The implementation of the Goods and Services Tax (GST) in India was a historical move, as it marked a significant indirect tax reform in the country. The amalgamation of a large number of taxes (levied at a central and state level) into a single tax is expected to have big advantages.
One of the most important benefit of the move is the mitigation of double taxation or the elimination of the cascading effect of taxation. The initiative is now paving the way for a common national market. Indian goods are also expected to be more competitive in international and domestic markets post GST implementation.
From the viewpoint of the consumer, there would be a marked reduction in the overall tax burden that is currently in the range of 25% to 30%. The GST, due to its self-policing and transparent nature, is also easier to administer on an overall scale.
When did GST start?
Several countries have already established the Goods and Services Tax. In Australia, the system was introduced in 2000 to replace the Federal Wholesale Tax. GST was implemented in New Zealand in 1986. A hidden Manufacturer’s Sales Tax was replaced by GST in Canada, in the year 1991. In Singapore, GST was implemented in 1994. GST is a value-added tax in Malaysia that came into effect in 2015.
History of GST in India
- 2000: In India, the idea of adopting GST was first suggested by the Atal Bihari Vajpayee Government in 2000. The state finance ministers formed an Empowered Committee (EC) to create a structure for GST, based on their experience in designing State VAT. Representatives from the Centre and states were requested to examine various aspects of the GST proposal and create reports on the thresholds, exemptions, taxation of inter-state supplies, and taxation of services. The committee was headed by Asim Dasgupta, the finance minister of West Bengal. Dasgupta chaired the committee till 2011.
- 2004: A task force that was headed by Vijay L. Kelkar the advisor to the finance ministry, indicated that the existing tax structure had many issues that would be mitigated by the GST system.
- February 2005: The finance minister, P. Chidambaram, said that the medium-to-long term goal of the government was to implement a uniform GST structure across the country, covering the whole production-distribution chain. This was discussed in the budget session for the financial year 2005-06.
- February 2006: The finance minister set 1 April 2010 as the GST introduction date.
- November 2006: Parthasarthy Shome, the advisor to P. Chidambaram, mentioned that states will have to prepare and make reforms for the upcoming GST regime.
- February 2007: The 1 April 2010 deadline for GST implementation was retained in the union budget for 2007-08.
- February 2008: At the union budget session for 2008-09, the finance minister confirmed that considerable progress was being made in the preparation of the roadmap for GST. The targeted timeline for the implementation was confirmed to be 1 April 2010.
- July 2009: Pranab Mukherjee, the new finance minister of India, announced the basic skeleton of the GST system. The 1 April 2010 deadline was being followed then as well.
- November 2009: The EC that was headed by Asim Dasgupta put forth the First Discussion Paper (FDP) , describing the proposed GST regime. The paper was expected to start a debate that would generate further inputs from stakeholders.
- February 2010: The government introduced the mission-mode project that laid the foundation for GST. This project, with a budgetary outlay of Rs.1,133 crore, computerised commercial taxes in states. Following this, the implementation of GST was pushed by one year.
- March 2011: The government led by the Congress party puts forth the Constitution (115th Amendment) Bill for the introduction of GST. Following protest by the opposition party, the Bill was sent to a standing committee for a detailed examination.
- June 2012: The standing committee starts discussion on the Bill. Opposition parties raise concerns over the 279B clause that offers additional powers to the Centre over the GST dispute authority.
- November 2012: P. Chidambaram and the finance ministers of states hold meetings and set the deadline for resolution of issues as 31 December 2012.
- February 2013: The finance minister, during the budget session, announces that the government will provide Rs.9,000 crore as compensation to states. He also appeals to the state finance ministers to work in association with the government for the implementation of the indirect tax reform.
- August 2013: The report created by the standing committee is submitted to the parliament. The panel approves the regulation with few amendments to the provisions for the tax structure and the mechanism of resolution.
- October 2013: The state of Gujarat opposes the Bill, as it would have to bear a loss of Rs.14,000 crore per annum, owing to the destination-based taxation rule.
- May 2014: The Constitution Amendment Bill lapses. This is the same year that Narendra Modi was voted into power at the Centre.
- December 2014: India’s new finance minister, Arun Jaitley, submits the Constitution (122nd Amendment) Bill, 2014 in the parliament. The opposition demanded that the Bill be sent for discussion to the standing committee.
- February 2015: Jaitley, in his budget speech, indicated that the government is looking to implement the GST system by 1 April 2016.
- May 2015: The Lok Sabha passes the Constitution Amendment Bill. Jaitley also announced that petroleum would be kept out of the ambit of GST for the time being.
- August 2015: The Bill is not passed in the Rajya Sabha. Jaitley mentions that the disruption had no specific cause.
- March 2016: Jaitley says that he is in agreement with the Congress’s demand for the GST rate not to be set above 18%. But he is not inclined to fix the rate at 18%. In the future if the Government, in an unforeseen emergency, is required to raise the tax rate, it would have to take the permission of the parliament. So, a fixed rate of tax is ruled out.
- June 2016: The Ministry of Finance releases the draft model law on GST to the public, expecting suggestions and views.
- August 2016: The Congress-led opposition finally agrees to the Government’s proposal on the four broad amendments to the Bill. The Bill was passed in the Rajya Sabha.
- September 2016: The Honourable President of India gives his consent for the Constitution Amendment Bill to become an Act.
2017: Four Bills related to GST become Act, following approval in the parliament and the President’s assent:
- Central GST Bill
- Integrated GST Bill
- Union Territory GST Bill
- GST (Compensation to States) Bill
The GST Council also finalised on the GST rates and GST rules. The Government declares that the GST Bill will be applicable from 1 July 2017, following a short delay that is attributed to legal issues.
Tax Structure before GST
- Before the implementation of GST, taxation laws between the Centre and states were clearly demarcated. There were no overlaps between the fiscal powers, whatsoever. The Centre would levy tax on goods manufacture, except alcohol for consumption, narcotics, opium, etc.
- The states had the power to charge tax on the sale of goods.
- The Centre would levy the Central Sales Tax that was collected by the originating states.
- The Centre was also levying service tax on all types of services.
- Additionally, the Centre was charging and collecting additional duties of customs on goods that were imported into or exported from India. This tax was levied in addition to the Basic Customs Duty. This additional duty of customs is referred to as Countervailing Duty (CVD) and Special Additional Duty (SAD) and it counter balances excise duties, state VAT, sales tax, and other such taxes.
The introduction of the GST regime made amendments to the Constitution so that the Centre and states are empowered at the same time to levy and collect GST. This concurrent jurisdiction of the states and Centre also requires an institutional mechanism that ensures joint decisions are taken about the structure and operation of GST.
Constitution (One Hundred and First) Amendment Act, 2016
In order to address prevalent issues in taxation, the Constitution 122nd Amendment Bill was put forth in the 16th Lok Sabha on 19 Dec 2014.
- The Bill suggests levy of GST on all goods and services, except alcohol that humans consume.
- The tax is levied as Dual GST by the Centre and states/union territories. The component levied by the Centre is Central Tax - CGST, while that levied by the state is State Tax - SGST. The tax levied by union territories is Union Territory Tax - UTGST.
- The Centre would levy the GST on inter-state trade or imports of services and goods. This tax is referred to as Integrated Tax - IGST.
- The Central Government will also levy excise duty on tobacco products, in addition to GST.
- The tax on five petroleum products, i.e., high speed diesel, crude, petrol, natural gas, and Aviation Turbine Fuel (ATF) will be outlined later after a decision is made by the GST Council.
September 2016: A Goods and Services Tax Council (GSTC) was created by the union finance minister, revenue minister, and ministers of state to take decisions on GST rates, thresholds, taxes to be subsumed, exemptions, and other features of the taxation system. The state finance ministers mentioned that the EC would be a platform for states where there would be discussions of their regional issues. The GST Council is a separate entity that would oversee the implementation of the GST system.
Decisions taken by GST Council
Some of the major decisions taken by the GSTC so far are:
- There would be four tax rates under the GST regime, i.e., 5%, 12%, 18%, and 28%. Some goods and services were also classified as exempt from tax.
- A cess above the peak rate of 28% would be levied on certain sin and luxury goods.
- The administrative control over 90% of taxpayers with turnover less than Rs.1.5 crore would be with the State tax administration. 10% of control would be with the Central tax administration.
- Administrative control over taxpayers having turnover above Rs.1.5 crore would be equally divided between the State and Centre tax administration.
Goods and Services Tax Network
Goods and Services Tax Network (GSTN) was set up as a private company in 2013 by the Government under Section 25 of the Companies Act, 1956. GSTN is expected to offer the front-end services of registration, payment, and returns to taxpayers. It would also develop back-end technical modules that will be utilised by 25 states that have opted in.
GSTN has also identified 34 IT and financial technology companies and tagged them as GST Suvidha Providers (GSPs). These organisations will develop applications that will be used by taxpayers when they interact with GSTN.
Key features of the GST regime
The GST system is characterized by the following features:
- GST is applicable on the “supply” of services or goods as opposed to the earlier concept of taxation on goods manufacture, sale of goods, or service provision.
- GST is a destination-based tax structure unlike the origin-based structure that existed previously.
- CGST, IGST, and SGST/UTGST are levied at rates that would be mutually agreed upon by the states and Centre.
- GST will replace the central taxes mentioned below:
- Duties of Excise (medicinal and toilet needs)
- Central Excise Duty
- Additional Duties of Excise (Goods of Special Importance)
- Additional Duties of Customs (CVD)
- Service Tax
- Special Additional Duty of Customs(SAD)
- Additional Duties of Excise (Textiles and Textile Products)
- Cesses and surcharges
- GST will subsume the following state taxes:
- Central Sales Tax
- Entry Tax
- State VAT
- Luxury Tax
- Purchase Tax
- Entertainment Tax, except that levied by local entities
- Taxes on lotteries and gambling
- Taxes on advertisements
- State cesses and surcharges
- Taxpayers with annual turnover of Rs.20 lakh is exempt from GST. For special category states, this cut-off is Rs.10 lakh. An option of compounding is available to small-scale taxpayers with annual turnover of Rs.50 lakh or below. The choice of threshold exemption and the compounding scheme are optional.
- Input credit of CGST shall be used only for paying CGST on the output. Similarly, input credit of SGST/UTGST will be used only for the payment of SGST/UTGST. Therefore, the two channels of input tax credit cannot be cross-utilised, except for the payment of IGST for inter-state supplies.
Benefits of GST Implementation
Key benefits of the GST announcement are detailed below:
- As mentioned above, the GST system will create a common national market that boosts foreign investment.
- The cascading effect of taxation will be mitigated.
- There will be uniformity in laws, rates of tax, and procedures across states.
- The GST regime is expected to boost manufacturing activities and exports. This would, in turn, generate more employment and lead to the growth of the economy.
- Indian products would be more competitive in the international markets.
- The GST system is likely to improve the overall investment climate in India.
- Uniformity in the rates of SGST and IGST will reduce tax evasion to a large extent.
- The average sales burden experienced by companies is expected to come down, thereby increasing consumption and boosting subsequent production of goods.
- GST is a simpler system of taxation with smaller number of exemptions.
- There are automated and simplified methods for processes such as registration, refunds, returns, tax payments, etc.
- All interactions will be handled by the common GSTN website.
- The input tax credit process will be more accurate and transparent, as electronic matching will be performed.
- The final price of most goods will be lower when taxation is at the new GST rates. There will also be a seamless input tax credit flow between the manufacturer, retailer, and supplier of service.
- A huge segment of small-scale retailers may be either exempt from tax or may benefit from low tax rates based on the compounding scheme. Consumers will further benefit if purchases are made from these small retailers.
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