GST - GOODS AND SERVICES ACT BY RAJAT JHINGAN

An Introduction to GST

GST is a destination based tax and levied at a single point at the time of consumption of goods or services by the ultimate consumer. GST is based on the principle of value added tax. GST law emphasizes on voluntary compliance and on accounts based reporting and monitoring system. It is a comprehensive levy and envisages tax collection on both goods and services at the same rate. GST offers comprehensive and continuous chain of tax credits from the producer's point/service provider's point up to the retailer's level/consumer’s level thereby taxing only the value added at each stage of supply chain. The supplier at each stage is permitted to avail credit of GST paid on the purchase of goods and/or services and can set off this credit against the GST payable on the supply of goods and services to be made by him. Thus, only the final consumer bears the GST charged by the last supplier in the supply chain, with set-off benefits at all the previous stages.

The GST Council will recommend rates of tax, period of levy of additional tax, principles of supply, special provisions to certain states etc. The GST Council will consist of the Union Finance Minister, Union Minister of State for Revenue, and state Finance Ministers.

GST is applicable on the supply of goods or services. Alcoholic liquor for human consumption is exempt from GST. Initially, GST will not apply to:

(        a)   Petroleum crude,

(        b)  High speed diesel,

(        c)  Motor spirit (petrol),

(        d)  Natural gas, and

(        e)  Aviation turbine fuel.

The GST Council will decide when GST will be levied on them.

Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco. An additional tax of up to 1% on the supply of goods will be levied by centre in the course of inter-state trade or commerce. The tax will be collected by the centre and directly assigned to the states from where the supply originates. This tax will be levied for two years, or for a longer period as recommended by the GST Council. The central government may exempt certain goods from such additional tax.

GST in India Comprises of:
1	CGST	Central Goods and Service Tax	Levied and collected by Central Government
2	SGST	State Goods and Service Tax	Levied and collected by State Governments/Union Territories with State Legislatures
3	UTGST	Union Territories Goods and Service Tax	Levied and collected by Union Territories without State Legislatures
4	IGST	Integrated Goods and Service Tax	Levied by Centre on all inter-State supplies, sum total of CGST and SGST/UTGST

Genesis of GST

Internationally, GST was first introduced in France and now more than 160 countries have introduced GST. Most of the countries, depending on their own socio-economic formation, have introduced National level GST or Dual GST. United States is one of the biggest democracies has not introduced GST for the sake of retaining the federal structure and to help the states to retain their financial autonomy. India has opted for Dual-GST system which is somewhat similar to the Canadian Dual GST framework.

It has now been more than a decade since the idea of national Goods and Services Tax (GST) was mooted by Kelkar Task Force in 2004. The Task Force strongly recommended fully integrated ‘GST’ on national basis.

The talks of ushering in GST, however, gained momentum in the year 2014 when the NDA Government tabled the Constitution (122nd Amendment) Bill, 2014 on GST in the Parliament on 19th December, 2014. The Lok Sabha passed the Bill on 6th May, 2015 and Rajya Sabha on 3rd August, 2016. Subsequent to ratification of the Bill by more than 50% of the States, Constitution (122nd Amendment) Bill, 2014 received the assent of the President on 8th September, 2016 and became Constitution (101^st Amendment) Act, 2016, which paved the way for introduction of GST in India.

In the following year, on 27th March, 2017, the Central GST legislations –

·        Central Goods and Services Tax Bill, 2017;

·        Integrated Goods and Services Tax Bill, 2017;

·        Union Territory Goods and Services Tax Bill, 2017 and

·        Goods and Services Tax (Compensation to States) Bill, 2017

 were introduced in Lok Sabha. Lok Sabha passed these bills on 29th March, 2017 and with the receipt of the President’s assent on 12th April, 2017, the Bills were enacted.  The enactment of the Central Acts is being followed by the enactment of the State GST laws by various State Legislatures. 

Telangana, Rajasthan, Chhattisgarh, Punjab, Goa and Bihar are  among the first ones  to pass their respective State GST law s. Government is  endeavoring to roll out GST by 1st  July, 2017, by achieving consensus on  all the  issues  relating  thereto. The government rolled out GST on 1^st July 2017 and it was implemented from that date all across India except the state of Jammu and Kashmir.

Constitution (101^st Amendment) Act, 2016: Changes

Article 246 (A) (New Article):

It says that:

(1)Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Implication:

• Both Union and States in India now have “concurrent powers” to make law with respect to goods & services.
• The intra-state trade now comes under the jurisdiction of both centre and state; while inter-state trade and commerce is “exclusively” under central government jurisdiction.

Article 269A (New Article):

It says that:
(1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.

(2) The amount apportioned to a State under clause (1) shall not form part of the Consolidated Fund of India.

(3) Where an amount collected as tax levied under clause (1) has been used for payment of the tax levied by a State under article 246A, such amount shall not form part of the Consolidated Fund of India.

(4) Where an amount collected as tax levied by a State under article 246A has been used for payment of the tax levied under clause (1), such amount shall not form part of the Consolidated Fund of the State.

(5) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.’

Implications:

• In case of the inter-state trade, the tax will be levied and collected by the Government of India and shared between the Union and States as per recommendation of the GST Council.
• The article also makes it clear that the proceeds such collected will not be credited to the Consolidated Fund of India or State but respective share shall be assigned to that state or centre. The reason for the same is that under GST, where centre collects the tax, it assigns state’s share to state, while where state collects tax, it assigns centre’s share to centre. If that proceed is deposited in Consolidated Fund of India or State, then, every time there will be a need to pass an appropriation bill. Thus, under GST, the apportionment of the tax revenue will take place outside the Consolidated Funds.

Article 279-A (New Article): GST Council

This article provides for constitution of a GST council by president within sixty days from this act coming into force. The GST council will constitute the following members:

• Union Finance Minister as chairman of the council
• Union Minister of State in charge of Revenue or Finance
• One nominated member from each state who is in charge of finance or taxation

The GST council will be empowered to take decisions on the following:

• The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;
• The goods and services that may be subjected to, or exempted from, the goods and services tax;
• Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply;
• The threshold limit of turnover below which goods and services may be exempted from goods and services tax;
• The rates including floor rates with bands of goods and services tax;
• Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;
• Special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
• Any other matter relating to the goods and services tax, as the Council may decide.

All decisions taken at the GST council will be taken based on voting. Process of voting is clearly articulated in detail in the constitutional amendment bill.

Changes in the 7^th Schedule

This amendment has made following changes in 7^th schedule of the constitution:

Union List:

• The entry 84 of Union List earlier comprised the duties on tobacco, alcoholic liquors, opium, Indian hemp, narcotic drugs and narcotics, medical and toilet preparations. After this amendment, it will comprise of Petroleum crude, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel, tobacco and tobacco products. Thus, these are now out of ambit of GST and subject to Union jurisdiction.
• Entry 92 (newspapers and on advertisements published therein) has been deleted thus, they are now under GST.
• Entry 92-C (Service Tax) has been now deleted from union list.

State List

• Under State list, entry 52 (entry tax for sale in state) has been deleted.
• In Entry 54, Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List I.; has been now replaced by Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”
• Entry 55 (advertisement taxes) have been deleted.
• Entry 62 (Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling) has been replaced by these taxes only to be levied by local governments (panchayats, municipality, regional council or district council).

Other Important amendments in existing articles

• The residuary power of legislation of Parliament under article 248 is now subject to article 246A.
• Article 249 has been changed so that if 2/3rd majority resolution is passed by Rajya Sabha, the Parliament will have powers to make necessary laws with respect to GST in national interest.
• Article 250 has been amended so that parliament will have powers to make laws related to GST during emergency period.
• Article 268 has been amended so that excise duty on medicinal and toilet preparation will be omitted from the state list and will be subsumed in GST.
• Article 268A has been repealed so now service tax is subsumed in GST.
• Article 269 would empower the parliament to make GST related laws for inter-state trade / commerce.

Further, the amendment also provided that Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. This resulted into the Compensation Cess Bill.

GSTN – Goods and Services Tax Network

Under the GST regime, all these different identification numbers required for indirect tax purposes will be replaced by a single umbrella number, the GSTIN. All the taxpayers have been consolidated into a single platform for compliance and administration purposes and have been assigned registration under a single authority. The government has set up GSTN–a special purpose vehicle to provide the IT infrastructure necessary to support GST digitally. All of these businesses will be assigned a unique Goods and Services Tax Identification Number (GSTIN). This 15-digit number is similar to the Tax Identification Number (TIN) that is allotted to business entities registered under a state’s Value Added Tax law. Currently, businesses providing services are also required to obtain a Service Tax Registration Number assigned by the Central Board of Excise and Customs (CBEC). The functions of GSTN inter-alia include:

  v Facilitating Registration

  v Forwarding returns to Central and State authorities

  v Computation and Settlement of IGST

  v Matching of tax payment details with banking network

  v Providing various MIS reports to Central and the State governments based on tax-payer return information

  v Providing analysis of taxpayer’s profile

  v Running the matching engine for matching, reversal and reclaim of input tax credit.

What does GSTIN contain?
 A complete break-up of the proposed GST Identification Number. Each taxpayer is allotted a state-wise PAN-based 15-digit Goods and Services Taxpayer Identification Number (GSTIN).
1. Firt 2 digits of the number represents the state code as per Indian Census 2011.
2. Next 10 digits is the PAN number of the taxpayer.
3. 13th digit gets assigned based on the number of registrations within a state.
4. 14th digit is Z by default.
5. Last digit is the ‘sum’ check code.

GST Tax Rates

Under GST, all goods and services transacted in India are classified under the HSN code system or SAC Code system. Goods are classified under HSN Code and services are classified under SAC Code. Based on the HSN or SAC code, GST rates have been fixed in five slabs, namely NIL, 5%, 12%, 18% and 28%. 

  v 0% - No Tax

  v 5% - Essential Goods

  v 12%- Products/ service which are basic necessities

  v 18% - Revenue Neutral Rate (RNR)

  v 28% (Insome Cases upto 160%) – Demerit/ Luxury/ Sin Goods

HSN code or Harmonized System Nomenclature code number is an internationally adopted commodity description and coding system developed by the World Customs Organization (WCO). HSN code is used by more than 200 countries as a basis for their customs tariffs. Currently over 98 % of the merchandise in international trade is classified under HSN code With the HSN code acting as an universal classification for goods, the Indian Government has decided to adopt the use of HSN code for classification of goods under GST and levy of GST.

Expected Benefits of GST

GST is a win-win situation for the entire country.  It brings benefits to all the stakeholders of industry, Government and the consumer. It will lower the cost of goods and services give a boost to the economy and make the products and services globally competitive.

  The significant benefits of GST are discussed hereunder: 

  v Creation  of  unified  national  market: GST  aims  to  make  India  a  common  market  with  common tax rates and procedures and remove the economic barriers thus paving the way for an integrated economy at the national level.

  v Mitigation  of  ill  effects  of  cascading: By  subsuming  most  of  the  Central  and  State  taxes  into a single tax and by allowing a set-off of prior-stage taxes for the transactions across the entire value chain, it would mitigate the ill effects of cascading, improve competitiveness and improve liquidity of the businesses.

  v Elimination  of  multiple  taxes  and  double  taxation:  GST  will  subsume  majority  of  existing  indirect tax levies both at Central and State level into one tax i.e., GST which will be leviable uniformly on goods and services.  This will make doing business easier and will also tackle the highly disputed issues relating to double taxation of a transaction as both goods and services. 

  v Boost to ‘Make in India' initiative:  GST will give a major boost to the ‘Make in India' initiative of the Government of India by making goods and services produced in India competitive in the national as well as international market .

  v Buoyancy  to  the  Government  Revenue:  GST  is  expected  to  bring  buoyancy  to  the  Government Revenue by widening the tax base and improving the taxpayer compliance. 

Challenges in Implementation of GST

Industry has been largely supportive of GST and, with a notable exception of textile sector, there was little or no resistance across the country. From a consumer’s standpoint, there were no shortages in supplies and increases in prices, barring few cases where the effective rate of tax has gone up significantly. Despite all these there are certain challenges faced in implementation of new tax regime:

Clients Preparedness

Clients' understanding of GST provisions and its impact on their business is still at a nascent stage, and many are still identifying the locations and places they need to be registered in.

These businesses are also assessing the mandated GST-compliance their relevant functional departments need to adhere to, including their Supply Chain, IT Systems, and Legal. This is necessary for identifying their new Working Capital, Cash Flow, and Fund Flow needs. To be on the right side of the GST anti-profiteering clause, businesses are also assessing their cost sheets while performing Comparable Analysis of the pricing of goods and services, pre-and post GST.

Lack of Clarity on GST Provisions (Rules and Regulation)

Various provisions of GST are still ambiguous. Categorisation of goods and services in various cases is still unclear. Provisions for anti-profiteering, as well as the now-deferred e-way bill, which tracks consignments across states, are unclear.

The new tax regime requires transporters to generate e-way bills on the GST portals which includes incurring substantial costs to install radio frequency identification devices (RFIDs). Currently there is no clarity on who will bear the bill for the infrastructure. The government has also made the rules related to assessment and audit public, but the absence of actual forms in the public domain challenges the effectiveness of the rule.

Heavy Compliance Burden

There has been increased compliance, with increase in the number of returns to be filed annually. Businesses will need to file multiple returns, a minimum of 37 in most cases for assessees, and this can increase multifold in accordance with business models. Clients will need to ensure timely compliance by registered suppliers to ensure there is no loss of input credit. This will necessitate correct data and reports to fill accurate GST returns.

Preparedness of IT Systems

Various businesses are yet to map the accounting software and IT systems in line with the new tax provisions, to create GST invoices, and extract required reports. Tax and accounting professionals jointly need to ensure that their clients' current systems are compatible with their GST Service Provider (GSP).

With GST demanding compliance, only days after guidelines were issued in their entirety, India Inc is rushed for time to modify the entire IT framework. Seamless implementation will require six million micro, small, and medium enterprises (MSMEs) to adapt their invoicing approaches for which they do not have adequate IT support and systems.

Scarcity of Skilled Resources

With GST rates and their complexities only recently becoming a part of our policy framework, skilled staff with updated GST subject knowledge and training are not easily available. This has placed an additional work load on personnel across industries, and created an urgent need for additional GST-skilled resources to ensure swift implementation.

While GST aims to streamline business and protect consumer interests, the legislation should not allow a sense of apprehension to impact industrial interests. GST is both a challenge and an opportunity for tax and accounting professionals, and knowledge of cloud, big data, analytics, and business applications along with financial knowledge is the need of the hour.