India: GST: A Bird's Eye View

Last Updated: 14 September 2016
Article by Link Legal India Law Services

Highlights

  • Introducing a single and transparent tax system.
  • Subsuming of certain major Central and State taxes.
  • Tax to be paid proportionate to value of the goods.
  • Input Tax Credit across value chain and curing the cascading effect of taxes.
  • Uniformity in tax rates and compliances across states.

Constitution (122nd Amendment) Bill, 2014

The tax regime in India has come a long way from being a cumbersome legislation to a more efficient system of imposing tax on value additions at every stage and reducing the overall burden of tax. The introduction of VAT in 2005 cured the cascading effect of tax by imposing tax only on the value additions within a supply chain. This made the tax structure more transparent and facilitated in reduction of price of various goods.

However, though the introduction of VAT decreased the cost of production of goods, it could not do much in case of inter-state movement of goods and also did not permit set-off of input credit across different taxes. In order to remedy these failures the Government of India recently passed the Constitution (122nd Amendment) Bill, 2014.

The Bill seeks to amend the Constitution of India and confer a simultaneous power upon the Centre and the State Legislatures to make laws governing goods and services tax. The Bill proposes to introduce Goods and Service Tax (GST), a single tax on the supply of all goods and services.

GST

The GST system will introduce a harmonised system of taxation wherein all the central and state indirect tax would be clubbed and taxed under 'one tax' code. The introduction of GST will subsume certain major taxes levied presently by the Central and State Government.

Taxes to be subsumed at Central level would include the following:

  • Central Excise Duty;
  • Additional Excise Duty;
  • Service Tax;
  • Additional Customs Duty

Similarly, taxes to be subsumed at State level would include the following:

  • State Value Added Tax/Sales Tax;
  • Entertainment Tax;
  • Entry tax;
  • Purchase Tax;
  • Luxury tax

Under the GST model, tax will be levied under three components, namely, Central Goods and Service Tax (CGST), State Goods and Service Tax (SGST) and the Integrated Goods and Service Tax (IGST).

  • SGST and CGST will be levied on all intra-state supply of goods and services.
  • IGST will be levied on inter-state supply of goods and services.

Also on import of goods, all State taxes are being subsumed and IGST will be levied on all imports into the territory of India.

Therefore tax under GST will be levied on "supply of goods or services". Further, the term 'supply' has been given a wide connotation to include all supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal, importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, etc. The liability to pay the tax would arise at the time of supply and the time of supply would be taken as a date earliest when the goods were either removed or made available to the recipient or date on which invoice is issued or the date on which supplier receives payment.

GST will be levied on all goods and services except alcoholic liquor for human consumption. Further, it is intended that initially, GST will not apply to certain products such as petroleum crude, high speed diesel, motor spirit, and natural gas and aviation turbine fuel, however, GST on these goods will be made applicable in a phased manner.

Input Tax Credit

A major introduction that will be brought by GST will be the availability of input tax credit at not only each stage of supply but also for inter-state transactions. Moreover, utilization of credit of CGST or SGST, respectively, between goods and services will also be allowed. Consequently, input tax credit of CGST will be made available for discharging the CGST liability on the output at each stage. Similarly, input tax credit of SGST will be made available for discharging the SGST liability at each stage of output.

Though cross utilization between CGST and SGST will not be allowed, set off of CSGT and SGST against IGST will be permitted. Therefore, with the introduction of GST, input tax credit will be available across intra-state as well as inter-state transactions.

Legal Impact

The model GST law provides for a smooth transition as far as the registration procedure is concerned. The existing dealers having a valid and subsisting VAT or service tax or central excise registration will not be required to apply for any fresh registration. Also for new dealers the registration procedure will become much easier and only a single online application for registration will be required to be filled in.

The introduction of GST will require amendments in various legislations and due consideration to the same will be required. Such as, under the present regime, the SEZ Act provides for exemption from payment of Central Sales Tax and Service Tax. The SEZ Act will now require an amendment detailing the extent of exemption from payment of CGST/SGST/IGST in SEZ units.

Also, subject to its effective date, GST may have an impact on the existing contractual agreements and clause relating to payment of taxes might be required to be reviewed as per the negative list, if any, to be introduced under GST. If there is any tax rate mentioned in any contractual agreement, the same may be required to be revisited to make it compliant with GST.

Conclusion

A brief reading of the model GST law promises a reduction in taxes at the consumer level due to availability of input tax credit at each stage. It also denotes a more sophisticated procedure for collecting tax between the Central and the State. However, there is still a long way ahead as the Constitutional Amendment Bill is yet to be passed by the States and there is presently a never ending debate on the rate at which GST will be levied. Therefore, it needs to be seen whether GST will live upto the expectations and finally resolve the issue of cascading taxation and onerous fillings under different tax legislations, as and when it becomes effective.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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