GST - HEETESH VEERA

[GURU]

By Heetesh Veera & Suresh Nair



THE Empowered Committee of State Finance Ministers has submitted its
First Discussion Paper on Goods and Services Tax (GST) and the same
has been placed in public domain for comments. This document has taken
into account the report of the Joint Working Group on GST and the
views received from the State and Central Government on proposed model
for GST making it the “curtain raiser” for the eventual roll out of
GST. Amongst others, the Discussion Paper has laid emphasis on the
need to have an appropriate mechanism on GST, binding on both the
Centre and the States. The importance of a harmonius rate structure
under GST with agreed upon mandate on Constitutional amendment also
finds mention in the Discussion paper.
Key features of proposed GST model:
Components of GST:
A dual GST with defined functions for the Centre and States has been
recommended. In other words, both the Centre and the States would have
concurrent power to levy tax on goods and services ie The dual GST
would have two components: one levied by the Centre (CGST) and the
other levied by the States (SGST). This is line with the Budget
announcement of Hon'ble Finance Minister.
Taxes to be subsumed under GST:
Central levies to be subsumed under CGST
+ Central Excise duty
+ Additional Excise duties
+ The Excise duty levied under the Medicinal and Toiletries
Preparation Act
+ Service Tax
+ Additional customs duty , commonly known as Countervailing Duty
(CVD)
+ Special Additional Duty of Customs@ 4% (SAD )
+ Surcharges, and
+ Cesses
State taxes to be subsumed under SGST
+ VAT / Sales tax
+ Entertainment tax levied by States ( Entertainment tax levied by
local bodies has been left out )
+ Luxury tax
+ Taxes on lottery, betting and gambling
+ State Cesses and Surcharges which relate to supply of goods and
services
+ Entry tax not in lieu of Octroi
The treatment to be adopted for Purchase tax is under discussion and a
final view on the same is yet to emerge. It is desirable to have
consensus on subsuming Purchase tax , as keeping such components of
present VAT system out of GST could impact the efficiency of the
proposed GST model. This is one of the open issues identified in the
Discussion Paper.
Alcoholic beverages and Petroleum Products have been kept out of the
GST net whereas Tobacco products would be subjected to GST with Input
Tax Credit. Centre may be allowed to levy excise duty on tobacco
products over and above GST without Input Tax Credit.
Applicability of GST :
CGST and SGCT would be applicable to all transactions of goods and
services made for a consideration with the following exemptions:
Exempted goods and services
Goods which are outside the purview of GST
Transactions which are below the prescribed threshold limit for GST
GST rate structure
Under the proposed GST model, goods would have two rates, both at
Centre and State - Lower rate for necessary items and a standard rate
for goods in general. A special rate has been envisaged for precious
metals with a list of exempted goods under CGST and SGST (efforts are
on to have a similar exempted list of goods). Services would have a
single rate at CGST and SGST level. The Discussion paper does not
refer or comment on the Revenue Neutral Rate or exact value of two
rates for goods/ services which would be known in due course. This
would have helped the stake holders understand possible impact of
proposed GST model on their business and operations.
Statute for GST:
It is now official that multiple statutes (one for CGST and a separate
statute for every state) would govern the implementation of Dual GST.
This is one area that requires concerted effort from the Centre and
the Empowered Committee as multiple state legislations could make the
proposed GST model no different from the present VAT set up.
Comprehending the issues that could arise out of multiple state
legislations ( as experienced during the phased implementation of
VAT ), the discussion paper specifically mentions that the basic
features of law such as chargeability, definition of taxable event and
taxable person, measure of levy, valuation provisions, basis of
classification etc would be uniform across the state statutes as far
as practicable .
Administration of GST
The administration of CGST would be vested with the Centre and that
for SGST would be with the respective States. The Centre and the
States would have concurrent jurisdiction for the entire value chain
and for all taxpayers on the basis of prescribed threshold for goods
and services. Functions such as assessment, scrutiny, audit and
enforcement would be undertaken by the authority collecting the
respective taxes.
Threshold for GST
A uniform threshold for SGST of Rs 10 lakh both for goods and services
for all States and Union Territories has been adopted. There is a
reference that CGST for goods may be kept at Rs 1.5 crore and the
threshold for CGST for services may also be “appropriately high”.
Composition / Compounding Scheme under GST
A uniform compounding cut-off of Rs 50 lakhs of the gross annual turn
over with a floor rate of 0.5% across the states has been recommended.
Option for dealers to opt for GST even if below the compounding cut-
off would be provided.
GST on imports and exports
Imports would attract both CGST and SGST under the proposed GST model.
Given the destination based concept of GST, it has been clarified that
the tax revenue in case of SGST will accrue to the State where the
imported goods and services will be consumed. Exports (from processing
zones of the SEZ's , EOU's or domestic tariff units ) would be free
from levy of GST. Clearances from SEZ to DTA would attract GST without
any benefits to applicable rates.
Credit mechanism under GST
The proposed model does not offer fungibility of CGST with SGST and
vice a versa ie Cross utilization of input tax credit between CGST and
SGST would not be allowed under the proposed GST model. Taxes paid
against the CGST would be taken as input tax credit for payment of
CGST only. The same principle would apply for the SGST. This would
envisage maintaining separate sets of records for availing and
utilization of CGST and SGST.
Area based exemption schemes / Special Industrial Area Scheme
Present tax exemption scheme would make way for cash refund schemes
after collection of GST so as to maintain the chain of set-offs. The
area based exemption scheme would be continued till such time of
legitimate expiry of the Scheme. It is proposed to do away with any
new exemption or continuation of such special industrial area schemes
under GST regime.
Proper accounting of the GST
The CGST and SGST would be credited to the identified accounts of the
Centre and respective States separately. The Discussion Paper
acknowledges that this could be an important cog in the wheel for
smooth transition and implementation of GST and specifically mentions
that it should be ensured that the account heads for all services and
goods would have indication whether it relates to CGST and SGST
(identifying the State to whom the specific SGST is to be credited).
Tax payer Identification Number
With view to integrate the PAN based Income tax number and facilitate
data exchange and tax payer compliance, each tax payer would be
allotted a PAN based taxpayer identification number with a total of
13/15 digits.
Periodical returns
Returns as prescribed would need to be submitted to bother the Centre
GST authority and to the State GST authorities concerned.
Inter State transactions of Goods and Services
The Discussion Paper supports the view that with the introduction of
GST, levy of Central Sales tax (CST) on inter-state transactions would
be removed. One important feature coming out from the Discussion Paper
is clarity on the manner in which inter state transactions would be
taxed under GST. Salient features of the IGST model for taxing Inter
State transactions of goods and services, as accepted by the Empowered
Committee, are as follows:
Centre would levy IGST ( which would typically be sum of CGST and
SGST ) on all inter-state transaction of taxable goods and services.
The inter-state seller will pay IGST on value addition after adjusting
available credit of IGST, CGST and SGST on his purchases. The
Importing dealer will claim credit of IGST which would be used by him
for discharging his output tax liability in his own state.
A Central agency to be set up to act as a clearing house, verify the
claims and inform the respective governments to transfer the funds.
The key advantages of IGST Model are:
Uninterrupted ITC chain on inter-state transactions
Substantial blockage of funds for the inter-state seller or buyer not
envisaged
Refund mechanism not required as dealer in exporting state would use
up the Input tax credit for paying the tax
Before parting : The Discussion Paper has not thrown open any Pandoras
box or surprises and much of the key impact areas could depend on how
the legislation is put in place as a mechanism to administer this new
levy. The Discussion Paper is in sync with the information / thought
process available in public domain and deliberated upon also Empowered
Committee could have provided clarity on the likely effective date of
implementation of GST, the possible rates for goods / services,
whether the MRP based valuation Scheme would continue in the proposed
GST scenario, how the refund mechanism of CGST and SGST which replaces
area based exemption scheme would work to overcome the cash flow
issues, what would be the treatment for accumulated Cenvat Credit /
VAT credit while transitioning into the proposed GST model etc. May be
there will be more on these aspects in the days to come.
(The authors are senior indirect tax professionals in Ernst & Young
Ltd. The views expressed are personal)