Goods and Services Tax is a comprehensive indirect tax which is to be levied on the manufacture, sale and consumption of goods and services in India. This is so far the biggest tax reform in the country. GST eliminates the cascading effect of taxes because it is taxed at every point of business and the input credit is available in the value chain.
Historical Background
France was the first country to introduce GST system in 1954. More than 140 countries have implemented the GST. Genesis of GST occurred during the previous NDA Government under Atal Bihari Vajpayee Government when it set up the Asim Dasgupta committee to design a model for GST. The UPA Government took the matter further and announced in 2006 that this tax would be introduced from April 1, 2010. However, so far it was not introduced. All the GST bills including Constitution (101st Amendment) Act have been passed now and GST is set to come into force from July 1, 2017.
Taxes Replaced by GST
GST would replace almost all vital indirect taxes and cesses on Goods & services in the country. Among the taxes levied by centre, GST will subsume the following:
- Central Excise duty & Service Tax
- Duties of Excise (Medicinal and Toilet Preparations)
- Additional Duties of Excise (Goods of Special Importance)
- Additional Duties of Excise (Textiles and Textile Products)
- Additional Duties of Customs (commonly known as CVD)
- Special Additional Duty of Customs (SAD)
- Central Surcharges and Cesses so far as they relate to supply of goods and services
Among the state taxes that would be replaced by GST include:
- State VAT
- Central Sales Tax c. Luxury Tax
- Entry Tax (all forms)
- Entertainment and Amusement Tax (except when levied by the local bodies)
- Taxes on advertisements
- Purchase Tax
- Taxes on lotteries, betting and gambling
- State Surcharges and Cesses so far as they relate to supply of goods and services
Principles followed in subsuming the taxes
The following principles were adopted while subsuming the above taxes under GST. Firstly, the taxes to be levied should primarily indirect taxes and should be part of the transaction chain that commences with production or manufacturing or import of good / service at one end and consumption at other. Secondly, such replacement of taxes should result in free flow of tax credit in intra and inter-state level. Thirdly, the GST should give fair revenue to both centre and states.
Commodities Not under GST
Kindly Note that following have been kept out of the ambit of GST:
- Potable alcohol
- Five petroleum products viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel
- Electricity
The above arrangement is “temporary” and the GST Council will decide the date from which they shall be included in GST. For these commodities, the existing VAT and central excise will continue to operate until they are included in GST. It’s worth note here that Tobacco and Tobacco Products have been included in GST and centre will have power to levy the GST on tobacco and tobacco products.
Apart from the above, there will be no GST on the sale and purchase of securities, which shall continue to be governed by Securities Transaction Tax (STT).
Understanding Dual GST
Most of the countries have a unified GST system. Brazil and Canada follow a dual system where GST is levied by both the Union and the State governments. India also has dual GST where Centre and States simultaneously levying it on a common tax base. The structure is as follows:
For intra-state trade
The GST levied by centre is called Central GST (CGST) while that levied by states / UTs is State GST (SGST) or UTGST.
For inter-state trade
For inter-state supply of Goods & Services, an Integrated GST (IGST) will be levied and administered by Centre.
CGST and IGST will be levied and administered by Centre; while SGST / UTGST will be levied and administered by respective states and UT administrations.
Principles followed in adopting dual GST
The principle of fiscal federalism has been adapted where by centre and states have been assigned powers to levy and collect taxes through appropriate legislations.
GST Legislation
The entire GST legislation is based on six separate acts / bills. Their current status (April 4, 2017) is as follows:
- Constitution 101st amendment Act, 2016: This act was passed in September 2016 and comes into force in July 1, 2017.
- Central GST (CGST) Bill, 2017: This bill has been now passed on Lok Sabha and expected to be passed in Rajya Sabha Soon.
- SGST (state GST) Bill, 2017: This bill has been approved in GST Council but yet to be introduced and passed.
- Union Territory GST (UTGST) Bill, 2017: This bill has been passed in Lok Sabha and yet to be passed in Raya Sabha
- Integrated GST (IGST) Bill, 2017: This Bill has been passed in Lok Sabha and Yet to be passed in Rajya Sabha
- GST (Compensation to States) Bill, 2017 (Compensation Cess Bill): This bill has been passed in Lok Sabha and yet to be passed in Rajya Sabha.
Brief information about each of them is as follows:
Constitution 101st amendment Act, 2016
This is the enabler act for GST and it amends several important articles and schedules of the constitution of India so that necessary constitutional . You can read in detail about this here. Here are important notes for your examinations.
- The new articles added by this amendment to Indian Constitution are Article 246-A (Special provision with respect to goods and services tax); Article 269-A ((Levy and collection of goods and services tax in course of inter-State trade or commerce) and Article 279A (GST Council).
- Two schedules have been changed viz. 6th schedule and 7th
- As per article 246-A:
- 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.
- As per Article 269-A:
- 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 tax. Thus, under GST, the apportionment of the tax revenue will take place outside the Consolidated Funds.
- Article 279-A:
- There will be a GST council constituted by President, headed by finance minister as its chairman and one nominated member from each state who is in charge of finance or taxation. GST Council has been discussed in detail here.
- 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.
- Other Changes
- 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.
Taxation Powers of Centre and States Post 101st Amendment Act
The 101st constitution amendment act has resulted in some important changes into the taxation power of the union and states. For basics, you may read this article on gktoday. For your examination, you should note that after the 101st amendment act:
- Parliament as well as every state legislature in the country has powers to enact laws to levy Goods and services tax. In case of inter-state trade, only parliament has power. {Article 248}
- The residual power of taxation i.e. to tax the subjects which are not in state or concurrent list is STILL with Parliament. However, such power is now subject to Article 246-A. {Article 248}
- If Rajya Sabha by two-third majority passes a resolution that it is necessary and in national interest that parliament should make a law with respect to Goods and Services Tax on any matter in state list, it shall be lawful for the parliament to do so. Such a tax shall be in force for one year. To extend it further, similar resolution from Rajya Sabha will be needed. {Article 249}
- During emergency, Parliament of India will have powers to make GST law on any subject in state list {article 250}.
- Duties levied by the Union but collected and appropriated by the States include only Stamp duties. The stamp duties collected shall not form the part of consolidated fund of India BUT will be assigned to states. {Article 268 (1); Kindly note that excise duty on medicinal and toilet preparations has been omitted from this article}
- Article 268-A (Service tax levied by Union and collected and appropriated by the Union and the States) has been omitted from constitution and now is part of GST.
CGST Bill
The salient features of CGST are as follows:
CGST Registration Number
One registration number is for CGST and it is being proposed at a pan-India level unlike the existing excise registration numbers at the factory/location based. This will reduce the number of registration numbers which business have to obtain and also the number of returns which have to be filed.
Peak tax rate is 20% under CGST
This bill once becomes an act, will allow the centre to levy CGST on goods and services within the boundary of a state. The rate of CGST will not exceed 20%. We note here that under GST, the peak rate is 20% for CGST and 20% for SGST, thus the highest tax that can be charged as GST would be 40%. However, this level of taxes has been provided only as enabling provisions. The highest tax rate tier currently is 28% (there are four tiers viz. 5, 12, 18 and 28%).
For smaller taxpayers, the composition levy is 2.5%
The taxpayers with turn over less than Rs. 50 Lakh will pay a flat rate on turnover instead of the value of goods and services supplied. This rate will be capped at 2.5%.
Certain Goods to be exempted
Certain goods and services will be exempted from GST via notification as per recommendation of GST council. {Currently, around 80 products and services including healthcare, food items, non-ac restaurants are on exemption list).
Registration, Returns and Refund (Consumer Welfare Fund)
The businessmen whose turnover exceeds 20 Lakh will register in GSTN in their own state where they conduct business. The turnover threshold is Rs. 10 Lakh for special category states. The self assessment returns are to be filed every month. If the tax paid was in excess of or unutilized input credit, the taxpayers can apply for refund. Upon such application, the money will be credited either to the tax payer account or in a “Consumer Welfare Fund”. The money accrued in Consumer Welfare Fund will be used for consumer welfare.
Prosecution and Appeals
For GST related offenses, the persons may be fined or imprisoned or both by the CGST commissioners. Such orders can be appeared before the GST appellate Tribunal; and further before the high court.
SGST /UTGST Bill
This bill has been approved in GST Council but yet to be introduced and passed. Its tentative draft is available in public domain and most salient features are similar to CGST. There will be a SGST Registration Number. SGST is based on the state; similar to the current TIN numbers for VAT, each business will have to have one SGST registration number in the states where it has a presence. Similar to CGST registration number the SGST registration number will also be PAN-based. Each State, including Union territory with Legislature will pass its own State / UT Goods and Services Tax (SGST) Bill.
Integrated GST (IGST) Bill
This Bill has been passed in Lok Sabha and Yet to be passed in Rajya Sabha. Once this is passed, it will pave the way to charge IGST tax on inter-state trade and commerce i.e. where supply and consumption is happening in to states or UTs. This tax will be paid by the Inter-state seller on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
GST (Compensation to States) Bill, 2017 (Compensation Cess Bill)
This bill has been passed in Lok Sabha and yet to be passed in Rajya Sabha. The salient features are as follows:
- This bill provides for compensation to states for any loss in revenue due to implementation of GST. The period of compensation will be five years from the date the state brings SGST in force.
- For the purpose of calculating the compensation amount in any financial year, year 2015-16 is to be considered as base year. The revenue in that year and a 14% growth rate in revenue will be taken for calculation for five years.
- The base year revenue of the state will be calculating by adding its revenues from VAT, CST, entry tax, octroi and other local body taxes, taxes on luxury, entertainment, advertisement etc. However, this will not include revenue on alcohol and certain petroleum products.
- The compensation will be provisionally calculated and released at the end of every two months. The annual calculation of revenue will be audited by CAG.
- The compensation payable to a state has to be provisionally calculated and released at the end of every two months. Further, an annual calculation of the total revenue will be undertaken, which will be audited by the Comptroller and Auditor General of India.
- The GST council has recommended a Compensation Cess which can be levied on certain goods and services and its proceeds will be credited to a Compensation Fund. This cess is capped at 135% for Pan Masala; Rs. 400 tonne for coal; Rs. Rs 4,170 + 290% per 1,000 sticks of tobacco, and 15% for all other goods and services including motor cars and aerated water.
- The unused money in Compensation Fund will be distributed as follows: 50% of the fund to be shared between the states in proportion to revenues of the states, and (ii) remaining 50% will be part of the centre’s divisible pool of taxes.
Other Important Facts and Notes about GST for UPSC (Prelims Examination)
GST is a Destination Based Tax
GST is a destination based tax, which means that it would accrue to the taxing authority which has jurisdiction over the place of consumption which is also termed as place of supply. This implies that the states which consume more than manufacture will benefit. It may not be encouraging for the states which are top in production of goods and services.
In GST, CGST and SGST will be simultaneously levied
The CGST and SGST will be simultaneously levied on every transaction of supply of goods and services. Both will be levied on same price. The location of the supplier and recipient is immaterial for the purpose of levy of both the taxes.
Both States and Centre have a say in GST rates
Under GST regime, both the CGST and SGST would be levied at rates jointly decided by centre and states. These rates would be notified on recommendations of GST Council.
GSTN is the Special Purpose Vehicle for GST administration
Goods and Service Tax Network (GSTN) is a Special Purpose Vehicle (SPV) set up to cater to the needs of GST. The GSTN shall provide a shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders for implementation of GST. The key functions of the GSTN are as follows;
- facilitating registration
- forwarding the returns to Central and State authorities
- computation and settlement of IGST
- matching of tax payment details with banking network
- providing various MIS reports to the Central and the State Governments based on the tax payer return information
- providing analysis of tax payers’ profile
- running the matching engine for matching, reversal and reclaim of input tax credit.
The GSTN is developing a common GST portal and applications for registration, payment, return and MIS/ reports.
GST provides for a Compliance rating mechanism for tax payers
As per Section 149 of the CGST/SGST Act, every registered person shall be assigned a compliance rating based on the record of compliance in respect of specified parameters. Such ratings shall also be placed in the public domain. A prospective client will be able to see the compliance ratings of suppliers and take a decision as to whether to deal with a particular supplier or not. This will create healthy competition amongst taxable persons.
GST Provides for an Anti-Profiteering measure
As per section 171 of the CGST/SGST Act, any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. An authority may be constituted by the government to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
For GST to be levied – there must be business and quid-pro-quid
In order to be a supply which is taxable under GST, the transaction should be in the course or furtherance of business. As there is no quid pro quo involved in supply for charitable activities, it is not a supply under GST.
GST differentiates between composite supply and mixed supply
Composite supply is a supply consisting of two or more taxable supplies of goods or services or both or any combination thereof, which are bundled in natural course and are supplied in conjunction with each other in the ordinary course of business and where one of which is a principal supply. For example, when a consumer buys a television set and he also gets warranty and a maintenance contract with the TV, this supply is a composite supply. In this example, supply of TV is the principal supply, warranty and maintenance service are ancillary.
Mixed supply is combination of more than one individual supplies of goods or services or any combination thereof made in conjunction with each other for a single price, which can ordinarily be supplied separately. For example, a shopkeeper selling storage water bottles along with refrigerator. Bottles and the refrigerator can easily be priced and sold separately.
Under GST, Composite supply shall be treated as supply of the principal supply. Mixed supply would be treated as supply of that particular goods or services which attracts the highest rate of tax.