Framework of Goods and Service Tax Act in India

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GST - The JourneyPast Current

National GST Dual GST ??????


Current Tax Cost in India

Intra-State

Ex. Duty – 12%

Edu. Cess – 3%

VAT– 5%/12.5%

Imports

Customs DutyBasic – 10%

CVD – 12%

Ed. Cess – 3%

Service Provider

Serv. Tax –

12.36%

Factory

RetailerDealer

Toll Manufacturer

Goods

Transporter

Serv. Tax-12.36%

Interstate

purchase

(CST)

Stock transfer

(No tax)

Octroi – 0.5 to 5%

Inter-State

Ex. Duty – 12%

Edu. Cess – 3%

CST – 2%

Local purchase

VAT – 5%/12.5%

Other

Service

Provider

Serv. Tax –

12.36%

Local purchase

VAT – 5%/12.5%

Other

Service Provider

Serv. Tax –

12.36%

Central Levy State Levy

VAT rate may range from 12.5-15% depending on the State

-Credit not fungible between State and Centre; resulting in a cascading impact of taxes- Cumulative burden of Indirect Taxes in India – 28% to 44% (approx.)


Multiple rates

Different rates in different states

Different definitions

Border controls

TODAY in VAT…


No credit on CST purchases leading to cascading

effect

Complex law on stock transfer and transit sales

TODAY in CST…


Negative List Regime started

Concept of Declared List

Cenvat credit disputes

Valuation related issues

Reverse charge

TODAY in ST…


• Taxes levied by Central / State / Municipality

• Authority to levy a tax is derived from the Constitution of India– Article 265 - "No tax shall be levied or collected except by the authority of

law”

• Article 246 – Distribution of legislative powers including taxation, between the Parliament of India and the State Legislature

9

Constitutional Framework...

Schedule VII – Three Lists

10

Union List State List Concurrent List

• Income Tax

• Custom Duty

• Excise Duty

• Corporation Tax

• Service tax

• Central Sales Tax

• Stamp duty in respect of bills of exchange, cheques, promissory notes, etc

• Taxes on lands and buildings

• Excise duty on alcoholic liquor etc

• Entry tax

• Sales Tax

• Tolls

• Luxury Tax

• Stamp duty in respect of documents other than those specified in the provisions of List I

• Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty

Encroachment of each other’s jurisdiction by state & centre


Constitutional Amendment Bill

Introduction of Article 246A in the Constitution:

“Parliament and the Legislature of every State, have power to make laws with respect to goods

and services tax imposed by the Union or by that State respectively.

Provided that Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”


Entry 84 of Union List to amend to empower Centre to levy tax

on SALE of goods.

Entry 54 of State List to amend to empower State to levy tax on

SERVICES.

Entry 92A of Union List to amend to empower Centre to levy

tax on inter – state SERVICES.

3/4th majority in Parliament & 50% collegium of State Assembly

ratification.

Constitutional Amendments…

Duality of charge – pre negative list

Goods Vs. Services◦ Lines between the taxation of Goods & Services is constantly blurring◦ Duality of Charge

13

Sr.

No.

Activity Customs

duty

Central / State

Excise duty

Service

tax

VAT / CST

1. Intellectual Property Services

2. Import of Designs, Technical

Know etc..

3. Works Contract

4. Construction Services

5. Manufacture of Products

liable to State Excise


Discrimination – Mfg / SP / Traders

Non-uniform application of exemptions, credit provisions, etc.

Cascading impact of taxes

◦ Non-transferability – lack of fungibility

◦ Inverted duty structures

Rate structure - no uniformity

◦ no clear basis on which effective rates determined

◦ Non availability of cross credits leading to accumulation

Basis of levy of Service Tax was uncertain and variable

◦ Rendition / performance

◦ Consumption / use

◦ Receipt

Other pain points in the current system


Components of gst..

GST

Taxes levied by

State Govt.

Taxes levied by Central

Govt.


Key taxes subsumed

Central

Central Excise Duty

Addnl. Excise Duties

Excise Duty on M&TP

Service Tax

CVD

SAD

Surcharges

Cesses State

Entry Tax (not Octroi)

Cesses and surcharges

on goods and

services

Taxes on lotteries, betting,

gambling

Luxury Tax

Entertainment Tax (except

levied by local

bodies)

VAT/Sales Tax

Dual GST

CST TO BE PHASED

OUT


To be levied by the Centre through a separate statute on

all transactions of goods and services made for a

consideration

To cover end – 2 end transactions across value chain

Exempted goods and services, non - GST goods and

transactions within threshold limits are to be out of

CGST

Central GST (CGST)


To be levied by the State through a separate

statute on all transactions of goods and services

made for a consideration

To cover end 2 end transactions across value chain

Exempted goods and services (uniform across all

States!), non - GST goods and transactions within

threshold limits are to be out of SGST

State GST (SGST)


Each State to have a separate statute

Uniformity on basic features.

Would be paid to the accounts of respective States

SGST …


For inter-state transactions

Centre to levy IGST which would be CGST + SGST

Appropriate provision for consignment sale/stock

transfer

Inter-state dealer will pay IGST after adjusting IGST,

CGST and SGST credit on purchase

Integrated GST (IGST)


The seller in State X will pay the IGST to the Centre

While paying IGST, seller will adjust his lying

IGST/CGST/SGST credit

State X will have to transfer the credit of SGST used by

the seller for payment of IGST to the Centre

IGST …


Buyer in State Y can avail credit of IGST

Buyer in State Y can use the IGST to discharge his

output tax liability

Centre has to transfer credit of IGST used for

payment of SGST to State Y

A clearing house has to be formed for facilitating

IGST

IGST …


CGST against CGST

SGST against SGST

No Cross sectoral set-off between CGST & SGST

IGST for CGST/SGST & vice versa

Set - off …


Both CGST and SGST would be levied on import

of goods and services

Tax would be based on destination principle

Tax revenue of SGST would accrue to the State

where the imported goods / services are consumed

Full set-off of GST on imports available

GST on Imports…


Interest of small traders and SSI to be protected

Upper ceiling on gross annual turnover and a

floor tax rate to be prescribed

Compounding cut off at Rs. 50 lakhs with a floor

rate of 0.5% across the States

Compounding …


10 lakhs limit for goods and services across all

States / UT for SGST

1.5 crore for SSI manufacturers on CGST

CGST exemption limit on services to be increased

(presently at 10 lakhs)

Threshold exemptions…


• Dual GST should be levied on imports also with facility of credit for the tax paid

• Exports must be zero rated i.e. there should be no tax element in the price of goods exported

Imports should be taxed?


• Area Based

To be discontinued after current eligibility period

• Product Based

To be converted in to refund route

• Limited FlexibilityTo Centre & States barring few exceptions

Tax Exemptions


• Two-rate structure –– Lower rate for necessary items and items of basic importance

– Standard rate for goods in general.

– Special rate for precious metals and a list of exempted items.

• taxation of services - may be a single rate for both CGST and SGST.

• It will be total of the rate as applicable under CGST & SGST.

Rate of Tax


• Between 18% to 22%.

• Government is yet to indicate whether the revenue neutral rate of tax on goods and services would be the same.

RNR


Identity –

Single supply Vs. Multiple Supplies


Concept of principal supply Vs. Ancillary supply

(Example – Oil Consumption in car repair)


• Composite Supplies -

Different Elements with Different Tax Rates

International Practice in developed countries–

Remain Silent in Law

Answers from Judicial Pronouncement


• Discussion paper proposes government to clarify if a transaction –

a) is to be treated as supply and not service of goods

b) is to be treated as supply of service and not goods

c) is to be treated neither as supply of goods nor services


GST- RATES WORLD WIDE

Country GST RatesChina - 17% Indonesia - 10% Philippines - 10% Taiwan (Chinese Taipei) - 5% Australia - 10% Germany - 16% Denmark - 25%Japan & Singapore - 5%UK - 17.5%France - 19.6%New Zealand - 12.5%

to be contd…..


Additional tax in lieu of cst

• Additional tax on inter-State sale of goods (akin to CST) at a rate not exceeding 1% imposed for a period of two years or more, as approved by GST council


Exclusions of gst

Petroleum (but may be included within GST subsequently basis recommendation by GST Council)

Alcohol for human consumption lottery and betting Basic customs duty and safeguard duties on import

of goods into India Entry taxes levied by municipalities or panchayats Electricity duties/ taxes Stamp duties on immovable properties Taxes on vehicles


Declared goods will not exist

• No concept of ‘declared goods’ of special importance under the amended provisions of the Constitution


Widening the scope of service…

‘Service’ meaning anything other than goods.

Due to wide definition of service, GST may also apply on real estate, actionable claims, shares, securities etc.

Hence suitable amendments should be made for excluding activities/ sectors on which GST is not intended to be applied.


Legislative powers….

Parliament

State

Legislative powers for

GST


Legislative powers rest with parliament…

• Parliament enjoy exclusive power to make law for GST on supply of goods or services in the course of inter-State trade or commerce

• Parliament to formulate the principles for determining the place of supply of goods or services


Legislative powers of state -

• States not empowered to levy GST on transaction for supply of goods or services on a transaction that is import, export or inter-state


Gst council…

• To be formed within 60 days under the Chairmanship of Finance Minister and 33members –

• Finance Minister

• Minister of State for Finance

• State Finance Ministers or any other Minister nominated by State Governments (i.e. 29 States and 2 Union Territories with legislature, totaling to 31 members)


Council to recommend union and state on ……

• Model GST law

• Taxes to be subsumed

• Rates and slabs

• Exemption

• Threshold

• Special provisions for North-Eastern States, J&K, Himachal and Uttarakhand

• Date on which the GST shall be levied on petroleum products


Voting rights at the meeting…

• One half of the total number of Members of Council form quorum at its meetings

• Central Government to have a weightage of 1/3rd of the total votes and all the State Govt.s together to have a weightage of 2/3rd of the total votes

• Every decision of the GST Council to be taken by majority of not less than 3/4th of the weighted votes of the members present and voting


No proposal can be passed by GST Council if……

• half of the members (i.e. minimum 17) are not present, no proposal can be passed

• without the approval of Centre,

• Assuming all the 31 State members are present and voting along with Centre, then 20 States/ Union Territories should accept a proposal for approval


Rules to determine place of supply of goods or service

• Central Sales Tax Act, 1956 needs to be amended (basis recommendation by GST Council) for laying down rules to determine place of supply of goods or services:

in the course of inter-State trade or commerce;

in the course of import;

locally within a State


Effect of Article 366(29A)……

• Article 366(29A) defining deemed sales not proposed to be removed, but the same will be irrelevant for GST

• In the previous Constitutional Amendment Bill it was proposed to be omitted

• This provision may be retained during the transition period (one year from GST Amendment Act, 2014 or repeal of the State Acts, whichever is earlier)


Compensation

• Compensation to States for loss of Revenue for a period of five years (i.e.100% compensation for first three years, 75% in the fourth year and 50% in the fifth year)


important issues need to be duly addressed in GST regime:

• Transitioning of area based excise and VAT exemptions

• Transitioning of VAT and CENVAT credits lying with taxpayers on the date of introduction of GST

• Applicability of GST and credit mechanism on stock transfers

• Rate(s) of GST on various products and services particularly the ones that presently attract lower taxes.

• Consistency in rate of GST across the states

• Applicability of GST and credit mechanism on imported goods

• Credit of additional tax of 1 percent sought to be imposed

• Consistency in compliance procedures across the States

• Dispute resolution mechanisms

• Continuity of surcharges and cesses like automobile cess, oil cess etc


• GST system should distinctly cover areas of taxation in e-commerce, IT industry and also spell out tax treatment for cross-border transactions in the digital space.

• Bill gives the state leverage to vary taxes within a spectrum of acceptability.

• Corporate world is likely to face issues to determining the state of consumption

IMPORTANT ISSUES NEED TO BE DULY ADDRESSED IN GST REGIME:


Suggestions for effective implementation..

• Industries will also have to look into compliance obligations for B2B and B2C transactions

• Due to lack of clarity on the Revenue Neutral Rate, the GST structure, the draft legislations, threshold limits, treatment of unutilized Credits, status of exemptions and incentives, it is difficult to comment on whether the Amendment Bill is actually a win-win for all the stake holders.


• With the release of OECD’s discussion draft on “place of taxation of B2C supply of services and intangibles”, in connection with formulation of GST Guidelines, industries are required to make contributions by providing suggestions on the same.

SUGGESTIONS FOR EFFECTIVE IMPLEMENTATION..


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Date post:	15-Jul-2015
Category:	Law
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