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Goods and Service Tax - In Simple Terms

Jun 08, 2017

Goods and Services Tax (‘GST’), the biggest Indirect Tax Reforms since Indian Independence, was first idea-ted in 2006 by the then Finance Minister Mr P. Chidambaram was introduced the 115th Constitutional amendment bill 2011. However, he failed to bring consensus between the Centre and the States. The bill was lapsed due to dissolution of Lok Sabha in 2014.

Since day one, the NDA Government under the leadership of Mr Narendra Modi had been working on bringing the GST to reality. However, the ploy was spoiled owing to various political drama for quite sometime. The Government has worked over time in bringing a consensus of all the parties and the States. It is a laudable act of the parties to set aside their political differences and support the economically beneficial tax reforms.

SNAPSHOT OF THE ONE HUNDRED AND FIRST CONSTITUTIONAL AMENDMENT BILL, 2016

Subsuming of various Central indirect taxes and levies along with State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies) and State cesses and surcharges in so far as they relate to supply of goods and services;
Dispensing with the concept of ‘declared goods of special importance’ under the Constitution;
Levy of Integrated Goods and Services Tax (‘IGST’) in inter-State transactions of goods and services;
Conferring concurrent power upon Parliament and the State Legislatures to make GST laws;
Formation of GST Council to make recommendations on Tax rates, taxable and non-taxable goods and services, model GST laws, principle of apportionment, threshold limit and rate bands;
Alcoholic liquor for human consumption outside GST purview. In case of petroleum and petroleum products, shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council;
Formation of a Dispute Resolution Mechanism;and
Compensation to the States for loss of revenue arising on account of implementation of the GST for a period which may extend to five years.

So, what does the constitutional amendment bill and draft Model GST Law would mean to the Business World?

GST represents not just a change in the tax regime, but a business transformation;
Its introduction will necessitate a review and change of tax positions, the supply chain, enterprise resource planning (ERP) systems, business processes and accounting among others;
Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market;
All goods and Services would be liable to tax by the Centre (Central GST-CGST), State (State GST-SGST) and Centre to levy Integrated GST (‘IGST’);
GST is destination-based consumption tax as against the current tax regime of origin based taxation;
All tax credits/liabilities will travel along with the goods/ services to ensure no leakage/delays;
All taxes and returns are to be paid, uploaded and tracked online only – a complete paperless and digital tax administration;
GST enables service providers to avail additional credits with VAT/ sales tax cost on capex;
The underlying principle in GST is to ensure “one country, one tax rate” and ‘Zero tax loss in the entire value chain’; and
From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%.

IMPACT ON A SERVICE PROVIDER:

A Service Provider with operations in 36 States and Union Territories, can obtain a single centralized service tax registration, whereas under GST, separate registrations may have to be obtained in each of the 36 States and Union Territories; and
A Service Provider currently files only three service tax returns a year, under GST regime, the Service Provider will have to file 4 or 5 returns per state per month, which amounts to about 180 returns per month, .

IMPACT ON A MANUFACTURER:

A manufacturer with one factory and operations in 36 States and Union Territories will have 38 registrations currently (1 Excise, 36 VAT, and 1 Service Tax), Under GST the number of registrations will be reduced to 36 (1 for each of the 36); and
Number of tax returns filing will be increased to 180 returns per month from the existing 37 monthly returns and a ST half-yearly return.

IMPACT ON THE TRADERS:

A trader with operations in 36 States and Union Territories will have 36 registrations currently (36 VAT), Under GST the number of registrations will continue to be same;
Number of tax returns filing will be increased to 180 returns per month from the existing 36 monthly returns;
Traders must comply with HSN code, which they have not been used to hitherto; and
Traders will be potentially assessed by Centre and State Tax Authorities, who has been assessed by VAT Authorities hitherto.

IMPACT ON E-COMMERCE SECTOR:

E-Commerce players could potentially be tax collecting agents of the Governments with the levy of Tax Collection at Source (‘TCS’) on all the sales made by the Sellers;
With this levy online sellers could potentially be deprived from the threshold limit; and
This could potentially hurt the innovative e-commerce sector and lock in their monies as tax, hurting much needed working capital for Small and Medium Enterprises.

ENFORCEMENT OF LAW:

The draft GST Model Law has been published in June 2016 for public comments. If everything goes on as planned, GST could be possibly enforced from Q1 of 2017.

CONCLUSION REMARKS:

Given that the draft Model GST law is already available for public, with the passage of Constitutional Amendment bill, the Government has earned much needed confidence from the Business Forum.

With Constitutional amendment bill being passed in Rajya Sabha, What happens next? Will shortly come back in next series.

This article was first published on LinkedIn by Kalaiarasan Manoharan

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