Introduction After a long wait of more than 15 years, the time has now come to welcome the most awaited reform in the taxation history of India. The introduction of Goods & Services Tax (GST) is expected to become a reality just within a few months from now. The Government of India has conveyed from time to time its intention to introduce this much awaited reform in the system of indirect taxes at central as well as at State level. Readers may recall that a committee called “Empowered Committee of State Finance Ministers” was constituted on 17th July 2000, under the directions of the then Prime Minister of India, Shri Atal Bihari Vajpayee. It was given the task of replacing the existing system of sales tax prevailing in various states all over the country, designing the GST model and overseeing the IT back-end preparedness for its rollout. The committee, under the leadership of Dr. Asim Dasgupta, the then Finance Minister of West Bengal, who was the first chairman of this committee, did wonders in bringing together all the States and the Centre to discuss and resolve their issues and concerns. Many important decisions such as Introduction of VAT at state level, setting up Tax Information Exchange System (TINXSYS) and release of First Discussion Paper on GST (on 10th November 2009), etc., were taken on the basis of recommendations of this Committee and various groups and sub-groups working under its directions. After Dr. Gupta, the Committee was headed by Shri Sushil Modi, the then Finance Minister and Dy. Chief Minister of Bihar, thereafter Abdul Rahim Rather, the then Finance Minister of Jammu & Kashmir. And at present Shri K.M. Mani, the Finance Minister of Kerala is the chairman of Empowered Committee.
Successive Union Finance Ministers, starting from Shri Yaswant Sinha, Jaswant Singh, P. Chidambaram, Pranab Mukherjee and now Arun Jaitley have given their inputs from time to time. Dr. Manmohan Singh, as Finance Minister of India, has played an important role in the overall exercise of reforms.
Evolution of the concept of VA T and its journey to India
“Added Value Tax (AVT, in the American Tax nomenclature), tax on value added (TVA, as the French and German refer to it) and value added tax (VAT , the popular English usage) is a concept which originated during the first quarter of 20th century. Dr. Wilhelm Von Siemens, a German industrialist, propounded the concept in the year 1918 as a substitute to the then newly established German Turnover Tax. However, Maurice Lauré, Joint Director of the French Tax Authority, was the first to introduce VAT, in France, on April 10, 1954.
The VAT as a system of tax, conceptually, has been of great interest among the early writers on public finance. It became a topic of public debate after European Economic Community’s (EEC) acceptance of it as an instrument of tax harmonisation. In fact, the introduction of VAT in France largely paved the way for its being accepted as a common market tax. And it became the most popular system of indirect taxes after its adoption by England in the year 1971. The European and Australian countries have contributed a lot in its transformation, improvement and continuous development. At present, the system is prevalent in more than 140 countries all over the world. Malaysia is the latest addition where the system of VAT (GST) has been adopted with effect from 1st April 2015 in place of the earlier system of sales tax and services tax. The general rate of GST adopted in Malaysia is 6%.
The VAT , in common parlance, may be described as a tax levied on the value added to a product or service each time it changes hands. The growing popularity of VAT is due to its simple tax structure, transparency and neutrality. With the widening of tax base, the rate of taxes are lower. Whether it is sale/supply of goods or rending of services, most of the commodities as well as services are taxed at one single revenue neutral rate with exception only for a few commodities and services, which may be taxed at special rates. Tax exempt commodities are listed at minimum and zero rate of tax is provided on exports and inter-branch transfers. It enhances competitiveness and removes the cascading effect of taxes and levies by providing full setoff of taxes paid on inputs. As the levy covers each stage of value chain, the impact of tax is not concentrated on one level, which in turn reduces inducement for evasion considerably.
By virtue of method of computation, the incidence of tax, under VAT, can be seen readily from the tax paid on final point of sale. This is not possible when taxes are levied on inputs or intermediate stage of sale and purchase without any relief at subsequent stages. Because of transparency under VAT , it is possible to quantify, at any stage, precisely the tax borne at the earlier stages.
Neutrality is another attribute of VAT that is non-interference with the choices of decisions of economic agents and equal treatment of products, producers and consumers. In this system, other things remain the same, the tax liability does not vary as between different classes of dealers, or between integrated or specialised units. The allocation of resources is left to be decided by the free play of market forces and competition.
Main characteristics of VAT
- A destination based multi-point system of taxation
- Covers goods and services both
- Collected at each stage of supply and distribution
- Input Tax Credit
- Ultimate burden passed on to the consumer
Looking into various advantages of the system of VAT , most of the countries all over the world have adopted the concept in their system of taxing goods and services. Thus it is being called as Goods & Services Tax (GST).
Although most of the developed and developing countries have adopted the system of VAT , the most notable exception is USA, where still the system of sales tax – General Sales Tax or Retail Sales Tax (RST) is prevailing. The manner of levying taxes in USA varies from State to State. In general, it may be described as a single point last stage taxation wbut there are exceptions depending upon the policy of a particular State.
As far as India is concerned, being a federal country, the taxation structure is governed by its Constitution. The Centre and the States levy tax on commodities at various stages of production and distribution, utilising their powers generated from the Constitution of India, which was prepared in the year 1949-50 for adoption by all the erstwhile provinces, which were merged, converted and united as States and a Government at Central level as to have one Independent India. The Constitution provides for separate independent powers as well as combined powers of the Centre and the States and also provides for collection, distribution and sharing of taxes.
In the present setup, Central Government levies taxes such as Custom Duty, Countervailing Duty, Excise Duty, Service Tax, etc. While the States have power to levy Sales Tax (State VAT ), Entertainment Tax, Entry Tax, Luxury Tax, State Excise, Profession Tax, etc. The Central Sales Tax, under an enactment of the Centre, is also being collected by the States.
A bare look at the history of indirect taxation in our country shows that many of the taxes which were levied before independence have continued either as it is or with minor modifications from time to time, and, a few more new taxes have been introduced in the free India. Although, abolition of some of the pre-independence taxes could have been considered by Governments at both the levels, but somehow it remained a major point of debate that whether the taxation structure should continue as it is or it needs a thorough overhaul? This fact is evident from the process of setting up of various committees, groups and task forces and their reports since 1969 till date.
Some of the committees which suggested, long ago, a major overhaul of the existing system of taxation include S. Bhootlingam Committee (1969), Indirect Taxation Enquiry Committee (1976) and Jha Committee on Indirect Taxes (1977). The Jha Committee, in the year 1978, strongly recommended adoption of the system of VAT. It said:”VAT in its comprehensive form extends from mining and manufacture stages to the retails stage. It can replace all other forms of internal indirect taxes such as excise, sales tax and octroi.”
Other notable committees, which gave important suggestions on redesigning of indirect taxation system include; “Tax Reforms Committee (1991-92)” chaired by Dr. Raja J. Chelliah, “Advisory Group on Tax Policy and Tax Administration (2001)”, chaired by Dr. Parthasarathi Shome and “Task Forces on Direct and Indirect Taxes (2002)”, chaired by Dr. Vijay Kelkar. Dr. Parthasarathi Shome also led the Tax Administration Reform Commission (TARC), which submitted its report to the present Finance Minister on 30th May 2014.
It may be worthwhile to note that adoption of a comprehensive system of value added tax is being consistently suggested by various committees constituted by the Government of India since 1977. The first positive step in this direction was taken in 1986 when modified value added tax (MODVAT) was introduced in Central Excise, which was later converted to CENVAT in the year 2000. However, real credit for a committed approach to reforms goes to Dr. Manmohan Singh, as Union Finance Minister (1991-96), who took up the challenge of reforms. In his Budget speech, in 1993, Dr. Manmohan Singh, indicated that high on his agenda of economic reforms was the replacement of historical sales tax systems by a Value Added Tax system. He entrusted this issue to the National Institute of Public Finance and Policy (NIPFP) for examination and recommendations. The NIPFP set up a high-level study team, under the leadership of Dr. Amaresh Bagchi, to go into the details of the issue. The report of the Committee, published in April 1994, is the pioneering work in this field and it has identified the basic themes for the subsequent discussions and action programs relating to reform of sales tax and other forms of indirect taxes. Its comments on the prevailing system of indirect taxes are also worth noting –
“The system (of domestic trade taxes) that is operating at present is archaic, irrational and complex. According to knowledgeable experts, the most complex in the world. It interferes with the free play of market forces and competition, causes economic distortions and entails high costs of compliance and administration.”
After the introduction of MODVAT, the next step towards comprehensive VAT was introduction of Service Tax in the year 1994. The concept, started with the coverage of just 3 services, now covers almost all services, except a privileged few. The Service Tax mechanism was modified from time to time with continuous expansion of its base and the facilities like input tax credit. The integration of Excise and Service Tax ITC was another step in the same direction.
Meanwhile, after a lot of discussion and persuasion, the States agreed to replace the age old sales tax with a transparent and vibrant system of value added tax. At present, all the States as well as Union Territories of India have adopted VAT in place of sales tax and trade tax, etc.
With these developments so far, we have reached a stage of fragmented VAT, which is working either independently or jointly with one or more taxes. Both the Centre and the States continue to levy tax at various stages of production and distribution utilising their powers generated from the Constitution of India (as described in the earlier paragraphs).
It is now time to consolidate all these indirect taxes into one, whether it is a tax on sale of goods, purchase of goods, on production, movement, entry or on consumption, rendering of services, receiving of services, entertainment or enjoying the luxuries, whatever needs to be taxed must be combined together into one tax. Thereafter, it does not make any difference whether it is called comprehensive VAT or Goods & Services Tax (GST). The administration of such a tax, whether done by the Centre or the States, has to be in such a manner so as to avoid unnecessary hassles, unwanted complications and undue favours. The system must ensure that the Government gets what is due to it, neither more nor less. The consumer must know exactly the burden of tax on him. And the dealers (traders, manufacturers, service providers, etc.), who are responsible to collect tax from the ultimate consumer and deposit the same into the Government Treasury, must be ensured that there is no burden of tax on them while performing this pious duty.
Indian Goods and Services Tax (GST)
Introduction of a Goods and Services Tax (GST) to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice versa. Separate taxation of goods and services often requires splitting of transaction value into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs. Integration of various Central and State taxes into a GST system would make it possible to give full credit for input taxes collected. GST, being a destination-based consumption tax, based on VAT principle, would also greatly help in removing economic distortions caused by the present complex tax structure and will help in the development of a common national market.
All of us are well aware through various press reports and the budget speeches of respective finance ministers since 2004, that the Government of India is committed to introduce GST in place of existing indirect taxes which are being levied by Central and State Governments. Somehow, the process got delayed, first on account of the late introduction of state level VAT and thereafter, due to various other factors. The real work on designing a suitable GST model, for India, could start from May 2007, when the Empowered Committee of State Finance Ministers (EC) appointed a Joint Working Group (JWG) to give its recommendations regarding detailed framework to be adopted for GST. The working group studied various models and their suitability in Indian conditions. Based upon JWG Report, the EC announced in November 2007 that Indian GST shall be dual GST to be levied concurrently by both levels of Government,
The original target date for introduction of GST was set as 1st April 2010. P. Chidambram, the then Finance Minister in his budget speech 2007-08 stated “I wish to record my deep appreciation of the spirit of cooperative federalism displayed by State Governments and especially their Finance Ministers. At my request, the Empowered Committee of State Finance Ministers has agreed to work with the Central Government to prepare a roadmap for introducing a national level Goods and Services Tax (GST) with effect from 1st April, 2010.” Shri Pranab Mukherjee, as Finance Minister, in his budget speech 2009-10 stated, “I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all stakeholders.”
While the Empowered Committee released its ‘First Discussion Paper on Goods and Services Tax’ on 10th November 2009, the Economic Division in the Department of Economic Affairs (Ministry of Finance, Government of India) initiated a working paper series with the objective of improving economic analysis and promoting evidence based policy formulation in its mandated areas of work. Several such well-researched Working Papers were released, which were written by well known economists such as Dr. M. Govinda Rao, Satya Poddar, Ehtisham Ahmad, R. Kavita Rao and others. Kavita Rao, in her paper released in November 2008, has raised certain issues with reference to dual GST, and, Satya Poddar & Ehtisham Ahmad, in their paper released in March 2009, have discussed in detail various aspects of GST model for India based upon their studies of implementation of VAT/GST in various other countries.
However, public debate on GST started only after release of ‘First Discussion Paper’ by the Empowered Committee. Considering various aspects of points covered by the said Discussion Paper, it was felt by almost all stake holders that it would need detailed discussion and the target date of 1st April 2010 cannot be met. Various institutions and associations of trade, industries and professionals, including ICAI, FICCI and others, submitted their views and queries. It may be worth noting that immediately after the release of the First Discussion Paper, the Task Force, appointed by the 13th Finance Commission headed by Dr. Vijay Kelkar, released its own Report on ‘Goods and Service Tax’ on 15th December, 2009. The recommendations of the Task Force are significant, and, the same are at variance with the recommendations of EC on certain key issues.
Apart from EC, and Task Force, etc, the Ministry of Finance (Government of India) also appointed a Joint Working Group of Central and State Government Officers, on 30th September 2009, for identifying issues concerning amendment to the Constitution and essential features of Central and State legislation for implementation of dual GST. It also constituted three sub working groups, on 1st June 2010, to work on specific issues, such as;
(1) To work on and propose registration, returns, payments, refunds, audit and dispute resolution mechanism for GST regime.
(2) To work on and draft legislation on Central GST and Model State GST
(3) To work on and finalise basic design of IT system required for GST in general and IGST in particular.
Further, to have an appropriate IT infrastructure, an ‘Empowered Group on IT Infrastructure for GST’, was constituted, on 26th July 2010, under the chairmanship of Nandan Nilekani. On the basis of the recommendations of this committee, the EC set up a company known as Goods and Services Tax Network (GSTN), incorporated on 28th March 2013, u/s. 25 of the Companies Act, 1956.
Recently, two more committees have been formed for facilitating implementation of GST from 01/04/2016. While one committee called ‘Steering Committee’ will monitor the progress of IT preparedness of GSTN/CBEC/Tax Authorities, finalisation of reports of all the Sub-Committees constituted on different aspects relating to the mechanics of GST and drafting of CGST, IGST and SGST laws/rules. This Committee shall also monitor the progress on consultations with various stakeholders like trade and industry, and training of officers. The other committee has been assigned the job of recommendation possible tax rates under GST that would be consistent with the present level of revenue collection of Centre and States. While making its recommendations, this Committee will take into account expected levels of growth of economy, different levels of compliance and broadening of tax base under GST. The Committee would also analyse the Sector-wise impact of GST on the economy.
While all these committees, sub-committees, working groups, etc, are working on their respective assignments, the parliament is ready to pass the Constitution Amendment Bill, the States will follow soon, so as to empower the Centre and the States to levy tax on goods and services concurrently, the question which is of prime importance is, what would be the final design of Indian Goods and Services Tax?
Once the final design of Indian GST is known, then only it is possible to understand the real impact thereof. How it will affect the manner of tax collection and administration thereof? Whether the trade and industry will have relief from multi-tax authorities, and, whether the ultimate tax payer i.e. the consumer, will have any tangible benefit? Several advantages, which are being publicised, whether these are real or illusionary? Several such questions are coming to mind, some of them have been discussed at various seminars, workshops and study circles and some are yet to be discussed, and, the people are anxiously waiting for the answers.
Some basic questions, being asked by people in general, are noted here as follows:-
1. Which commodities and services will remain out of the GST network? Although some indication has been given in the Constitution Amendment Bill, but one has to wait for the final outcome.
2. Which taxes will be subsumed in GST? Various authorities from time to time have said that all indirect taxes levied by Central and State Governments will be subsumed in GST. But there are variances in various reports circulated so far. One important question is whether Octroi, LBT, Electricity Duty, etc. will form part of GST or will continue to be levied separately? Ideally, all such taxes which are being levied at present by all Government authorities (whether Central, State or local) on any kind of transaction related to goods and services should get covered by the GST. But, whether there is consensus on this issue?
3. Which are the commodities and services to remain tax free (zero rated) within GST? At present there is a long list of exempt commodities under the Excise law. There are separate list of items exempt under VAT laws of each State. Whether it will be a common list of exempted (tax free) goods and services for CGST and SGST or it will differ from State to State? Further, can there be a situation where an item is exempt from SGST in a particular State but liable to tax for CGST or vice versa?
4. What will be the rate of tax on sale/supply of taxable goods and/or services? Whether it will be one single rate of GST applicable to all such goods and services or there will be a Schedule specifying different rates of tax applicable to different types of taxable supplies?
5. Further, how the proportion of CGST and SGST will be worked out? Whether it is rate of GST which will divided in two parts i.e. CGST and SGST, or the GST rate is sum total of CGST rate and SGST rate? Thus, whether effective rate of GST may be different State to State?
6. Whether the rate of SGST on a particular kind of goods or services can be different from one State to another?
7. What will be the threshold limit of turnover, below which GST is not applicable to a dealer/assessee? The First Discussion paper has indicated that there will be a common threshold of Rs. 10 lakh for SGST, and, there will be a higher threshold for CGST (Rs. 1.5 crore). It also suggested that there may be appropriate higher threshold for services. As thereafter there is no official communication, the issue needs to be clarified appropriately. How these separate thresholds will work? And, if a common figure of threshold is considered for CGST and SGST, then whether it is qua each State or combined figure of annual turnover in all the States together? At present, a small dealer having both the activities i.e. selling of goods as well as providing services is not liable to any tax (whether VAT or service tax) if his annual turnover of rendering services is below Rs. 10 lakh and further, if his annual turnover of sale of goods in each State is less than Rs. 10 lakh.
8. A related question is that, at present small manufacturing units, cottage industries, village industries, etc., are not liable for Excise Duty, how they will get necessary exemption under the GST Law? Or all such units will be treated like other big industries, and therefore liable for the same treatment? There are a large number of dealers falling under this category all over the country.
9. Regarding registration of dealers, the First Discussion Paper has indicated that each tax payer would be allotted a PAN-linked taxpayer identification number.Whether there will be two separate such numbers i.e. one for CGST and another for SGST? The question is pertinent with reference to multi-state operations.
10. Answer to the above question would play an important role in deciding whether a dealer would be required to file one common return or two separate returns (may be in the same format). We understand that in case of dealers having multi-state activities, for each State, there may be a separate return for SGST qua each State but what about CGST returns in such cases.
11. Similarly, for payment of taxes, whether it will be through one common challan or two separate payments i.e. one for CGST and another for SGST and may be third for IGST?
12. As the credit for input SGST has to be used only against SGST payable on sales i.e. output SGST, how the CGST credit has to be utilised – whether qua each State or credit in one State can be utilised for payment of CGST in any other State. Most of the large scale service providers will have such a situation. How the mechanism will work if there is one common return and if there are separate returns?
13. Regarding administration of GST, we have been given to understand that, the Centre as well as States will have concurrent jurisdiction. The Central Government authorities will assess the amount of CGST and the State Government authorities will assess the amount of SGST. Would that mean that the same dealer/assessee will be liable to be assessed by two different authorities in respect of the same transaction? Thus, the same invoices, same set of books of account and documents will have to be produced before two different authorities. And how the situation should be tackled if the Central authority takes a different view than that of the State authority, or vice versa, on any such point of assessment, whether it is value of transaction, classification, rate of tax or the amount of input tax credit, etc.?
14. Whether a registered dealer under GST will be eligible for full input tax credit of respective components of GST for all purchases of goods and services (including capital goods) or there will be artificial restrictions and reductions?
15. Whether the practice of disallowing input tax credit (as being prevalent in some of the States at present) will continue in GST regime, if a duly registered supplier has not paid due taxes to the Government or has delayed the payment of taxes?
16. Will there be any kind of ‘composition schemes’ for dealers (whether supplying goods or services) having turnover below certain limit, say Rs. 1 crore? And those dealers who are in the business of retail trade like kirana merchants, who deal in various kinds of goods but not in a position to maintain commodity wise or tax rate wise accounts. Similarly, in case of hotels, restaurants and cooked food vendors.
17. Whether the present definition of goods (as given under the local sales tax laws) will continue as it is or will be modified for the purposes of “GST”?
18. What would be the definition of ‘services’ and how the place of supply in case of services will be determined?
19. What about the taxation of transactions, which are falling at present in the deemed sale category? Whether such transactions of ‘works contract’, etc., will be categorised as ‘sale of goods’ or of rendering of services? The question is pertinent when there are different rates of taxes on various kinds of goods and services.
20. How the process of transition will take place, particularly with reference to accumulated credits, etc., as on the date immediately prior to the date of implementing the new regime?
There are several such questions, which needs to be addressed, before taking a final decision, and their appropriate solutions need to be incorporated in the final draft of the new legislation.
Note from the indirect tax committee of BCAS: It is said by renowned tax experts that GST would free India from the shackles of archaic indirect tax laws and usher in a new era of growth and prosperity. GST may affect all industries, irrespective of the sector. It will impact the entire value chain of operations namely procurement, manufacturing, warehousing, distribution and sale. Some of the business models may need appropriate changes. The Indirect Taxes Committee of BCAS has taken an initiative to maintain a question bank on the proposed design of GST. We feel that the readers of BCAJ. They may have many questions to ask, particularly with reference to specific sector/s with which they are associated. And there may be general questions and suggestions which may be of immense importance. The BCAS is also preparing for providing a platform for dialogue amongst its readers on various issues of concern. All pertinent questions and suggestions are proposed to be submitted to the respective authorities who are responsible for drafting and finalising the Act and Rules concerning implementation of Goods and Services Tax. We would, therefore, like to invite all our readers to send their queries on GST, via e-mail to (to be informed), marking the subject as “GST Question Bank”. Our intention is to let our readers to take an active part in the framing of the law itself. We also propose to publish articles on best practices followed in some of the selected countries where GST has already been implemented successfully. Please look forward for the next issue of BCAJ.
