Indirect Taxes - Transformation in GST

INDIRECT TAXES – TRANSFORMATION INTO GST

Seminar Report submitted for Requirements for the Degree of

MBA

by

JOGENDER SINGH CHAUHAN (09-MBA-618)

Under the Supervision of

C.A. Vivek Bansal

Department of Management Studies UNIVERSITY COLLEGE OF ENGINEERING RAJASTHAN TECHNICAL UNIVERSITY, KOTA MAY 2010

Acknowledgement First of all, I would like to express my sincere gratitude to my supervisor & faculty member C.A. Vivek Bansal, for his support, his critical reviews of my work, his highly appreciated guidance and his friendly attitude during this work.

I am thankful to Sh. S.C. Bhatnagar Consultant [Indirect Tax] for their invaluable suggestions and motivation in a very positive environment and constructive atmosphere for carrying out my seminar work. Their active involvement and participation in the technical discussions and encouragement is greatly appreciated.

Last but not the least, I thank all my colleagues and friends for assisting me very much.

(Jogender Singh Chauhan) Date:

Certificate This

is

to

certify

that

the

seminar

entitled

“INDIRECT

TAXES

–

TRANSFORMATION INTO GST” submitted by JOGENDER SINGH CHAUHAN (09/MBA/618) in the Practical fulfillment for the award of Master of Business Administration degree, to Department of Management Studies, Rajasthan Technical University, Kota, is carried out under my guidance.

C.A. Vivek Bansal Date:

Abstract Taxes are the blood stream of any country and the taxes are generally classified in two sections one the direct taxes which covers income tax, wealth tax and Gift Tax whereas indirect taxes covers Central Excise, Customs & Service Tax. The indirect taxes are the spinal cord of the economy of the any country, indirect taxes are collected by Central as well as State Governments, however, the major portion of the Central Revenue comes from indirect taxes i.e. Central Excise, Customs & Service Tax. The indirect taxes collected by State Government are State Excise and Sales Tax, etc.

In the present provisions of collection and administration of taxes there are certain bottlenecks to remove such bottlenecks the present system of indirect taxes is being transformed into GST i.e. Goods and Service Tax. In GST the taxes collected by Central Government are to be merged and the taxes collected by the State Government are to be merged and are to be administered by the respective governments.

Contents Approval Sheet

Acknowledgement

Abstract

1.

2.

INTRODUCTIONS

1-1

1.1 Meaning of tax

1-1

1.2 Characteristic of tax

1-1

1.3 Constitutionally established scheme of taxation

1-2

1.4 Meaning of direct & indirect taxes

1-5

1.5 Direct tax

1-5

1.6 Indirect tax

1-5

1.7 Taxation in India

1-5

1.8 Revenue from indirect taxes.

1-7

INDIRECT TAX

2-1

2.1 Indirect Tax

2-1

2.2 Examples of Indirect Taxes

2-2

2.2.1 Central Excise Duty

2-2

2.2.2 Customs Duty

2-4

2.2.3 Service Tax

2-5

2.2.4 Central Sales Tax

2-6

2.2.5 Value Added Tax [VAT]

2-7

2.3 Merit of Indirect Taxes

2-8

2.4 Demerit of Indirect Taxes

2-4

2.5 Administration

2-10

2.6 Indirect tax reform in India

2-10

3.

2.6.1 Towards Taxing the Value-Added: From Central Excise to CENVAT:

2-10

2.6.2 Towards Taxing the Value Added: From Sales Tax to State VAT

2-11

2.6.3 Expanding the Tax Base: Service Tax

2-14

2.6.4 Reducing the Tax Rate: Lowering Dependence on Indirect Taxes

2-14

2.6.5 Unfinished reforms

2-16

2.7 Merger of indirect taxes i.e. GST

2-17

2.8 Summary

2-18

GOODS AND SERVICE TAXX [GST]

3-1

3.1 Introduction

3-1

3.2 Goods and Service Tax

3-2

3.3 GST – A backdrop

3-2

3.4 Highlights of the GST in India

3-3

3.5 Issues to be decided yet.

3-7

3.6 Administration of the tax.

3-8

3.7 Impact of GST India INC.

3-10

3.8 Beneficiaries after GST

3-12

3.9 Impact of GST on Economy.

3-12

3.10 GST work at the ground level.

3-12

3.11 Merits of GST

3-13

3.12 Pre-requisites for successful implementation of GST

3-14

3.13 GST- Expectation

3-15

3.14 Effective date of GST Rollout

3-17

3.15 Experience of GST in other country

3-17

3.16 Conclusion

3-18

3.17 Summary

3-20

Reference

List of Tables

Chapter 1

INTRODUCTION

1.1 MEANING OF TAX

Tax is the amount paid by person staying with a territorial limit of sovereign State and is levied compulsory on individuals, goods, property, business, services etc. tax constitutes government revenue. The purpose of taxation is to apportion the cost of Government among those who in some measures are privileged to enjoy its benefits and hence must bear its burden. Therefore, the ordinary notion of taxation that it is a penalty imposed on the subject by the sovereign power is not correct. Tax is also not a liability on the subject emanating from any contract. But it is a payment without any direct Quid Pro Quo.

1.2 CHARACTERISTICS OF TAX;

Taxation is devoid of rational approach, Rates of taxation depend entirely on the will of the Finance bill of country or State. There is no uniformity either in coverage of items or quantum of levy in the state as the concept of fiscal policy for levy of tax differs.

Though there may not be any uniformity in taxation, determination of the rates of taxes is a part of fiscal policy pursued by the Central Government or State Government as the case may be for economic growth in the country. High or Low rates of taxes, exemption full or partial, inclusions or otherwise of a particular section or taxation, etc., are broad policy issues decided by Government, keeping in view the socio-economic compulsions, and revenue need. The incidence may vary depending on one’s abilities to pay, though attempts are made to see that persons with equal financial status should make equal tax payment. The great Economist and Statesman Kautilya had cautioned the sovereign power on arbitrary taxation policy when he observed that “one’s own root

Chapter 1 Introduction

1-2

should not be destroyed by giving up taxes not that of others (subject) by excessive taxation.” John Marshall had a dig at taxation when he observed that “The power to tax involves power to destroy” and there appears a lot of sanity in the statement. Common man is burden by taxation directly or indirectly.

1.3 CONSTITUTIONALLY ESTABLISHED SCHEME OF TAXATION

Article 246 of the Indian Constitution, distributes legislative powers including taxation, between the Parliament and the State Legislature. Schedule VII enumerates these subject matters with the use of three lists;



List - I entailing the areas on which only the parliament is competent to makes laws,



List - II entailing the areas on which only the state legislature can make laws, and



List - III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.

Separate heads of taxation are provided under lists I and II. There is no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation). The list of thirteen Union heads of taxation and the list of nineteen State heads are given below: List I – Union List S. No.

Parliament

1

Taxes on income other than agricultural income (List I, Entry 82)

2

Duties of customs including export duties (List I, Entry 83)

3

Duties of excise on tobacco and other goods manufactured or produced in India except (i) alcoholic liquor for human consumption, and (ii) opium, Indian hemp and other

Chapter 1 Introduction

1-3

narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in (ii). (List I, Entry 84) 4 5

Corporation Tax (List I, Entry 85) Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on capital of companies (List I, Entry 86)

6

Estate duty in respect of property other than agricultural land (List I, Entry 87)

7

Duties in respect of succession to property other than agricultural land (List I, Entry 88)

8

9

10

11

12 13

Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight (List I, Entry 89) Taxes

other than stamp

duties on

transactions

in stock

exchanges and futures

markets (List I, Entry 90) Taxes on the sale or purchase of newspapers and on advertisements published therein (List I, Entry 92) Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce (List I, Entry 92A) Taxes on the consignment of goods in the course of inter-State trade or commerce (List I, Entry 93A) All residuary types of taxes not listed in any of the three lists (List I, Entry 97) Table No. 1.1 – Union List of scheme of taxtion List II – State List

S. No.

State Legislature Land revenue, including the assessment and collection of revenue, the maintenance

1

of land records, survey for revenue purposes and records of rights, and alienation of revenues (List II, Entry 45)

2

Taxes on agricultural income (List II, Entry 46)

Chapter 1 Introduction 3

Duties in respect of succession to agricultural income (List II, Entry 47)

4

Estate Duty in respect of agricultural income (List II, Entry 48)

5

Taxes on lands and buildings (List II, Entry 49)

6

Taxes on mineral rights (List II, Entry 50)

1-4

Duties of excise for following goods manufactured or produced within the State (i) 7

alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics (List II, Entry 51)

8

Taxes on entry of goods into a local area for consumption, use or sale therein (List II, Entry 52)

9

Taxes on the consumption or sale of electricity (List II, Entry 53)

10

Taxes on the sale or purchase of goods other than newspapers (List II, Entry 54)

11

12

Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by radio or television (List II, Entry 55) Taxes on goods and passengers carried by roads or on inland waterways (List II, Entry 56)

13

Taxes on vehicles suitable for use on roads (List II, Entry 57)

14

Taxes on animals and boats (List II, Entry 58)

15

Tolls (List II, Entry 59)

16

Taxes on profession, trades, callings and employments (List II, Entry 60)

17

Capitation taxes (List II, Entry 61)

18 19

Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling (List II, Entry 62) Stamp duty (List II, Entry 63) Table No. 1.2 – State List of scheme of taxtion

Any tax levied by the government which is not backed by law or is beyond the powers of the legislating authority may be struck down as unconstitutional.

Chapter 1 Introduction

1-5

1.4 MEANING OF DIRECT & INDIRECT TAX :

Taxes are either direct or indirect. Incidence of levy is the determinative factor to distinguish between direct or indirect tax. The character of levy would remain so notwithstanding the time and manner of collection. So long there are no changes to essential features of a tax, it continues to be so.

1.5 DIRECT TAX :

A direct tax is one which is demanded from the very person who it is intended or desired should pay it. Income-tax, professional tax, etc., are examples of direct tax. The tax is paid by the person concerned without any hope of shifting the incidence to another person. It is, therefore, levied on the person who ultimately bears the burden of it.

1.6 INDIRECT TAX :

“Indirect Taxes” accordingly to John Stewart Mill, “are those which are demanded from one person on the expectation and intention that he shall indemnify himself at the expense of another – such are the Excise and customs”. The tax is levied on goods and services and not on income or profits. The incidence of tax is carried by the commodity to the actual point of consumption.

1.7 TAXATION IN INDIA

Taxes in India are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such the Municipality or the Local Council.

Chapter 1 Introduction

1-6

The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the State. An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law." Therefore each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.

Table 1.3 Indian Taxation System

Chapter 1 Introduction

1-7

1.8 REVENUE FROM INDIRECT TAXES

REVENUE IMPORTANCE OF CENTRAL AND STATES TAXES FOR DETERMINING GST RATE SHARES.

(Rs. crore) Central and State Taxes Central Taxes (Union Duties + Service Tax + CVD + SAD)

2000-01 90990

2001-02 93692

2002-03 105963

2003-04 119116

State Taxes: Group 1 #

104824

112054

124556

142613

State Taxes: Group 1+ Group 2##

116010

125039

139981

160474

Centre + State I

195814

205746

230519

261729

Share of Centre (%)

46.5

45.5

46

45.5

Share of States (%)

53.5

54.5

54

54.5

Centre + States II

207000

218731

245944

279590

Share of Centre (%)

44

42.8

43.1

42.6

Share of States (%)

56

57.2

56.9

57.4

2005-06 164031

2006-07 203841

2007-08 234826

2008-09 233469

Central and State Taxes Central Taxes (Union Duties + Service Tax + CVD + SAD)

Excise

2004-05 Excise 135470

State Taxes: Group 1 #

164478

182077

213714

247495

284153

State Taxes: Group 1 + Group 2##

186785

209744

249687

290186

333448

Centre + State I

299948

346108

417555

482321

517622

Share of Centre (%)

45.2

47.4

48.8

48.7

45.1

Share of States (%) Centre + States II

54.8 322255

52.6 373775

51.2 453528

51.3 525012

54.9 566917

Share of Centre (%) Share of States (%)

42 58

43.9 56.1

44.9 55.1

44.7 55.3

41.2 58.8

Table No. 1.4 Revenue Importance of Central and States Taxes for Determining GST Rate Shares. Central taxes include Union excise duties, service tax, additional duties of customs and special CVD. # Group 1: All sales taxes, state excise duties, motor vehicle tax, tax on goods and passengers, taxes and duties on electricity, entertainment tax, other taxes on goods and services ## Group 2: land revenue, stamps and registration fees, urban immovable property tax

Chapter 2

INDIRECT TAX

2.1

INDIRECT TAX

Indirect Tax or the tax that is levied on goods or services rather than on persons or organizations are of different types in India like Excise Duty, Customs Duty, Service Tax, and Securities Transaction Tax. In India, there are a series of Tax laws and regulations in order to control the indirect taxation, which can be either law, made by the central government or even can be state specific laws. As a result these taxes are an important part of the total cost of material sold. It is thus essential to make appropriate planning for such payments, collection and payment of taxes in input, input services & collection of the said taxes on sale of goods and services and payment of such taxes to the credit of Government of India.

In general, the Indirect Tax in India is a complex system of interconnecting laws and regulations, which includes specific laws of different states. For this there are many reliable organizations in India, which employs efficient Indirect Tax professionals to help the industry and/or to their clients. These tax professionals with their in-depth knowledge and wide-ranging experience offers effective planning methods to their clients in order to help in their cost minimization. The Indirect Taxation regime encompasses various types of taxes like Sales Tax, Service Tax, Custom and Excise Duties, VAT and Anti-Dumping Duties, and the organizations provide services in all these related fields.

In the recent year, the Indian government has undertaken significant reform of indirect taxation system. This includes the initiation of a region-based and state-level VAT on goods. However, it may be noted that as taxes still forms a barrier to inter-state trading in order to attain a secured market for the activities related to services and goods

Chapter 2 Indirect Tax

2-2

more reform is needed. Some of the reforms that can be introduced for a better indirect taxation system in India are -



The serialized set of Indirect Taxes so far activated at the central and state levels should be amalgamated and treated as a single tax.



The integrated Indirect Tax should be neutral at all levels such that chances of fraudulence would be minimized.



The Central Sales Tax, which obstructs easy trading between different states, is being under the process of termination that would help to abolish the control measures on the inter-state trade.

By the year 2011 the Indian government has planned to activate a goods and service tax [GST} neutral at all levels in order to fulfill these objectives. The government can undertake either an introduction of a national VAT or a system, which would permit both a state VAT, or a central VAT. Along with this if the government also can incorporate a central VAT that can be rebated, on the trade across the boundary lines, then there would be minimum chances of fraudulence.

2.2

EXAMPLES OF INDIRECT TAXES

2.2.1

CENTRAL EXCISE DUTY:

An excise or excise tax (sometimes called a duty of excise or a special tax) may be defined broadly as an inland tax on the production for sale; or sale, of a specific good or narrowly as a tax on a good produced for sale, or sold, within the country. Excises are distinguished from customs duties, which are taxes on importation. Excises, whether broadly defined or narrowly

defined,

are inland taxes,

whereas

customs

duties

are

border taxes. Being an indirect tax as noted in the next paragraph, clearly

Chapter 2 Indirect Tax

2-3

explains that it can not be a tax on a product someone has produced for their own consumption. e.g: A loaf of bread, a bottle of beer. It is not a consumption tax, but a form of sales tax. As an individual can not pass the tax on to the buyer as they are not selling it and no sale took place as they are clearly not buying it off themselves.

An excise is an indirect tax, meaning that the producer or seller who pays the tax to the government is expected to try to recover the tax by raising the price paid by the buyer (that is, to shift or pass on the tax). Excises are typically imposed in addition to another indirect tax such as a sales tax or VAT. In common terminology (but not necessarily in law) an excise is distinguished from a sales tax or VAT in three ways: (i) an excise typically applies to a narrower range of products; (ii) an excise is typically heavier, accounting for higher fractions (sometimes half or more) of the retail prices of the targeted products; and (iii) an excise is typically specific (so much per unit of measure; e.g. so many cents per gallon), whereas a sales tax or VAT is ad valorem, i.e. proportional to value (a percentage of the price in the case of a sales tax, or of value added in the case of a VAT). Typical examples of excise duties are taxes on gasoline and other fuels, and taxes on tobacco and alcohol (sometimes referred to as sin tax)

Excise tax is notable for the vagueness of its definition "a tax levied on certain goods and commodities produced or sold within a country and on licenses granted for certain activities". The formula "produced or sold" is applicable to both domestic and foreign products. But the word "certain" is not further explained in the definition — or even in the etymology, according to which the word excise is derived from the Dutch accijns, which is presumed to come from the Latin accensare, meaning simply "to tax".

Chapter 2 Indirect Tax

2-4

It would be impossible to give a general formula predicting which goods are subject to excise. Lists of such goods are readily provided by governments, and from each list one may be able to infer the motives for grouping such goods together; however, no explicit formula appears to be provided by any one government.

The Central Excise duty is levied in terms of the Central Excise Act, 1944 and the rates of duty, ad valorem (on value) or specific, are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The taxable event under the Central Excise law is ‘manufacture’ and the liability of Central Excise duty arises as soon as the goods are manufactured. The Central Excise Officers are also entrusted to collect other types of duties levied under Additional Duties (Goods of Special Importance) Act, Additional Duties (Textiles and Textiles Articles) Act, Cess etc.

2.2.2

CUSTOMS DUTY:

Customs Duty is a type of indirect tax levied on goods imported into India as well as on goods exported from India. Taxable event is import into or export from India. Import of goods means bringing into India of goods from a place outside India. India includes the territorial waters of India which extend upto 12 nautical miles into the sea to the coast of India. Export of goods means taking goods out of India to a place outside India.

In India, the basic law for levy and collection of customs duty is Customs Act, 1962. It provides for levy and collection of duty on imports and exports, import/export procedures, prohibitions on importation and exportation of goods, penalties, offences, etc.

Chapter 2 Indirect Tax

2-5

The Constitutional provisions have given to Union the right to legislate and collect duties on imports and exports. The Central Board of Excise & Customs (CBEC) is the apex body for customs matters. Central Board of Excise and Customs (CBEC) is a part of the Department of Revenue under the Ministry of Finance, Government of India. It deals with the task of formulation of policy concerning levy and collection of customs duties, prevention of smuggling and evasion of duties and all administrative matters relating to customs formations. The Board discharges the various tasks assigned to it, with the help of its field organizations namely the Customs,

Customs

(preventive)

and

Central

Excise

zones,

Commissionerate of Customs, Customs (preventive), Central Revenues Control Laboratory and Directorates. It also ensures that taxes on foreign and inland travel are administered as per law and the collection agencies deposit the taxes collected to the public exchequer promptly.

In board since the terms customs duty means all coastal duties which includes import duty, export duty and transit duty. since import duty figures mainly in Customs Tariff, hence customs duty is understood as import duty.

2.2.3

SERVICE TAX:

Service Tax is levied on taxable services provided to any person by the person rendering such service or responsible for collecting the service tax. Tax on goods and services is a composite once, usually levied with reference to Value Added Tax System. Since the person responsible for collecting the service tax is also consuming taxable goods, he gets rebate on taxes paid on such commodities. In India tax on goods is distinct and different from tax on services. The nature and extent of service tax in India is discussed in Service Tax Manual. Service Tax was introduced in India

Chapter 2 Indirect Tax

2-6

in 1994 by Chapter V of the Finance Act, 1994. It was imposed on a initial set of three services in 1994 and the scope of the service tax has since been expanded continuously by subsequent Finance Acts. The Finance Act, extends the levy of service tax to the whole of India, except the State of Jammu & Kashmir.

The Central Board of Excise & Customs (CBEC) under Department of Revenue in the Ministry of Finance, deals with the task of formulation of policy concerning levy and collection of Service Tax. In exercise of the powers conferred, the Central Government makes service tax rules for the purpose of the assessment and collection of service tax. The Service Tax is being administered by various Central Excise Commissionerates, working under the Central Board of Excise & Customs. There are six Commissionerates located at metropolitan cities of Delhi, Mumbai, Kolkata, Chennai, Ahmedabad and Bangalore which deal exclusively with work related to Service Tax. Directorate of Service Tax at Mumbai over sees the activities at the field level for technical and policy level coordination.

2.2.4

CENTRAL SALES TAX:

Sales Tax is levied and collected from registered dealer on sale price of the goods. In the case of Central Sales Tax is on different, except that it is levied on inter-state sales. The registered dealer pays tax under the Act on all sales of goods other than electrical energy effected by him in course of inter-State trade or commerce.

A sale or purchase of goods shall be deemed to take place in the course of inter-state trade or commerce if such sale or purchase occasions the movement of goods from one State to another or is effected by a transfer

Chapter 2 Indirect Tax

2-7

of document to title to the goods during the movement from one State to another. Liability to Central Sales Tax is not dependent liability to Sales Tax in the appropriate State.

2.2.5

VALUE ADDED TAX [VAT]

VAT is a multi-stage tax levied at each stage of the value addition chain, with a provision to allow input tax credit (ITC) on tax paid at an earlier stage, which can be appropriated against the VAT liability on subsequent sale. VAT is intended to tax every stage of sale where some value is added to raw materials, but taxpayers will receive credit for tax already paid on procurement stages. Thus, VAT will be without the problem of double taxation as prevalent in the present tax laws Presently VAT is followed in over 160 countries. The proposed Indian model of VAT will be different from VAT as it exists in most parts of the world. In India, VAT will replace the existing state sales tax system.

One of the many reasons underlying the shift to VAT is to do away with the distortions in our existing tax structure that carve up the country into a large number of small markets rather than one big common market. In the present sales tax structure tax is not levied on all the stages of value addition or sales and distribution channel which means the margins of distributors/ dealers/ retailers et al are not subject to sales tax at present. Thus, the present pricing structure needs to factor only the single-point levy component of sales tax and the margins of manufacturers and dealers/ retailers etc, are worked out accordingly. Under the VAT regime, due to multi-point levy on the price including value additions at each and every resale, the margins of either the re-seller or the manufacturer would be reduced unless the ultimate price is increased.

Chapter 2 Indirect Tax

2-8

The States have reiterated their commitment to introduce Value Added Tax (VAT) from April 1, 2003, after the Centre agreed to compensate them for any revenue loss due to the introduction of this new taxation measure by up to 100 per cent.

The States, on their part, have decided that all their VAT legislation would have common provisions in respect of all important matters and a simple VAT law will replace the existing plethora of State laws such as those on sales tax, turnover tax, purchase tax, entry tax, and the like.

The VAT by the States would have two basic rates of 10 per cent and 12.5 per cent, which would be revenue neutral rates for most items.. The two basic rates have been selected so that States, which have lower sales tax rates, could raise it to 10 per cent while those levying higher rates of 17-18 per cent would have to lower them to 12.5 per cent. Over time, the VAT rates would be merged into one uniform rate. It has also been decided to phase out Central State Tax (CST) within three years with the introduction of VAT as this causes distortions in internal trade and impeded development of a common market

2.3

MERIT OF INDIRECT TAXES



CONVENIENCE IN ASSESSMENT & RELATIVE DIFFICULTY IN EVASION – The tax is required to be assessed by the assessee him self on appropriate forms and is submitted to the concerned officers who checks it and if not found in order then explanation/ demands are raised in terms of Act/Rules. The records of the assessee are periodically audited and genuineness and truthfulness is reconfirmed. In this system it is difficult to evade the tax.

Chapter 2 Indirect Tax 

2-9

INCLUSION OF TAX IN THE PRICE – Since it is a indirect tax the assessee is entitled to increase the price of goods by adding the tax in the value thus, the burden of tax is transferred is shouldered by the purchaser.



MAY NOT BE REGRESSIVE IF LEVIED ON AD-VALORUM BASIS – the tax is levied on ad-valorem basis on every value addition the tax is levied progressively.



DIFFICULT TO EVADE – If attempted is made to evade the tax the result is counterproductive because of ad- valorem rates and CENVAT system.



TAXES ON DRINKS, NARCOTICS & TOBACCO, SERVE A SOCIAL PURPOSE BY DISCOURAGING THEIR CONSUMPTION – Tax rate on such items is more in percentage thus, making the drinks, narcotics, & tobacco dearer.

2.4

DEMERIT OF INDIRECT TAXES



Regressive Character.



Do not create social Consciousness as payment of tax is not felt by the payer.



Government is not certain about the proceeds of these taxes.



Burden of Indirect taxes can be shifted forward or backward as such consumers have to bear the ultimate burden of tax.



Can be evaded by methods as Smuggling, Falsification of Account etc.

Chapter 2 Indirect Tax 2.5

2-10

ADMINISTRATION

The Indirect Taxes are administered by the Central Board of Excise and Customs (CBEC) or Board) through its field offices, the Central Excise Commissionerate. For this purpose, the country is divided into 10 Zones and a Chief Commissioner of Central Excise Department head each of Zone. There are total 61 Commissionerate in these Zones headed by Commissioner of Central Excise. Divisions and Ranges are the subsequent formations, headed by Deputy/Assistant Commissioners of Central Excise and Superintendents of Central Excise.

Central Sales Tax is levied by the Central Government but the tax so levied is collected by the appropriate state i.e. the State in which the registered dealer is located. When the registered dealer is located in more than one State, then each places of business is treated as separate entity for purpose of levy and collection of the Central Sales Tax.

2.6

INDIRECT TAX REFORM IN INDIA

2.6.1

TOWARDS TAXING THE VALUE-ADDED: FROM CENTRAL EXCISE TO CENVAT: -

The current generation of reforms of indirect taxes leading the system towards a value added tax started with the introduction of MODVAT from March 1, 1986 with reference to specified Chapters of the Central Excise Tariff Act, 1985. At first, the coverage was limited to 37 out of 91 Chapters. From March 1, 1987, all commodities except petroleum products, textiles, tobacco, cinematographic films and matches were covered. In the MODVAT system, early in the nineties, full rebate on the excise tax paid on capital goods was allowed instead of setting up a system of annual depreciation related deductions. With effect from 1995-96, the entire manufacturing chain was brought under MODVAT.

Chapter 2 Indirect Tax

2-11

The central government change MODVAT to CENVAT in 1996-97. The CENVAT covers value added in the case of production and sale of goods up to the stage of ‘manufacturing’. Compared to MODVAT, CENVAT had fewer rates. The taxation space up to the value added in the production of goods is common between the centre and states. While the tax structure was thus simplified, continuation of several surcharges and cesses continued to complicate the system. These are listed below: a) Special Excise Duty, b) National Calamity Contingent Duty, c) Education Cess, d) Secondary and Higher Education, e) Cess on Motor Spirit, f) Cess on High Speed Diesel Oil, g) Surcharge on Motor Spirit, and h) Surcharge on Pan Masala and Tobacco Products.

2.6.2

TOWARDS TAXING THE VALUE ADDED: FROM SALES TAX TO STATE VAT

State taxes include state sales taxes, the Central Sales Tax (CST) assigned by the central government to the states, motor vehicle tax, state excise duties, entertainment taxes. The structure of sales tax, prior to reforms undertaken in late nineties was characterized by high tax rates, multiplicity of tax rate and exemptions, lack of uniformity in defining the tax base across states, large number incentives, and cascading of taxes. During reforms of sales taxes prior to the introduction of state VAT, most states had agreed to phase out the incentive related exemptions, and implement floor rates. There are several minor taxes imposed by the States on the sale, purchase, storage and movement of different goods.

Chapter 2 Indirect Tax

2-12

Apart from the general sales tax, most states levied an additional sales tax or a surcharge. In addition, the states levy luxury tax as also an entry tax on the sale of imported goods. All these practices led to heterogeneity in structure, as well as rates, causing diversion of trade as well as shifting of manufacturing activity from one state to another. Further, widespread taxation of inputs led to vertical integration of firms, encouraging production of more and more of the inputs needed rather than purchasing them from ancillary industries. This system taxation of goods became nonneutral, interfering with the producers' choice of inputs as well as with the consumers' choice of consumption, thereby leading to severe economic distortions. With the initiative of Empowered Committee of the state Finance Ministers, states initiated indirect tax reforms in the late nineties. As a first step, they reduced the rate categories in the case of sales taxes, reduced exemptions, and introduced floor rates. There were tangible revenue benefits after these changes, which facilitated, under the guidance of the Empowered Committee, the implementation of state level VAT. The State-VAT recommended by the Empowered Committee of state Finance Ministers was elaborated in a White Paper brought out by the Government of India. The main features of the scheme suggested by the Empowered

Committee were: a) uniform schedule of rates of VAT for all states, making the system simple and uniform and prevent unhealthy tax competition among

states; b) the provision of input tax credit meant for preventing cascading effect of tax; c) the provision self assessment by dealers aimed at reducing harassment; and

Chapter 2 Indirect Tax

2-13

d) the zero rating if exports aimed at increasing the competitiveness of Indian exports. As per the basic principles of VAT, the State-VAT provides that for all exports made out of the country, tax paid within the state will be refunded in full. Units located in Special Economic Zone (SEZ) and Export Oriented Units (EOUs) are to be granted either exemption from payment of input tax. The most important part of the VAT scheme relates to the tax rates. Under the VAT system covering about 550 goods, only two basic VAT rates of 4 and 12.5 percent are to apply plus a specific category of tax-exempted goods and a special VAT rate of 1 percent only for gold and silver ornaments. Under the exempted category, the Empowered Committee placed 46 commodities comprising of natural and unprocessed products in the unorganized sector, items that are legally barred from taxation and items which have social implications. Under the state-VAT, there is the proposal to give flexibility to the states to select a set of maximum of 10 commodities States for exemption from a list of goods specified by the Empowered Committee, which are of local social importance for the individual States without having any inter-state implications. The rest of the commodities in the list are common for all the States. Under 4 percent VAT rate category, the largest number of goods (about 270) were placed, common for all the States, comprising of items of basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. The remaining commodities, common for all the States, will fall under the general VAT rate of 12.5 percent

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2-14

It was proposed that VAT on AED items relating to sugar, textile and tobacco, because of initial organizational difficulties, will not be imposed for one year after the introduction of VAT and till then the existing arrangement will continue. 2.6.3

EXPANDING THE TAX BASE: SERVICE TAX. The service tax was levied for the first time in 1994-95 budget. Since then its rate has been progressively increased and the number of services under the service tax net has also been increased year after year (Table 2.6.3.1)

Service Tax was introduced from 1st July 1994 Union budget

1994-95 1996-97 1997-98 1998-99 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007 -08 2008-09 2009-10 2010-11

2.6.4

Number of Cumulative Services Number of Introduced Services 3 3 3 6 9 15 11 26 15 41 10 51 7 58 7 65 15 80 12 92 6 98 4 102 4 106 8 114 Table 2.1 - Taxation of Services

REDUCING THE TAX RATE: LOWERING DEPENDENCE ON INDIRECT TAXES Reducing the tax rates as well as the number of rate categories was a key objective of the reform. In the case of CENV AT, most of the products used to attract excise duties at the rate of 14 percent until recently. As per an announcement in December 2008, the core Cenvat rate has been brought down to 10 percent. Some products also attract special excise duty/and an additional duty of excise at the rate of 8 percent above the Cenvat rate. In addition, there is a 2 percent education and 1 percent higher education cess

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2-15

applicable on the aggregate of the duties of excise. Excise duty is levied on ad valorem basis or based on the maximum retail price in some cases

In 2005, the core Cenvat rate was kept at 16 per cent for a majority of the items. There were two more rates: a demerit rate of 24 per cent and a concessional rate of 8 per cent. Effectively, there were several other rates of excise duty that continue to be applied on different items, subject to their enduse. With the 200809 budget, the core Cenvat rate was brought down to 14 percent. This has now been brought down to 10 percent. The adoption of the state VAT also led to rationalization and some reduction in the tax rates. The rate of the central sales tax was also gradually brought down.

Reduction of indirect tax rates led to a fall in the share of indirect taxes in total taxes. This was compensated by a rise in the direct tax revenues so that the overall tax revenue relative to GDP except for a few initial years of reforms did not fall. It may be noted that the rate reduction led to higher tax buoyancy in the case of direct taxes and fall in tax buoyancy in the case of indirect taxes. However, it has reduced the dependence of overall tax revenues on indirect taxes thereby facilitating the move to the next stage of reforms towards GST where the risk of revenue shock to the system is less now than used to be the case.

Table 2.2 – Share of Indirect Taxes in Total Tax Revenue Reduction of indirect tax rates led to a fall in the share of indirect taxes in total taxes. This was compensated by a rise in the direct tax revenues so that the

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2-16

overall tax revenue relative to GDP except for a few initial years of reforms did not fall. It may be noted that the rate reduction led to higher tax buoyancy in the case of direct taxes and fall in tax buoyancy in the case of indirect taxes (Appendix Table A2). However, it has reduced the dependence of overall tax revenues on indirect taxes thereby facilitating the move to the next stage of reforms towards GST where the risk of revenue shock to the system is less now than used to be the case.

2.6.5

UNFINISHED REFORMS

While the system of taxation is thus characterized by fragmentation and overlaps in the case of goods, the taxation of services remains separated and disjointed. The service tax is levied by the central government. Taxation of goods by either tier of government may cascade into taxation of services and vice versa since goods are needed in the production and sale of services and services are needed in the production and sale of goods. The nature of a modem economy is such that it is often difficult to draw lines between goods and services as these are embedded into each other. Considering the value added of goods and services taken together in the overall Indian economy as providing a comprehensive tax base, there are three kinds of segmentations that take place in India under the existing arrangements: segmentation of goods from services, segmentation of central jurisdiction

vis-a-vis

state

jurisdictions,

and

segmentation

of

production/manufacture from sale. These artificial divisions for purposes of taxation lead to various distortions, administrative and compliance costs, and inefficiencies. These are also not consistent with prevailing tax practices in the modem economies of the world who have implemented a value added tax regime including federal countries.

Thus, even after the introduction of the principle of taxation of value added in India, its application has remained piecemeal and fragmented. Several problems continue with each segment of the system of taxation of goods and services as summarized below.

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1. In the case of Cenvat, the issues relating to defmition of manufacturing and

methodology

of

valuation

remain

causing

difficulties

in

implementation of the tax. 2. The problem of multiple rates remains although the tax rate structure is simpler than what it used to be. This leads to various classification disputes. 3. In the case of services taxation, problems relate to distinguishing between a good and a service. The distinction between the two is often blurred. 4. Exclusion of services from the tax base of the states potentially erodes their tax- buoyancy in a growing economy. 5. Cascading has not been fully eliminated as there is cross cascading between State VAT, Cenvat, and central services tax. 6. The Central sales tax continues to cause artificial inter-state border boundaries and violating the destination based principle of taxation of goods and services. 7. Many of these problems can be addressed by extending the scope of taxation of services for the states and the scope of taxation of goods up to the retail stage for the centre.

2.7

MERGER OF INDIRECT TAXES I.E. GST

Before parting and to bring an end to this article we summarize that GST is a harmonized consumption tax system, whose introduction will bring an end to a varied number of Indirect taxes presently being levied by Central Government and State Government. The proposed date of Introduction of GST has been announced by the Government to 1st April, 2011. Till now Government has not yet issued any Draft of GST model or various provisions to be applied, all we can do is to wait for the Draft to release. Till then we can only predict the outlook of the GST model in India and nothing can be said with utmost certainty. However so far the proposal is to merge following taxes collected by

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Centre and State Government and to announce a composite rates of tax to be collected and one point to be called as GST.

Central Taxes

State Taxes

Central excise duty

Value Added Tax/ Sales tax

Additional excise duties

Entertainment tax (unless it is levied on local bodies)

Service tax

Luxury tax

Excise duty under Medicinal & ToiletriesTax on lottery, betting and gambling Preparation Act Countervailing duties (on imports in lieu ofEntry tax not in lieu of Octroi excise duty) Additional duty of Customs (levied onState surcharges and cesses in so far as imports in lieu of value added tax or centralthey relate to supply of goods and sales tax)

services

Surcharges and Cesses** Chart 2.3 – Marger of indirect Taxes into GST

2.8

SUMMARY

Indirect Tax or the tax that is levied on goods or services rather than on persons or organizations are of different types in India like Excise Duty, Customs Duty, Service Tax, and Securities Transaction Tax. In India, there are a series of Tax laws and regulations in order to control the indirect taxation, which can be either law, made by the central government or even can be state specific laws. As a result these taxes are an important part of the total cost of material sold. It is thus essential to make appropriate planning for such payments, collection and payment of taxes in input, input services & collection of the said taxes on sale of goods and services and payment of such taxes to the credit of Government of India.

Chapter 3

GOODS AND SERVICE TAX [GST]

3.1

INTRODUCTION

Indirect taxes on goods and services at the state level constitute 85 percent of own tax revenue of the state governments of which sales tax alone accounts for 61percent. A change in regime in recent times from cascading types sales taxes to taxes based on inputtax credit within taxation of goods, as well as the adoption of a uniform rates of tax, has resulted in buoyant revenues. However, the reform agenda is far from complete. The proposed GST regime constitutes the next step towards comprehensive reforms of indirect taxes in India. It would be the final step or a step in the right direction, depending on how the country chooses to define the constituents of this new regime. Decisions on the design of the proposed tax are not yet in the public domain. In this context, the objective of this paper is twofold: First, to identify the likely form of the proposed tax and the contentious issues that need a resolution before the tax can be implemented effectively. Second, given the importance of indirect taxes in the portfolio of the states, since any change would not affect all states uniformly, an attempt would be made to project the likely impact of one particular design of GST on states. While these estimates can at best be tentative, they will highlight the fact that the impact is differential across states and these differences would have to be taken into account in designing the proposed assignment of tax powers between the centre and the states. The paper is organized as follows. Section 2 sets out the contours of a feasible design of VAT in India. It also takes on board the various alternatives proposed. Section 3 looks at the issues that need resolution and the options available for resolving the same. Section 4 provides estimates of the rates of tax that would ensure that the regime is revenue neutral. It also illustrates the differential impact across states, under one configuration.

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3-2

This section works with the assumption that there is only one rate of tax under the new regime.

3.2

GOODS AND SERVICE TAX

GOODS AND SERVICE TAX(GST) is a comprehensive value added tax on Goods and Services. It is collected on value added at each stage of sales and purchase in the supply chain without state boundaries. It would integrate all taxes currently levied in India by central and state governments on goods and services like excise duty, service tax, state VAT/Sales tax, entry tax/octroi, state excise duty, countervailing custom duty, luxury tax, tax on consumption/sale of electricity, entertainment tax etc. GST is a unified tax on goods and services aimed at replacing the multiple tax system currently being followed by the Centre and States. GST is a multi-stage consumption tax imposed on a broad range of goods and services. It is a tax on transactions and endcustomers who consume the goods or services bear the final cost of the tax. The underlying principle is that the GST will have a simple structure and goods as well as services will be taxed at a uniform rate. It is aimed to be a simple, nation-wide. GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer’s point and service provider’s point up to the retailer’s level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism.

3.3

GST – A BACKDROP

In India, VAT was introduced at the Central level for select commodities in terms of MODVAT with effect from March 1, 1986, and in a step-by-step manner for all commodities in terms of CENVAT in 2002-03. Subsequently, after Constitutional Amendment empowering the Centre to levy taxes on services, these service taxes were also added to CENVAT in 2004-05. The concept of Goods and Services Tax or GST was

Chapter 3 Goods and Service Tax

3-3

mooted by Dr. Vijay Kelkar, former Finance Secretary in 2004. The Kelkar Task Force had suggested a comprehensive Goods and Services Tax (GST) based on VAT (value added tax) principle. VAT was introduced in India from April 1, 2005 with a view to substituting sales tax with many falling states in line from that date onwards. Afterwards, the remaining states had fallen in line. Now, all States and Union Territories implemented Value Added Tax in lieu of sales tax and VAT has been an unqualified success in raising the tax revenue for the States. The rate of growth of tax revenue has nearly doubled from the average annual rate of growth in the pre-VAT five-year period after the introduction of VAT. After VAT, the next logical step is GST. GST is an improvement over VAT. The implementation of GST is a step towards a comprehensive indirect tax reform in the country. The groundwork for implementation of GST with effect from April 1, 2010, was started way back in 2007 after the then Finance Minister, P.Chidambaram, announced GST rollout while presenting the Union Budget 2007-08 in Parliament.

France

introduced GST in 1954 being the first country to introduce it. As of now, it is prevalent in more than 140 countries, including, Canada, Australia, the UK, China, Germany, New Zealand and Singapore. Most countries introduced a single GST while Brazil & Canada have a dual GST.

3.4

HIGHLIGHTS OF THE GST IN INDIA

The following are the highlights on Goods and Services Tax in India” announced by the Empowered Committee on State Finance Minister in New Delhi on November 10, 2009 in the presence of Union Finance Minister, Pranab Mukherjee (the committee’s chairman and West Bengal finance minister Asim Dasgupta released the document in New Delhi): 1.

The Empowered Committee has agreed to phase out CST (central sales tax – at present at a rate of two per cent) upon introduction of GST (Goods and Services Tax) on the understanding that the States would be adequately

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3-4

compensated, by the Centre, for any revenues loss on account of phasing out of CST. 2.

DUAL GST: A dual GST structure is recommended. The two components are: Central GST (CGST) to be imposed by the Centre and State GST (SGST) by the States. Rates of GST would be decided later.

3.

The date of implementation of GST will also be decided later

4.

Separate acts will be enacted at the Centre and the States to implement CGST and SGST respectively.

5.

Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST.

6.

Cross utilization of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services under the IGST (Integrated GST) model. IGST would consist of both the Central GST (CGST) and the state GST (SGST).

7.

A uniform threshold of annual gross turnover of Rs 10 lakh is proposed for all goods and services for SGST applicable for all States and Union Territories. Below this threshold limit, State GST is not applicable. The threshold limit for Central GST may be kept at Rs 1.5 crore for goods and Central GST may be kept at higher levels for services.

8.

Each taxpayer would be allotted a PAN-linked taxpayer identification number

9.

The following Central Taxes should be, to begin with, subsumed under the Goods and Services Tax:

Chapter 3 Goods and Service Tax (i)

Central Excise Duty

(ii)

Additional Excise Duties

(iii)

Excise Duty levied under the Medicinal & Toiletries Preparation Act

(iv)

Service Tax

(v)

Additional Customs Duty, also known as Countervailing Duty (CVD)

(vi)

Special Additional Duty of Customs - 4% (SAD)

(vii)

Surcharges, and

3-5

(viii) Cesses.

10.

Following State taxes and levies would be, to begin with, subsumed under GST:

11.

(i)

VAT / Sales tax

(ii)

Entertainment tax (unless it is levied by the local bodies).

(iii)

Luxury tax

(iv)

Taxes on lottery, betting and gambling.

(v)

State Cesses and Surcharges in so far as they relate to supply of goods and services.

(vi)

Entry tax not in lieu of octroi

Some Taxes kept out of GST purview: a. Alcoholic Beverages: They will be kept out of GST.

b. Crude oil, diesel, petrol and ATF: They will be kept out of GST. States will be free to levy taxes on them. 12.

Decision is yet to be taken on certain taxes:

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3-6

a. Purchase Tax: (Usually imposed by Punjab and Haryana on buyers of food grains): The decision to subsume this under GST will be decided later in consultation with GOI. b. Natural Gas: A final view will be taken later in consultation with GOI. 13.

Tobacco Products: They will be subjected to GST with input tax credit (ITC)

14.

Taxation of Services: Both the Centre and States will have concurrent power to levy tax on all goods and services. For inter-State transactions an innovative model of Integrated GST will be adopted by appropriately aligning and integrating CGST and SGST.

15.

GST Rate Structure: It has been decided to adopt a two-rate structure – a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. The GST rates will be decided later.

16.

Exports: They would be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded. Exports are “zero rated’ as in competitive international markets one cannot export taxes!

17.

Imports: Both CGST and SGST will be imposed on imports of goods and services into the country

18.

The administration of GST shall be divided into states and Centre with a proposition to have uniform compliance procedures across states under the respective laws.

19.

Constitutional Amendments: The implementation of GST requires some legal and constitutional changes. The government may have to bring out an

Chapter 3 Goods and Service Tax

3-7

Integrated Goods and Services Act replacing the existing acts governing a plethora of taxes. A Joint Working Group (JWG) was set up on September 30, 2009 to address these issues and prepare the necessary draft constitutional amendments. The States, at present, do not have the powers to levy a tax on supply of services; while the Centre does not have power to levy tax on the sale of goods. For the GST to be introduced at the State level, it is essential that the States should be given the power of levy of taxation of all services. This power of levy of service taxes has so long been only with the Centre. A Constitutional Amendment will be made for giving this power also to the States. 20.

Adequate compensation to States: It would be essential to provide adequately for compensation for loss that might emerge during the process of implementation of GST for the next five years. This issue may be comprehensively taken care of in the recommendations of the Thirteenth Finance Commission.

21.

IT Infrastructure: This has to be expedited at the level of Centre and States.

22.

The spirit of fiscal federalism must be kept in mind always. This spirit of cooperative federalism is the essence of GST and the only feature that would ensure that a national market with free movement of goods and services across State boundaries develops, in the true sense.

3.5

ISSUES TO BE DECIDED YET.

One interpretation from the First Discussion Paper of November 10, 2009, is that Octroi seems to have been kept out the GST diluting the spirit behind introduction of GST. Many experts infer that octroi, which is at present applicable on entry of goods in specified areas, may not be subsumed into GST and would continue to be levied by local bodies.

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3-8



The rates of CGST and SGST have not been specified in the discussion paper



Also, the probable date of implementation date has also not been specified in the discussion paper. Many experts feels that the date may get postponed to April 1st , 2011 instead of the original April 1st, 2010.



The discussion paper has not suggested any threshold limit of annual gross turnover (below which GST will not be made applicable) for Central GST on services; while the threshold limit for CGST on goods has been kept at Rs 1.5 crore.



The process of consensus build-up is underway on GST rates and compensation formula for possible revenue loss for states

3.6

ADMINISTRATION OF THE TAX

If the tax bases are successfully harmonised, even with some variation in the tax rates across states, it is possible to pool the resources of the tax administrations so as to improve tax administration. There is no significant advantage in implementing two completely disjointed tax administrations for such a tax regime. The important question however is to what extent can and should there be unification of administration. To begin with, it is important to understand the gains from unification or integration. Dealing with two tax administrations adds to compliance costs for the tax payer two returns, two sets of officials, and potentially two audits. Some unification therefore would make the transition more acceptable. From the point of view of tax administration, the information flowing from the taxpayer to a unified administration would be more reliable than to two separate administrations. Resources can be conserved by not duplicating routine tasks like registration and returns processing. Having made a case of some unification in administration, it is useful to discuss what extent of unification is feasible and/or desirable. In principle, it is possible to imagine a

Chapter 3 Goods and Service Tax

3-9

single tax administration for this new regime. The regime can be in the form of an independent revenue administration which implements the tax laws of both levels of government. Or it could be a part of either level of government, which takes responsibility to collect revenues on behalf of the other and transfers the same. Such regimes exist in Canada for instance. Such a proposal would face one important question  what happens to the existing tax administrations? Once again it is possible to subsume existing tax administrations within this new arrangement. Even with this problem out of the way, it is difficult to arrive at a consensus on such a proposal since there is some perceived autonomy with respect to tax administration as well. The minimum desirable level of integration is one covering registration, returns filing, database generation, and management. This level of integration would allow the tax administrations to function efficiently and gain from each other’s expertise. A further degree of integration could be one where there is a common audit for both the taxes. This, as argued earlier, would ensure that the compliance cost for the tax payer is minimized. Since the revenue interests of different tax administrations would be different, it is possible that some state governments would perceive a given case as a significant revenue risk which the central tax administration might not. To allow for these differences, the tax departments could have the autonomy to choose cases for audit, subject to the condition that the audit would cover both taxes and would therefore apply for both levels of government. A common procedure for choosing case for audit therefore would need to be developed.

Between these two extremes, any intermediate position should be acceptable to the taxpayer. It is however, important to mention that segregation of units by size or economic activity into groups to be administered by one or the other administration would hinder effectiveness of administration. It would constitute an artificial segregation, and depending on the perceived strength and weakness of the underlying administrations, there would evolve an incentive to align oneself to one or the other. This would give rise to definitional conflicts of turf between two levels of government, without contributing actively to taxes or improved administration or to improved economic environment. It is

Chapter 3 Goods and Service Tax

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therefore desirable to develop schemes whereby the division of functions between the different tax administrations is not of immediate concern and relevance to the taxpayer.

3.7

IMPACT OF GST ON INDIA INC.

It is debatable whether India Inc is ready for a rollout of GST by April 1, 2011. The implications for India Inc are enormous. Overall, GST is expected to reduce tax incidence for several goods and services in the country. Lesser taxes and cost means higher demand for goods and services. GST is expected to bring in uniform indirect tax system across the country which is easy to understand and implement. Its effective implementation will have beneficial impact on Indian companies in the form of lower working capital needs, better supply chain management, reduction in ware house costs, and others. Reduced working capital requirement would result in less interest costs 

A company, like, Maruti Suzuki, is readying itself for GST rollout. The company thinks with GST, the tax incidence on their cars will come down substantially which means the car will be dearer and demand for their cars would go up.



Tax experts are of the opinion that GST will result in reduced taxes for many goods and services



GST is going to change the way FMCG and other manufacturing companies do business in India. Companies have to be better prepared for its rollout and make their processes (IT, business, etc) stronger well before GST implementation.



Industries, like, cement, aluminium, copper, VFY, telecom, FMCG suffer from not only heavy taxation but also, multiple taxation and various slabs. Once GST is implemented these sectors will be relieved of the twin problems

Chapter 3 Goods and Service Tax

3-11

of higher and multiple taxation. It will have a salutary impact on the operations of these companies. 

The impact on FMCG sector will be from a different perspective also. After GST, the need for maintaining several warehouses across the states will be removed. This is big scope for FMCG companies to restructure their operations, logistics and ERP systems in a big way.



In the existing regime, companies set up several warehouses in many states to avoid certain taxes. With the introduction of GST, companies need not resort to such practice of setting up warehouses in many states.



Once GST is introduced, several bottlenecks in the supply chain can be removed and companies will save substantial costs



A corollary of the reorganization on the part of FMCG sector will be felt on the logistics sector. This entire supply chain will undergo a thorough overhaul and this will create huge opportunities, for integrated logistics players in India. The dynamics involved in this massive exercise are yet to fully appreciated or analysed in the investor community. However, industry veterans, like, Adi Godrej, have been expressing the readiness of their companies for the GST rollout.



The implementation of GST across the Centre and States and UTs presupposes the existence of a robust information technology (IT) services. This is a great opportunity for IT and IT-related companies, especially, in the medium-sized IT players.



The operations of NBFCs too will undergo as they too suffer from various forms of service taxes. It is hoped that the GST rollout will create tremendous scope for NBFCs to ease their burden of multiple taxes.

Chapter 3 Goods and Service Tax 3.8

3-12

BENEFICIARIES AFTER GST?

The effective implementation of GST is expected to benefit the government, industry, traders, companies, end-consumers, lawyers, accountants, IT service providers, etc.

3.9

IMPACT OF GST ON ECONOMY

Finance Commission, says the introduction of GST would be the single biggest measure after the elimination of licensing in 1991. In fact, this could also provide the requisite stimulus to the economy during the present economic slow down. GST once introduced will create a common market across the length and breadth of the country. Effective implementation of a unified GST with minimum exemptions will give a fillip to the GDP growth. As per the rough estimates of Dr. Vijay Kelkar, the economic value of the GST reforms in India will be to an extent of USD 500 billion, or roughly 50 per cent of India’s GDP. The introduction of GST is expected to have a salutary impact on total tax collections, employment and fiscal deficit. The 13th Finance Commission, that was set up in November 2007 (award period: 2010-15), is reviewing the GST structure and deciding on the sharing of taxes between the Centre and States. State finances would be shaped by the recommendations of the Commission.

3.10

GST WORK AT THE GROUND LEVEL.

Stage of supply chain

Manufacturer Wholesaler Retailer

Purcha se value of input

Value additio n

Value at Rate of GST which GST on supply of outpu goods and t services made to next stage Rs. Rs. Rs. Rs. Rs. 200 80 280 10 28 280 60 340 10 34 340 30 370 10 37 Table No.3.1 GST work at the ground level

Input tax credi t

Net GST = GST on output – input tax credit

Rs. 20 28 34

Rs. 8 (28 – 20) 6 ( 34 - 28) 3 (37 – 34)

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3-13

As shown in the above example, let us assume a manufacturer buys raw materials at a cost of Rs 200. While buying she pays a GST of Rs 20 at the assumed rate of 10 per cent. During the manufacturing process, she adds value to the tune of Rs 80 and converts the raw material into a finished good and sells it for Rs 280 and pays a GST of Rs 28 on the finished product at the rate of 10 per cent. Effectively, here her net GST would be only Rs 8 (28 – 20) as she avails Rs 20 as input tax credit (which she is entitled while buying raw materials). Likewise in the entire chain till retailer the same principle applies down the line. The wholesaler buys the finished product for Rs 280 and adds value Rs 60. and sells it for Rs 340 to the retailer and pays GST of Rs 34 on the product; however, the wholesaler’s net GST would only be Rs 6 (34 – 28) after deducting the input tax credit. In the case of retailer, he buys it for Rs 340 and adds a value of Rs 30 and sells it for Rs 370 and in the process his effective GST would be only Rs 3 (37 – 34). To put it simply, the tax payer is only paying tax on the value addition and not on the entire value of finished product; except the end-consumer.

3.11

MERITS OF GST 

Only the incremental value added at each stage of value addition gets taxed



The producer gets input tax credit except at the hands of the final consumer



It avoids tax on tax and tax incidence is reduced for all players involved



It reduces transaction costs for tax payers benefiting the traders and industry



More players will come under tax net as it gets widened with GST ensuring better compliance

Chapter 3 Goods and Service Tax 

3-14

Due to the input tax credits, the prices for end-consumers may come down as traders and service providers may pass on the benefit of lower taxes to end-users



GST may cleanse the present tax system of red tape, delays, corruption and leakages



The effective rollout of GST is expect to usher in a single and common market across the country

3.12

PRE-REQUISITES FOR SUCCESSFUL IMPLEMENTATION OF GST.

The following are the prerequisites for an effective rollout of GST: 

It needs to have minimum number of GST rates and minimum exemptions so as to achieve widest possible tax base.



The rates of CGST and SGST are needed to be moderate.



The rates of tax of SGST and exemptions from SGST are uniform throughout the country.



The input credit chain is seamless covering the entire value chain from manufacturing to retail without breaks regardless of whether goods or services are supplied within a State or across State boundaries.



The tax treatment of goods and services is similar.



The Central and State levies are fully neutralized in the case of exports (out of India).



The procedures are simple and harmonized between the Centre and the States.



Removal of distorting state taxes such as entry tax, octroi, high stamp duties etc by subsuming them in the GST.

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3-15

Amongst the administrative actions that are critical for the success of GST is the creation of a strong Information Technology Infrastructure both for the Centre and the States.

3.13

GST – EXPECTATIONS 1)

Withdrawal of Check Post

2)

Limited number of rates of taxes

3)

Abolition of Works Contract Tax

4)

Input Tax credit may be available on Invoice system like Cenvat and VAT.

5)

Adjustment of Input tax credit on Central GST against output tax of State GST and Vice versa

6)

Cross utilization of credits between Goods and Services

7)

Carry forward of accumulated Input Tax Credit (VAT) and Cenvat Credit under GST system on the day of introduction of GST

8)

Exporters may be allowed to procure materials without payment of GSTAbolition of Refund System.

9)

Existing exemptions be continued;

10) The tax benefits already enjoying by the EOU, SEZ, Soft ware Technology Park would continue to be available in the GST regime as well. 11) All area based exemptions schemes already in force may be converted into post-tax cash refund schemes. 12) Introduction of self assessment system under dual GST;

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13) Single Return system to cover both Central and State GST. 14) Simple legislation for both State GST and Central GST-. Uniform legislation for State GST 15) Special Additional Duty (SAD) on imports may be replaced by State GST and Central GST 16) Dispute Resolution: The disputes with regard to questions of facts at the first stage may be undertaken by the respective authority. Further stages of appeal and issues relating to questions of law may be dealt with by a joint entitry comprising the Centre and states. This would ensure uniformity and fairness in decision making. 17) Units in Special Economic Zones may be relieved of the burden of all embedded taxes, whether central or states. Supplies made to SEZ units may also be kept outside the purview of GST. 18) There should be a common and uniform threshold limit of exemption for small tax payers applicable to all states. 19) There should be a common and uniform threshold limit of exemption for availing composition scheme amongst all states. 20) The authority to amend the common exempted list and the common composition scheme, uniform threshold limit may be rest with a joint authority of Central and State Governments to ensure that no single State or Central Government amends either to these unilaterally. 21) There should be a common and uniform list of exempted goods; 22) Octroi and Entry tax should be brought within the ambit of GST 23) Taxes on Tobacco products should be subjected to GST with Input Tax Credit facility; 24) Alcoholic beverages should be brought under GST with ITC benefits;

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3-17

25) Petroleum products should be subjected to GST with ITC benefits. If there is specific administrative problem, all products excepting Crude, Motor spirit and HSD, all petroleum products including ATF should be brought within the limit of GST.

3.14

EFFECTIVE DATE OF GST ROLLOUT.

Government of India originally proposed to introduce the new tax system from April 1, 2010. The Finance Minister had expressed government’s commitment to implement the GST regime, however, due to some practical difficulties which are yet to be addressed the Finance Minister reinforcing his commitment to bring the regime but due to issues raised by some of the state governments pertaining to compensation for the revenues the states which may have to forego as a result of the rollout of GST. However, some experts are suggesting the implementation date may get postponed till April 1st, 2011, due to a variety of reasons. Even the Union Finance Minister, some days back, hinted at the possibility of a postponement by a few months.

3.15

EXPERIENCE OF GST IN OTHER COUNTRIES.

More than 150 countries have introduced GST in some form. It has been a part of the tax landscape in Europe for the past 50 years and is fast becoming the preferred form of indirect tax in the Asia-Pacific region. It is interesting to note that there are over 40 models of GST currently in force, each with its own peculiarities. Goods and Service Tax is a Consumption Based Destination Tax France was the first country which introduced a comprehensive goods and service tax Regime in 1954. In Australia the GST (Goods and Service tax) is a 10% on most of the goods and Services transaction. It replaced the previous Federal wholesale system and designed to phase out a number of various State and Territory Government taxes, duties and levies such as banking taxes.

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While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. Goods and Services Tax (GST) was introduced in Singapore on 1st April 1994, at a low 3%. At the present time the rate of tax of GST in Singapore is 7% since 1st July 2007.

In Canada GST is imposed at 5% on supplies of goods or services made in Canada and include most products, except certain politically sensitive essentials such as groceries, residential rent, and medical services, and services such as financial services. The GST replaced a hidden 13.5% Manufacturers' Sales Tax (MST). The GST also replaced the Federal Telecommunications Tax of 11%. At the same time, it must be noted that GST is a more structured and transparent form of indirect taxation. It has proven itself as the most efficient and effective method of providing revenues that governments need, while encouraging economic growth and efficiency.

3.16

CONCLUSION

The implementation of GST in India in the form of a comprehensive value added tax is contingent on several key decisions. While there is clarity that the tax would be in the form of a dual VAT, that is the only detail about the tax that is available in the public domain. Presuming that the country is going to witness considerable tax reform, it is only fair on the taxpayers that the details be worked out well in advance so that preparations for a smooth transition can be made. This paper attempts to identify some of the potential contours of the tax. One of the key issues that needs to be resolved is the treatment of inter-state transactions in goods and services. The existing consensus of zero-rating by itself would not be adequate to address the potential concerns of evasion in such transactions. Zero-rating with pre-payment appears to be a superior alternative. The related issue concerns taxation of services which span more than one tax jurisdiction. International experience points towards self-

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assessment in the case of registered taxpayers and taxation in the jurisdiction of the supplier in other cases, with some revenue sharing among the member states. Some of the details need to be worked out before the tax on services can be implemented at the state level. A second concern relates to the need to integrate tax administration at the two levels in order to maximise on the efficiency of administration. While there are options available, a final choice needs to be made, once again Apart from these design issues, one important concern relates to the rate of tax. It is believed and correctly so, that if the rate of tax is “too high”, it induces non-compliance. In discussions on VAT in India, a rate of 20 percent has often been proposed as a feasible rate. Section 4 demonstrates that with the informal sector accounting for 30 percent of economic activity in taxed transactions, a rate of 20 percent with non-rebatable excises of 10 percent on a few selected commodities would be required to generate the target revenue. If the non-rebatable excises are assigned to the union government, this translates into about 14 percent rate for the states and 6 percent for the centre. It may be mentioned that in deriving this rate, all agricultural commodities were considered to be exempt. This should mitigate the regressivity normally associated with VAT regimes. The above is however a conservative estimate  since a number of activities currently taxed have been assumed to be exempt for the purposes of arriving at these estimates. Any expansion in the tax base to include some of the activities would allow for a lower rate of tax to be implemented. Further, as observed earlier, the share of informal activities in total as proxied by the share of unregistered manufacturing in total GDP from manufacturing is registering some decline in recent times. If this trend persists, there is scope for considering lower rates of tax.

Finally, the impact of the tax on different states would be different. Careful assignment of tax powers is crucial for the new regime to be acceptable. In the absence of the same, transition to the new regime would require some other revenue transfers. With the new regime, instruments for the same would be limited, and can generate perverse incentives and/or unstable finances for some of the governments involved

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SUMMARY

Before parting and to bring an end to this article we summarize that GST is a harmonized consumption tax system, whose introduction will bring an end to a varied number of Indirect taxes presently being levied by Central Government and State Government. The proposed date of Introduction of GST has been announced by the Government to be 1st April, 2011. Till now Government has not yet issued any Draft of GST model or various provisions to be applied, all we can do is to wait for the Draft to release. Till then we can only predict the outlook of the GST model in India and nothing can be said with utmost certainty. Further we would bring in light that the Finance Ministers categorical statement in Parliament regarding GST implementation on April 1, 2010 clearly indicates the Governments clear and incessant intention towards bringing this tax regime by its due date. Accordingly, based on indications, as also on the basis of our subsequent interactions with senior Government Officials, we believe that the April 1, 2011 timeline for introduction of the dual GST will be duly met and we must welcome this new levy as this is the future of forthcoming India.

List of Tables 1-1

Union List of scheme of taxation

1-2

1-2

State List of scheme of taxation

1-3

1-3

Indian Taxation System

1-6

1-4

Revenue Importance of Central and States Taxes for Determining GST

1-7

Rate Shares 2-1

Taxation of Services

2-14

2-2

Share of Indirect Taxes in Total Tax Revenue

2-15

2-3

Merger of indirect Taxes into GST

2-18

3-1

GST work at the ground level

3-12

xiv

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