The Rollout of the Goods and Services Tax (GST) Is Finally Here
The rollout of the Goods and Services Tax (GST) on July 1, 2017 will herald a paradigm shift in the collection of indirect taxes in the country. A unified rate of tax will now be charged on most goods.
The new regime is expected to significantly streamline the collection of tax in the country, and will replace central and state levies, such as service tax, central excise duty, state level value added tax, and local taxes such as octroi.
The GST Council has released a list of 1211 goods, in 98 categories, along with the applicable rates of tax; the rate can be 0%, 5%, 12%, 18%, and 28%. A significant number of goods have been included in the 18% bracket. A list of services has also been notified, with several services included in the 12% bracket.
The new regime has several advantages, including:
Input tax credit: at the time of paying tax on their output, manufacturers or service providers can reduce their tax amount on the basis of the tax amount they have already paid on inputs, such as raw materials. However, credit is available to the recipient only if the invoice is matched. This will help clarify the tax burden, and prevent cascading of taxes.
Clear slabs in terms of tax rate: as mentioned above, the rates of tax have been clarified into 0%, 5%, 12%, 18%, and 28%. Precious metals such as gold will attract GST at the rate of 3%, while luxury and sin goods (such as cigarettes) would incur an additional charge.
Nomenclature: GST as levied by the Centre would be termed Central GST (CGST), while the GST as levied by the states would be termed State GST (SGST). Integrated GST (IGST) would be levied on inter-state supply (including stock supply) of goods and services, and levied by the Centre.
Destination based: GST would be levied by and at the state of consumption, and not the state of production.
Exports: Exports would be treated as zero rated supplies, and no GST would be payable on exports of goods or services. Exporters would be able to claim input tax credit.
Imports: Imports would be treated as inter state supplies and subject to IGST in addition to applicable customs duties.
Anti-profiteering mechanism: The law also includes an anti-profiteering mechanism, meant to ensure that following the rollout of the GST, the benefits of the reduction in the cost of goods and services are passed on to the consumer. A National Anti-Profiteering Authority (NAPA) is being set up, in order to ensure that the spirit of the law is complied with.
The GST Council, at its 15th meeting, approved the draft transition laws that will help the move to the new regime. Once GST is implemented (midnight of June 30, 2017), companies can claim credit of up to 40% of their CGST dues, for excise duties paid on stock held prior to rollout.
Other noteworthy features of the new regime include:
Most compliance requirements will be online; while this will require some taxpayer education and understanding, it will, in the long term, increase efficiency in collection, and therefore, compliance.
Business entities with an annual turnover of up to Rs 20 lacs would not be required to register under the GST regime, unless it voluntarily chooses to do so, in order to be part of the input tax credit chain. For special category states such as Assam and Uttarakhand, the threshold is Rs 10 lacs.
To ensure that the input tax credit can be seamlessly used for payment of taxes under both central and state law, the law has provided that the ITC entitlement from taxes paid under the Central law can be cross-utilised for payment of taxes under the laws of the states or union territories.
Existing mechanism of Input Service Distributor (ISD) under the service tax law has been retained to allow the flow of ITC in respect of input services within a legal entity.
The GST law has been a long time coming in India, and will add considerably to the ease of doing business in India. The uniform rates of tax will also increase tax compliance by increasing ease of paying tax. Ultimately, it is hoped that consumers benefit, with a reduction in the cost of goods and services, by eliminating cascading taxes. Further, large swathes of unregulated industry will come under the ambit of revenue authorities. While there may be some implementation hiccups, these are to be expected with such a paradigm shift in regime. As more clarifications are issued, the system will fall further and further into place, and indirect tax collection in India considerably smoothened.