Indian Goods and Services Tax – A Macro Overview

The Tax

India Goods and Services Tax (GST), a new consolidated
indirect tax, slated to be implemented from 1^st July 2017 as per
current indications, is a common tax on supply of both, goods and services, to
be commonly levied and collected by Centre, 28 States and 7 Union Territories,
on a common base, at common rates, having common procedures to be administered
fully electronically through a common digital platform.

Reaching this far, with an enactment, at the Central level,
of all the three laws, Integrated GST, Central GST, Union Territory GST as also
law for imposing Compensation Cess, an innovative instrument to collect tax for
distribution among State Governments for likely loss of revenue on GST
implementation, is no mean achievement.

Most rules are also finalised and agreed, rate schedules are
broadly agreed and announced and the State Governments are in the process of
enacting State GST Acts. This is an unparalleled accomplishment for a country
having a federal structure of governance, with population of over a billion
people and wide diversity in many ways.

We are all now waiting with bated breath for the
implementation of this historic indirect tax reform; a new tax structure which
has many unique and unprecedented features in the history of indirect taxation,
not only in India but around the world.

The Model – Australia, EU and Canada and India

Our new indirect tax system retains the basic principles of
value added tax system, adopts features of indirect taxation system of some
developed, more advanced/experienced nations, encompasses latest
recommendations of Organisation of Economic Co-operation and Development (OECD)
for consumption taxes and tops it with India’s unique challenges, traditions,
culture, level of development, and experience of our own taxation systems.

When we look around the world for comparables, we find that
Australia, Canada and EU have some comparable features in their tax reforms and
consumption tax models.

Australia consolidated wholesale sales tax and state level
duties and taxes into a federal level system of GST in 2000 and they adopted a
standard rate of 10 % (comparatively lower rate). So, they now have only one
Federal GST and states do not levy sales tax as also few other levies, duties
which they were levying prior to introduction of federal level GST described as
“New Tax System”. It used pricing control and anti-profiteering provisions to
monitor prices¹.

European Union Council issued a direction² in 1977
to all member nations to harmonise their national VAT systems through which tax
was levied on supply of goods and services; turnover taxes. The objective was
to achieve a common base for taxation, apply common meanings to the terms
“taxable person”, “taxable transaction” and others, common provisions relating
to place of supply of goods and services, common list of exemptions,
deductions, assessment basis and the like, so as to achieve non-discrimination
as to origin of goods and services and permit fair competition among member
nations. The system, in a way, is similar to our State Level VAT system (except
that it is at independent country level and includes taxation of services and
importation of goods); not comparable with our New GST system.

Canada has a federal structure of governance and they have
national as well provincial level (similar to States in our system) GST³.
The rate of the national level GST is uniformly applied across the country but,
States determine their own system of taxation including rate of tax on supply
of goods and services and they have varied systems. One province (Ontario) has
value added tax system described as Provincial Tax System, some provinces
impose tax only at retail level (British Columbia, Manitoba and Sasketchewan),
some provinces (Nova Scotia, Newfoundland and Labrador) have merged their
provincial taxes with national tax and adopted harmonised system of taxation
(HST) administered by national administrator, the Canada Revenue Agency, and
one province (Alberta) does not impose provincial tax at all⁴. So, this is also not comparable with Indian system of GST⁵.

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1   GST final report –
ACCC oversight of pricing responses to the introduction of the new tax
system-January 2003 –
https://www.accc.gov.au/system/files/GST%20Final%20Report.rtf

2   Sixth Directive,
77/388/EEC -17 May 1977 – ref http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV%3Al310063 Article 226b of the Sixth Directive

3   Introduced from
1.1.1991

4   https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)

5   https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)                                 

We, in India, have adopted dual model for taxation of goods
and services whereby Central Government and State Governments (including Union
Territories) will levy and administer the new tax, GST on supply of goods and
services. Uniformity, non-discrimination, no non-double taxation or no
non-taxation are sought to be achieved through overarching GST Council, a body
established through the Constitution having powers to make recommendations on
all key aspects of GST like rate, tax base, goods, services and taxes to be
subsumed in GST and so on. This body is somewhat on the lines of the European
Commission. The voting powers within GST Council are so fixed that neither
Centre alone nor States ( even if they all join hands) can change the decisions
of the Council, a path-breaking move to achieve uniformity and stability as is
described, ‘one tax across the nation’.

GST Features

We have adopted, as charging event, the concept of “supply”,
the term used internationally, replacing manufacture, sale and provision of
services as major taxes, Central Excise Duty (on manufacture levied by Central
Government), State Value Added Tax (on sale of goods levied by State
Governments), Service tax  (on provision
of service levied by Central Government), Octroi and Entry tax (on entry of
goods in local area for consumption levied by Local Authorities and State Governments),
Luxury tax (on specified services levied by State Governments) and specified
cesses levied by Central and State Governments merge into one tax, GST, levied
at the same rate by Central and State Governments on common base.

All taxable goods and services, across the country, when they
move from one state to another, will have paid tax, the Integrated GST (I-GST)
which is sum of Central GST (C-GST) and State GST (S-GST) or Union Territory
GST (UT-GST). This will be so, even in cases where goods/services move to own
branches, depots, distributors, stockists, otherwise than on sale/transfer of
property in goods. The tax so paid, to the extent of B2B (and, in most cases,
when the goods move to own branches, depots and like will be B2B transactions)
will be fully creditable unlike the earlier system where, Central Sales Tax was
not levied on transfer of stocks to own depot, branch ( against F form), levied
at concessional rate for B2B transactions ( against C form) and was not
creditable; it was retained by the originating State.

The objective of this design feature of our GST system is to
ensure that goods and services moving across States do not have to be supported
by C/F/I and like forms, prevalent under the current system for no or
concessional rate of tax ( forms to be obtained from tax department) as also
verified at check-posts set up by State Governments at their borders to capture
movement of goods without taxes, can be done away with (to achieve one tax
across the nation without, sort of, border restrictions) and, at the same time,
provide reasonable assurance to the State Governments of non-leakage of
revenue. Of course, the unscrupulous will attempt to find ways around it;
vigilance and way bill mechanism in the new system seek to track such leakages.

So far as movement of goods and services pursuant to supply
within a State is concerned, goods and services would have paid due tax, C-GST
plus either S-GST or UT-GST .

I would not be surprised, if, after a few years, some of the
Union Territories merge their U-GST and some smaller States merge their S-GST
with C-GST and hand over tax administration to Central Government – like
Harmonized GST of Canada. This could result in a fair degree of saving of tax
compliance cost for businesses and administration cost for governments at State/UT
level.

Gains and Pains

The charge on supplies within one legal entity [identified
based on Permanent Account No. (PAN) allotted by Income tax Department], when
goods move to another State to self has a logic in that it enables transfer of
input tax credit from one State to another where sale will take place and the
input tax credit can be utilised. This feature is enabled through I-GST
mechanism which is a sort of settlement mechanism. I- GST can be used for
payment of I-GST itself, C-GST, S-GST and UT-GST and, in same manner, all those
taxes, C-GST, S-GST and UT-GST, can be used for paying I-GST. Same is not true
so far as C-GST and S-GST/UT–GST are concerned. They will move parallel and not
meet, meaning C-GST input tax credit cannot be utilised for payment of S-GST/UT
GST and vice versa.

This requirement of payment of tax on inter-state transfer of
stocks will add cost in terms of cash flow management. But, a bigger worry of
businesses is valuation – whether administrations will be flexible on this aspect
since the transaction is tax neutral. Current provision, to the effect that
value declared by tax payer for such supplies will be accepted if the taxable
person is eligible for “full” input tax credit or that, the value could be 90%
of the sale price at the time of supply to third parties, is met with
skepticism.

The inclusion of such provision for services though is
puzzling. Valuation of services for transfers within an organisation will be a
challenge and, it appears that the department’s perspective is that even
employee cost must be included to arrive at open market value of services. This
means, taxing employee services which are specifically excluded from charge of
GST. There is provision for input service distribution and that could have been
used for transfer of input tax credits in case of services. Some rethink is
required on this aspect. Hopefully, sooner than later!

Our GST adopts same basic principles of value addition –
which we had adopted for Central Excise Duty, State VAT and Service tax.  The chain for taxation starts from origin and
ends when it reaches the ultimate consumer. 
Taxes paid at each of the earlier stages are rebated through mechanism
of input tax credit. Ideally, therefore, no tax cost should stick to
businesses, they being mere pass -through entities. Practically, that does not
happen due to non-allowance of input tax credit on several grounds like exempt
supplies with taxable supplies, supplies used for personal purposes or those,
where input tax credit is specifically restricted like motor vehicles.

A provision not to allow input tax credit when no tax is
payable on output is a reasonable one as the chain of input tax credit stops
there. The difficulty arises when the list of disallowable input tax credit
becomes large. The items on which input tax credit is not allowable under our
GST include expenses  like outdoor
catering, rent-a-cab, free samples, health insurance of employees and others.
These have been subject matter of significant litigation in the past and
attempt appears to be to clarify intent and avoid litigation; provide
certainty. However, it is desirable that tax paid on all inputs, goods and
services, used for purpose of business ought to be eligible for input tax
credit to minimise tax cost and cascading.

Exports will be zero rated and imports will be charged to
IGST, collected, at the time of clearance of import consignments, with the
Customs duties. There is a feature in export of services that appears to be
different from current regime of service taxation. A supply of service where
supplier is in India and place of supply is outside India is an interstate
transaction. Where the recipient is also outside India, consideration is
received in convertible foreign exchange and the supplier and recipient are not
establishments of distinct persons (different establishment of the same legal
entity), the transaction is “export of service”⁶ and will be
zero-rated. The difference is, if these three conditions are not fulfilled,
supply will be subjected to IGST though the place of supply is outside India.

The rates and exemptions under GST are more or less
maintained at the current level to ensure that the current overall tax burden
does not increase in GST. There are four rate bands, 5% and 12% (merit rate),
18% (standard rate) and 28% (demerit rate). There is also Compensation Cess
which varies significantly and is fairly steep for luxury/sin goods like
tobacco and tobacco products. It ranges from 1% to 15% for motor vehicles
depending on specifications. Special rate of 0.25% is prescribed for rough
diamonds and 3% for gold, gold jewellery, silver and processed diamonds⁷.
The exercise of rate fitment is currently ongoing.

The varied rate structure is different from other countries
and a question often asked, in the backdrop of one of the objectives of GST of
simplification of current complex indirect tax structure, is: is this
simplification ? While there could be no two arguments that ideally, one ought
to have only two rates, merit and standard, given the diversity and need for
consideration of all strata of society, variable rate was a must for our
country. Over a period of time, this too will be modified and we too will move
to two or three rate structure.

____________________________________________

6   S2(6)
of IGST Act,20175

7.Statement of Revenue Secretary post
GST Council Meeting of 3 June 2017- Business Standard Article of 5 June,2017-
business-standard.com

Several areas where there was litigation and department has
accepted the position or there are decisions of higher courts, have been
incorporated in the law and will hopefully, reduce litigation. For example, a
specific provision is made as regards amalgamation or merger of companies⁸.
Not all issues are addressed though and, hopefully, will be addressed as we go
along.

There are a few pain points too like paying tax on reverse
charge basis on purchases from unregistered persons, generating self invoice
and the like. This specific provision will, no doubt, increase cost of
compliance and will lead to the threshold losing its relevance. Reverse charge
is also continued for few services like that of legal services provided by
individual advocate or firm of advocates to business entity. This too is not
compatible with GST concept and ought to have been avoided.

______________________________________

8   S
87 0f CGST Act,20177.

Need for pan India service providers to register in each
state and work out tax liability state wise as also requirement for providing
information about each branch together with name and address of the person in
charge, besides proof of address, is a time consuming exercise. Maybe, going
forward, the IT system will soften this burden.

There is significant unease among pan India suppliers of
goods and services about possibility of differing views/approaches that could
be adopted by different authorities and likely multiple demands on identical
transactions. A centralised audit system for such suppliers by a group
comprising officers representing Central Government and State Governments
(these could be rotated from State to State depending on the volume of activities
in a State and can be done electronically without human intervention) is a
solution, referred to in the passing, and may be adopted as the tax authorities
across different States gain experience.

Requirement of quoting detailed HSN Code or Service
Accounting Code at the time of registration on GSTN portal itself is causing
huge anxiety especially for non-manufacturing sector. Asking this information,
at this early stage of GST implementation, could be done away with. Broad
industry classification could meet the objective; facilitating government in
collating industry-wise data and simplifying process for tax payers from
compliance perspective.

There are very detailed and exhaustive transition provisions
which have envisaged various situations and dealt with them. Yet, there are
areas that need to be addressed. Leasing industry is an example where
transition provision is missing.

A provision that is causing significant apprehension during
transition is that of “anti-profiteering”; up to what level should one go and
how to determine it? There are mixed reports from Australia and more recently,
Malaysia, as to effectiveness of such provisions in controlling prices post GST
implementation. Some sectors like consumer goods or fast moving capital goods,
where there is intense competition, will self-adjust prices and the likelihood
of price increase is less. Monopolies and monopolistic sectors are the ones
where Government will have to focus. This will certainly be an area of intense
interest for all, especially, the consumer groups.

Entirely digital administration is a super feature of our GST
system facilitating several processes like enabling businesses to comply with
laws of all the States from one location; complete one to one matching of
invoices to avoid disputes and demands at a later date. But, this feature has
its own challenges, connectivity issues, comparability and so on. Here again,
as we gain experience, systems and processes will be streamlined. Technology
platform will significantly ease verification of input tax credits and overall
compliances as is the experience with TDS under Income tax.

Mindset change