Roadmap for GST

Not a super highway, but a typical Indian road

V S Datey

1. Introduction

In view of federal structure of governance in India, there is multiplicity of taxes on goods and services. Excise duty on manufacture, customs duty on imports/exports and service tax on services are levied by Central Government, while sales tax (State Vat), Entry tax/octroi and duty on liquor are levied by State Government.

Besides these, there are plethora of taxes like cesses, surcharge, stamp duty, entertainment tax, road tax and what not.

Such multiplicity of taxes distort the tax structure and brings in complexities. Reforms in taxes is of course a continuous process. Cenvat (that time it was termed as ‘Modvat’) was introduced in 1986 in Central Excise to avoid cascading effect of excise duties. Introduction of State Vat started in 2005 and now most of the States have implemented State Vat.

GST is a logical consequence of State Vat.

Idea of national GST was first mooted by Kelkar Task Force in 2004.

A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee strongly recommended fully integrated ‘Goods and Service Tax’ (GST) on national basis.

Full integration of goods and service tax will obviously take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning was made by proposing to make credit of service tax and excise duty inter-chargeable. The then Finance Minister Shri P Chidambaram, in para 148 of his budget speech on 8-7-2004, stated as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.

To give effect to this proposal, Cenvat Credit Rules, 2004 were issued and made effective from 10-9-2004.

Empowered Committee for GST - The task of designing and implementing GST was taken up Empowered Committee of State Finance Ministers which had also designed the State Vat. The Empowered Committee had appointed various working groups and also had various meetings to discuss issues relating to proposed national GST.

Basic idea of GST considerably diluted - When it was initially proposed as a national GST in 2004, it was projected as a solution to all ills of taxation. It was envisaged that there will be a simple single point GST. All Central and State taxes will be merged in national GST. In short, it was projected as a six lane super highway of taxation.

Over the years, basic idea of ‘one single tax’ has been considerably diluted and various compromises have been made. The ‘Empowered Committee of State Finance Ministers’ was holding numerous meetings and trying to sort out various issues. Outside public and taxpayers only had some vague idea how GST is proposed to be implemented, through unauthenticated press reports, some study reports etc.

Release of first discussion paper - It appears that some basic ideas about way to implement GST have crystalised. First discussion paper has been released by Empowered Committee of State Finance Ministers on 10-11-2009.

Report of task force on GST of Thirteenth Finance Commission – Subsequent to release of first discussion paper, Report of task force on GST of Thirteenth Finance Commission was released on 15-12-2009. The report broadly endorses the direction of GST as proposed in the first discussion paper. However, the task force is of the view that the GST as envisaged by Empowered Committee in its first discussion paper is in diluted form. The task force has recommended ‘flawless GST’. Some significant suggestions (which are different from first discussion paper) are as follows –

Instead of IGST, ‘Modified Bank Model’ was proposed (Principally, does not seem to be much different from IGST model).

It seems almost none of these recommendations has been accepted.

Constitution Amendment Bill – Constitution Amendment Bill has been introduced on 22-3-2011 giving proposed amendment to Constitution required to introduce GST.

Overall direction of GST is clear - It is true that many aspects of GST are yet not clear in the first discussion paper and the proposed Constitution Amendment Bill, but now basic direction of GST is known. The discussion paper and Constitution Amendment Bill gives broad outline of policy of proposed GST and provide the industry and business a glimpse of shape of things to come. Thus, the basic direction in which GST is heading is clear though many issues are yet to be sorted out.

Of course, it is still a long way to go.

Compromised GST - The GST system as proposed to be introduced is result of deliberations of committee of representatives from 29 States. Each State has its own views and peculiarities (and whims and fancies). Hence, having uniform nationwide GST is very difficult and some compromises/adjustments are inevitable. This had happened while introducing State VAT also.

It is rightly said that ‘A camel is a horse designed by Committee’. As the story goes, a committee was formed to design a horse. As usual, each committee member had his own ideas, whims and fancies, due to which some adjustments and compromise were inevitable. The result was that finally, the design that came out was of a camel!

Not super highway – typical Indian road – It is clear that the GST as proposed will not be a six lane superhighway, but a typical narrow Indian road with potholes, diversions and encroachments. However, the road seems to be motorable.

1.1 Background of ‘Empowered Committee of State Finance Ministers’

Tax on sale within the State is a State subject. Over the period, many distortions had come in taxation due to unhealthy competition among States by giving sales tax incentives and ‘tax rate war’ started to attract more revenue to State. Many steps were taken to remove the distortions and rationalise tax structure since 1999. It was decided to introduce uniform State Level VAT.

Introduction of VAT was difficult in India as sales tax is a State Subject and sales tax on sale within the State can be levied only by respective State Governments. Even in respect of Central Sales Tax (CST), though the tax is levied under Central Act, the CST is collected in the State from which goods are sold, i.e. originating State and CST so collected is retained by that State only. The CST amount never goes to Union Government.

After lot of persuasion by Central Government, all States ultimately agreed to introduce State Level sales tax VAT at the conference of Chief Ministers all States at Delhi in November, 1999 and an Empowered Committee was constituted.

Initially, there was no formal structure of Empowered Committee. ‘Empowered Committee of State Finance Ministers’ was formally set up on 17-7-2000 with Finance Ministers of 10 States, to monitor implementation of uniform floor rates of sales tax by States and phasing put sales tax based incentives. Dr. Asim Dasgupta was the Chairman. Subsequently, the Committee was reconstituted on 12-8-2004 with all State Finance Ministers as its members. Dr. Asim Dasgupta ceased to be Chairman after his party lost elections in West Bengal.

Mr. Sushil Kumar Modi, Deputy Chief Minister and Finance Minister of Bihar, has been appointed as Chairman of the Empowered Committee w.e.f. 18-7-2011. His initial comments in respect of GST are quite positive. He is from BJP and it is hoped that he will be able to reduce opposition of BJP.

The Empowered Committee has been registered as a Society on 17-8-2004. It has office at Delhi Sachivalaya, I P Estate, New Delhi 110 002. Email – empcom@hotmail.com, vatcouncil@ yahoo.com. Tel – 2339 2431.

Though the committee is termed as ‘empowered committee’, actually, it has no powers. The discussion paper or white paper issued by empowered committee have no statutory force.

The decision of committee are arrived through consensus and  persuasion. Since consensus is required (and not majority decision), various compromises become inevitable.

Decisions of empowered committee are not ‘law’ and not binding – Decisions of empowered committee have only persuasive value. These are not statutory provisions and their recommendations cannot govern State legislature – Federation of All Ida Tea Traders Associations v. Government of AP (2007) 5 VST 21 (AP HC DB).

1.2 State-wise position of VAT 

Some 21 States have introduced State VAT (though in diluted form) w.e.f. 1-4-2005.

Haryana was the only State to introduce VAT w.e.f. 1-4-2003. 20 States have introduced VAT w.e.f. 1-4-2005. These include Assam, Andhra Pradesh, Bihar, Delhi, Goa, Karnataka, Kerala, Maharashtra, Punjab and West Bengal.

States like Gujarat, Chhatisgarh, Jharkhand, Madhya Pradesh and Rajasthan (which were that time ruled by BJP) introduced Vat w.e.f. 1-4-2006.

Tamilnadu introduced Vat on 1-1-2007. Uttar Pradesh introduced Vat w.e.f. 1-1-2008.

Uttarakhand has not introduced VAT so far. J&K is out of picture of Vat due to constitutional limitations.

1.3 Progress so far towards GST

Various steps have been taken for moving towards GST -

Practically, Vat has been introduced both at Central level upto manufacturing stage and at State level at trading stage. Purpose of GST is to merge and synthesize these two taxes.

After introduction of GST, central excise duty, service tax and Central Sales Tax (CST) will be abolished. State Vat will also go. Octroi and Entry tax may be allowed only at Panchayat or Municipality level. Stamp duty, entertainment tax, road taxes etc. will also continue.

1.4 Announcement in Parliament about GST

Shri Pranab Mukherji, Finance Minister of Government of India, in para 85 of his budget speech on 6-7-2009 (made while presenting budget for 2009-10) has stated as follows -

‘I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts.  The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST.  The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all stakeholders’.

1st April 2010 and even 1st April 2011 have come and gone. Even introduction of GST by 1-4-2012 seems practically impossible.

One Central GST and 29 State GSTs - The most disturbing part of the announcement made by Finance Minister is that each State will legislate, levy and administer its own State GST. Thus, there will be one Central GST law and 29 State GST laws. The State GST Laws are unlikely to be uniform, all over India.

It was expected that there will be uniformity in GST law all over India. This hope has gone in smoke. Initially, it was envisaged that there will be one GST out of which some part will go to Centre and balance to States. There will be single assessment and all other taxes will be abolished. This is not going to happen.

Difficulties of dealers having multi-state operations - The difficulties presently faced by dealers having operations in more than one States will continue as at present.

2. Overview of proposed GST

The overview of proposed GST is summarised as follows –

3. A primer on Vat

GST is based on principle of Vat. Hence, it is appropriate to see basics of Vat.

Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various stages and processes till it reaches the ultimate stage. Output of the first manufacturer becomes input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer.

For example, steel ingots are made in a steel mill by ‘A’. These are rolled into plates by a re-rolling unit ‘B’, while third manufacturer say ‘C’ makes furniture from these plates. He sales it to ‘D” who is final consumer. Of tax on a product is 10% of selling price, the transaction would go as follows.

The value added by B is only Rs. 40 while he is paying tax on Rs. 100 on which A has already paid the tax. He is also paying tax on Rs. 10 which is actually tax paid by A. Similarly, C is paying tax on material on which A and B have already paid the tax. Thus, tax is paid again and again on again on the material which has already suffered tax. There is also tax on tax.

This is called cascading effect or ‘snow balling effect’ of taxes. ‘Snow balling’ means suppose a small ice ball starts rolling from top of Himalaya, it accumulates ice as it rolls down and become very big piece by the time it reaches bottom of hill.

This has the following disadvantages –

(a)    Computation of exact tax content difficult

(b)   Varying Tax Burden as tax burden depends on number of stages through which a product passes. If same product passes through 5 stages, tax burden will be less. If same product passes through 10 stages, tax burden will be more.

(c)    Discourages Ancillarisation and growth of small scale industries, since manufacturer tends to manufacture himself instead of buying the  parts from outside. This increases cost of production.

(d)   Concessions on basis of use is not possible. For example, Government wants to exempt product of D as it is for flood relief or for common man’s consumption. Now, even if Government gives exemption to D, the product does not become tax free as relief of taxes earlier paid by A, B and C cannot be given.

(e)    India is member of World Trade Organisation (WTO). As per WTO, there should be free and fair competition. Hence, no country can give export incentives, but product can be made tax free. If D is exporting his product, such exports cannot be made tax free, since Government does not know how much tax was paid earlier and cannot give relief. Thus, exports cannot be made tax free.

3.1 VAT to avoid the cascading effect

VAT was developed to avoid cascading effect of taxes. The basic principle is that at every stage, tax should be paid only on value added at that stage and not on entire sale price.

‘Value added’ is the difference between sale price and cost of material and other inputs on which tax has been paid.

In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), In VAT, the idea is that B will pay tax on only Rs. 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages, as at every stage, tax will be paid only on ‘value added’ by him to the product and not on total selling price.

VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage.

3.2 Tax credit system to remove cascading effect

VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage. For example, B will get credit of tax paid by A, C will get credit of tax paid by B and so on. Thus, aforesaid example will be re-worked as follows in Vat.

Note - 'B' is purchasing goods from 'A'. His purchase price is Rs. 100/- as he is entitled to Cenvat credit of Rs. 10  i.e. tax paid on purchases. His invoice shows tax paid as Rs. 14. However, since he has got credit of Rs. 10, effectively he is paying only Rs. 4 as tax, which is 10% of Rs. 40/-, i.e. 10% of 'value added' by him. Similarly, you will find that C is actually paying tax of Rs. 3.50 (17.50 – 14) which is 10% of Rs. 35 and D is actually paying tax of Rs. 3 on his ‘value added’ of Rs. 30.

If you see the invoice of D, it shows tax of Rs. 20.50, which is the total tax on that Government paid as follows – Rs. 10 by A, Rs. 4 by B, Rs. 3.50 by C and Rs. 3 by D.

3.3 Revenue Neutral Rate to get same tax revenue

You will find that earlier Government was getting total tax revenue of Rs. 70 (10+15+20+25) while after Vat, Government revenue will be only Rs. 20.50. The intention of Vat is neither to increase Government revenue nor to reduce Government revenue, Hence, Government has to find a rate where the tax revenue continues to be same as before. This is termed as ‘Revenue Neutral Rate’ (RNR).

In aforesaid example, the RNR is 34.146% as shown below.

Here also, you will find that B is effectively paying tax of Rs. 13.65 which is 34.146% of Rs. 40 i.e. value added by him.

Actually, RNR is not so high in India – Actually, in India, RNR is not so high since, to avoid double taxation, most of the States had provided for tax at first sale and all subsequent sales (termed as re-sale) were exempt. Hence, Government was getting revenue only at the first point. When State Vat was introduced, RNR was envisaged as 12.5%. ( Now, many State Governments have increases this rate).

3.4 Vat is consumption based tax

You will find that actually tax is collected by Government only at final stage i.e. consumption stage. Till then, the credit is passed on to next buyer. Hence, Vat is termed as ‘consumption based tax’.

For example, if goods are manufactured in ‘X” State, sent to ‘Y’ State and sold in ‘Y’ State, the tax revenue will be collected only by ‘Y’ State and no revenue will accrue to ‘X’ State Government.

This does not make difference in respect of Central Taxes like excise duty and service tax as wherever tax is paid, revenue goes to Central Government. However, this makes huge difference in respect of State Vat.

3.5 Advantages of VAT

All earlier disadvantages have gone in Vat system. Advantages of VAT are as follows :

(a)    End use based exemptions or concessions can be given as tax as shown in invoice is the total tax borne by that commodity. Concessions can be given to goods used for poor people. Government has flexibility in applying varying tax rates to different commodities

(b)   Exports can be freed from domestic taxes, which is permissible under WTO.

(c)    Vat provides an instrument of taxing consumption of goods and services

(d)   Interference in market forces is minimum.

(e)    Aids tax enforcement by providing audit trail through different stages of production and trade.

(f)    Vat acts as a self-policing mechanism. For example, B will get credit only if A issues invoice showing tax. Hence, B insists on tax invoice from A. Thus, B acts as police form A, C acts as police for B and so on. This increases tax compliance. It also indirectly increases income tax revenue.

(g)   Tax evasion is reduced. Even if tax is evaded at one stage, the transaction gets caught in next stage of production or distribution and then Government gets its revenue.

(h)   Simplicity with minimum distortion in tax structure - as there are few variations in tax rates and exemptions from taxation are very few.

(i)     Transparent – The invoice shows total tax borne by that commodity. There are no hidden taxes.

(j)     Certainty in taxation due to simple tax structure and minimum variations.

 Most of the countries have adopted ‘tax credit’ method for implementation of VAT.

3.6 Disadvantages of Vat

(a)    Heavy compliance cost – detailed accounting and paper work required as is not as simple as a single point sales tax.

(b)   Hindrance in inter-state movement of goods – Each State wants to keep record of goods coming in and going out of State, for which check posts are required. This delays movement and increases corruption.

(c)    State where goods are produced do not get any tax revenue as all revenue goes to State where goods are consumed as Vat works on destination principle. For example, major quantity of wheat produced in Punjab goes outside the State. Similar situation exists in case of minerals in Jharkhand, software in Karnataka or manufactured products in industrially advanced States. Of course the States get indirect benefits like growth of employment, improved economy etc. but no direct benefit of Vat/sales tax.

(d)   Tax evasion through bogus invoices. Since input tax credit is on the basis of invoice, the invoice is like currency note to the seller. Printing invoice is much easier than printing currency notes.

3.7 Highlights of Vat

The basic principles are as follows –

4. Inter State GST is a very good and novel idea

IGST (Integrated GST) on inter-state transactions is a very novel and practical idea. At present, dealer having inter-state transactions is in a difficult position. CST payable is only 2% (in some cases Nil, if it is tock transfer). He is required to file refund claim if his credit of State Vat (later it will be State GST) is high.

It is experience that refunds lead to corruption (politely termed as ‘rent seeking’) and harassment. Huge funds of dealer are blocked, seriously affecting his working and cash flow. It also increases litigation, as refund claims are often rejected on flimsy grounds (due to fear of ‘audit objections’). Further, most of States are financially broke and often refunds are delayed due to shortage of funds with State Governments.

IGST (Integrated GST) will considerably reduce this difficulty.

4.1 Credit of IGST used for SGST to importing State

It is envisaged that Integrated GST (IGST) will be imposed on inter-state transactions. It will be equal to SGST plus CGST. The IGST will be entirely collected by Centre. The dealer in importing State (i.e. where goods are received for sale, use or consumption) will be entitled to avail tax credit of entire IGST. If the dealer in importing State utilises that input tax credit for payment of SGST, the amount will be reimbursed to the importing State by Centre.

IGST (Integrated GST) has to be paid electronically.

The amount to be credited to importing State will be calculated on basis of e-returns submitted by registered dealer in importing State, on monthly basis.

It is envisaged that dealer in importing State will utilise input tax credit of IGST in sequence of IGST, CGST and SGAT. Thus, input tax credit (ITC) of IGST will be utilised first for payment of IGST on sale of goods and services and then for payment of CGST. Only balance, if any, will be utilised for payment of SGST.

4.2 Debit of SGST used for payment of IGST to exporting State

Registered Dealer in importing State can take ITC (Input Tax credit) of IGST paid by dealer in exporting State. The credit will be matched with e-returns filed by registered dealers of importing State and exporting State.

If the dealer in exporting State utilises input tax credit of SGST for payment of IGST, Centre will debit that amount to the exporting State (i.e. State from which goods are sent to another State). Thus, Centre will act as ‘clearing house’ among different States.

The amount to be debited will be calculated by Centre on basis of e-returns submitted by registered dealer in exporting State, on monthly basis.

It is envisaged that the dealer in exporting State will utilise his input tax credit in sequence of IGST, CGST and SGST for payment of IGST (Integrated GST) on his sales/services. Thus, first he will utilise his input tax credit (ITC) of IGST and CGST for payment of IGST on his sale of goods and services. If that credit is insufficient, then only he can utilise credit of SGST for payment of IGST.

4.3 B2C transactions

In case of B2B transaction, the buyer is importing State will be registered and hence there will be debit and credit as explained above. In case of B2C transactions, the buyer in importing State will not be registered. In such case, the credit of SGST portion of IGST will be entirely credited to importing State, with some exceptions.

If the SGST rate in both exporting State and importing State are same, there will be no difference if goods are purchased in the State or procured from outside the State. However, if SGST rate in exporting State is lower compared to SGST rate within the State, it will be cheaper to import goods from outside the State. This might start ‘rate war’ among States!

4.4 Control through TIN and national computerised database

Each dealer having inter-state transaction will be registered with Central authority and will have Tax Identity Number (Tax Identification Number). It may be Income Tax Pan based 13/15 digit number. The e-return filed by selling dealer will contain TIN number of purchasing dealer and amount of IGST (Integrated GST) paid. This will be matched with e-return filed by purchasing dealer and then only credit will be allowed.

A mechanism similar to AS26 in Income Tax is being developed by team led by Mr. Nandan Nilekani. Credit will be available on basis of transactions recorded in this system.

TIN number of a dealer can be verified on http://www.tinxsys.com. (Tax Information Exchange System). TINXSYS is an exchange authored by empowered committee of State Finance Ministers.

4.5 What happens if selling dealer of exporting State does not pay the IGST or takes bogus credit

The purchasing dealer can take input tax credit on basis of invoice issued by selling dealer.

However, it seems that if the selling dealer does not pay tax within prescribed period, the credit will be disallowed. Similarly, if it is found that selling dealer has taken bogus credit, it may be recovered from purchasing dealer.

 The control will be through mechanism of e-return and audit.

Really, such provision, if made, will be highly unjust. Why purchasing dealer should suffer for fault of selling dealer?

If selling dealer has utilised some input tax credit which is disallowed by tax authorities, its burden will ultimately fall on purchasing dealer and he cannot even file appeal and even notice of such proposed disallowance will not be served on him!

4.6 Advantages of IGST

IGST will considerably reduce refund claims by dealers and consequent delays, harassment and corruption.

IGST (Integrated GST) can eliminate need of check posts at State borders, as check will be maintained electronically through credits and debits of exporting and importing dealer [However check posts can be eliminated only if there is political will]..

4.7 Illustrations

Compute the invoice value to be charged and amount of tax payable under GST by a dealer who had purchased goods for Rs. 1,20,000 and after adding for expenses of Rs. 10,000 and of profit Rs. 15,000 had sold out the same. The rate of SGST and CGST on purchases and sales is 8%.

Ans – Effectively, tax is payable on Rs. 25,000 @ 8% each i.e. Rs. 2, 000 of SGST and Rs. 2,000 of CGST.

Compute the GST amount payable by Mr. A who purchases goods from a manufacturer on payment of Rs. 2,32,000 (including GST) and earn 10% profit of net purchase price, on sale to retailer? SGST and CGST rate on purchase and sale is 8% each.

Ans – Net purchase price of Mr.  A is Rs. 2,00,000 (check that by adding 16%, the amount comes to Rs. 2,32,000). His profit is 10% of net purchase price. Thus, his net sale price is Rs. 2,20,000. He is liable to pay SGST of Rs. 17,600 and CGST of Rs. 17,600. He will get input tax credit (ITC) of Rs. 16,000 of SGST and Rs. 16,000 of CGST. Thus, he is liable to pay SGST of Rs. 1,600 and CGST of Rs. 1,600.

A dealer purchased 11,000 Kgs of inputs on which SGST and CGST paid @ 4% was Rs. 4,000 each. He manufactured 10,000 Kgs of finished products from the inputs. 1,000 Kgs was the process loss. The final product was sold at uniform price of Rs. 10 per Kg, as follows – Goods sold within State – 4,000 Kgs. Finished product sold in inter-state sale – 2,500 Kgs. Goods sent on stock transfer to consignment agents outside the State – 2,000 Kgs. Goods sold to Government departments outside the State – 1,500 Kgs. There was no opening or closing stock of inputs, WIP or finished product. The SGST and CGST rate on the finished product of dealer is 8% each. Calculate liability of SGST and CGST. Find Input tax credit available to dealer and tax required to be paid in cash.

The tax payable would be as follows –

Tax paid on inputs – SGST - Rs. 4,000, CGST – Rs. 4,000. This credit should first be utilised for payment of CGST and SGST respectively and balance is to be used for payment of IGST. Thus, balance available for payment of IGST is Rs. 800 of CGST and Rs. 800 of SGST.

Thus, tax payable is as follows –

(A) IGST – Rs. 8,000 (Rs. 9,600 – Rs. 1,600)

(B) CGST – Nil

(C) SGST – Nil

Since credit of SGST of Rs. 800 has been utilised for payment of IGST, the State Government will get debit of Rs. 800 from Central Government.

In aforesaid example, if 2,000 Kgs were exported (and not stock transferred), what would be the tax liability and credit available.

If finished product is exported. There is no tax liability. Hence, IGST will be Rs. 6,400.

Further, the entire credit of tax paid on raw material is available. Hence, tax payable is as follows –

(A) IGST – Rs. 4,800 (Rs. 6,400 – Rs. 1,600)

(B) CGST – Nil

(C) SGST – Nil

Since credit of SGST of Rs. 800 has been utilised for payment of IGST, the State Government will get debit of Rs. 800 from Central Government.

In the previous example, if the raw material was purchased inter-state (and not locally), on which IGST of Rs. 8,000 was paid, what will be net tax liability of the dealer?

The IGST paid should first be utilised for payment of IGST. Hence, he should utilise entire Rs. 8,000 for payment of IGST.

Thus, tax payable is as follows –

(A) IGST – Rs. 1,600 (9,600-8000)

 (B) CGST – Rs. 3,200

(C) SGST – Rs. 3,200

Calculate the GST liability for the period Jan. 1, 2011 to Jan. 31, 2011 from the following particulars: Inputs worth Rs. 1,00,000 were purchased within the State. Rs. 2,00,000 worth of finished goods were sold within the State and Rs. 1,00,000 worth of goods were sold in the course of inter-State trade. CGST and SGST paid on procurement of capital goods worth Rs. 1,00,000 during the month was at 8,000 each. If the input and output tax rate in the State are 8% of SGST and CGST,  find the total tax liability.

Ans – Tax payable on sale within State – CGST – Rs. 16,000 and SGST Rs. 16,000.

Tax payable on inter-state sale – IGST – Rs. 16,000.

ITC on capital goods – CGST – Rs. 4,000 and SGST Rs. 4,000 (Note – It is assumed that 50% credit of capital goods is available in current year and balance in subsequent year, on the basis of similar provision under Cenvat. However, exact credit available will depend on SGST and CGST provisions when enacted)

ITC on inputs – SGST Rs. 8,000 and CGST Rs. 8,000.

Total Credit – CGST – Rs. 12,000 and SGST – Rs. 12,000.

This credit can be utilised for payment of SGST and CGST respectively. Hence, net tax payable is as follows -

(A) IGST – Rs. 16,000 (No credit available)

 (B) CGST – Rs. 4,000 (16,000 – 12,000)

(C) SGST – Rs. 4,000 (16,000 – 12,000)

Since no credit of SGST has been utilised for payment of IGST, there will be no debit to State Government.

5. Constitutional provisions

Article 246(1) of Constitution of India states that Parliament has exclusive powers to make laws with respect to any of matters enumerated in List I in the Seventh Schedule to Constitution. (Called ‘Union List’). As per Article 246(3), State Government has exclusive powers to make laws for State with respect to any matter enumerated in List II of Seventh Schedule to Constitution.

Seventh Schedule to Constitution (referred to in Article 246) indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called ‘Union List’’). List II (State List) contains entries under jurisdiction of States. List III (concurrent list) contains entries where both Union and State Governments can exercise power. [In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists].

5.1 Union List relevant to taxation

List I, called “Union List”, contains entries like Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list relevant to taxation provisions are as follows :

Entry No. 82 - Tax on income other than agricultural income.

Entry No. 83 - Duties of customs including export duties.

Entry No. 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.

Entry No. 85 - Corporation Tax.

Entry No. 92A - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.

Entry No. 92B - Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.

Entry No. 92C – Tax on services [Amendment passed by Parliament on 15-1-2004, but not yet made effective].

Entry No. 97 - Any other matter not included in List II, List III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.)

5.2 State list pertaining to taxation

State Government has exclusive powers to make laws in respect of matters in List II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Entries in this list relevant to taxation provisions are as follows:

Entry No. 46 - Taxes on agricultural income.

Entry No. 51 - Excise duty on alcoholic liquors, opium and narcotics.

Entry No. 52 - Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi).

Entry No. 54 - Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.

5.3 Concurrent list

List III of Seventh Schedule, called “concurrent list”, includes matters where both Central Government and State Government can make laws. This list includes entries like Criminal Law and Procedure, Trust and Trustees, Civil procedures, economic and social planning, trade unions, charitable institutions, price control, factories, etc. In case of entries included in concurrent list, in case of conflict, law made by Union Government prevails. The only exception is that if law made by State contains any provision repugnant to earlier law made by Parliament, law made by State Government prevails, if it has received assent of President. Even in such cases, Parliament can make fresh law and amend, repeal or vary law made by State. [Article 254 of Constitution].

5.4 Deemed sale of goods

The issue of sales tax has been made more complicated by the definition of ‘deemed sale of goods’.

Article 366(29A) of Constitution, as amended by Constitution (46th Amendment) Act, 1982, w.e.f. 2-2-1983 states as follows :

As per Article 366(29A) of Constitution of India, ‘Tax on the sale or purchase of goods’ includes -

  (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration

  (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract

  (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments

  (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration

  (e) a tax on supply of goods by any un-incorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration

   (f) a tax on supply, by way of or as part of any service or in any manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration

And such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

This definition is an amended one which was amended w.e.f. 2-2-1983 by Constitution (46th Amendment) Act, 1982. This definition has been made wide to cover transactions of works contract, leasing, hire purchases and food served in hotels. As clarified in the definition itself, these transactions are ‘deemed sales’, i.e. these will be deemed as sales even if as per normal definition, these will not be ‘sales’. Subsequent to this amendment, most of the State Governments have amended the State sales tax laws to impose tax on these transactions. CST Act was amended w.e.f. 11-5-2002 to cover ‘deemed sale’.

5.5 Amendments to Constitution made in 2004 not yet made effective

 88th Amendment to Constitution has been passed by Parliament on 15-1-2004, but not yet made effective.

Entry 92C to List I of Seventh Schedule has been introduced with reads as follow – Union List (as newly inserted), reads ‘Tax on Services’.

Newly inserted Article 268A(1) to Constitution provides that tax on services will be collected and appropriated by Union as well as States. Article 268A(2) provides that the proceeds of service tax so levied by Union and States shall be appropriated as per law formulated by Parliament.

These amendments have been passed by more than 50% States but has not yet been brought into force.

Both Article 268A and Entry 92C will be omitted when GST is introduced.

6 Proposed Amendments to Constitution

As can be seen from aforesaid provisions in Constitution of India, presently, Centre cannot impose GST on traders for sale within the State, since that entry is included presently in List II of Seventh Schedule to Constitution of India (State List). Similarly, State cannot imposed service tax concurrently with Central Government.

Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 has been introduced in Lok Sabha on 22-3-2011.

The Highlights are as follows –

Concurrent powers to Union and State to impose GST – Parliament and Legislature of every State will have powers to make laws in respect of GST. However, Parliament has exclusive powers to make laws in respect of supply of goods or of services, or both takes place in the course of inter-State trade or commerce. ‘State’ includes Union Territory for this purpose [Proposed Article 246A to Constitution].

Tax on Inter-State goods and service tax on supplies to be apportioned - Tax on Inter-State goods and service tax on supplies and also on import of supply of goods and services will be collected by Union Government and apportioned between Union and State in the manner prescribed by Parliament by law [Proposed Article 269A(1) of Constitution]. Parliament will formulate principles of determining when supply of goods or services takes place in the course of inter-state trade or commerce.

Goods and Service Tax Council – GST Council with Union Finance Minister and Chairperson and Ministers of Finance or Taxation of each State Government as members shall be constituted. Such Council can make recommendations relating to GST, to harmonise structure of GST and development of harmonised national market for goods and services. Decision at meeting will be by consensus of all members present [Proposed Article 279A of Constitution].

Goods and Service Tax Dispute Settlement Authority – A Goods and Service Tax Dispute Settlement Authority will be constituted. Dispute or compliant made by State Government or Union Government will be adjudicated by the Authority. The dispute can be only in respect of recommendation made by GST Council that results in loss of revenue to State Government or Government of India or affects the harmonised structure of GST [Proposed Article 279B] (Since GST Council can only make recommendations and that too after consensus, it is not clear how any dispute can arise, as the ‘recommendation’ cannot be binding either on Centre or State].

State cannot impose tax on supply of goods or service in inter-state, export or import transactions - State cannot impose tax on supply of goods or services or both, when such supply takes place outside the State (i.e. inter-state) or in course of export or import of goods or services or both. Parliament will formulate principles for determining when supply of goods or services takes place outside the State (i.e. inter-state) or in course of export or import  [Proposed Amendment to Article 286].

‘Declared goods’ will not include goods covered under GST - ‘Declared goods’ will not include goods covered under GST [Proposed Article 286(4)]. Thus, only goods outside GST regime can be declared as ‘goods of special importance’.

Definition of GST – ‘Goods and Services Tax’ means any tax on supply of goods or services or both except taxes on supply of the following goods, namely (i) Petroleum Crude, (ii) HSD, (iii) motor spirit (commonly known as petrol), (iv) natural gas, (v) aviation turbine fuel and (vi) Alcoholic Liquor for human consumption [proposed Article 366(12) of Constitution].

Note that the word used is ‘supply’ and not ‘sale’. Thus, concept of ‘sale of goods’ will be no more relevant. It is clear that petroleum products and liquor will be out of GST regime.

Deemed sale concept will go – Concept of ‘deemed sale of goods’ will go as Artricle 366(29A) is proposed to be omitted.

Excise duty only on specified products - Entry 84 of List I of seventh schedule is proposed to be amended to provide that Central Excise Duty can be imposed only on Petroleum products (Petroleum Crude, HSD, motor spirit i.e. petrol, natural gas, aviation turbine fuel) and tobacco and tobacco products.

Restriction on imposing tax on newspapers and advertisements in newspapers to go – Present restrictions on imposing tax on newspapers and advertisements in newspapers to go [Entry 92 of List I and Entry 55 of List II of Seventh Schedule proposed to be omitted and Entry 54 of List II proposed to be amended].

Entry tax or octroi only by Panchayat or Municipality – Entry tax or octroi can be levied and collected by Panchayat or Municipality [Proposed amendment to entry 52 of List II of Seventh Schedule].

Sales tax on petroleum products and alcoholic liquor – State Government can impose sales tax on sale of petroleum products and alcoholic liquor.[proposed amendment to Entry 54 of List II of Seventh Schedule]. Central Government can impose tax on inter-state transaction under existing entry 92A of List I of Seventh Schedule.

Entertainment tax – Entertainment and amusement tax can be levied by Panchayat or Municipality or Regional Council or District Council only [proposed amendment to Entry 62 of List II of Seventh Schedule].

6.1 Amendments have to be passed by at least 15 States, besides Parliament

The constitutional amendments will have to be passed by Parliament and at least 15 State legislatures. Then Central and State GST Acts will have to be passed, rules framed and notified.

It is a big challenge to complete all this procedure by 31-3-2010.

It seems if some States do not fall in line, partial GST may have to be introduced to begin with.

6.2 Debit to State will require approval of State legislature

The tax paid is part of Consolidated Fund of the State. Any debit to that fund requires approval of State legislature as per Article 283(2) of Constitution of India.

Thus, unless the State passes suitable law, debit by Centre to State will not be possible.

7. Issues which need attention/clarifications

The basic direction of GST is now clear. However, there are various issues which need attention and clarification.

7.1 Valuation of stock transfer/branch transfer for payment of IGST

Often goods are sent outside State under stock transfer or for incorporation in works contract. Goods may also be sent on sale or return basis. In such cases, IGST will become payable. Clear and unambiguous provisions are required for valuation of goods for purpose of payment of ISGT.

7.2 Textile sector

Presently, textile sector is virtually outside excise net and in many cases, even Vat net. The policy about tax on textile sector is not clear. It seems the sector is so unorganised and so divergent that the sector may be kept out of GST net at least in initial stages.

7.3 Job work and repairs on Inter State basis

GST will apply to job work and repairs. That is not a problem. Issue is how to send goods inter-state for job work or repairs. There are many issues presently in the documentation and issue of F form. These need to be sorted out.

It seems IGST will be payable when goods are sent inter-state for job work or repairs, as the words used are ‘supply of goods or service’ and not ‘sale of goods or service’. This will increase strain on working capital requirement.

7.4 Centralised registration and assessment not likely

At present, dealers having multi-state operations face considerable difficulties as they have to face assessments in various States which is very costly and time consuming. Provision for centralised registration and assessment would have been much simpler. However, this may be possible for IGST and CGST but definitely not for SGST.

7.5 Casual dealer

In some cases, a dealer usually does not have business in other States but may get occasional business of transaction in other State e.g. specific works contract or sale contract. In such cases, getting regular registration and completing all formalities is a costly and difficult proposition. In such cases, there should be provision of a ‘casual dealer’.

7.6 Uniformity in law and procedures not likely

It would have been much better if the law and procedures are uniform all over India and only implementation was given to States (like CST Act). At present, each State has its own procedures, rules and forms. This makes life miserable for registered dealers having multi-state operations. This position is most likely to continue.

7.7 Dual assessments

There will be dual assessment i.e. both by Centre and State though hopefully, some coordination mechanism may be developed to reduce transaction costs of small and medium size taxpayers.

In case of SSI, small service providers, and small traders, there may be only single assessment by State Government authorities, as they will be liable to pay only SGST.

7.8 Unutilised transitional credit

While switching over to GST, there will be Input tax credit (ITC) of Cenvat (in case of manufacturers) and State Vat (in case of traders). Provision will be there to transfer this credit under GST.

7.9 Exemptions and incentives to new industries already granted in some States

All State Governments were offering sales tax incentives to new industries set up in the State. The incentives were broadly of three types - (a) Exemption - Don’t charge tax and don’t pay (b) Deferral - Charge sales tax in invoice but pay after long period of (say) 12 to 18 years (c) Remission - Charge in the invoice but retain and do not pay to Government.

State Governments have stopped giving incentives to new industries. However, there are commitments in respect of industries set up earlier. State Governments will have to continue with the incentives which were already granted   [Some States have allowed industries under exemption scheme to convert to deferral scheme so that such industries can pass on benefit of VAT to their buyers].

Central Government has given area based exemption from excise duty to various States.

The incentive period/exemption period has not expired. The commitments already made will have to be honoured till the incentive/exemption period is over.

However, after introduction of GST, these area based exemptions will be useful only when supply is directly to consumer and not to any intermediary like dealer or trader.

7.10 Many of exemptions may become redundant

Many of exemptions, particularly those relating to SSI and area based exemptions may become much less attractive. This s because these exemptions will be useful only where goods are sold directly to customer/consumer who cannot utilise Vat credit. If such goods are sold to manufacturer or trader, the exemption will be of no use. The reason is that such buyer (manufacturer or trader) will have to pay SGST/CGST/IGST on entire value of transaction without any Vat credit on inputs.

7.11 Tie between state autonomy and simplification in tax structure

It is true that States should have sufficient  autonomy in a federal structure of government. However, there has to be a fair balance between such autonomy and need of a simple tax structure.

It seems the balance has been lost in the dual GST as proposed. In order to ensure autonomy to States, the GST structure has become very complicated.

7.12 Penal provisions should not apply for first two years

There are bound to be ambiguities and different interpretations in initial stages. Hence, it should be specifically provided that penal provisions shall not apply for first two year. Only tax with interest should be payable, if at any time, tax is found to be payable.

7.13 Need of working capital finance will increase

Presently, no tax is payable in case of stock transfer or sending material for job work. Now, IGST/CGST/SGST will become payable, at least in case inter-state transactions. This will increase need of additional working capital finance [Of course, this statement is only half truth, since even today, hue funds are blocked for years, as refund from State Government to dealers engaged in inter-state transactions is not available in time]

8. Conclusion

The GST as envisaged may not be ideal mode but seems to be workable and seems to be the best possible design, considering the constitutional and political constraints. The GST system will certainly be better that the present multi-layer tax system and will definitely be better than the present hybrid system.

Cost efficient distribution channels - The business will have to restructure their operations to take maximum advantage of GST.  Distribution channels based on hub and spoke model can be developed which will be very cost effective since credit of IGST will be available across all States.

Inter State Trading Houses - Just like ‘merchant exporters’ specialising in physical exports, there could be ‘inter state trading houses’ specialising in inter-state transactions. Thus, small and medium enterprises, instead of entering into inter-state transactions themselves can route their transactions through such ‘inter state trading houses’, which will be quite cost effective.

Increased need of working capital – Need of working capital will increase [However, dealer will not have to wait endlessly to get refund from State Government, as at present].

Review of purchase policies – Present purchase policies will have to be reviewed. For example, following will need review – (a) Purchase of branded goods from SSI in rural area (b) Purchase of goods from exempt SSI units (c) Purchase of goods from manufacturers enjoying area based exemptions.

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