Mother of all tax reforms: India’s goods and services tax 2017

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Goods and Services Tax (GST) is the single biggest tax reform in India’s history. No power on earth can stop an idea whose time has come, and it is now time of GST. GST will be levied on the supply of goods or services or both in India.

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International Journal of Management (IJM) Volume 8, Issue 4, July– August 2017, pp.8–15, Article ID: IJM_08_04_002 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=4 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication MOTHER OF ALL TAX REFORMS: INDIA’S GOODS AND SERVICES TAX 2017 Dr. R B Krishna Former Member of Income Tax Appellate Tribunal, India Anand Kumar Jaiswal PhD. Research Scholar, Jain University, Bangalore, India ABSTRACT Goods and Services Tax (GST) is the single biggest tax reform in India’s history. No power on earth can stop an idea whose time has come, and it is now time of GST. GST will be levied on the supply of goods or services or both in India. GST will subsume a number of existing indirect taxes being levied by the Centre and State Governments. With the introduction of GST, India had switchover to new indirect Tax regime which is administered with the help of new age Information technology. In GST, all the business transaction is captured on a common portal hence transparency in business dealings are established. With the introduction of the GST, the Central and State Governments will have simultaneous powers to levy the GST. Credit for taxes would be given for input of goods and services with the help of GSTN, which is a Technology platform for GST. GSTN is a National Information Utility (NIU) and it will provide reliable, efficient and robust IT Backbone for the smooth functioning of the Goods & Services Tax regime. The common GST Portal of GSTN will function as the front-end of the overall GST IT eco-system. The harmonization of laws, procedures and rates of tax across India would make compliance easier and simple. The effect of GST is going to be far deeper than the tax itself, because it will lead to digitization of businesses of India. This will also greatly reduce the human interface between the taxpayer and the tax administration, leading to speedy decisions. Successfully handling the technological failure and resolving of teething problems of implementation of GST in the initial years would determine the success of such mammoth tax reform. The use of new age information technology will change the way taxes are paid and accounted. In the true sense, it is mother of all future tax reforms not only in India but also for all countries across the world. Key words: GST, Goods and Service Tax, Indirect Tax, Excise duty, Service tax, Sales Tax. Cite this Article: Dr. R B Krishna and Anand Kumar Jaiswal, Mother of All Tax Reforms: India’s Goods and Services Tax 2017. International Journal of Management, 8 (4), 2017, pp. 8–15. http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=4 http://www.iaeme.com/IJM/index.as 8 editor@iaeme.com
Dr. R B Krishna and Anand Kumar Jaiswal 1. INTRODUCTION “No power on earth can stop an idea whose time has come”, the Finance Minister Shri Manmohan Singh had quoted Victor Hugo while presenting the historic Union Budget on 24th July 1991. One such ideal that was translated into action on 1st July 2017 was Goods and Services Tax (GST). India witnessed the single biggest tax reform in its history, when at the stroke of midnight of 30th June 2017, the Government of India launched the Goods & Services Tax (GST) at the Central Hall of Parliament. Prime Minister Shri Narendra Modi coined a new acronym for GST - ‘Good & Simple Tax’ while calling it a shining example of co-operative federalism. President Shri Pranab Mukherjee termed GST a 'disruptive tax' and called upon the Central and States Governments to continue to make improvements to GST law. GST, stands for Goods and Services Tax, will be levied on the supply of goods or services or both in India. GST will subsume a number of existing indirect taxes being levied by the Centre and State Governments including Central Excise duty, Service Tax, VAT, Purchase Tax, Central Sales Tax, Entry Tax, Local Body Taxes, Octroi, Luxury Tax, etc. The taxable event in GST is supply of goods or services or both. Various taxable events like manufacture, sale, rendering of service, purchase, entry into a territory of State etc. have been done away with in favour of just one event i.e. supply. 2. NEW TAX REGIME This is a tax regime which will use information technology as predominant tools for administration, levy, collection, compliances and assessment. This tax regime will become mother of all future tax reforms not only for India but also for other countries since the experience of extensive use of information technology for a tax system of would give birth to similar tax reforms across world. The developed economy of OECD1 countries would learn from the experiences of such tax reforms and implement similar ones in their home countries to reap the fruits of such technological advanced administered tax regime. GST is expected to rejuvenate and expand the Indian economy in a similar way the 1990s liberalization had done for India. Future generations of India can look back on the GST Tax law as one of the watershed moments in tax history that led to the concept of One Nation One Tax. The introduction of Goods and Services Tax (GST) is a significant reform in the field of indirect taxes in India. With the introduction of GST, India had switchover to new indirect Tax2 regime which is administered with the help of new age Information technology. This is first time that such blending of tax law with technology is happening at the transaction level. This would become a case study across various Universities and various countries may adopt it once it gets stabilized in India. 1 The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world. 2 Indirect Tax is Tax levied on business transaction. Other taxes are Direct tax which is also known as Income Tax levied on taxable Income from all business operation. http://www.iaeme.com/IJM/index.as 9 editor@iaeme.com
Mother of All Tax Reforms: India’s Goods and Services Tax 2017 2.1. Methodology of Tax Credit in GST Regime GST is a destination based consumption indirect tax. It has been designed in a manner so that the tax is collected at every stage and the credit of tax paid at the previous stage is available to set off against the tax to be paid at the next stage of transaction, thereby eliminating the cascading effect of taxes. This eradicates “tax on tax” and allows cross utilization of input tax credits between goods and services, which benefit the industry by making the entire business supply chain as tax neutral. The seamless availability of Input Tax Credit across goods or services at every stage of supply will enable streamlining of business operations. Further, since all transaction are captured on a common portal, the transparency in business dealings is also established. 2.2. Prior and Post GST Regime Prior to GST India's indirect tax system consisting of many central and state levies, such as VAT, sales tax, duty, service tax and luxury tax. GST will bring these indirect taxes under one umbrella. The driving force to move to GST comes from the shortcomings of the current indirect Tax system in the country and the need for a cost-effective, neutral, easy-to-operate tax system, encouraging voluntary compliance and integrating India into a single common market. By merging various central and state taxes into a single indirect tax, it would mitigate the cascading effect of tax on tax and pave the way to a common national market in India. Before the advent of GST, the fiscal power between the Center and State has been clearly stated in the Constitution of India, with almost no overlap between their domains. The center has the power to impose taxes on the production of goods (with the exception of alcoholic beverages for consumption, etc.), while states have the power to impose taxes on the sale of goods. In Inter-State sales, the Center has the power to impose a (Central Sales Tax) tax, but the tax is collected and kept entirely from the State of origin. As far as services are concerned, only center had the power to impose tax which was known as service Tax. 2.3. Power distribution between Centre and State Governments. With the introduction of the GST, the Central and State Governments will have simultaneous powers to levy the GST on Intra-State supply. And GST would also be levied by the Central Government on all inter-State transactions of taxable goods or services. The Constitution of India defines “Goods and Services Tax” as any tax on supply of goods, or services or both, except for taxes on the supply of the alcoholic liquor for human consumption. Given the federal structure of India, there will be two components of GST. One will be the Central GST - GST (CGST) and other will be State GST (SGST). Both the center and the states will simultaneously levy GST in the Value chain of the transaction. In case of inter-state supply an Integrated Goods and Services Tax (IGST) would be levied. GST in form of Integrated Goods and Services Tax (IGST) is a mechanism to monitor the inter-State trade of goods and services and ensure that the SGST component accrues to the consumer State. It would maintain the integrity of ITC chain in inter-State supplies. The IGST rate would broadly be equal to CGST rate plus SGST rate. IGST would be levied by the Central Government on all inter-State transactions of taxable goods or services. Since GST would be levy on all supplies of goods and services, GST credit would be given for input GST of goods and services. Hence net GST would be payable only on economic value addition. Ultimately GST taxes would be paid only on consumption of goods and services, which will accrue to the respective Governments. http://www.iaeme.com/IJM/index.as 10 editor@iaeme.com
Dr. R B Krishna and Anand Kumar Jaiswal 3. CHRONOLOGY EVENTS FOR THE JOURNEY Sixteen years’ earlier discussions were initiated by Prime Minister Shri Atal Bihari Vajpayee on unified Indirect tax regulations in India and today it is reality. In the year 2000, the Vajpayee Government opened the discussion on the GST through the creation of an expert committee headed by Shri Asim Dasgupta, former Finance Minister of Western Bengal. In the year 2003, the Kelkar Task Force suggested the need for a global indirect tax reform within the GST. In the year 2006, Finance Minister Shri P Chidambaram proposed GST in the Union Budget. Empowered Committee (EC) of state finance ministers was assigned the responsibility to chalk out a roadmap for its implementation. In the year 2008, the empowered committee presented a report "A Model and Roadmap for GST in India." In the year 2009, the empowered committee after having held talks with the Center and States submits its first discussion paper on goods and services Tax in India In the year 2014, the Finance Minister Shri Arun Jaitley introduced the Constitution Amendment Bill, 2014 in Lok Sabha for Goods and Services Tax. In the year 2015, the lower house of parliament passed the Constitution Amendment for implementation of Goods and Services Tax. And in the year 2016, the upper house of Parliament passes the same. In the year 2016, the GST Council was formed which was headed by Union Finance Minister. The Council recommended the various legislations and rates of Tax including exemptions, etc. for implementation of Goods and Services tax. In the year 2017, various supporting legislations were passed by Center and States like CGST, IGST, SGST and UTGST. And also, various Rules and notifications were issued by Governments. The new tax structure was implemented with effect from July 1, 2017. However, GST does not include taxes on petroleum products, electricity charges, excise duty and sales tax on alcohol and stamp duty. Further Basic customs duty is also outside the GST ambit. 4. MAIN SALIENT FEATURES OF GST The main salient features of GST are as under: (i) GST would be applicable on “supply” of goods or services as against the present concept of tax on the manufacture of goods or on sale of goods or on provision of services. (ii) GST would be based on the principle of destination based consumption taxation as against the present principle of origin based taxation. (iii) It would be a dual GST with the Centre and the States simultaneously levying it on a common base. (iv) Centre taxes that would be subsumed within GST are a) Central Excise Duty; b) Duties of Excise (Medicinal and Toilet Preparations); c) Additional Duties of Excise (Goods of Special Importance); d) Additional Duties of Excise (Textiles and Textile Products); http://www.iaeme.com/IJM/index.as 11 editor@iaeme.com
Mother of All Tax Reforms: India’s Goods and Services Tax 2017 e) Additional Duties of Customs (commonly known as CVD); f) Special Additional Duty of Customs (SAD); g) Service Tax; h) Cesses and surcharges insofar as they relate to supply of goods or services. (v)State taxes that would be subsumed within the GST are: a) State VAT; b) Central Sales Tax; c) Purchase Tax; d) Luxury Tax; e) Entry Tax (All forms); f) Entertainment Tax (except those levied by the local bodies); g) Taxes on advertisements; h) Taxes on lotteries, betting and gambling; i) State cesses and surcharges insofar as they relate to supply of goods or services. (vi) A “Dual GST” model has been adopted in view of the federal structure of our country. Centre and States will simultaneously levy GST on every supply of goods or services or both which, takes place within a State or Union Territory. Thus, there shall be two components of GST: (i) Central tax (CGST) (Levied & collected under the authority of CGST Act, 2017 passed by the Parliament) (ii) State tax (SGST) (Levied & collected under the authority of SGST Act, 2017 passed by respective States) (vii) Goods and Services Tax Network (GSTN): It is Technology platform for GST. This National Information Utility (NIU) will provide reliable, efficient and robust IT Backbone for the smooth functioning of the Goods & Services Tax regime. 5. GOODS AND SERVICES TAX NETWORK (GSTN) It is a not for profit company and has been set up primarily to provide IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders for implementation of the Goods and Services Tax (GST). It is unique, as it seeks, for the first time to establish a uniform interface for the tax payer and a common and shared IT infrastructure between the Centre and States. Since, GST is a destination based tax, the inter- state trade of goods and services (IGST) would need a robust settlement mechanism amongst the States and the Centre. This is possible only when there is a strong IT Infrastructure and Service back bone which enables capture, processing and exchange of information amongst the stakeholders (including tax payers, States and Central Governments, Accounting Offices, Banks and RBI). The common GST Portal developed by GSTN will function as the front-end of the overall GST IT eco-system. The IT systems of CBEC and State Tax Departments will function as back- ends that would handle tax administration functions such as registration approval, assessment, audit, adjudication etc. http://www.iaeme.com/IJM/index.as 12 editor@iaeme.com
Dr. R B Krishna and Anand Kumar Jaiswal Common and shared IT infrastructure has functions such as filing of registration application, filing of return, creation of challan for tax payment, settlement of IGST payment (like a clearing house), generation of business intelligence and analytics. All statutory functions to be performed by tax officials under GST like approval of registration, assessment, audit, appeal, enforcement etc. will remain with the respective tax departments. The approval happens through the common portal. 6. BENEFITS OF GST It will bring benefits to all the stakeholders viz. industry, government and the citizens. GST aims to make India a common national market with uniform tax rates and procedures and removes the economic barriers, thereby paving the way for an integrated economy at the national level. By subsuming most of the Central and State indirect taxes into a single tax and by allowing a set-off of prior-stage taxes for the transactions across the entire value chain, GST would mitigate the ill effects of cascading and thereby improve our competitiveness. This spreads the tax incidence burden across value chain of the goods and Services and improve cash flow and better management of working capital for the businesses. It is expected to lower the cost of goods and services, boost the economy and make goods and services globally competitive. The harmonization of laws, procedures and rates of tax across India would make compliance easier and simple. There would be common definitions, registration, refund process, common forms/formats, common interface through GST portal, resulting in efficiencies and synergies across the board. Also, the common tax base and common system of classification of goods or services lend greater certainty to taxation system and collection. Uniform GST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighboring States. India’s GST is largely technology driven. The interface of the taxpayer with the tax authorities will be through the common portal (GSTN). There will be simplified and automated procedures for various processes such as registration, returns, refunds, tax payments, etc. All processes, be it for applying for registration, filing of returns, payment of taxes, filing of refund claims etc., would be done online through GSTN. The input tax credit will be verified online. Electronic matching of input tax credit across India will make the process more transparent and accountable. This will encourage a culture of compliance. This will also greatly reduce the human interface between the taxpayer and the tax administration, leading to speedy decisions. The effect of GST is going to be far deeper than the tax itself, because it will lead to digitization of businesses of India. Anybody who has a business with a turnover of more than Rs. 20 lakh will have to digitalise their business and that is going to bring in tremendous efficiency in the way business as work in India. Further it is going to lead to big logistical gains since businesses can dismantle the warehouses which they maintained in each state to avoid paying non-creditable central sales tax and state entry taxes on inter-state movement. It will increase the efficiency in logistics Industry. Reduction in unnecessary logistics costs will increase profits for businesses involved in supply of goods through transportation. Further movement of trucks and lorries across state borders would be smooth since all check posts would be dismantled. With detailed electronic information on common portal about the business transaction and businesses specially the SME and self-employed business can now approach Bank for credit facility on the basis of verifiable business transactions. http://www.iaeme.com/IJM/index.as 13 editor@iaeme.com
Mother of All Tax Reforms: India’s Goods and Services Tax 2017 7. GST AND INCOME TAX Under the GST law, each sales invoice, is to be uploaded on the GST portal of goods and services. GST Network (GSTN) will provide 100% sales invoice record on monthly basis. Such information can be accessed by the income tax department with adequate safeguard. Since under the new scheme, GSTN will be the only depositor of all these transactions and the income tax department will have a clear picture of total sales and purchases, and ultimately the overall profitability of each company. This will lead to transparency in Income tax collection. 8. CHALLENGES IN GST Successfully handling the technological failure and resolving of teething problems of implementation of GST in the initial years would determine the success of such mammoth tax reform. Frequent and regular compliances calendar will make small businesses in the manufacturing sector to bear most of the brunt of GST implementation. Under the existing excise laws, only manufacturing business with a turnover more than Rs. 1.50 crores have to pay excise duty. However, under GST the turnover limit has been reduced to Rs 20 lakh thus increasing the tax burden for many manufacturing SMEs. However earlier such manufacturer was registered with Sales tax authorities of the respective State. Small businesses do not normally employ professionals and prefer to pay taxes and file returns on their own to save costs. In GST regime since it is a completely new tax system, they will require professional assistance which will increase cost. Most businesses use accounting software or ERPs for filing tax returns which have excise, VAT, and service tax already incorporated in them. The change to GST will require them to change their ERPs and that would lead to increased costs of purchasing new software and training employees. Petroleum products are being kept outside the scope of GST as of now. States will levy their own taxes on this sector. Tax credit for inputs will therefore not be available to related industries like the plastic industry which are heavily dependent on petroleum products. Petrol and diesel are required to run factory machinery and unavailability of input tax credit on petroleum products will most probably push up the final price of all manufactured goods. 9. CONCLUSION GST is a destination-based indirect tax and multi-stage tax collection mechanism. GST is a win- win situation for the whole country. GST aims to make India a common market with common tax rates and procedures and eliminates the economic barrier paving the way for an integrated nationwide economy. This tax regime will become mother of all future tax reform since it changes the way tax is levied, collected and administered. The use of new age information technology will change the way taxes are paid and accounted. In the true sense, it is mother of all future tax reforms not only in India but also across the world. With change of interface of tax from officers of tax department to online common portal, the tax administration system will become more transparent, clean and reliable. It is hoped that the Indian direct tax systems will definitely catch up with information technologically advanced new Indirect tax systems in the coming years. http://www.iaeme.com/IJM/index.as 14 editor@iaeme.com
Dr. R B Krishna and Anand Kumar Jaiswal REFERENCES [1] The Central Goods and Services Tax, 2017 [2] The Integrated Goods and Services Tax, 2017 [3] https://pvsassociates.com/gst/ [4] http://www.cbec.gov.in/htdocs-cbec/gst/index# [5] https://www.gst.gov.in/ [6] http://www.gstn.org/about-us/ [7] http://www.idtc.icai.org/knowledgesharing.php [8] http://www.gstcouncil.gov.in/about-us [9] http://www.cbec.gov.in/resources//htdocs-cbec/gst/eflier-IGST-23062017.pdf [10] http://www.cbec.gov.in/htdocs-cbec/gst/benefits-of-GST-onlineversion-07june2017.pdf [11] Gurveen Kaur, GST in India – A significant Tax Amendment. International Journal of Management, 8 (3), 2017, pp. 53–62. [12] Vineet Singh and Abhinna Srivastava. Direct Tax Revenue: A Case Study of Central V/S State Government. International Journal of Management, 6(12), 2015, pp. 83-88. http://www.iaeme.com/IJM/index.as 15 editor@iaeme.com