RESPONSIBLE BUSINESS & GST
Transparency induces Responsibility
By: Loni Bora & Sudhir Panda
Performance of an economy is dependent on the size of the white economy as the black economy remains out of control of government. The size of India’s black economy is about 40 % and it had been growing to an uncontrollable level, till De-monetization happened. It is estimated that if, all the black money is declared, it would generate a tax revenue of more than Rs. 7,50,000 core gainst the total tax collection of Rs. 6,41,000 Core (in 2009-10). According to White Paper on Black Money in India, published in May 2012, Swiss National Bank estimates that the total amount of deposits in all Swiss banks, at the end of 2010, by citizens of India were INR 92.95 billion). These prompted drastic measures to control black economy and create disincentives for further generation of black money. Demonetization was a part of initiatives in this direction. The specific objective of demonetization is to mop up black money from economy, hidden in forms of currency, genuine or fake.
However, the doorway to black money is taxation system. Any income which reported to tax authorities and /or tax paid is a part of the white economy and National Income Accounting System. Any income which is not reported, becomes the part of black economy. Therefore the ability of the tax system is to ensure that every income becomes the part of the system. This could not happen in India as the Indirect Tax System apart from the Direct Tax system was too complex with about 15 taxes introduced by Govt. of India and State Governments, regular change in tax rates, difficult compliance procedure, mostly manual.
This induced a culture of resorting to Black Economy or Unreported Economy or Secret Economy. The situation demanded drastic simplification of tax structure to help improve the efficiency of tax collection system and induce tax evaders to come into the fold of the taxation system- the white economy, thus reducing the size of the black economy.
After realizing the need for simplification, GST was conceptualized in 2000 by then Prime Minister Atal Bihari Vajpayee, which took too long to be finally implemented in July 2017. The delay may be due to the ambition of the political parties to share credit for historic legislation even at the cost of national interest. This is obviously not a responsible politics. This irresponsible politics has a direct bearing on responsible business.
The GST regime has an inherent impact on the transparency of business process due to the fact that all business transactions are to be reported to Government through GSTN (GST Network), a portal to be a trusted National Information Utility (NIU) which provides reliable, efficient and robust IT Backbone for the smooth functioning of the Goods & Services Tax regimen. This will create a transparency about indirect taxation system involving the centre and states and make it convenient for the government to manage the taxation system. The advantages of reporting and disadvantages of not reporting will induce the tax invaders be part of the white economy and reduces the size of black economy. This is expected to increase the size of the revenue. In addition the major benefit of GST is expected to be huge reduction in the cost of administration as GST regime as it is going to administer only one tax GST, in place of about 20 taxes.
India is notorious for its complex tax system, which includes Direct Tax and Indirect Tax systems.
Direct Taxes, as the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc.
Indirect Taxes are applied on the manufacture or sale of goods and services. These are initially paid to the government by an intermediary, who then adds the amount of the tax paid to the value of the goods / services and passes on the total amount to the end user.Examples of these are sales tax, service tax, excise duty etc.
The complexity of Indian Tax system, primarily the Indirect Tax system has become too notorious inducing many to evade and pulling down the rating of India, on ” Ease of Doing Business”. For new businesses and startups, it becomes impossible to navigate through various direct and indirect taxes. Constant changes in tax rates also make it even worse.
For example, there were about fifteen Indirect Taxes in operation in India, the list of which is given below.
LIST OF INDIRECT TAXES BEFORE GST
- Central Excise Duty
- Service Tax
- Countervailing Duty
- Special Countervailing Duty
- Value Added Tax (VAT)
- Central Sales Tax (CST)
- Octroi / Toll Tax
- Entertainment Tax
- Entry Tax
- Sales Tax
- Luxury Tax
- Swachh Bharat Cess
- Basic custom Duty (BCD)
- Education Cess
- Anti Dumping Duty
- Safe Guard Duty
In addition, VAT rates and regulations differ from state to state. And it has been observed that states often resort to slashing these rates for attracting investors. This results in loss of revenue for both the Central as well as State government.
Thus, there was an emergent need to simplify indirect tax structures to control the size of the black economy, increase tax revenue and reduce tax burden on the tax payers.
The long awaited Goods and Service Tax (GST) is in operation wef. 1st July 2017.
Goods and Services Tax in India is a new and comprehensive tax indirect tax applicable throughout India which replaced multiple cascading taxes listed above, levied by the central and state governments. The GST will be governed by a GST Council and its Chairman is the Finance Minister of India. Referred to as one of the biggest tax reforms in the country, GST is expected to bring together state economies and improve overall economic growth of the nation.
Both the Central as well as State governments are set to impose GST on all services and goods produced except exempted goods and services, manufactured and imported in India. Exports are not subject to GST.
The simple GST regime will have uniform tax rates across States for both inter-state and intra-state transactions except Jammu & Kashmir. This will promote compliance and ease of doing business. The uniform GST rates will reduce the incentives for evasion by eliminating rate arbitrage between neighboring States and that between intra-state and inter-State sales. The Goods and Services Tax promises to alleviate this problem among many others.
It is being hailed as the game changer for India’s economy and is being labeled as the biggest change in the Constitution since India’s independence. The Goods and Services tax or commonly referred to as the GST will replace the indirect taxes levied by the Central and State Governments and provide for a single and streamlined process. It presents India as a unified market to business owners and also aims at bringing a lot of black money back into the mainstream economy. The tax will be implemented at every step of value creation.
GST LAW IN INDIA HISTORY
Globally, GST is not a new phenomenon. France was the world’s first country to implement GST Law in the year 1954. Since then, 159 other countries have adopted the GST Law in some form or other. In many countries, VAT is the substitute for GST, but unlike the Indian VAT system, these countries have a single VAT tax which fulfills the same purpose as GST.
In India, the discussion on GST Law was flagged off in the year 2000, when the then honorable Prime Minister Atal Bihari Vajpayee brought the issue to the table.
History of GST in India Year by Year Events
CONSTITUTIONAL AMENDMENT IN GST
A Constitutional Amendment as the name suggests is any change in the Constitution. A democracy like India derives all its rules and laws from the Constitution and hence any change in the Constitution is a change in the fundamental fabric of the country. The GST is the One Hundred and Twenty Second such proposed amendment and hence is named The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014.
In simple terms bills other than the Constitution Amendment Bill are just modifications to topics that area already mentioned in the constitution. The introduction of a few new IITs is a perfect example. All these require are a simple majority in both the houses and the President’s Approval. However the GST requires a Constitution Amendment Bill which is a direct change in the Constitution and requires two-thirds of the votes in both Lok Sabha and Rajya Sabha.
“GST, when implemented, is expected to usher in a harmonised national market of goods and services and shall lead to a simplified, assessee-friendly tax administration system. It will subsume most of the country’s central and state label duties and taxes.”
Naushad Forbes, President, CII
FINER POINTS IN THE IMPLEMENTATION OF THE BILL
Several committees were setup to evaluate the feasibility and implementation of the GST. Some fine points which were considered are:
- The problem of separating the taxation powers of the state and the centre which resulted in CGST and SGST.
- Exemptions from the GST which currently includes Petroleum and Liquor for human consumption.
- GST will be applicable on imports too along with the Basic Customs Duty which has not been scrapped.
THE EMPOWERED COMMITTEE
The Empowered Committee is a committee of the Finance Ministers of the states. It was set up by the Vajpayee Government to look into the Value Added Tax model. The committee has had an influential hand in shaping and structuring of the GST.
THE ADVANTAGES OF GST
The advantages are many as discussed below.
- Elimination of cascading:
GST will be collected at every stage of value addition and the credit of tax paid at the previous stage will be available to set off the tax to be paid at the next stage of transaction. This will eliminate cascading of taxes. This, in turn, will lower the cost of the goods and services for the consumer.
- Creation of a common national market:
GST is expected to broaden the tax base, improve compliance through common and uniform procedures and tax-rates, promote make in India and boost our economy. GST will `lead at one stroke to removal of inter-state economic barriers, thereby creating a common national market.
- Easier and low cost compliance:
Harmonization of laws, procedures and rates of tax at Centre and State level will make compliance easier and simple. In addition to common forms and formats, GST will also have a common compliance interface through the GSTN portal. This will result in efficiencies and synergies across the board. This will also remove disputes like the ones on entry tax and e-commerce taxation existing today. The overall outcome will be a reduction in compliance costs, alleviation of the need for multiple record keeping and filing returns for multiple taxes, thereby leading to cost saving for the trade and industry. Simpler online procedure under GST.
The entire GST process starting from registration to filing returns and payment of GST tax is online. Startups do not have to run around to tax offices to get various registrations under excise, VAT, service tax.
- Increased efficiency in logistics:
The logistics industry in India had to maintain multiple warehouses across states to avoid the current CST and state entry taxes on inter-state movement. Most of the times, these warehouses were forced to operate below their capacity thus increasing their operating costs.
After GST, these restrictions on inter-state movement of goods will be lessened and the logistics sector might start consolidating warehouses across the country. As an outcome of GST, warehouse operators and e-commerce players have already shown interest in setting up their warehouses at strategic locations such as Nagpur, which is the zero-mile city of India, instead of every other city on their delivery route.
Reduction in unnecessary logistics costs will increase profits for businesses involved in supply of goods through transportation.
- Regulating the unorganized sector:
Certain industries in India like construction and textile are largely unregulated and unorganized. GST has provisions for online compliances and payments, and availing of input credit only when the supplier has accepted the amount, thereby bringing accountability and regulation to these industries.
- Boost to Make in India:
GST will give a major boost to the Government of India’s ‘Make in India’ initiative by making goods or services produced or provided in India competitive in the national and international markets. The currently prevalent Counter-veiling Duty (CVD) on imported goods will be replaced under GST regime by the integrated tax (IGST) which is simply the sum total of Central GST + State GST. This will bring parity in taxation on domestic and imported products, and thereby provide protection to domestic industry.
Under the GST regime, exports will be entirely zero rated, unlike the present system where refund of some taxes is not allowed due to fragmented nature of indirect taxes between the Centre and the States. This means that ITC of tax paid on input supplies would be available to the exporter even though no tax is required to be paid on final export supplies. The exporters also have an option to pay IGST on export supplies and claim refund for the same for which a fast track mechanism has been provided. This will boost Indian exports thereby improving the balance of payments position.
- Increase in Tax Base, Revenue buoyancy & GDP Growth:
GST is expected to bring buoyancy to the Government Revenue by widening the tax base and improving taxpayer compliance. GST will also improve India’s ranking in the ‘Ease of Doing Business Index’. The introduction of GST is estimated to contribute 1.5% to 2% additional GDP growth.
- Special benefits to small taxpayers:
The small tax payers have been provided special benefits in GST with regard to compliance levels as well as payment of tax. A small taxpayer having aggregate turnover of Rs. 20 lakhs (10 lakhs for North-Eastern States, Sikkim, Uttarakhand and Himachal Pradesh) need not register under GST. Those below the threshold limits may voluntarily register and pay the requisite GST and avail the input tax credit.
Taxpayers above the threshold limits of 20/10 lakhs, but up to an aggregate turnover of less than Rs.75 lakhs in the previous year (50 lakhs in North Eastern States, Sikkim and Himachal Pradesh) have the option of Composition levy Scheme with a single low tax rate linked to the turnover and simplified compliance requirements (quarterly return).
- Boosting domestic demand:
Under GST, the average tax burden on the majority of goods is likely to come down, which will lead to reduction in prices, in turn resulting in more consumption. This will boost domestic demand, create more opportunities for domestic business and drive job creation.
The single biggest benefit of the GST would be transforming India into ‘One Nation, One Tax, One Market’. GST will unshackle Indian trade and industry and help realise our full economic potential.
- Control of Chinese Product:
The Goods and Services Tax (GST) has an interesting China connection. The country’s transformational tax reform may turn out to be a strong deterrent to cheap Chinese imports in India.
The GST, by its design, is likely to break the interstate supply chain of cheap Chinese products, leading to a reduction of such imports.
Implementation of GST will reduce the cost of collection of indirect tax. According to a report published (by Ministry of Statistic and Program Implementation, Government of India) shows that in the year 2013-2014 the cost of indirect tax collection is double that of the cost of direct tax collection in percentage term. While 0.90% is the cost of indirect tax correction, the cost of direct tax collection is 0.57 % of the total direct tax revenue.
The total collection of revenue of direct and indirect tax for the year 2013-2014 is Rs.638591 Cr (direct tax) and Rs.496238 Cr (indirect tax).
KEY FEATURES OF GST
The key features of GST are as under.
- Technology-driven tax administration & transparency:
Administration of GST being largely technology driven will not only expedite decision making, but will also usher in a new era of transparency. Under GST, the physical interface between the tax payer and tax administration will be greatly reduced as most of the compliance requirements such as registration, filing of returns, payment of taxes, etc. will be performed online.
The GST Network, a not-for-profit, non-government company promoted jointly by Central and State Governments, will provide shared IT infrastructure and services to both Central and State governments and also to the tax payers. It will provide a uniform interface for taxpayers across India. A robust IT back-bone which enables capture, processing and exchange information amongst taxpayers, State & Central governments, Banks, RBI and other stakeholders will greatly smoothen the indirect tax administration and boost compliance.
HOW WILL GST WORK?
Ideally, taxes are levied at various stages of retail, supply and production based on the value assigned to the product by retailers, suppliers and producers individually. Unfortunately, the current tax system is unjust to most of the manufacturers in India. Here is an example to help you get a gist of our current tax system.
For example, a soap manufacturer that procures raw materials at 500 lakhs/batch. Here, the manufacturer sets the operating profits as 100 lakhs and holds back a processing cost of 100 lakhs.
In this case, the manufacturer pays 36 lakhs bearing tax rate @18%. Let us find out how.
The manufacturing company initially paid 90 lakhs as input tax. Now when the company decides to sell the batch for 700 lakhs, it receives a tax credit of 90 lakhs. Thus, the tax amount for the final transaction comes to 36 lakhs.
Another example, let us assume that a manufacturer wants to make a shirt. For this he must buy yarn. This gets turned into a shirt after manufacture. So, the value of the yarn is increased when it gets woven into a shirt. Then, the manufacturer sells it to the warehousing agent who attaches labels and tags to each shirt. That is another addition of value after which the warehouse sells it to the retailer who packages each shirt separately and invests in marketing of the shirt thus increasing its value.
|Transaction||New Regime||Old Regime||Comments|
|Sale within the state||CGST + SGST||VAT + Central Excise/Service tax||Revenue will now be shared between the Centre and the State|
|Sale to another State||IGST||Central Sales Tax + Excise/Service Tax||There will only be one type of tax (central) now in case of inter-state sales.|
GST will be levied on these value additions the monetary worth added at each stage to achieve the final sale to the end customer.
There is one more term we need to talk about in the definition Destination-Based. Goods and Services Tax will be levied on all transactions happening during the entire manufacturing chain. Earlier, when a product was manufactured, the centre would levy an Excise Duty on the manufacture, and then the state will add a VAT tax when the item is sold to the next stage in the cycle. Then there would be a VAT at the next point of sale.
So, earlier the pattern of tax levy was like this:
GST takes off the tax burden for manufacturers. Most importantly, GST would include various indirect taxes that are currently imposed on various partakers in the supply chain. Bringing down such taxes would not only curb overall production costs, but would also improve the country’s economy in long run.
FINAL GST RATE SLABS
According to Harmonized System Nomenclature(HSN), the Goods and Services Tax (GST) will be levied at multiple rates ranging from 0 per cent to 28 per cent. GST Council finalized a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury items Service Tax will go up from 15% to 18%. The services being taxed at lower rates, owing to the provision of abatement, such as train tickets, will fall in the lower slabs.
In order to control inflation, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate.
The lowest rate of 5% would be for common use items. There would be two standard rates of 12 per cent and 18 per cent, which would fall on the bulk of the goods and services. This includes fast-moving consumer goods.
Highest tax slab will be applicable to items which are currently taxed at 30-31% (excise duty plus VAT).
Ultra luxuries, demerit and sin goods (like tobacco and aerated drinks), will attract a cess for a period of five years on top of the 28 per cent GST.
The collection from this cess as well as that of the clean energy cess would create a revenue pool which would be used for compensating states for any loss of revenue during the first five years of implementation of GST.
The structure is a compromise to accommodate demand for highest tax rate of 40% by states like Kerala. While the Centre proposed to levy a 4% GST on gold but the final decision on this was put off. During a press conference, finance minister Mr. Jaitley said, “GST rate on gold will be finalised after the fitting to the approved rates structure of all items is completed and there is some idea of revenue projections”.
The principle for determining the rate on each item will be to levy and collect the GST at the rate slab closest to the current tax incidence on it.
CGST, SGST AND IGST
India is a federal democracy that is one which has clear demarcation of powers, responsibility and revenue collection between the states and the centre in its constitution. For example law and order falls under the state’s jurisdiction while the nation’s defence is the centre’s responsibility. The GST too needs to have clear provisions on what areas the centre and the state are allowed to collect revenue from taxation to prevent an overlapping.
The Central GST or CGST is the areas where the centre has the powers and State GST where the State has taxation capabilities. The IGST or Integrated GST is for movement of goods within the states of the Indian union. This will be collected by the union however will be transferred over to the states. Thus it is essential that if and when the GST comes out it is rolled over in the entire nation simultaneously.
Impact of GST
GST is expected to have its impact on all the stake holders of the economy; Manufacturers, Distributor and Retailers, Consumers and the Government as detailed below.
- On Manufacturers, Distributor and Retailers:
GST is expected to boost competitiveness and performance in India’s manufacturing sector. Declining exports and high infrastructure spending are just some of the concerns of this sector. Multiple indirect taxes have also increased the administrative costs for manufacturers and distributors and it is expected that with GST in place, the compliance burden will ease and this sector will grow more strongly.
- On Service Providers:
As of March 2014, there were 12, 76,861 service tax assesses in the country out of which only the top 50 paid more than 50% of the tax collected nationwide. Most of the tax burden is borne by domains such as IT services, telecommunication services, Insurance industry, business support services, Banking and Financial services etc. These pan-India businesses already work in a unified market, and while they will see compliance burden becoming lesser there will apparently not be much change in the way they function even after GST implementation.
- On Consumers:
The consumers are expected to get benefit from reduction in the tax burden derived out of efficiency of tax administration.
- On Government:
The Government will obviously benefit from reduction in cost of tax administration and increase in tax revenue.
Sector-wise Impact Analysis
In a vast country like India, the logistics sector forms the backbone of the economy. We can fairly assume that a well organized and mature logistics industry has the potential to leapfrog the “Make In India” initiative of the Government of India to its desired position.
The e-com sector in India has been growing by leaps and bounds. In many ways, GST will help the e-com sector’s continued growth but the long-term effects will be particularly interesting because the model GST law specifically proposes a tax collection at source (TCS) mechanism, which e-com companies are not too happy with. The current rate of TCS is at 1% and it’ll remain to be seen if it dilutes the rapid boom in this sector in any way in the future.
On the whole, GST is expected to benefit the pharma and healthcare industries. It will create a level playing field for generic drug makers, boost medical tourism and simplify the tax structure. If there is any concern whatsoever, then it relates to the pricing structure (as per latest news). The pharma sector is hoping for a tax respite as it will make affordable healthcare easier to access by all.
In the telecom sector, prices are expected to come down after GST. Manufacturers will save on costs through efficient management of inventory and by consolidating their warehouses. Handset manufacturers will find it easier to sell their equipment as GST will negate the need to set up state-specific entities, and transfer stocks. The will also save up on logistics costs.
The Indian textile industry provides employment to a large number of skilled and unskilled workers in the country. It contributes about 10% of the total annual export, and this value is likely to increase under GST. GST would affect the cotton value chain of the textile industry which is chosen by most small medium enterprises as it currently attracts zero central excise duty (under optional route).
- Real Estate:
The real estate sector is one of the most pivotal sectors of the Indian economy, playing an important role in employment generation in India.The probable impact of GST on the real estate sector cannot be fully assessed as it largely depends on the tax rates. However, it is a given that the sector will see substantial benefits from GST implementation, as it will bring to the industry much required transparency and accountability.
Agricultural sector is the largest contributing sector the overall Indian GDP. It covers around 16% of Indian GDP. One of the major issues faced by the agricultural sector, is transportation of agri products across state lines all over India. It is highly probable that GST will resolve the issue of transportation. GST may provide India with its first National Market for the agricultural goods. However, there are a lot of clarifications which need to be provided for rates for agricultural products.
The FMCG sector could see significant savings in logistics and distribution costs as the GST will eliminate the need for multiple sales depots. The GST rate for this sector is expected to be around 17% which is way lesser than the 24-25% tax rate paid currently by FMCG companies. This includes excise duty, VAT and entry tax all of which will be subsumed by GST.
Freelancing in India is still a nascent industry and the rules and regulations for this chaotic industry are still up in the air. But with GST, it will become much easier for freelancers to file their taxes as they can easily do it online. They will be taxed as service providers, and the new tax structure will bring about coherence and accountability in this sector.
The automobile industry in India is a vast business producing a large number of cars annually, fueled mostly by the huge population of the country. Under the current tax system, there are several taxes applicable on this sector like excise, VAT, sales tax, road tax, motor vehicle tax, registration duty which will be subsumed by GST. Though there is still some ambiguity due to tax rates and incentives/exemptions provided by different states to the manufacturers/dealers for manufacturing car/bus/bike, the future of the industry looks rosy.
With increased limits for registration, a DIY compliance model, tax credit on purchases, and a free flow of goods and services, the GST regime truly augurs well for the Indian startup scene. Currently, many Indian states have very different VAT laws which can be confusing for companies that have a pan-India presence, specially the e-com sector. All of this is expected to change under GST with the only sore point being the reduction in the excise limit.
Among the services provided by Banks and NBFCs, financial services such as fund based, fee-based and insurance services will see major shifts from the current scenario. Owing to the nature and volume of operations provided by banks and NBFC vis a vis lease transactions, hire purchase, related to actionable claims, fund and non-fund based services etc., GST compliance will be quite difficult to implement in these sectors.
No doubt, GST is a landmark reform initiative for simplification of tax structure. As rightly said by PM Modi, ” GST is Good & Simple Tax “. It has the capacity to control black money by creating a transparent tax administration system and reduce cost of tax administration. In making this potential a reality all stake holders need to play their part, primarily the business communities- small or big. Here comes the challenge in making this business community to change their behavior;from non taxpaying to taxpaying, from manual compliance to electronic compliances, from hiding facts to sharing facts etc. These behavioral changes are not easy, resistance to change is inherent. The duty of the government is to manage this process of change, which is crucial to the success of GST reform. The Government need to hand hold the traders and businessmen, present and potential tax payers to report their business operations to GSTN. The business community in turn need to behave responsibly in an era of transparency created by system of on-line filing and be a part of a transformed tax regime, benefiting themselves and the country.