More than 10 years in the making, India’s nationwide Goods and Services Tax (GST) regime was finally introduced on July 1, 2017, and rolled out nationwide a week later when the state of Jammu and Kashmir adopted the law. This special feature summarizes the GST regime, and why it is so important.
Why The Need For GST?
The GST is intended to be a growth-enhancing tax reform that replaces a complex array of indirect taxes levied at both Central and state level, which were widely thought to discourage inter-state trade and commerce.
Almost a dozen taxes are being subsumed by the GST regime. At central level, these are central excise duty, additional excise duty, service tax, additional customs duty, and special additional customs duty. State level taxes replaced by the GST include state value-added tax, entertainment tax, “octroi” and entry tax, purchase tax, luxury tax, and taxes on lotteries, betting, and gambling.
According to several analyses of the reforms, the GST will boost India’s economic growth prospects considerably. Standard & Poor’s for instance, has said that GST “is arguably the most important structural reform to date by the Modi Government, and will improve efficiency, cross-state trade, and tax buoyancy.”
Why Has It Taken So Long?
That such a comprehensive reform to a country’s indirect tax regime would take a considerable length of time to complete is not that surprising. However, the road towards the introduction of GST in India has been a particularly long, hard slog.
A comprehensive GST was first proposed by the Kelkar Task Force on indirect tax in 2003, before a proposal was included in the 2006/07 Budget by then Finance Minister P. Chidambaram for the introduction of GST on April 1, 2010. However, the implementation deadline was pushed back on an almost annual basis as various committees discussed the reforms at length.
These delays were largely due to the fact that the Central Government and the more than two-dozen states had to agree to the removal of existing taxes, as well the finer points of the tax regime that would replace them. And with several influential states fearful that GST would deprive them of some revenue-raising powers and lead to them collecting lower amounts of tax revenue, the negotiations between state governments and the Centre took considerably longer than expected. Indeed, the Central Government eventually had to cut a deal with the states whereby they will be compensated for a period time after the introduction of GST.
Furthermore, legislation to change the Constitution of India needed to be agreed and passed by parliament before GST could be introduced. And this was when opposition parties exploited their majority in the upper house of parliament, the Rajya Sabha, to frustrate the BJP Government, which made the introduction of GST a top priority when elected in 2013.
The GST Constitutional (122nd Amendment) Bill 2014 was only finally endorsed by the upper house on August 5, 2016, and the bill received presidential assent on September 8, 2016 to become the GST Constitutional (101st Amendment) Act 2016.
However, in a sense, the passage of the constitutional amendment bill was only half the job done. Certain key elements of the GST regime still needed to be agreed, such as rates and registration thresholds.
This was done under the auspices of the GST Council, formed after the passage of the constitutional amendment bill in September 2016. Chaired by the Union Finance Minister Arun Jaitley and with state governments forming its membership, the GST Council was created to push through a compromise between state and center representatives, allowing the debate surrounding the settings for the GST to take place largely behind-closed-doors and largely free from political interference.
A Summary Of The GST Regime
Like similar regimes elsewhere in the world, India’s GST is a single tax on the supply of goods and services from the manufacturer to the consumer. Businesses can claim a tax credit for tax incurred on acquiring inputs when they make an onward sale. Therefore, only the final consumer bears the GST, charged by the last dealer in the supply chain.
However, India’s GST system is unique in that it has three elements, as summarized below.
A Three-Tier System
Three laws government the regime: The Central Goods and Services Tax (CGST) Act 2017, which provides for rules on the taxation of supplies of goods or services within a state (intra-state supplies); The Integrated Goods and Services Tax (IGST) Act 2017, which covers the same for supplies between states (inter-state supplies); and The Union Territory Goods and Services Tax (UTGST) Act 2017, which covers the rules on intra-Union Territory supplies.
Although there will be three component parts to the GST, supplies will not be subject to multiple taxation. All supplies, except exempt supplies, will simultaneously be subject to both CGST and state GST (SGST).
With regards to inter-state transactions, the Center is to levy and collect the IGST – equal to CGST plus SGST – on all inter-state supplies of goods and services.
Under the IGST system, the inter-state seller pays IGST on the sale of their goods to the Central Government after adjusting IGST, CGST, and SGST credits on their purchases (in that order). The exporting state then transfers to the Center the credit of SGST used in payment of IGST.
The importing dealer claims an IGST credit while discharging his output tax liability (both CGST and SGST) in his own state. The Center then transfers to the importing state the IGST credit used in payment of SGST.
Since GST is a destination-based tax, all SGST on the final product ordinarily accrues to the consuming state. CGST revenue generally goes to the Center.
The regime features four rates. There are two main rates – 12 percent and 18 percent – which are levied on most goods and services. A reduced 5 percent rate applies to some common, non-essential items, and a 28 percent rate is levied on “luxury goods” and tobacco products. Further, a cess could be levied on top of the 28 percent rate, potentially meaning that indirect tax levies on certain supplies could exceed this 28 percent rate.
Those goods that are considered essentials are subject to a zero rate, and services are generally subject to an 18 percent rate. Exports are subject to a zero rate, in line with international norms.
The GST registration threshold at INR2m (USD26,500), although a INR1m registration threshold applies in the northeastern states.
Collection The GST
Tax collection is divided between the states and the Center. States assess those taxpayers with turnover below INR15m, while both the Center and states are responsible for assessing tax on businesses with turnover equal to or greater than this threshold. Revenue is split 50:50 between the Center and states, although the Central Government had to agree a compensation package with the states in order to secure their support for the GST laws.
Most taxpayers are required to file four returns, covering their supplies and purchases, and monthly and annual returns. Others will file up to eight returns. Small taxpayers are permitted to file on a quarterly basis, and returns must be filed electronically.
New dealers are required to file an application for registration online with the Goods and Services Tax Network (GSTN) – the IT network underpinning the GST system – and there is a single application for all tax authorities. Each dealer is given a unique ID – a GSTIN. Registration applications are approved within three days, although post-registration verification will be carried out where there is a risk of non-compliance.
The law also made provision allowing for the introduction of reverse charge GST. A reverse charge – typically applied to counter non-compliance and fraud – requires that the recipient accounts for both output and input tax and remits the amount to the tax authority. It is intended to ensure that a supplier cannot charge VAT and then disappear with the revenue without remitting it to the tax authority.
The Central Board of Excise and Customs issued a notice on June 28, 2017, outlining the types of supplies where the reverse change must apply. These include:
- Certain services provided by a goods transport agency;
- Services supplied by an individual advocate;
- Services supplied by an arbitral tribunal to a business entity;
- Services provided by way of sponsorship to any body corporate or partnership firm;
- Certain services supplied by the Central Government, State Government, Union territory or local authority to a business entity;
- Services supplied by a director of a company or a body corporate to the said company or the body corporate;
- Services supplied by an insurance agent to any person carrying on insurance business;
- Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company; and
- Services supplied by an author, music composer, photographer, artist or similar by way of transfer of, or permitting the use or enjoyment of, a copyright.
The reverse charge rules came into force on July 1, 2017.
On July 8, 2017, Jammu and Kashmir became the last states to adopt GST, seven days after it was rolled out across the rest of the nation. In a statement, the Ministry of Finance announced that: “The President of India has promulgated today two ordinances, namely, the Central Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance, 2017 and the Integrated Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance, 2017 extending the domain of Central GST Act and the Integrated GST Act to the State of Jammu and Kashmir, with effect from July 8, 2017. With this, the State of Jammu and Kashmir has become part of the GST regime, making GST truly a ‘one nation, one tax’ regime.”
Later that month, on July 15, the Government said that all legal services provided to a business should be subject to goods and services tax under a reverse charge. The Government clarified that the following services are taxable under a reverse charge: “Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity. Legal service has been defined to mean any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.”
Clarification of the GST treatment of hotel stays has also been provided in response to questions about whether five-star luxury hotels are classified as “luxury goods.” To which the Central Board of Excise and Customs responded on July 18 that: “In this context, it is hereby clarified that accommodation in any hotel, including 5-star hotels having declared tariff of a unit of accommodation of less than INR7,500 per unit per day, will attract GST [at] 18 percent.”
The Central Government says that everybody wins with GST; the system is simpler and cheaper for the tax authorities and taxpayers to administer; in general, prices are expected to become cheaper and more transparent for consumers; and the reform encourages inter-state trade, which should ultimately benefit the whole economy.
However, it is probably fair to say that the new system hasn’t got off to the most auspicious of starts, as evidenced by the publication of guidance after the introduction of the new law. The fact that the legislative delays truncated the amount of time that the GST Council spent on drawing up the GST framework probably hasn’t helped matters, and the tax authorities will likely continue clarifying aspects of the GST regime in the weeks and months ahead.
The numerous protests against the new tax which have erupted in the weeks after the law’s introduction also point to a lack of education among small businesses about the new regime. Indeed, India’s Federation of Small Medium Enterprises has said that as much as 70 percent of small traders are unprepared for GST. What’s more, unlike most large businesses, small firms are unlikely to be aware of, or know how to, operate the accounting systems needed to account for GST inputs and outputs, and complete the necessary returns, let alone have them in place.
Other criticisms have centred on the complex four-tier GST rate framework, which smacks of an uneasy compromise between the Central Government and the states on the matter. In countries with similar consumptions taxes, one standard rate is the norm, with one or two lower rates common.
It seems that in the early stages of the GST regime, there could be high levels of non-compliance – higher than expected by government, at least, especially among small traders. And this could have ramifications for taxpayers across the supply chain – those registered for GST in accordance with the law have already raised the issue of claiming VAT refunds when trading with non-compliant counterparts.
Given the scale of the reforms, India’s GST was never going to go off without a hitch. And to say that this is one of the most important economic reforms since independence in 1947 is by no means over-selling the importance of them. However, in view of the compliance issues outlined above, it may take some considerable time for regime to bed in. Therefore, any benefits from the GST in terms of more seamless business-to-business trade may not be felt for a while yet.
For their part, taxpayers in India must ensure that they are as prepared as possible for what is a transformational change in the nation’s tax system.