GST bill, the most comprehensive indirect tax regime, is soon to become a law next year. Extensive efforts are being made by the Central government and state governments to rollout the GST regime by April, 2017. The GST council has fixed a four-tier rate structure that will start at 5 percent, attaining dual standard rates of 12 percent and 18 percent, and the highest tax rate reaching upto 28 percent. Most of the items that fall under mass consumption will be under the lowest tax bracket, as proposed by the GST council. There are some goods and services that are nil-rated or enjoy tax exemption under GST. Ample provisions exist in the model GST law to eliminate the cascading of taxes and to boost the flow of credit across key sectors of the economy. The most significant aspect of GST that is expected to immensely benefit businesses is the mechanism of Input Tax Credit (ITC), as defined under various provision of the model GST law.
As per the existing taxation system, ITC (Input Tax Credit) cannot be claimed for CST, Entry Tax and Luxury Tax. In addition, some manufacturers and service providers cannot claim the Central Excise duty. Also, domestic manufacturers cannot avail the benefits of Countervailing Duties (CVD), which is an additional import duty. The CVD is charged for goods in an importing country to counter negative impact on domestic manufacturers that may arise due to export subsidy offered on the same products for exporting nations. The aforementioned are some of the significant factors that constrain the flow of credit across various sectors which the new GST regime has sought to overcome.
To know the provisions of the credit availability of input taxes for various transactions, it is essential to understand the model nature of input taxes. Input tax is defined under various acts of the GST law and falls within these three categories: Central Goods and Service Tax Act (CGST), State Goods and Service Tax Act (SGST) and Integrated Goods and Services Tax (IGST). Broadly, input tax can be defined as the GST charged on any supply of goods and/or services charged to a person in the course or furtherance of his business.
The input tax consists of IGST and CGST in the CGST Act whereas the SGST Act includes IGST & SGST. In the IGST Act, input tax consists of all three taxes—IGST, CGST and SGST. As per the model GST law, cross-utilization of the credit of CGST and SGST is not possible. The input taxes under IGST are levied on all inter-state transactions and commerce. A person registered under any of the acts can avail tax credit on stock inputs, semi-finished goods and finished goods in stock, which is inclusive of capital goods. The amount is credited to the individual’s electronic credit ledger. However, the credit of input tax can only be availed for supplies meant for the purpose of business transactions.
The draft IGST law has made clear provisions to determine the place of supply of goods. All inter-state sellers are liable to pay IGST on value addition after making adjustments for available credit of IGST, CGST and SGST on purchases. As per the taxing of interstate supplies, the government has mandated a specific procedure. The state where the goods and services are exported will transfer to the Centre, through a pre-defined formula, the credit of SGST used in the payment of IGST, while the dealer in the other state who is importing, can claim the credit of IGST while paying the output tax in his own state. In addition, the Central government is mandated to transfer the credit of IGST to the importing state which is used in the payment of SGST.
The salient features of IGST offer many advantages to the sellers and buyers. There is no upfront payment of taxes. Furthermore, since the ITC is used by the seller, no refund claims are needed in the exporting state. This leads to uninterrupted maintenance of the ITC chain on all inter-state transactions and ensures that the taxation is neutral and unbiased. The simple accounting system puts minimal tax compliance burden on the taxpayers and boosts business-to-business (B2B) and business to consumer (B2C) transactions across the nation.
As per the proposed GST law, the GST paid on reverse charge should be considered as input tax. The provision mandates that the tax credit can be availed by the recipient of a good or service if he intends to use it to further his business. This puts the onus of payment of taxes for certain supplies on the recipients. The list of such services can be specified by the Central government and state governments on the recommendation of the GST council. Though the present taxation system has this provision, the benefit is limited as it does not cover a large number of unorganized buyers.
There are many instances where the GST council is yet to offer clarity. For instance: transactions of goods where the place of supply is within the state but the location of the supplier is not registered under the supplier’s state. The way input tax credit will be availed by the recipient is not clear in the model GST law. The same condition may arise if the recipient has to pay IGST on reverse charge basis. If the recipient is bereft of any ITC in the aforementioned instances, it may constrain the credit supply chain and make GST futile for such transactions. Furthermore, the provisions under the model GST law mandates that ITC be reversed in case of any discrepancy between the outward supply details and the inward supply details submitted by the supplier and buyer respectively. Hence, it becomes necessary that filing of valid return by all the parties is necessary. Despite the government making elaborate mechanisms for the ITC, many concerns still remain unaddressed. It remains to be seen how the GST council will address these concerns before the law is finally implemented across the nation.