VAT Road to GST

VAT: Road to GST 1

Project Report on Contemporary issues

VAT: Road to GST

Course Code: MGT 727

Submitted by: Varun Puri Reg. No. 10800464 RR1805 A 19

Submitted to: Anand Thakur

DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHAGWARA (2010) Lovely Professional University

VAT: Road to GST 2

DECLARATION

I, "Varun Puri”, hereby declare that the work presented herein is genuine work done originally by me and has not been published or submitted elsewhere. Any literature, data or works done by others and cited within this report has been given due acknowledgement and listed in the reference section.

_______________________ (Varun Puri)

_______________________ (Registration No.)

Date:__________________

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Contents Review of Literature...................................................................................................5 Need, Scope & Objective of Study..............................................................................7 Need........................................................................................................................7 Scope....................................................................................................................... 7 Objective.................................................................................................................7 Value Added Tax.........................................................................................................8 History....................................................................................................................8 VAT in India............................................................................................................. 8 What is Value Added Tax (VAT)?.............................................................................9 The basic principle of VAT.....................................................................................10 Why a New Tax System?.......................................................................................10 Who have to register as a Taxpayer?....................................................................11 Registration for VAT:- (Procedure)........................................................................12 Declaration & Payment of Tax...............................................................................14 Comparison of VAT and Sales tax..........................................................................14 Advantages of application of VAT..........................................................................15 VAT Effect on Inflation...........................................................................................17 Effects of VAT on Distribution................................................................................18 VAT Effect on Economic Growth............................................................................20 Goods & Services Tax Model for India......................................................................20 GST: The way ahead..............................................................................................20 Salient features of the GST model.........................................................................21 Taxes subsumed by GST.......................................................................................23 GST’s benefit to the small entrepreneurs and small traders.................................25

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Executive Summary Chanakya’s economic wisdom of granting states the right to tax its people just as a shepherd shears his flock or as a bee gets nectar from the flower we have died with him. The modern Indian state taxes its people just like the French use the flower for extracting perfume – in such a way that by the time they are through, nothing much of the flower remains. Over the years, this suffocating system of taxation has spawned a black economy that is by many estimates half as big as the white counterpart. Moreover the revenue collection system of the states was a totally corrupt one and many efforts since the economy actually liberalized itself have brought only limited results with lot more remaining to be done. A new system of taxation base on the principles of value addition took effect from April 2005. The basic objective of this project is to gain knowledge of the current indirect tax regime i.e. Value Added Tax, this report will help one to know what are the prerequisites for registering under the Vat regime & what are the benefits of VAT over the previous Sales Tax regime. When we talk about contemporary about VAT immediately Goods & Services Tax regime comes to the picture which is now scheduled to be implemented in 2011. This was the other objective, to understand the concept of GST.

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Review of Literature Dasgupta, A., 20051, This White Paper on State-level Value Added Tax (VAT) is presented in three parts. 1) The justification of VAT and its background In Part 2, the main design of VAT, as evolved on the basis of a consensus among the States through repeated discussions in the Empowered Committee, has been elaborated. While doing so, it was recognized that this VAT was a State subject and therefore the States had freedom for appropriate variations consistent with the basic design as agreed upon at the Empowered Committee. Finally, in Part 3, .what was the steps taken by the various states.

Rao, K, 2008,2 This paper attempts to identify some of the potential contours of the tax. One of the key issues that need to be resolved is the treatment of inter-state transactions in goods and services. The related issue concerns taxation of services which span more than one tax jurisdiction. International experience points towards self-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 maximize on the efficiency of administration. 1

Dasgupta, A., 2005,”A White Paper On State-Level Value Added Tax”,

2

Rao, K, 2008, ”Goods and Services Tax for India”, National Institute of Public Finance and Policy New Delhi, http://www.nipfp.org.in

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D T TI3,2009, The Survey results demonstrate an almost unanimous consensus that GST will be beneficial to the Indian economy. But the suitability of Dual GST which seems to be the only practical alternative in the short-term is not favored by a majority of the respondents. In addition, the possibility that a few states may not join the GST bandwagon presents as area of concern. The respondents were divided over extension of GST to products of conspicuous consumption which attract high tax rate or the manner of availability of tax credit on capital goods. The most significant point to note out of the Survey, not entirely unexpected, is the view that the appropriate date for GST introduction is April 2011. It is also interesting to note that; Easier compliance, efficient administration and increased tax collection are ranked in that order as critical success factors. Clearly there is a message to the Government where the implementation efforts should be aimed at. The results of the Survey reveal the expectations, apprehensions and concerns of the trade & industry and provide an insight to the policymakers to address the same for a successful implementation of the GST.

3

DTTI,2009, “The pre GST Survey”, Deloitte Touche Tohmatsu India Private Limited, http://www.amchamindia.com/Deloitte-Pre%20GST%20Survey%202009.pdf

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Need, Scope & Objective of Study Need In the current scenario when our economy is to implement its new indirect tax regime Goods & Services Tax which is extension to VAT model. The study aims to compare the VAT with sales tax regime & then to have insight about registering under VAT. Scope The scope of study covers VAT the current regime & the new GST regime.

Objective • To Understand the concept of VAT • To Compare VAT with Sales tax regime • To know how to register under VAT • To Procedure for Declaration & Payment of VAT • To know Impact of VAT on Economy & Inflation • To know features of Goods & Services TAX

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Value Added Tax History4 Maurice Lauré, Joint Director of the French Tax Authority, was first to introduce VAT on April 10, 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for 52% of state revenues.

VAT in India Finally after 14 years vat was implemented. Let us have a glance on the history of vat up till April 2005 and reasons why it could not be implemented before. Economic reforms were on a priority by the government since 1991. But it is to be noted that, VAT was introduced in India in the year 1976, in respect of Central Excise. However, it was restricted only up to the Excise Duties, and was known as Modvat (modified value added tax). The coverage of Modvat gradually increased and covered various other chapters. The importance & need of VAT in the sales tax structure of India was recognized by the taxation authorities. But the reason why the proposal of VAT took a long time is because VAT in its simplest form cannot be adopted in India where there are various authorities who can levy the taxes (e.g.: State/ Central/ Municipality) There are various reasons why the implementation can take time. It is the policies, the framework, the commodities, the taxation rate, changing from a multiple point tax to a single point tax, etc and all such details had to be worked upon. Moreover, in the then existing sales tax regime, it is the states that collect the taxes, that too at different rates.

4

^ "Les recettes fiscales" (in french). Le budget et les comptes de l’État. Minister of the Economy, Industry and Employment (France). 23 February 2009. http://www.performancepublique.gouv.fr/le-budget-et-les-comptes-de-letat/approfondir/les-recettes/les-recettesfiscales.html. "la TVA représente 130,2 milliards d’euros, soit 52,0 % des recettes fiscales nettes de l’État." Accessed from : http://en.wikipedia.org/wiki/VAT#cite_note-0

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What is Value Added Tax (VAT)?5 VAT is a simple transparent tax collected on sales of goods. The states and union territories of India have decided to implement VAT in place of sales tax and a number of other state taxes. 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 120 countries. 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 reseller or the manufacturer would be reduced unless the ultimate price is increased. Cascading effects of taxation Sales Tax

5

Dasgupta, A.(2009), “A White Paper On State-Level Value Added Tax”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 6-8

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The basic principle of VAT The Value Added Tax system has its origin in the West European countries. Generally, taxes are levied on the selling price of the product. Today raw material passes through a number of stages and processes until it reaches the ultimate stage. For instance, steel ingots are made in a steel mill, which are then rolled into plates in a rerolling unit and after this a third manufacturer will make furniture from these plates. Thus, output of the first manufacturer becomes the input of the second manufacturer, who carries out further processing and supplies it to the third manufacturer. This process continues till the final product emerges. The product then goes to the wholesaler who in turn will sell it to the retailer and he will finally turn it to the consumer. Thus, if tax is levied on the selling price of a product, the incidence of tax goes on increasing as the raw material and final product pass from one stage to another, as shown in the table below

Why a New Tax System? There are seven significant reasons to reform the tax system. 1) The then existing system was too complex. That tax code has evolved over many years

creating thousands of conflicting definitions and exemptions. It required numerous complex forms that take an enormous amount of time and money to complete. It also led to difficulty in enforcement and collection, and created hundreds of loopholes that are used to reduce or evade taxes.

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2) It was too easily exploited for political reasons. Tax rates, incentives, and exemptions

were altered continuously for political reasons. There was ongoing political pressure to alter tax laws to benefit or exclude special interest groups. 3) The then existing structure created a poor economic impact. The tax code was often

altered to provide economic stimulus for various business segments, with dubious results. It neglected the overall health of the economy. It often discourages economic growth by creating a negative incentive to work and to earn more. An ideal system would tax spending to create a positive incentive to earn more, and save and invest more. 4) It was a bureaucratic control. The Income tax Revenue Survey requires a huge operating

budget and over 114,000 employees to manage this huge bureaucracy. This was nonproductive labour that does not contribute directly to the economy. In fact, it is a measurable drain on the economy both in direct and indirect costs, estimated at over $600 billion annually. These educated and talented people could contribute greatly in productive jobs in the private sector. 5) It requires a large number of professionals in the private sector, like tax accountants,

lawyers, and even entire corporate departments, to advise, interpret and prepare tax returns. This process wastes valuable resources on non-productive labour that could otherwise be used to build businesses and strengthen the economy. 6) It forces business managers to make decisions based on tax implications rather than good business. For example, a company decides not to build a new assembly plant because of negative capital investment tax policies, and thereby deprives a community from new jobs and the company from growth. 7) It is inefficient. It just costs too much to collect taxes this way. If we are ever going to reduce the national deficit without breaking the back of the tax payer, this is the first place to reduce waste. Who have to register as a Taxpayer? All legal and natural persons who provide goods, works or services and have an annual sales turnover exceeding the threshold limit should register as taxpayer. All importers are required to

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register irrespective of their annual turnover. If the dealer supplies only exempt goods and services he must still notify the local VAT office if his turnover exceeds the threshold limit. Totally exempt businesses will not however be registered as taxpayers but still be subjected to later visits by VAT officials to confirm their exempt status. It is the person, NOT the enterprise, who is registered for VAT. The person is only registered once for all enterprises/branches/divisions carried on unless permission is granted to register them separately.

The person to be registered •

Sole proprietor (individual)

•

Incorporated/unincorporated body of persons

•

Corporation / company

•

Association not for gain

•

Welfare organization / trust

•

Local authority and certain public authorities

Registration for VAT:-

(Procedure)

•

Download or buy forms; FORM 1, FORM 2, FORM 3,

•

Fill the Application in duplicate and affix photograph.

•

Attach the following documents to the application a. Copy of the constitution document e.g. Partnership deed for partnership firm, Memorandum and Articles of Association for a company. b. Board Resolution authorizing the signatory to sign the application in case of company.

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c. Proof of identification of the authorized signatory e.g. voter identity card, passport, driving license. d. Proof of principal place of business e.g. rent receipt, lease agreement, electricity bill. e. Submit the forms to the jurisdictional Central Excise Office •

Submit the above in the nearest Commercial Tax Office.

•

On submission, the Commercial Tax Officer would verify if the submission is complete and desirable.

•

He would make a field inspection of your premises.

•

The Office of Commercial Tax Officer would send you the VAT CERTIFICATE

•

Once registered, you will have to account for output tax that is attributable to your taxable sales. You will also have to submit VAT returns monthly to the Commercial Taxes Department and keep proper books of accounts.

Type of registration: VAT (Obligatory): All those businesses having •

Annual turnover equal to or more than 5 lacks

•

Carries out Inter State transactions (Irrespective to annual sales)

VAT (Voluntary) Any one not fulfilling the above conditions may register himself under VAT voluntarily keeping future in consideration. TOT Turnover Tax also called Composition scheme or Lump Sum Payment Schemes. Small retailers may not be in a position to maintain detail record of tax paid on inputs and tax payable on final products. In such case, they will pay tax at flat rate based on their turnover. Naturally,

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they cannot issue a VAT invoice and cannot show sales tax separately in their invoice. The empowered committee has agreed that dealers with turnover up to Rs. 40 lakhs p.a. can be eligible to the composition scheme, by just paying 1 % which is now 0.25% of their turnover as composition tax. This option is available only for the businesses like Brick Kilens & Dhabas (that does not include restaurants). Declaration & Payment of Tax One must complete a VAT declaration form monthly as per directions of the VAT office for instance on the 16th day of each month. On the form you will show the amount of VAT you have paid to your suppliers and the amount you have charged your customers. The difference between the two figures is either the amount of tax due to be paid to the VAT office or the amount of credit to be carried forward to the next month’s declaration. Credit for purchases can only be claimed if you are in possession of an official tax invoice which shows the amount of VAT you have paid on the transaction. If you calculate that you owe tax to the VAT office it should be paid at the same time as you submit your declaration form. If you are owed tax it will be carried forward and you will deduct it from the tax you owe the following month. You will also need to show other information on your declaration.

In case of Annual turnover more than 1 crore •

Monthly declaration & payment of Output tax using FORM 16 o This is annexure less return

•

On the end of every quarter through FORM 15 o Annexures FORM 18, 19, 23, 24 o FORM 23 & 24 includes the Total Purchases, input tax, Total Sales & input taxes

In case of Annual turnover less than 1 crore •

Filing of Quarterly return using FORM 15 with FORM 18, 19, 23, 24 as annexure

Comparison of VAT and Sales tax Under Sales Tax

Under VAT

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Tax levied at the stage of the first sale (only for Tax levied and collected at every point of sale. cotton, leather and natural gas at the final stage). Tax levied and collected at every point of sale Tax collected at every point of sale and the tax already paid by the dealer at the time of purchase Successive sales (resale) of goods on which tax is of goods will be deducted from the amount of tax already paid do not attract tax. paid at the next sale. Dealers reselling goods on which tax has already Dealers reselling tax-paid goods will have to been paid do not collect any tax on resale and file collect VAT and file returns and pay VAT at nil returns every stage of sale (value addition). The manufacturer will pay VAT on the goods On 19 goods used as raw materials there is no purchased as raw materials but the VAT paid on input tax credit on the tax paid on such goods and raw materials will be deducted on the sale of 2% tax is levied on other goods used as raw goods manufactured. Thus duplication of tax materials for manufacture. burden on raw materials will be avoided. Computation of tax liability is complex. It is transparent and easier. Huge number of forms required in procedure. Six taxation rates. At the most a few forms required. Only two rates. Tax only on goods. Assessment done by the department.

Tax on goods and services both. Self-assessments by dealers.

Advantages of application of VAT In its purest form, VAT is a tax that is levied on the value added along different stages of production and distribution of a commodity or service. Therefore, it is a tax on the sum total of value added, i.e., equal to the value of a commodity or service. In this sense, it should be equivalent to a retail sales tax that is collected only at the retail stage. But the retail sales tax is difficult to collect because there are too many retailers of various sizes. The VAT, instead, can be collected at earlier stages of production in fragments and can end at the retail stage. But the total collected from the VAT should be exactly the same as if collected only from the retailers of the commodity concerned. (i) Eliminates cascading effects :The VAT is preferred because the VAT minimizes distortions. The simple excises or the turnover taxes results in the unintended effect of (i) taxing an output (together with its input content) more than once; as well as (ii) applying a tax on the earlier paid input tax leading to cascading. It causes producers to move their capital or resources away from the production of

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one output to another one which does not suffer from cascading. The VAT, because it gives credit for input tax earlier paid, avoid the distortion as represented by misallocation or redirection of resources from one economic activity to another. Therefore, it does not alter producers’ decisions to produce particular commodities which, in general, should reflect the demands from consumers. However, for this benefit to occur, the VAT must give credit for raw materials and capital goods. (ii) Eases administration:Although there are feasible options limiting the impact of cascading, the utility of multipoint VAT goes much beyond that. Arresting cascading could be considered important to a regime of VAT. Nevertheless, the institution of VAT in fact should be conceived also as an instrument of tax administration – an administration that checks evasion through a self monitoring feature, and an account based audit system that is regarded as superior to the system of physical verification. The latter already having fallen into disrepute for causing distress to tax filer’s needs to be eventually abandoned as its positive impact on revenue yield remains questionable. An accountbased audit should not only tighten the tax net but raise revenues through a wider acceptability of a tax administration in the public eye. (iii)

Improves International competitiveness:-

Since VAT has the potential for eliminating cascading, it is possible to design the VAT in a manner that will ensure that exports are free from any tax burden (zero-rating). Further, such adjustments under the VAT structure are also WTO consistent. As a result the competitiveness of exports in international markets is enhanced. Even though exports are generally exempt from sales tax and the burden of input tax embedded in the exports is sought to be eliminated through the duty drawback mechanism, nevertheless, the process is cumbersome and the effect is not fully realised. As export competitiveness can be adversely influenced by then tax factor, the capacity to zero rate easily and accurately is an important aspect of the VAT. (iv)Imparts Transparency:Another positive aspect of the VAT is its simplicity and transparency, which commodity taxes usually lack. The VAT tends to collect the quantum of tax payable at every stage of transaction.

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Both producers and consumers, who ultimately bear the tax burden, are fully aware of the tax liability, which is not as easily ascertainable in other forms of commodity taxation. (v) Buoyant Source of Revenue:When faced with chronic budget deficits and growing expenditures, governments have been turning to tax reform as a way to raise revenues. Governments seek sources that are income elastic and not sensitive to changes in prices of particular goods or income sources. Since the VAT permits a relatively larger coverage in as much as it is possible to extend it to value addition at all stages in the production-distribution chain, the potential for raising resources efficiently is generally higher. (vi)Goodbye to Tax on Tax: VAT is the only tax that offers positive alternatives to the negative impact of indirect taxation. It is an accepted fact that commodity taxes create severe cascading effect as the taxes levied at earlier stages of production and distribution get taxed again and again at subsequent points. Consequently, instead of paying taxes on the value addition by a manufacturer, wholesaler or retailer, tax is paid on an inflated value, which includes taxes already paid at earlier stages. Such anomalies escalate prices and encourage vertical integration, where the manufacturer himself tries to wholesale and retail the goods. Vertical integration has been responsible for recession and unemployment particularly in developing countries. VAT has an inbuilt device for reducing the cascading effect by restricting the levy to actual value addition. It encourages growth by confining tax burden to the net economic contribution of the taxpayer. Moreover, since the Capital Investment also gets tax relief. VAT can accelerate economic growth by encouraging modernization and replacement. VAT Effect on Inflation In considering the introduction of VAT, countries are often concerned that it would cause an inflationary spiral. However there is no evidence to suggest that this is true. A survey of OECD countries that introduced VAT indicated that VAT had little or no effect on prices. In cases where there was an effect it was a one time effect that simply shifted the trend line of the consumer price index (CPI). To guard against any unforeseen price effects the authorities may consider a tighter monetary policy stance at the introduction of VAT. Lovely Professional University

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Effects of VAT on Distribution Value added tax is widely criticized as being regressive with respect to income that is its burden falls heavily on the poor than on the rich. This emanates from the fact that consumption as a share of income falls as income rises. Hence a uniform VAT rate falls heavily on the poor than the rich. This criticism is valid when VAT payments are expressed as a proportion of current income. However if, following the premise that welfare is demonstrated by the level of consumption rather than income, consumption is used as the denominator the impact of VAT would be proportional. A proportional burden would also be demonstrated if lifetime income rather than current income is used. A lifetime income concept considers the fact that many income recipients are only temporarily at lower income brackets as their earnings increase. In order to address the regressivety of VAT the following measures can be taken: •

The VAT itself can be used to differentiate taxation of consumer items that are consumed primarily by the poor such that they pay less or at zero rate or to tax luxury goods at a higher than standard rate.

•

VAT exemptions may also be granted on goods and services that are consumed mostly by the poor.

•

Equity concerns may also be addressed through other ways, outside the VAT system, such as other tax and spending instruments of government. This could be in the form of lower basic income tax rates on the poor or some pro-poor expenditures of government. The use of multiple rates of VAT has however been widely discouraged for various reasons. These include: o The fact that sometimes it is almost impossible to differentiate between higher quality expensive products – e.g. food, consumed by the rich and ordinary products consumed by the poor. Thus any concessions extended may tend to benefit the rich much more than the poor. o Increased costs of VAT administration as a differentiated rate structure brings with it problems of delineating products and interpreting the rules on which rate to use. o Significantly increased costs of tax compliance for small firms, which are usually unable to keep separate records/accounts for sales of differently taxed items. This

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results in the use of presumptive methods of determining the tax liability, which leads to more difficulties in monitoring the compliance. The higher compliance cost resultant from differentiation of VAT rates may also be regressive with respect to income since smaller firms with lower income tend to bear proportionately more of the burden than do larger firms. Exemptions refer to situations where output is not taxed but taxes paid on inputs are not recoverable. The rationale behind exemptions is to reduce negative distributional effects of tax through the effect on incomes. The effects of exemption may be as follows: •

Falling of revenues – exemptions break the VAT chain. If exemptions are granted at prior to the final sale, it results in a loss of revenue since value added at the final stage escapes tax.

•

Un-recovered taxation of some intermediate goods may lead to producers substituting away from such inputs thus distorting the input choices of the said producers.

•

Exemptions may create incentives to “self supply” i.e. tax avoidance by vertical integration.

•

Exemptions tend to feed on each other giving rise to a phenomenon called “exemption creep”. This arises from the fact that each exemption gives rise to pressures on further exemption. For example creating an exemption to reduce the tax burden on a particular commodity or goods may lead to increased pressure for exemption or zero rating of inputs used for the production of such a commodity.

Based on the above, it is important that care is taken when introducing exemptions in order to avoid distortions in the production process as well as to minimize revenue loss resulting from such distortions. Given the fact that the primary purpose of VAT is to raise government revenue in an efficient manner and with as little distortions of economic activity as possible, distribution effects are perhaps better addressed by other forms of tax and government expenditure policies which can often be better targeted at these aims.

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VAT Effect on Economic Growth Economic growth can be facilitated through investment by both government and the private sector. Savings by both parties are required in order to finance investment in a non-inflationary manner. Compared to other broadly based taxes such as income tax VAT is neutral with respect to choices on whether to consume now or save for future consumption. Although VAT reduces the absolute return on saving it does not reduce the net rate of return on saving. Income tax reduces the net rate of return as both the amount saved as well as the return on that saving are subject to tax. In this regard VAT may be said to be a superior tax in promoting economic growth than income tax. Since VAT does not influence investment decisions on firms, by increasing their costs, its effects on investment can be said to be neutral.

Goods & Services Tax Model for India GST: The way ahead “If the Value Added Tax (VAT) is considered to be a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level, then the Goods and Services Tax (GST) will be a further significant breakthrough – the next logical step towards a comprehensive indirect tax reform in the country.”6 By P. Chidambram Why GST? In the existing State-level VAT structure there are also certain shortcomings as follows. There are, for instance, even now, several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., and yet not subsumed in the VAT. In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects. This is the essence of GST, and this is why GST is not simply VAT plus service tax but an improvement 6

Chidambram, P., (2009), “First Discussion Paper On Goods and Services Tax In India”, The Empowered Committee Of State Finance Ministers, New Delhi, pp i.

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over the previous system of VAT and disjointed service tax. However, for this 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. Moreover, with the introduction of GST, burden of Central Sales Tax (CST) will also be removed. The GST at the State-level is, therefore, justified for (a) Additional power of levy of taxation of services for the States, (b) System of comprehensive set-off relief, including set-off for cascading burden of CENVAT and service taxes, (c) Subsuming of several taxes in the GST and (d) Removal of burden of CST. Because of the removal of cascading effect, the burden of tax under GST on goods will, in general, fall.

Salient features of the GST model7 Keeping in view the report of the Joint Working Group on Goods and Services Tax, the views received from the States and Government of India, a dual GST structure with defined functions and responsibilities of the Centre and the States is recommended. An appropriate mechanism that will be binding on both the Centre and the States would be worked out whereby the harmonious rate structure along with the need for further modification could be upheld, if necessary with a collectively agreed Constitutional Amendment. Salient features of the proposed model are as follows: •

The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.

7

Dasgupta, A.(2009), “First Discussion Paper On Goods and Services Tax In India”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 37-38

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•

The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

•

The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited).

•

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. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

•

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 model which is explained later.

•

The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.

•

Since the Central GST and State GST are to be treated separately, in general, 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.

• To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST. •

The administration of the Central GST would be with the Centre and for State GST with the States.

•

The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities.

•

Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the Lovely Professional University

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prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department. •

Keeping in mind the need of tax payers convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.

Taxes subsumed by GST8 The various Central, State and Local levies were examined to identify their possibility of being subsumed under GST. While identifying, the following principles were kept in mind: •

Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services.

•

Taxes or levies to be subsumed should be part of the transaction chain which commences with import/manufacture/ production of goods or provision of services at one end and the consumption of goods and services at the other.

•

The subjugation should result in free flow of tax credit in intra and inter-State levels.

•

The taxes, levies and fees that are not specifically related to supply of goods & services should not be subsumed under GST.

•

Revenue fairness for both the Union and the States individually would need to be attempted.

On application of the above principles, the following Central Taxes would be, to begin with, subsumed under the Goods and Services Tax: •

Central Excise Duty

•

Additional Excise Duties

•

The Excise Duty levied under the Medicinal and Toiletries Preparation Act

•

Service Tax

•

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

8

Dasgupta, A.(2009), “First Discussion Paper On Goods and Services Tax In India”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 19

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•

Special Additional Duty of Customs - 4% (SAD)

•

Surcharges, and

•

Cesses.

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

VAT / Sales tax

•

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

•

Luxury tax

•

Taxes on lottery, betting and gambling.

•

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

•

Entry tax not in lieu of Octroi.

The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholesaler and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholesaler. When the wholesaler sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholesaler. Thus, the manufacturer, wholesaler and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after settingoff GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well.

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GST’s benefit to the small entrepreneurs and small traders The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. The existing threshold of goods under State VAT is Rs. 5 lakhs for a majority of bigger States and a lower threshold for North Eastern States and Special Category States. A uniform State GST threshold across States is desirable and, therefore, the Empowered Committee has recommended that a threshold of gross annual turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for services should also be appropriately high. This raising of threshold will protect the interest of small traders.

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Conclusion Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is a Herculean task to say the least. The Constitution of India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and international imports are with the Union and post- production levies rest with the states. The Centre levies duties of excise on manufactures and import/countervailing duties on international imports apart from levying a tax on services under various taxing and the residuary entry in the Union List. The states levy VAT on goods sold or entering in the state under various entries of the state list. Even if all Union-level levies are integrated into a single levy and all state level levies culminate in a single State level levy; this may still have two levies and the resultant cascading and administrative burdens may nevertheless remain to an extent, though this may go a long way in harmonizing levies. A harmonized, integrated and fully fledged GST calls for the following: 1. Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. 2. Services have to be appropriately integrated in the tax network; and 3. Apart from all these, there has to be a robust and integrated MIS dedicated to the task of tracking flow of goods and services across the country and rendering accurate accounting of levies associated with such flow of goods and service. Lovely Professional University

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From the above report on GST it is most clear that the advantages are may be evidently laid out that is the increasing proximity of our tax system to the global tax system. In a way, it may boost our economy and enable us to compete at the global front. As a result, even our system may match the international phenomenon. This is the biggest advantage of such a system. But every system has its own intricacies embedded at the initial stages. Lower incidence of tax, reduced prices, a move towards the global concept, reducing cost of tax compliance, better revenue collection, an efficient and harmonized consumption tax system in the country all this looks good on the card, but is it really so easy to implement? Keeping the various constitutional, technological, procedural and political barriers, the job seems easier said than done.

References

Dasgupta, A., 2005,”A White Paper On State-Level Value Added Tax”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 6-8 Available at: www.finmin.nic.in/downloads/reports/whitepapervat.pdf 5

Dasgupta, A.(2009), “A White Paper On State-Level Value Added Tax”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 6-8 Available at: www.finmin.nic.in/downloads/reports/whitepapervat.pdf 6

Dasgupta, A.(2009), “First Discussion Paper On Goods and Services Tax In India”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 19 7

Dasgupta, A.(2009), “First Discussion Paper On Goods and Services Tax In India”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 37-38 8

Dasgupta, A.(2009), “First Discussion Paper On Goods and Services Tax In India”, The Empowered Committee Of State Finance Ministers, New Delhi,pp 19 3

DTTI,2009, “The pre GST Survey”, Deloitte Touche Tohmatsu India Private Limited, Available at http://www.amchamindia.com/Deloitte-Pre%20GST%20Survey%202009.pdf

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2

Rao, K, 2008, ”Goods and Services Tax for India”, National Institute of Public Finance and Policy New Delhi, http://www.nipfp.org.in 4

"Les recettes fiscales" (in french). Le budget et les comptes de l’État. Minister of the Economy, Industry and Employment (France). 23 February 2009. http://www.performance-publique.gouv.fr/le-budget-et-les-comptes-deletat/approfondir/les-recettes/les-recettes-fiscales.html. "la TVA représente 130,2 milliards d’euros, soit 52,0 % des recettes fiscales nettes de l’État." Accessed from : http://en.wikipedia.org/wiki/VAT#cite_note-0

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