While this tax has been introduced, much needs to be done before it can be completely implemented on April 1, 2017– passing laws, making rules on procedures, training of taxmen and taxpayers…
By Sumit Dutt Majumder
THE Goods and Services Tax (GST) has been introduced by an amendment of the constitution. This has empowered both the center and states to levy and collect GST in a Dual GST Model. But much needs to be done before it can be implemented on April 1, 2017.
The next logical step is to get laws relating to the implementation of GST passed in parliament and state legislatures. The laws are:
- Central GST (CGST) Act to be passed by parliament for collection and levy of CGST
- States GST (SGST) Act to be passed by state legislatures for levy and collection of SGST. These two laws are for intra-state trade and commerce
- There is also a third law for inter-state movement of goods and services–the Integrated GST (IGST) Act, to be passed by parliament. Basically, the IGST is a summation of CGST and SGST. IGST will be levied and collected by the center. While the CGST amount in it will go to the center’s coffer, the SGST amounts will go to the respective destination states, GST being a destination-based consumption tax. This distribution of revenue would be facilitated by the GST NET, the technology support for implementation of GST.
LONG ROAD AHEAD
Besides these GST laws, there will also be GST Rules that will lay down the procedures and formats of documents for actual implementation of GST. The essential prerequisite for having GST Acts and Rules in place is that the center and states will be on the same page on issues relating to these legislations. While considerable progress has been made, certain issues still remain unresolved.
The GST Council that was set up immediately after the constitution amendment process was over has already met thrice so far under the chairmanship of Union Finance Minister Arun Jaitley. The threshold below which GST will not be charged from the assesses has been finalized at Rs 20 lakh. The threshold for composition levy, i.e. one-time annual collection of GST as a small percentage of the annual turnover has also been finalized as Rs 50 lakh. These decisions will give relief to very small businesses from whom collection of tax is cumbersome and not cost-effective. It would have been better if these thresholds were still higher.
The minutes of the first meeting of the GST Council could not be approved in its second meeting on September 30 because of an issue that is mostly administrative and partly legislative. States had demanded exclusive single control over CGST collection in addition to SGST over assesses having a turnover of up to Rs.1.5 crore. The center agreed to the proposition only in respect of taxing the goods. It however, mentioned that it would have exclusive control over taxing the services as the states do not have the expertise and experience in taxing the services.
STATES’ DEMAND FOR CONTROL
In addition, states have demanded control over collection of IGST as well. Certain constitutional issues are involved in this matter. Article 246A read with Article 269A of the amended constitution clearly mandates that in respect of interstate trade or commerce, “Parliament has exclusive power to make laws with respect to goods and services tax…” and that GST in the course of inter-state trade or commerce shall be levied and collected by the Government of India. Thus, it is clear that the center will have exclusive control over collection of IGST. This is an unnecessary controversy and any change in this position would necessarily warrant another amendment of the constitution which is not desirable. Besides, the center’s arguments regarding its collective experience and expertise in taxing services as against the states lack of it do make sense.
Other pending issues include the finalization of the list of GST exemptions that will be common for both CGST and SGST. Negotiations between the center and states are going on over this for quite some time now. While the number of exemptions would definitely have to be brought down from the current level which is too high (around 300) for central excise, there are certain sectors like power and infrastructure where exemptions in some form will have to be continued for sustained growth in manufacture. Similarly, care will have to be taken to ensure that the services sector, which contributes around 60 percent to the country’s GDP, does not get hurt by a GST rate higher than the present level. It would perhaps be necessary to have more than one slab of GST rates for services as well.
In the last meeting of the GST Council from October 18-19, the GST rates were discussed, but could not be finalized. Reportedly, the thinking is that there will be a standard rate of 18 percent, a reduced rate of 12 percent and a further reduced rate of 6 percent for goods of common man’s use, and a higher rate of 26 percent for demerit goods like tobacco and cigarette and certain identified luxury goods. Besides, a cess on these goods over and above the higher rate of 26 percent is also being discussed. The idea of cess is not a sound one because the industry will not get any credit for the cess amount. It is a good development that two slabs of GST are being considered for services. This will lessen the tax burden on essential services which are expected to be at the lower slab.
Given that currently goods on an average suffer total indirect taxes, including central excise, service tax, state VAT, etc. in a range of 27-30 percent, the aforesaid expected rate seems reasonable. The GST Council is expected to take a call on GST rates in its next meeting in mid-November.
The GST Council is, indeed, moving fast. The draft rules for business processes like registration, payment invoice, filing of returns and claiming of refunds were placed in the public domain on September 26 and the stakeholders were given less than two days to give their views. The GST Council approved these rules in their second meeting on September 30. One wonders whether any worthwhile feedback was received and considered before finalization of these rules. The rules will be notified after enactment of the aforesaid GST Acts. The draft rules relating to the all-important “Place of Supply of Goods and Services” and availment and utilization of input tax credit are yet to be put in the public domain.
Incidentally, there are 17 rules on registration relating to application for registration, verification, registration certificate and so on. The rules also provide for automatic registration of persons already registered under the current laws relating to central excise, state VAT, etc. The rules for payment entail maintenance of electronic ledgers and registers and a system of Unique Identification Number for each transaction. Five rules relating to invoice pertain to tax invoice, manner of issuing invoice, bill of supply, etc. One important feature that will bring relief particularly to inter-state transporters is that a taxable person can apply for an electronic reference number and produce the same, instead of the tax invoice, for verification whenever wanted.
Similarly, there are 25 rules on returns and 27 forms of returns. A return, incidentally, is a statement that provides an important link between tax payers and taxman.
Besides these, there are also forms seeking information on inward supplies of inputs and outward supplies of outputs. There are also provisions for engaging Tax Returns Preparers who would assist taxpayers in complying with GST requirements. On refunds, six refund rules and 10 refund forms have been prescribed. There will be a provisional refund within seven days if the compliance rating of the claimant is good.
As regards area-based exemptions, a sensitive matter, the Council has sensibly adopted a refund mechanism whereby the assessee would be required to pay GST so that the credit chain is not interrupted. Once the taxes are paid, they would be reimbursed from the annual budgets of the center and states.
The center plans to get the acts relating to CGST and IGST passed during the Winter Session of parliament in November-December. The states would follow suit with regard to SGST Acts. The target date for implementation is still being maintained as April 1, 2017. Is it realistic?
There are certain concerns regarding the preparedness of both the taxmen and taxpayers. Their training has not yet speeded up. Without proper training, the GST implementation would be clumsy. Also, all the issues relating to GST laws and procedures have not yet been settled. Nothing concrete has yet been put in the public domain about the operation of the GST Net which is necessary for customization of the IT software of stakeholders. Trade and industry have stated that they would have a better idea about their Enterprise Resource and Planning requirements and customization of IT software after they know firmly about the laws and procedures and details of the GST Net. They want another six months after this is known.
It may be noted that GST being a transaction-based tax, it’s not essential that it must be implemented from the beginning of the financial year. It can be done on the first day of any month or preferably the first day of a quarter. In such a scenario, July 1, 2017, would be a more realistic target for implementation of GST.
Perhaps, it’s better to hasten slowly.
—The writer is former chairman, Central Board of Excise & Customs. He is
also the author of GST in India—Its Travails, Tribulations and Challenges Ahead
Lead picture: (L-R) The Union Minister for Finance and Corporate Affairs, Arun Jaitley briefing the media after the conclusion of the 3rd meeting of the GST Council on October 19, 2016. Photo: PIB; A shopper browses sale items during the Boxing Day sales at a Selfridges store in London. Photo: UNI