Feb 19, 2010
Goods and service Tax
Dr. Sanjiv Agarwal
Introduction:
So far, VAT at the state or Cenvat at the central level, along
with services tax, have been major steps in tax reforms.
Before the present tax regime, there was the sales tax regime,
where there was a cascading effect on tax.
VAT has removed this burden, but it had deficiencies.
The Cenvat load remains.
There were several state taxes which were not subsumed in any one tax.
The inter-state sales tax or CST was not fully relieved.
All this will be accomplished by the state GST.
If VAT was a major improvement in the indirect tax system,
GST will be the next logical step and a major breakthrough in
the history of tax reforms in the country.
With the GST, the positive impact on the GDP and state
domestic product may be as high as a 2 per cent gain.
As a first major step in the GST direction, the release of first
discussion paper is a major break through. The second step is
the need for a Constitutional amendment, as the power of levying
service tax will be given to the state, because it is a dual structure.
To subsume so many, many Acts, we also require a
Constitutional amendment. The GST on imports will also
require one. The first draft of the Constitutional amendment
is expected by the end of November. Side by side, work on
the draft for theCentral GST and draft model state GST legislation,
and draft for inter-state GST (IGST) and rules and procedure will start.
State governments have autonomy in selecting rates. In GST, the rates
will be exactly the same , so it will be a harmonious structure.
If there is an exigency, or state have items of local importance in
our choice of the list of exempted items which do not effect inter-state
trade- these will be given flexibility. All federal structures have faced the
problem. We are going to take care of it through Constitutional amendments.
Threshold limit in GST
A threshold of gross annual turnover of Rs.l 0 lakh, both for goods
and services for all the States and Union Territories will be prescribed
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.
After taking into consideration
the interest of small traders and small & medium scale industries and to
avoid dual control,
it has been proposed that the threshold forCentral GST
for goods will be lakh, Rs.l.5 crore and the threshold for services
should also be appropriately high.
Service Tax under GST
Service Tax is presently levied at 10.3% (inclusive of Education Cess)
percent tax on more than 105 services. States do not levy or collect
service taxes at present, but get a share from the Centre’s collections.
It is proposed that states will keep the entire collection from certain
services from this year. States would also tax another set of proposed
new services, collect and appropriate as \ part of compensation forcentral
sales tax phase-out in 2010. Since there would be issues on taxing cross
border services it is expected that the. State GST would only include services
that are essentially of “local nature”.
It has also been proposed thatService tax rate under
Central GST and State GST is likely to be uniform.
Though State Service Tax proposed to be levied on new local services
would add to the cost, a redeeming feature is that Input Tax Credit
would be eligible on the StateService Tax and a host of other levies
like entry tax, electricity tax, and luxury tax etc that would be
integrated under State GST. Of course, the service will qualify as
an eligible input service for claiming cenvat credit.
Inter-state Transactions of Goods and Services (IGST)
Integrated GST (IGST) model for taxation of inter-state transaction
of goods and services has been proposed by the discussion paper.
According to this model, Centre would levy IGST which would be
CGST plus SGST on all ‘inter-State transactions of taxablegoods
and services with appropriate provision for consignment or stock
transfer of goods and services . The inter-State seller will pay IGST
on value addition after adjusting available credit of IGST, CGST,
and SGST on his purchases. The Exporting State will transfer to the
Centre the credit off GST used in payment off GST.
The importing dealer will claim credit of IGST while discharging
his output tax liability in his own State. The Centre will transfer
to the importing State the credit of IGST used in payment of SGST.
The relevant information will also be submitted to theCentral Agency
which will act as a clearing house mechanism, verify the claims and
inform the respective governments to transfer the funds.
The advantages of IGST model are as follows-
* Maintenance of uninterrupted input tax credit chain on inter State transactions.
* No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.
* No refund claim in exporting State, as ITC is used up while paying the tax.
* Self monitoring model.
* Level of computerization is limited to inter-State
dealers and Central and State Governments should be
able to computerize their processes expeditiously.
* As all inter-State dealers will be e-registered and
correspondence with them will be by e-mail, the
compliance level will improve substantially.
* Model is likely to take ‘Business to Business’ as well
as ‘Business to Consumer’ transactions into account.
Taxpayer Identification number
Under the GST regime, each taxpayer will be allotted a PAN
inked taxpayer identification number with a total on 13 to 15 digits.
This would bring the GST PAN-linked system in line with the prevailing
PAN-based system for Income tax, facilitating data exchange and
taxpayer compliance.
Composition Scheme
According to the discussion paper, composition/compounding
scheme for the purpose of GST will have an upper ceiling on
gross annual turnover and a floor tax rate with respect to gross
annual turnover. In particular, there would be a compounding
cut-off at Rs. 50 lakh of gross annual turnover and a floor rate
of 0.5% across the States. The scheme would also allow option
for GST registration for dealers with turnover below the
compounding cut-off.
Documentation and compliance
Due to the dual structure of the GST, the assessees will
be required to maintain separate accounts for Central GST
and State GST. There will be one periodical return for both
CGST and SGST with one copy each to be submitted to the
respective GST authority.
Conclusion
GST will give more relief to industry, trade and agriculture
through a more comprehensive and wider coverage of input
tax set-off andservice tax set-off, subsuming of several
Central and State taxes in the GST and phasing out of CST.
The transparent and complete chain of set-offs which will
result in widening of tax base and better tax compliance may
also lead to lowering of tax burden on an average dealer in
industry, trade and agriculture.
The subsuming of majorCentral and State taxes in GST,
complete and comprehensive setoff of input goods and
services and phasing out of Central Sales Tax (CST)
would reduce the cost of locally manufactured goods and
services.
This is likely to increase the competitiveness of Indian
goods and services in the international market and to
boost Indian exports.
