The Black and White of GST

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 GST (Goods and Service Tax) is likely to be one of the landmark initiatives taken by the Indian Government to simplify and unify the indirect taxes regime. The earlier attempt to unify the Sales tax laws throughout the country through the VAT (Value Added Tax) Acts has been reasonably successful. The current indirect tax structure is

 GST (Goods and Service Tax) is likely to be one of the landmark initiatives taken by the Indian Government to simplify and unify the indirect taxes regime. The earlier attempt to unify the Sales tax laws throughout the country through the VAT (Value Added Tax) Acts has been reasonably successful. The current indirect tax structure is

  1. There are multiple indirect taxes like Excise duty on manufacture, Service Tax, Sales Tax, VAT and CST on Sales, Customs duty on imports, multiple minor taxes at State government level including octroi, entry tax, special entry tax, entertainment tax….
  2. Though VAT, Service Tax and Excise duty allows for taxation of only the value addition on products, technically, because of our federal structure of governance inter state value addition is not recognized.
  3. Though manufacturing companies can adjust Central Excise duty and Service tax, there is no adjustment allowed towards VAT
  4. Multiplicity of forms, procedures, records and returns to be filed with government agencies
  5. High cost of compliance for the industry– industry estimates it to be about 1.5 to 2.5% of the taxes.
  6. High cost of administration for the government
  7. Indirect taxes is highly litigated with litigations ranging from disputes in classification, valuation, interpretation and levy of taxes

Some of these issues are proposed to be addressed through the proposed GST Act which is to come into effect from 1st April 2010. Though the GST Act is yet to come in Black and white, there are some aspects which are clear that GST would address.

Unified Indirect Tax

GST will replace the existing Central Excise, Service Tax, Value Added Tax and CVD on Customs

Will the minor taxes like octroi, entry tax, special entry tax and entertainment tax remain?

Single GST

Though GST was proposed to be a single GST throughout the country, it is now clear that there will be Central GST (CGST), State GST (SGST) and Inter-State GST (IGST). There is also a proposal to have multiple rates in these GSTs.

Is unified GST possible in India?

GST Credit mechanism

The proposed credit setoff mechanism is as follows



Input Credit


Available for utilization against


IGST


IGST, CGST, SGST


CGST


IGST, CGST


SGST


IGST, SGST

Will excess credit be refunded? Will Procedural aspects for credit availment be simplified?

Destination based tax

Currently most of the indirect taxes are origin based taxes, i.e., tax is collected and paid in the State of origin. However, under GST it is proposed to be changed to a destination based tax, i.e. the tax will be collected and paid in the state of consumption.

Inter State GST mechanism is still not clear. How will the tax be credited to the State of consumption?

Other issues that need to be addressed:-

  1. Clarity is required on the GST mechanism for tax exempt states like Himachal Pradesh and Jammu and Kashmir, STPIs, EOUs and SEZs
  2. Would multiple Registrations be required under SGST, CGST and IGST?
  3. Valuation and Classification of Goods and Services might be complicated.
  4. Transition provisions from the existing acts is required

Though there are a number of areas that need clarifications, both the industry and the government is clear that GST is the way forward. A draft law for discussion is scheduled to be released by the government shortly which I’m sure will lay a lot of fears to rest.