Good & service Tax (GST)

 What is GST and How was It Introduced In India?

KNOW THE ALL ABOUT GST

Of late, there was a lot of hype about GST, the latest taxation reform introduced by Indian government to amend the prevailing tax system.

This brought a sense of commotion and uncertainty among the common public, simply because the concept and the benefits were not understood. In this segment we are going to discuss each every aspect related to GST in an easy to understand and relatable language.

FIRST OF ALL, LET US TRY TO UNDERSTAND THE TERM GST

Going by the name; GST-Goods and Services Tax, is a single unified form of tax, which levies upon all goods and services. All trades and people involved in give and take of goods and services, will now pay GST, instead of getting entangled in many different forms of taxes, levied in different businesses in different forms. GST replaced many direct and indirect taxes, which were earlier in practice, and thus simplified the taxation procedures to a great deal. The prominent view behind the introduction of GST was to integrate the tax procedures, not only at state level, but at central level and bring in the economic betterment of the nation.

Thus GST is a actually a smart taxation system.

In the previous tax system, there were a large number of taxes collected by central and state government on manufacturing, sales and consumption of goods and services (we will discuss these in details in chapter 3) With GST in force, all such taxes will be replaced and there will be 2 major taxes prevailing: 1. GST and 2. Income Tax

It is a huge positive step taken by Indian government to improve on taxation system and to convert India into one common market by merging the taxes at Central and State level. This reform is going to make life easier and simpler for all, and will bring in a lot of transparency in business dealings, which is definitely going to kill corruption to a large extent.

Now, let us take a look at the journey as to how GST was implemented in India.

The Introduction of GST happened in few imperative steps:

In the budget speech for Financial Year 2006-2007, held on 1st April, 2006, a proposal for GST was initiated, to simplify the taxation, which was already prevalent in many foreign nations.

Following that, the Empowered Committee of State Finance Ministers initiated the task on building a roadmap of GST in first trimester of 2007. In Nov. 2007, first report to the committee was submitted by the team working on it.

Committee fine-tuned and finalised this first report in 2008 and submitted it by the name: " A MODEL AND ROADMAP FOR GOODS AND SERVICES TAX IN INDIA"

Empowered Committee released the first paper discussion on the report in Nov. 2009.

In 2010, then Finance Minister, Sh. Pranav Mukherjee, mentioned in his speech to introduce GST from April 2011, which eventually did not happen.

Thereafter, a full report on GST was submitted to the parliament by Standing Committee, in August 2013. The Empowered Committee rejected the proposal in same year November, as petroleum products were not included in the report.

In the session held in December 2014, 122nd Amendment Bill of Constitution was passed in Lok Sabha to levy GST.

Finally, on 3rd August, 2016, the bill was accepted and passed by Rajya Sabha, and it was said that GST will come in force from 1st July, 2017.

And thus, Goods and Services Tax Bill (GST), known to be as 122nd Amendment Bill, saw the light of day on 1st July, 2017.

In the current scenario, where industrialization is the need of the hour and pacing swiftly, GST is undoubtedly a big step in endorsing the economic development of the country. It comes along with the commitment of financial development and benefit to everyone.

WHAT ARE THE BROADER BENEFITS OF GST?

Prime Minister Sh. Narendra Modi had a vision with regards to GST. He saw it as the most needed reform for the nation, bringing following growth and benefits.

From a regular consumer or layman point of view, the most prominent advantage of GST is almost 30% reduction of overall tax burden on goods and services, which we all were paying earlier, on buying the products or using any services. Thus, the prices will fall.

Entry tax and state tax have been removed, which ensures free movement of goods from one state to another, making the availability of goods easy. This also enhances the importing and exporting power of manufacturers and traders.

Also, the multiple taxes, which were prevailing earlier, required a lot of paper work, in various tax segments, All businessmen had to engage themselves in huge paper piling while filing their tax returns. Now that GST is a unified form of tax, the paper work will be reduced considerably.

As India is a Federal Republic, so GST is implemented by Central and State Government.

Why was there a Need for GST in India-An Introduction to GST Council

Before GST, Indian Tax System was a giant ball of numerous taxes that were paid at different stages of business, and were separately collected by State and Central Government. The tax rates also differed from one state to another. Hidden taxes on exports, and no charge applicable on importing the goods form one state to another were also the instruments to fraud and forgery. This led to an entangled tax structure, with a lot of discrepancies taking place and tax corruption getting elevated.

GST, instead, unified the tax structure and consequently the entire nation. Now, the consolidated tax collected will be divided among Central and State Government, which is an easier way to provide services and goods across the nation, without any additional taxes imposed on them.

Additional taxes imposed on goods and services at different stages meant a substantial increase in cost that the end consumer was paying. The manufacturers and traders increased the costs to even out their tax burden. Also, the complex tax structure was inefficient, with a lot of loopholes being created in the entangled web. That is the reason, a consolidated and unified tax structure was needed to eliminate all these. GST Taxation will add a lot of value at each stage of business and trading. Thus, the economic growth is sure to be seen, in the coming phases of GST. India can now be identified as one national market with a unified and simplified tax structure, that too at a reasonable tax rate

GST is going to bring in a lot of transparency in the entire taxation system of the country. Consumers and businessmen will thus know the amount of taxes they are paying to government for manufacturing, sale and purchase of goods and services.

                        Need for GST

A complete destination based tax system

Benefit principle of taxation-2 ideas - Beneficiary pays & Proportionately pays

A single tax to replace multiple indirect taxes levied both at the Centre and State level.

Cascading effect of tax as set-off of prior-stage taxes was not available.

Tax burden on goods and services had to be reduced benefiting common man.

To make our products competitive in domestic and international markets.

To boost economic activity and create more jobs.

Now let us take a quick look at some of major benefits of GST

Simplified Tax Structure: As explained earlier, GST is a unified tax entity which eliminates a lot of troxes that went paid earlier at different stages in different businesses, like VAT, Excise, Service Tax etc, which you must have seen on the bills that you received for your purchases. Now, GST is a single tax which is levied on any good or services being sold or purchased. This is the biggest benefit of this tax system. All the confusion is eliminated. For businesses, accounting complexities will reduce resulting in less paperwork. which will save both time and money. GST will increase economic GDP by 2%-2.5%

A Substantial Increase In Tax Revenues: When the tax system is simplified, people will not run away from paying the taxes and willingly come forward to contribute through a single tax entity, GST. This will create a good revenue deposit for government, to be used in further development and betterment of the nation

Reduced Prices of Goods And Services: When the taxes are reduced by removing various direct and indirect taxes, the manufacturers, traders and service providers will automatically make their offerings available on lower prices for end consumers. Also, lower the prices, higher the demand; which clearly means a substantial boost to economy. Businesses and companies will benefit from this, as they will be producing more and selling more.

A Firm Boost To Export Industry: With the introduction of GST, India will rise as a competitive market with fair pricing. This will encourage more and more foreign players to enter Indian market, thus, giving a good boost to export and trading.

GST will take away cascading effect of various taxes that are charged on sale/ production/ purchase, taking off the burden from all the tax payers and end consumers.

But, all this reform making, decision making and implementation was not easy and will not be easy in future course. To have a structure in place and to make the processes smooth, a ruling or decision making body was needed. Thus, GST Council came in place.

WHAT IS GST COUNCIL AND ITS FUNCTIONS?

The key decision making body which is making all the important decisions regarding GST, its structure, the norms, regulations, enforcement and implementation is called GST Council. It is this council that is deciding the tax rates, tax exemptions, the due dates of obtaining GST forms, and deadlines of filing GST. This is council is also responsible for making decisions regarding special rates and provisions for various states. The major responsibility of GST council is to ensure a uniform tax system and tax rates for goods and services across the country.

HOW IS GST COUNCIL STRUCTURED?

As we discussed earlier in chapter-1, Constitutional Amendment Bill 122 was introduced in the parliament to implement GST in the entire nation. This bill was passed by Rajya Sabha on 3rd August, 2016 and Lok Sabha on 08th August, 2016. After being approved and accepted by 15 states Hon'ble President Sh. Pranab Mukherjee gave his assent to "The Constitution (One Hundred And First Amendment) Act, 2016" on 8th of September, 2016. After this assent, on 16th of September 2016, Government of India issued notification about bringing a council in existence, which would be solely responsible for making all decisions related to GST.

Since then the GST council and been notified bringing into existence the Constitutional body to decide

issues relating to GST. Article 279 (1) of the amended Indian Constitution states that the GST Council must be to be constituted by the President within 60 days of the commencement of the Article 279A. This article also states that GST Council will be a joint forum for the Centre and the States.

The Union Cabinet under the Chairmanship of Prime Minister Shri Narendra Modi approved setting up of GST Council on 12th September, 2016 and also setting up its Secretariat as per the following details:

Creation of the GST Council as per Article 279A of the amended constitution.

Creation of the GST Council Secretariat, with its office at New Delhi.

Appointment of the Secretary (Revenue) as the Ex-officio Secretary to the GST Council

Inclusion of the Chairperson, Central Board of Excise and Customs (CBEC), as a permanent invitee (non-voting) to all proceedings of the GST Council.

To create one post of Additional Secretary to the GST Council in the GST Council Secretariat (at the level of Additional Secretary to the Government of India), and four posts of Commissioner in the GST Council Secretariat (at the level of Joint Secretary to the Government of India).

★To create a post for Additional Secretary to the GST Council.

To create four posts of commissioner in the GST Council Secretariat. (This is at the level of Joint Secretary)

The Cabinet also decided to provide for adequate funds for meeting the recurring and non-recurring expenses of the GST Council Secretariat, the entire cost for which shall be borne by the Central Government.

★The GST Council Secretariat is manned by officers taken on deputation from both the Central and State Governments.

★ GST Council Secretariat will have officers taken on deputation from both the Central and State Governments.

★ The cabinet also provides funds for meetings the expenses (recurring and nonrecurring) of the GST Council Secretariat. This cost is completely borne by the Central government.

Thus it consisted of following prominent members:

★The Union Finance Minister Arun Jaitley: As the Chairperson

★ Union Minster of States: As Members and In Charge of Revenue of Finance

Minister In Charge of Finance or Taxation or Ministers Nominated By Each State: As Members

Other GST Council Recommendations

Further to this, article 279A (4) clearly specifies that the GST Council will be in focus to make all recommendations to the Union and the States on the important issues related to GST; for example, whether the goods and services in that state will be subject or exempted from GST.

GST Council also makes and enforces the tax laws related to:

Place of Supply

Threshold Limits

GST Rates On Goods And Services

 Special Rates For Raising Additional Resources During A Natural Calamity Or Disaster

Special GST Rates For Certain States

Since it came in existence, GST Council meetings are held at regular intervals and important decisions related to following are made and implemented in the meetings. This is a window into what happened in GST Council Meetings:

Rules were set up for how the conduct should be in GST Council.

Timetable was made for implementation of various GST

The threshold limit for exemption from levy of GST was decided as Rs. 20 lakhs for the States except for the Special Category States. For special category, as mentioned in Article 279A of the Constitution, it was decided as Rs 10 Lakhs.

★The threshold for availing the Composition Scheme (we will discuss this in later chapters) was decided as Rs. 75 lakhs in States other than the North East States, Sikkim and Himachal Pradesh where the threshold for availing the Composition Scheme is decided as Rs. 50 lakhs.

★The GST Council also recommended that manufacturers of the following goods shall not be eligible for the Composition Levy:

+ Ice Cream And Other Edible Ice, Whether or Not Containing Cocoa +Pan Masala

Tobacco And Manufactured Tobacco Substitutes

These service providers are kept out of the Composition Scheme, except the restaurant services.

★ It was decided to compensate states for 5 years for loss of revenue due to implementation of GST, the base year for the revenue of the State is laid as 2015-16 and a fixed growth rate of 14% is applied to it.

★ Approval to the draft of various GST rules related to registration, payment, return, refund and invoice, valuation, input tax credit, composition and transitional provisions were made.

★ It was decided that all entities exempted from payment of indirect tax under any existing tax incentive scheme would pay tax in the GST regime and the decision to continue with any incentive scheme shall be with the concerned State or Central government only. In case, the State or Central Government decides to continue with any existing exemption/incentive scheme; it will be administered by way of a reimbursement mechanism.

Adoption of four slabs tax rate structure of 5%, 12%, 18% and 28% was laid down. In addition, a category of exempt goods was decided and further a cess was decided to be levied on certain goods such as luxury cars, aerated drinks, pan masala and tobacco products, over and above the rate of 28% for payment of compensation to the states. (All these rate slabs and exemptions will be discussed in chapters ahead).

GST rates on 1211 items (foodgrains and common-use products like hair oil, soaps and toothpaste) were approved at the 14th GST Council meeting held at Srinagar on 18th and 19th of May 2017.

At the 15th GST Council meeting held at New Delhi on 3rd June 2017, tax rates on the remaining goods were approved.

28 states, and 2 Union Territories with Legislatures (Delhi and Puducherry) have already passed their respective State GST Bill in their State Assemblies.

★There were certain issues of cross empowerment and administrative division of taxpayers between the States and Centre, which were resolved by the council and put in place for effective implementation of the regulations.

A Little Extra:

In addition to GST Bill and GST Council, there was another major reform that took place. The Central Goods and Services Tax bill, Integrated Goods and Services Tax bill, Union Territories (without legislature) Goods and Services Tax bill and Goods and Services Tax (Compensation to States) bill was passed by the Lok Sabha on 29.03.2017 and by the Rajya Sabha on 06.04.2017.

What all Kinds of Taxes and Duties are now Fused under GST?

India is a republic and taxation is not only a subject of the centre, but also of each and every individual state. Even though the centre pitches in with financial help to every state, as it is required to do so, during times of emergencies and under pre-defined matters of governance, the reality is that every state is obliged to run the administration on its own by collecting various direct and indirect taxes. The onus of running the government, paying salaries, undertaking administrative costs, catering to infrastructure development, providing basic services expected out of a government and the likes are all supposed to be undertaken by the elected government. It is for this reason that state governments consider taxation policies so dearly.

There are certain products and services that are consumed more than others and any tax component included in their selling price ensures that government's coffers are assured of a stable income. Any reduction in those taxes means substantial financial loss to the exchequer that can adversely affect the government's books and its day to day running operations. This not only results in loss of revenue for the government, but any red marks in the balance sheet can also put the state government's ability to take loans from leading financial institutions in jeopardy, not to mention the government's credibility at stake.

A state government might have the central government to fall back on in times of adversities, but for the central government, any loss in revenue combined with additional expenditure is a sure-shot recipe for defaulting on credit lines and financial sops offered by international financial consortiums. This also affects the country's financial ratings that eventually has an adverse impact on the economy. Adverse ratings means loans become costlier, conducting business becomes difficult and the cost of running operations goes up thereby leading to a financial turmoil.

In short, the government's financial health reflects the country's financial health and everyone associated gets impacted by any downturn or negativity caused due to financial adversities. That's one of the reasons GST took so much of time to be formulated and finally implemented. Every stakeholder had to be convinced of the benefit of the tax in the long run, individual stakeholders' financial interests had to be taken care of so that there was no pause in running of the administration and adequate methodology had to be worked out to ensure nothing was overlooked, whether in terms of loss of revenue or finding alternate ways to compensate for such loss of revenue.

Given that India is a huge country with multiple states having multiple taxes combined with central taxes, a thorough groundwork was done before coming down to deciding the final rates. In the process, a lot of central and state taxes were combined, removed or just fused with the GST to ensure uniformity of taxes and remove duplicity as was the practice earlier.

However, do note that nothing was done on an ad hoc basis. There was a strategy in place and detailed roadmap was prepared with clear objectives about what was to be achieved.

Let's have a look at factors that were considered to remove multiplicity of taxes being levied and them being subsumed under GST:

1. The first and most important consideration was that the taxes that were fused with GST should have been primarily in the nature of indirect taxes. Such taxes were levied on either the supply or goods or the supply of services and only then they were considered to be merged under GST.

2. There is something called the transaction chain that begins with the import/manufacture/production of goods or provision of services at one end and the consumption of such goods and services at the other end. Now the taxes and levies had to be a part of such a transaction chain for them to be considered to be fused with GST.

3. The purpose of bringing in GST is to ensure smooth and easy taxation. However fusing certain taxes and levies with GST shouldn't affect the free flow of tax credit and this was one of the important parameters while undertaking the entire process

4. Another factor that was kept in mind while subsuming taxes and levies with GST was that those not specifically related to the supply of goods and services were not to be considered at all.

5. Since taxation affects the state as well as the union government in equal measures, one factor that was sincerely kept in mind was that revenue generation and earning was fair to both the stakeholders. Fusing taxes and levies with GST shouldn't result in losses to one and gains to other and vice-versa!

In the previous taxation system, which was more complex, taxes and duties were collected by central and state government at various stages of business in various forms. Businessmen were required to maintain numerous record books to maintain their tax accounts and abide by legal systems. The paperwork was heavy at both the ends: business' end as well as the government's end and considerable manpower along with substantial resources were required to be put at disposal to ensurestrict adherence of the law.

But now, a number of taxes and duties are fused together under GST, making it easy to maintain the records, improve efficiency, lessen the complications, which will all lead to ease of doing business!

To have a better understanding of the subject, we're presenting the taxes fused with GST after segregating them under State and Central taxes.

Following are the duties and taxes which were earlier paid at Central Level but are now merged under GST:

Central Taxes

1. Central Excise Duty

2. Service Tax

3. Add. Custom Duty

Goods & Services Tax

4. Spl. Add. Duty of Customs

5. Central Sales Tax

6. Central Surcharges & Cesses

State Taxes

1. VAT

2. Octroi & Entry Tax

3. Purchase Tax

4. Luxury Tax

5. Taxes on lottery & gambling

6. State cesses & surcharges

7. Entertainment Tax

Central Excise Duty (including Additional Excise Duty): Every product that is manufactured in the country was imposed with Central Excise Duty. The onus to collect such a duty was on the Central Board of Excise and Customs. The tax rate with input tax credit was 12.5% on all goods manufactured, exempting a few products such as silver omaments.

borne by the customers and used to be a major part of invoices. It was an indirect tax, wherein the service Service Taxi Service Tax is a task that is levy by the content the armvices provided and was actually provider collected the tax from service receiver and paid to the Government and lead to substantial Bamings for the government. However, it did lead to confusion among the customers about how was it different from a service charge etc. and there were debates around it, but now it has all been taken care of. For the record, Service Tax rate was 15% of value of services provided, Education cess and Secondary Education cess (tax on tax) was added at the rate of2% and Swachh Bharat cess at the rate of 0.50%

Additional Customs Duty: For every product that is imported in the country, the government levied a duty on it. Equivalent to Central Excise Duty, it was commonly known as Countervailing Duty. It was calculated on base value of goods including landing charges and basic customs duty (excluding anti-dumping duty, safeguarding duty, etc.) and it has now been fused with GST.

Special Additional Customs Duty: This duty was payable at 4% on imported goods, which replaced

VAT/ Sales Tax

Central Surcharges and Cess: A charge on tax is known as the surcharge and it was an additional charge basically charged on personal income tax (specifically on the high income slabs) and on corporate income tax. Cess was imposed by central government and was levied for specific purpose. Both the surcharges and cess are fused with GST wherever they were in the nature of taxes on goods or services. This included cess on rubber, tea, coffee, national calamity contingent duty etc.

Central Sales Tax: This has been phased out completely.

Following are the duties and taxes which were earlier paid at State Level but are now merged

under GST:

Value Added Tax (VAT): VAT was an indirect tax on the goods and services that are provided at state or domestic level. It was imposed at each stage in the chain of distribution and production, right from the supply of raw materials till the final valuation of the product and it was borne by the end users (customers) in distribution channel.

Central Sales Tax: CST, was levied on sales, which is affected by inter-state trade. CST was again an indirect tax on consumers. As it was centrally levied, so it was administered by the concerned state where the sales originated.

Octroi & Entry Tax: Octroi was a tax charged by local authorities; for instance, Municipality and Entry Tax was charged by State.

Purchase Tax: Purchase tax was a tax that was imposed by the state government on the purchase of goods and was applied to wide range of consumer goods

Luxury Tax: Luxury Tax levied on articles that were either expensive or optional.

Taxes on Lottery, Betting and Gambling: Tax which was imposed on Lottery winnings, Gambling and Betting and was calculated as Tax Deduction at Source (TDS). It was deducted from the end Income.

Entertainment Tax: Entertainment Tax was a tax levied by the government on things related to entertainment like: movie tickets, commercial shows, etc.

The above mentioned taxes and levies are no longer in effect and have been completely fused with GST. This doesn't mean that their financial benefit to the government has also been over. Instead, the rates have been seamlessly merged with GST rates after due diligence and detailed calculation.

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