GST: All you need to know!

This article has been written by Ishaan Garg. Ishaan is a first-year law student at Vivekananda Institute of Professional Studies, GGSIP University, Delhi.

An empowered committee was set up by Atal Bihari Vajpayee government in 2000 to streamline the GST model. It was to develop and reform the backend infrastructure which was essential for the implementation of GST. In his budget speech on 28 February 2006, P. Chidambaram, the then Finance Minister, announced the target date for implementation of GST to be 1 April 2010 and formed another empowered committee of State Finance Ministers to design the roadmap. The committee submitted its report to the government in April 2008 and released its First Discussion Paper on GST in India in 2009. The Constitution (122nd Amendment) Bill, 2014 was introduced in the Lok Sabha by Finance Minister Arun Jaitley on 19 December 2014, and passed by the House on 6 May 2015. In the Rajya Sabha, the bill was referred to a Select Committee on 14 May 2015. The Select Committee of the Rajya Sabha submitted its report on the bill on 22 July 2015. The bill was passed by the Rajya Sabha on 3 August 2016, and the amended bill was passed by the Lok Sabha on 8 August 2016. The bill, after ratification by the States, received assent from President Pranab Mukherjee on 8 September 2016, and was notified in The Gazette of India on the same date.

 The Act was passed in accordance with the provisions of Article 368 of the Constitution, and has been ratified by more than half of the State Legislatures, as required under Clause (2) of the said article. On 12 August 2016, Assam became the first state to ratify the bill, when the Assam Legislative Assembly unanimously approved it.

Presently the constitution empowers the Central Government and State Government to levy various taxes on the citizens of India. The central government levy taxes such as excise duty on manufacturing and service tax on supply of services, on the other hand, state government levy sales tax or Value Added Tax (VAT) on sale of goods. With GST all these taxes have come under one umbrella. Most of the best-known systems of GST in the world use a single GST model, while India has opted for a dual-GST model. Critics claim that CGST, SGST and IGST are nothing but new names for Central Excise/Service Tax, VAT and CST, and hence GST brings nothing new to the table. The concept of value-added has never been utilized in the levy of service, as the Delhi High Court is attempting to prove in the case of Home Solution Retail, while under Central Excise the focus is on defining and refining the definition of manufacture, instead of focusing on value additions. The Revenue can be very stubborn when it comes to refunds, as the Maharashtra Government proves, and software entities that applied for refunds on excess service tax paid on inputs discovered.

 The working of GST can be explained by giving a stage wise implementation of this system.

Stage 1

Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt. In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130. At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).

Stage 2

The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.

A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).

Stage 3

In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15). Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.

This system of is said to be implemented by 1st April 2016, the beginning of financial year in India; however it looks a farfetched dream. At its present state, it looks next to impossible to introduce a whole new tax rate mechanism in a country like India in one go. Rather it would be better if it could be partially implemented and gradually whole GST will come into being. Whatever be the date of its implementation, it would be interesting to see how the Indian tax payer would react to it, as ultimately they are the gainers or losers from this system of taxation.

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