Goods and Services Tax (GST): A new beginning in the indirect taxation landscape of modern India

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GSTThe GST, based on the concept of ‘one nation, one tax’, has finally been approved in the Rajya Sabha. Here is a brief overview of the impact it could have on Indian industry

By EB Bureau

The much awaited GST (Goods and Services Tax) has been cleared in the Rajya Sabha with 203 votes and without any opposition. The Goods and Services Tax (GST) is the biggest single reform in India’s indirect tax structure since 1991. The bill, however, will go back to the Lok Sabha for clearance, as some amendments have been made in the bill that was earlier cleared by the Lok Sabha.
GST is a single tax on the supply of goods and services, right from the stage of manufacture to the stage these are sold to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on the value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
The GST will replace at least 17 state taxes and federal levies, making the movement of goods cheaper and seamless across a market of 1.3 billion consumers. Although the modalities in the implementation of GST are not very clear and the industry is bound to face some teething problems during its implementation, it is assumed that GST will give a definite boost to the manufacturing sector in the country.
Before becoming a law, the bill has also to be approved by at least half of the Indian state legislatures. The GST rate has not been finalised yet, and a GST Council will be created comprising the nation’s finance minister as well as representatives from the states. This body will determine the final rate and other modalities with respect to this tax, and it is expected that the GST rate will be fixed around 18-20 per cent.
Being a destination based tax, the GST will reduce tussles between the state of origin and the destination state, which often competed to appropriate the same tax transaction. GST would also put to rest the ambiguity surrounding the treatment of ‘intangibles’ such as software and the concept of dual levy of taxes per se. Further, with manufacturing no longer being taxable, the concept of deemed manufacture and/or MRP valuation would be rendered redundant in the GST era, sparing businesses of the often long-drawn litigation process.
Importantly, the cascading effect of taxes would be effectively addressed under the GST regime owing to seamless flow of credit, with traders, in particular, being eligible to avail credit of services such as in the case of Annual Maintenance Service (AMC) contracts.
Currently, state VAT laws demand the submission of myriad documentation, thereby impeding free movement of goods. The Central Sales Tax Law, too, mandates issuance of diverse statutory forms to prove, among other things, that the inter-state purchase of goods is for resale and inter-state movement of goods is not a sale. The GST regime would assure a breakaway from the rigours of maintaining such voluminous documentation.
While the GST law addresses most of the important issues, the industry at large, and specifically the IT-electronics sector, eagerly anticipates and hopes the following issues shall be addressed:

  • The benefits afforded under the government’s flagship programme ‘Make in India’ should continue to enjoy patronage under the GST regime as well, given that businesses have made substantial investments, and also given that fruition of such schemes is realised over a period of time.
  • Benefits under the SEZ scheme and excise duty free zones, currently prevalent, should continue under the GST regime.
  • Prescription of lower rate of GST on IT products (i.e., all ITA products) on the basis of the HSN (Harmonised System of Nomenclature) classification across all states.
  • Simple rules that permit transfer of credit build up between offices/branches across India, particularly from marketing offices and from warehouses stocking parts for warranty/AMC supplies.

For more information, readers may refer to the GST bill at http://www.finmin.nic.in/reports/ModelGSTLaw_draft.pdf and the Press Information Bureau release on GST at http://pib.nic.in/newsite/PrintRelease.aspx?relid=148240.


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Salient features of GST

Easy compliance: A robust and comprehensive IT system will be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc, will be available to the taxpayers online, which will make compliance easy and transparent.
Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST will make doing business in the country tax-neutral.
Removal of cascading taxes: A system of seamless tax credits throughout the value-chain, and across boundaries of states, would ensure that there is minimal cascading of taxes.
Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
Gain to manufacturers and exporters: The subsuming of major central and state taxes in GST, complete and comprehensive set-off of input goods and services, and phasing out of Central Sales Tax (CST) will reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give a boost to Indian exports. (Source: ELCINA)


Mahesh Jaising“With the Revenue Neutral Rate report pegging the ceiling rate of GST at 18 per cent, the trader community for ‘general goods’ stands to gain, and the effect on the manufacturing sector appears to be neutral. However, the IT hardware sector is hopeful that ITA products will be notified under the lower merit rate, which is expected to be 12 per cent. Further, while for the services sector, 18 per cent rate of GST is on the higher side, with an enhanced pool of credit, one is hopeful that services will gain by way of higher aggregate spending.”
Mahesh Jaising,  partner, BMR & Associates LLP.


Nitin Kunkolienker“The IT-Electronics industry at large welcomes the proposed move to the GST regime, as the same will herald a new beginning in the indirect taxation landscape of modern India, paving the way for a simplified and homogenous tax structure for goods and services.”
Nitin Kunkolienker, vice president, MAIT, and director-corporate affairs, Smartlink Network Systems.

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