. Petroleum and petroleum
products (Crude Petroleum, Petrol, Diesel, and ATF) have also been brought
under GST. However, it has also been specifically provided that petroleum and
petroleum products shall not be subject to the levy of GST till a date to be
notified. Till such time Petroleum products will continue to attract excise
duty.

4.4.    Article 246A of the Constitution is
inserted in the main body of the Indian Constitution after Article 246 to
empower both the Centre and State to legislate on a common matter i.e. Goods
and Service Tax. The power to make laws on Inter-state transactions has been
kept exclusively with the Central Government.

4.5.     Article 279A of the Constitution has been
introduced for creation of Goods and Service Tax Council, a constitutional body
which will be a joint forum of the Central and the State Governments. This
Council will make recommendations to both the Central and State Government on
important issues like tax rates, exemptions, threshold limits, disputes
resolution for GST. The GST Council is envisaged as a recommendatory body with
the Union Finance Minister as Chairperson, Minister in charge of Finance or
Taxation or any other Minister nominated by the each State Government as
members and Union Minister of the State in charge of Revenue as Member of the
GST Council.

5.        Legislation – Draft GST Laws

5.1.      The dual GST model would be implemented
through multiple statutes:

–   An enactment by the Centre to govern the
collection and administration of CGST

–   An enactment by each of the States to govern
the collection and administration of SGST

–  An enactment by the Centre to govern the
collection and administration of IGST

–   An enactment by the Centre to govern the
collection and administration of Cess earmarked for grant of compensation to the
States for revenue loss on account of implementation of GST.

5.2.    While there would be multiple statutes for
collection and administration of different variations/components of the GST, it
is expected that the basic features of law such as chargeability, definition of
taxable event and taxable person, measure of levy including valuation
provisions, basis of classification etc. would be uniform across these
statutes. For the said purpose, the GST Council will recommend a draft
legislation for adoption by the State Governments. The GST Council is likely to
finalise the said draft GST Law very soon. However, full autonomy would be
available to the respective State Governments to deviate from the suggested
draft legislations, if there is a need for the same.

6.        Provisions relating to Levy and
Collection

6.1.    The
levy of tax on intrastate supply of goods and/or services is governed by the
CGST/ SGST Act whereas the levy of tax on inter-state supply of goods and/or
services is governed by the IGST Act. 

6.2.     Therefore,
the classification of a supply as intrastate supply or interstate supply
becomes paramount to determine the applicable taxes. This classification is
based on the combination of “location of supplier” and the “place of supply”
and is provided under the IGST Act. The provisions are tabulated below for
ready reference:

6.3.      It may be noted that the above
classification is subject to certain exceptions provided under the IGST Act.

7.        Supply

7.1.      The term “supply” is defined u/s. 3 of the
CGST/SGST Act. The said definition also applies to the IGST Law. The said
supply can be either taxable supply or an exempted supply.

7.2.     All forms of supply like sale, transfer,
barter, exchange, license, rental, lease or disposal and importation of
services are made liable for GST. However, it is important that such supplies
should be for a consideration and that the supplies should be in the course of
or furtherance of business or commerce.

7.3.    In addition to supplies for consideration,
Section 3(1) also includes supplies mentioned in Schedule-I without a
consideration. Notable inclusions in Schedule-I are as under:

–  Permanent transfer/disposal of business
assets, in cases where input tax credit has been availed

–  Supply of goods and/or services between
branches or between related persons

–   Supply of goods by principal to agent and vice-versa

–  Importation of services from overseas
branches

8.  Valuation & Rate/s of Tax 

8.1.      In general, GST would be payable on the
value of supply. While the general provision u/s. 15 states that the value of
supply shall be the transaction value, the same is subject to the following
conditions:

      –     Supplier and recipient of supply not
related

          –      Price is the sole consideration.

8.2.      The proposed GST Rate would be determined
based on the principle of Revenue Neutral Rates (RNR). ‘Revenue Neutral Rates’
(RNR) in layman terms, is the rate that allows the Central and States to
sustain the current revenue from tax collections.

8.3.      Based on the announcements made by the GST
Council, the following broad classifications of rates are proposed in upcoming
regime of GST:

–  Nil Rate for essential goods and services

–  Merit Rate for essential goods – 5%

–  Lower Standard Rate for goods and services –
12%

–  Standard Rate (RNR) for goods and services in
general – 18%

–   Demerit Rate for goods – 28%

–  Special rate for precious metals – yet to be
decided.

8.4.     In addition to the above, certain goods
classified under the 28% rate may also bear a cess which will enable the
compensation to be paid by the Centre to the Revenue loosing States.

9.        Exemptions & Composition Scheme

9.1.      Most of the exemptions currently available
will be phased out. However, section 11 of the Act permits the Government to
grant exemptions through the issuance of notifications. Further, certain goods
and supplies may be covered under the NIL rate under the Schedule

9.2.      A 
basic threshold exemption limit of Rs. 20 lakh has been provided.
Further, in order to facilitate small tax payers, an optional composition
scheme has been prescribed for persons having aggregate turnover of up to Rs.
50 lakh. The composition option is not available to the following persons:

–         Service Providers

–         Persons making inter-state supplies

9.3.     The Composition scheme is subject to
various conditions. The supplier is not eligible to claim the credit nor is he
entitled to collect the tax from the customer. Further, the customer is not
eligible for any credits of the composition amount.

9.4.   The following table explains the minimum
amount of tax payable under composition scheme:

10.      Time of Supply

10.1.    The liability to pay tax arises at the time
of supply. The following provisions are relevant in this regard.

10.2.    In general, the liability to pay GST arises
on the raising of invoice or receipt of payment whichever is earlier. However,
it is also provided that in case where the invoice is not issued within the
prescribed time, the date on which the invoice is required to be issued will
trigger the GST Liability.

11.      Place of Supply for Goods

11.1.    Section 7 of the IGST Act defines the place
of supply of goods other than imported and exported goods. The said provisions
are fundamentally different from the current provisions since they are based on
the destination principle rather than the origin principle.

11.2.    The following table summarises the place of
supply of goods as defined under the GST Act and under the IGST Act:

11.3.    Similarly, the place of supply for imported
/ exported goods is provided u/s. 8 of the IGST Act. The provisions are simple
and are therefore tabulated below for ready reference :

12.      Place of Supply for Services

12.1.  The concept of IGST serves multiple
objectives. Since the services are essentially intangible in nature, the place
of supply rules for services are drafted considering these objectives in
mind.  Further to the above objectives,
the place of supply rules under IGST also need to deal with situations of
supplies amongst two or more States, where also the guiding principle is
ensuring a seamless flow of credits amongst businesses and transfer of tax to
the correct State of Consumption.

12.2.    The following table summarises the
provisions in regard to the place of supply of services. It may be noted that
if the location of service recipient is not available on records, the location
of supplier will be considered in cases where the place of supply is the
location of recipient of service.

13.      Input Tax Credit

13.1.    Input Tax Credit mechanism is the core of
the GST Regime. The provisions of input tax credit are contained in section 16
of the Act. The salient features thereof are as under:

–   Input Tax credit will be allowed only to
registered persons

–  On registration, credit would also be
available for inputs and finished goods lying in stock on the date of
registration.

–   Credit to be calculated based on generally
accepted accounting principles as may be prescribed.

–   Proportionate credit in case certain goods
are used for business as well as non-business purposes

–  Certain cases of ineligible input tax credit
are also prescribed.

13.2.    Some examples of ineligible credits are
provided below for ready reference

– Motor vehicles unless used for transportation
of goods

–  Food and Beverages unless the same is used
for the purposes of further business in F&B

–  Employee related goods/ services

– Goods/ services resulting in construction of
immovable property for self-consumption

–  GST paid under the composition scheme

–  Goods for personal consumption

–   Goods lost, destroyed, stolen, written off or
disposed off by way of gifts or free samples

13.3.    Fungibility of credit: The rules relating to
fungibility of credits and priority of adjustment are as under

13.3.1. The input tax credit on account of IGST during
a tax period shall first be utilised towards payment of IGST; the amount
remaining, if any, shall be utilised towards the payment of CGST and SGST, in
that order.

13.3.2. The input tax credit on account of CGST during
a tax period shall first be utilised towards payment of CGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.3. The input tax credit on account of SGST during
a tax period shall first be utilised towards payment of SGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.4. No input tax credit on account of CGST shall be
utilised towards payment of SGST.

13.3.5. No input tax credit on account of SGST shall be
utilised towards payment of CGST.

13.4.    Section 16(2) of the Act also prescribes for
certain documentation before the credit can be claimed, such as possession of
tax invoice, goods/ service should have been received, tax has been actually
paid by the supplier and return has been furnished under the applicable
section. Similarly, it is also stated that the payment of tax by cash or credit
by the supplier is necessary to claim credit. Similarly, it is important that
the payment is made to the service provider within a period of 3 months.

14.      Procedural Aspects

14.1.    Under the GST Law, credits will be available
on the basis of online matching of credits. Towards that goal in mind, a
detailed procedure has been prescribed for periodic filing of statements,
online matching and submission of returns. The following chart explains the
process as a bird’s eye view.

14.2.    Elaborate rules are also prescribed for
payment of taxes, grant of refunds, assessment, audits, demands and
enforcement. Further, penal provisions are also prescribed for various offences
listed under the proposed Act.

15.      Transitional Provisions

15.1.    The model GST Law contains various
provisions dealing with transition related issues. The said provisions deal
with migration of registrations of existing taxpayers into the GST Regime and
thereafter deal with issues relating to credits, payment of taxes and certain
procedures.

16.      Anti Profiteering Measure

16.1.    Sensing the risk of GST resulting in
widespread inflation, the Government has introduced an anti profiteering
provision under the Model GST Law. Accordingly, it is proposed that an
authority shall be set up to investigate such cases and impose penalties as
deemed fit.

17.      Conclusion