Goods & Service Tax (GST)

Introducing GST in India, what is GST, its features, the Constitution (122nd Amendment) Bill, GST tax rate to be levied and business impact of GST in India

Introducing GST

With the unanimous approval of all the members of the Parliament, GST Bill 2016 leaves a mark on the history of India.

It will change the indirect tax structure of the nation, taking it towards a single tax system. Goods and Services Tax (GST) will replace the existing central and state taxes levied by the government. It will cover everything including manufacturing, sale or consumption of goods and services. All the authority to administer and levy GST will rest with only one body, the Union Government. One tax system will reduce the tax evasion from the country, giving rise to transparency. Additionally, elimination of inter-state taxes will decrease the procedural compliance and paperwork to a great extent. The consumers will be most benefitted by free movement of goods across the nation and reduction in the tax burden.

The successful implementation of the Goods and Service Tax will be a significant phase in India. Overall it can be said that GST will have a substantial impact on the entire working of the industries in the nation.

What is GST?

What is GST? Goods and service tax (GST) is a single rate of indirect tax to be applied in the country. It subsumes all the central and state taxes levied presently in the country into one single tax rate. In India, GST Bill was first introduced in 2014 as The Constitution (122^nd Amendment) Bill. This got an approval in 2016 and was renumbered in the statute by Rajya Sabha as The Constitution (101^st Amendment) Bill, 2016.

India being a federal republic, GST will be concurrently levied at Central (CGST) and state (SGST) level. The Union will prepare and implement a common base for both the levels. Destination principle will be considered as a basis for the levy for CGST and SGST. Hence, exports will become zero-rated and import taxes will equalise with domestic goods and services taxes. An Integrated Goods and Service Tax (IGST) will be imposed on inter-state supplies in the country. IGST will be a sum of CGST and SGST of the relevant state. GST council will be formed for solving all the issues and recommendations relating to GST.

Also, an additional tax of 1% will be levied by the Centre for the supply of goods over and above IGST, assigning the income earned to the origin states.

For an efficient and fruitful implementation of GST, the government will bear the losses incurred by the states and provide with compensations for five years.

GST will reduce the administrative complications and simplify the indirect tax system in India. It will result in a significant change, creating a single national market under one tax procedure.

Features

• The Union Government will be vested with all the powers to make the rules and regulations in the matter of supplies in the system of inter-state trade. For intra-state transactions (including services) the right to levy GST will be with states.
• GST will contain current Central and state-level taxes in itself. The Central taxes subsumed will include service tax, excise duty, additional excise duty, additional customs duty (CVD) and special additional duty. State VAT, entertainment tax, central sales tax, luxury tax, entry tax (other than Octroi) and purchase tax are state level taxes to be included in GST.
• Alcohol for human consumption will be kept away from GST.
• Integrated Goods and Service Tax (IGST) will be levied by the Centre on the inter-state goods and services.
• Application of GST on petroleum and petroleum products might happen.
• Basic customs duty will be levied on goods imported.
• Provisions relating to removal of Octroi or entry tax across India will be made.
• GST Council comprising of Central and state ministers will administer the GST in India.

The Constitution (101^st Amendment) Bill

The Bill introduces the Goods and Service Tax (GST) in the Constitution of India. It highlights the structure of the GST to be implemented. The key features presented in the Bill are scope, levy, construction of GST Council, additional tax on goods supply and compensation given to the states.

It is hoped that the Bill will be implemented by 2017.

Tax-rate Proposed for GST

The central question for the Government is to decide a GST tax rate to be applied. Currently, no tax rate is agreed upon but, Finance Minister has stated that it will be within 17% to 20%. He also promises to keep the GST tax rate as low as possible.

Business Impact of GST Implementation

The successful implementation of GST will make a revolutionary impact on the economy of India. It might benefit some, and some might have to change their strategy to be successful. GST being one tax for Central and state will give rise to transparency in the functioning of the nation. It will lead to ease of business transactions and will reduce logistics costs across sectors. The impact of GST on various industries can be observed as under:

• Real estate: Including the industry of real estate within the ambit of GST will result in less malicious acts in this sector. Tax evasion will be reduced as a consequence of the same. GST being one tax will solve the present issue of collecting VAT on excise duty. GST might have a negative impact also by increasing the cost for the consumers in case the output of real estate is exempted from it.
• Tourism and hospitality: Presently, multiple taxes are levied by the Centre and states for the tourism and hospitality industry. GST will replace all these taxes. GST might change the input credit availability for services used to renovate and construct the hotels and resorts. It is hoped that GST will simplify the procedures. The present benefits from Foreign Trade Policy might not be available and that might increase the costs.
• Education: Currently, education sector enjoys many exemptions and benefits. It is also a part of the negative list of services, excluding the industry from the service tax ambit. If the exemptions are retained, similar situation is likely to continue in this sector. However, for real benefits to this sector, the taxes to be paid on inputs must be eliminated.
• Financial Services: GST might result into increasing the cost of the banking and financial services. A service tax of 15% is levied on financial services at present. With the assumed GST tax rate of 18% to 20%, it can be said that services are going to get expensive. A lot many compliance issues might also arise with the application of GST. The banking sector recommends that GST must not cover financial and banking services. It can be said that levy of GST on these services will be too challenging.

Hence, GST will arise as transformative step, changing the whole indirect taxation system of India.