At last, a defining moment in India’s tax reforms has arrived. After seven long years, it appears that a compromise formula has been reached between the Centre and States, paving the way for the introduction of a harmonised GST regime from April 1, 2016.
The revised GST bill tabled in Lok Sabha for passage is in lieu of the 2011 GST bill, which has lapsed. However, the basic contours of the revised GST bill broadly remain the same. GST will subsume into one levy all indirect taxes imposed by the Centre (e.g. excise duty, service tax etc.) as well as VAT and local levies imposed by States (including entry tax). However, the revised GST bill keeps petroleum products and real estate transactions outside the ambit of GST as suggested by the Empowered Committee of Finance Ministers. The Centre has also agreed to guarantee compensation to States in lieu of revenues they may lose due to the GST regime.
The revised GST bill, as tabled in the Lok Sabha, suggests dual taxation in the form of SGST and CGST. SGST will subsume VAT, Entertainment tax, luxury tax, tax on lottery and State cess while CGST will subsume Central Excise duty, Additional Excise duty, Service tax, Excise duty levied under Medicinal and Toiletries Preparation Act, Additional Customs duty, Special Additional duty, Surcharge, Education and Secondary Higher Education Cess.
The basic principle is that all taxes which commence with import, manufacture and production of goods and provision of services and end with consumption are eligible to be subsumed. Taxes not related to supply of goods/services for consumption and taxes on items containing alcohol and petroleum products are kept out of GST. On the GST rate structure, two rates are proposed:
(i) a lower rate for items of basic importance; and
(ii) a standard rate for goods in general.
Exports are exempt from tax levies. A small taxpayer category [(gross annual turnover less than Rs 1.50 crore (yet to be finalised)] is exempt from CGST, SGST and input tax credit. For discussion only. Not intended to be an opinion or advice.
Taxes paid against CGST will be allowed as input tax credit against CGST and similarly in the case of SGST. Cross-utilisation of input tax credit is not allowed except in case of interstate supply of goods and services. In the case of interstate supply of goods and services, the Centre would levy IGST, which will include both SGST and CGST. Input tax credit allowed in this case will be SGST, IGST and CGST. Exports are fully exempted with zero rates while for consignment or stock transfer transactions, appropriate provision under the Act is contemplated.
In theory, a GST regime can deliver economic advantages to all stakeholders. But the actual realization of these benefits will depend on how effectively the GST Act is administered. Indeed, there is a very real opportunity for the Government to improve its tax revenues without unduly burdening assessees. Currently, India’s tax ratio as measured with reference to its GDP is low, at around 10%. A well-administered GST regime can improve this ratio. It can also help in keeping under check other critical economic parameters such as fiscal deficit and inflation.
At this time, the GST regime is more than a year away from becoming reality. It is the responsibility of all stakeholders – the Central and State governments, business entities, professionals, academicians and other players- to use this time to become well-informed of the salient administrative and operative mechanisms of GST. This will help in smoother transition and better administration while lowering the incidence of litigation.