GST

Goods & Services Tax (GST) is a Value added tax, that includes both goods and services. In India, it is imposed at four uniform rates.

In GST all the old taxes that were levied on most of the products have been subsumed since 2017, simplifying the tax structure.;

GST Taxation is performed only at only two levels and 3 types of taxes:

• Central level: CGST: Merging Central Excise duty, additional excise duty, Service tax, Additional Customs duty(Countervailing Duty), and Special additional duty of Customs.
• State level: SGST: Merging tax on inter-state sale of goods, VAT, Entry tax(Octroi tax), Luxury tax, purchase Tax, Entertainment tax, tax on lottery, betting, gambling, etc.
• Integrated GST: IGST on interstate trade(destination point): Tax to the destination state. The tax burden will shift from the state of origin to the state of consumption.
  • Destination states: Odisha, UP, Bihar, Kerala
  • Origin states: TN, Guj, Maha.
• There are 4 slabs: 5%, 12%, 18% and 28%. Each Invoice would have 2 taxes:
  • Either CGST + SGST : 50/50
  • Or CGST + IGST :  50/50
  • Special tax slabs:
    • 3% GST on Gold,
    • 0.25% GST rough precious stones & semi-precious stones

Advantages:

Economic advantages

• Remove cascading of taxes: Only one tax would remain to offset in input credit system.
• Removal of tariff & non-tariff barriers: Octroi, entry tax, check posts, etc. hinder the flow of trade throughout the country.
• Reduce compliance cost: A large number of taxes create high compliance costs. This has led to productivity gains in tax & logistics areas.
• Will bring down costs & increase consumption.
• Competitiveness: Decisions should be based on logical economic factors rather than Tax considerations. It means no undue benefit of location due to tax.
• National seamless market: significantly lower the transit time.

It might have improved our GDP by 1-2%/annum, Promoting exports, employment and boosting growth.

Better Governance:

It is one nation one tax that makes India a Unified common market, with not many exemptions and multiple rates. It has the following advantages:

• It is levied only at the destination point. Not at various points. Reduces tax terrorism.
• Therefore Reduced tax disputes.
• Easy framework: good tax compliance.
• More data: High tax compliance. [Will benefit Income tax department too]
• Transparent system.
• Tax burden shared equitably by manufacturing & services, minimising exemptions.
• Increased tax to GDP ratio.

Structural Limitations of GST

• Customs, Stamp duties, Petroleum, Electricity tax, Alcohol excluded: make 40% of Taxes.
• No cross utilisation of Input tax credit: Input credit of CGST will be unavailable for paying SGST AND Input credit of SGST will be unavailable for paying CGST.
• It takes away the Fiscal autonomy of the States. Since both the Union & the state have concomitant powers over nearly all indirect taxes.
  • Points of Contention between states and Centre: State/Union surcharge, Exempt list, Special rates due to calamity, Special category states(14th Finance commission) rate, Dispute settlement.
• Loss of revenue to large states with high manufacturing and efficient tax collection systems.
  • There was a compensation for loss of revenue for the first five years.
  • States of consumption are benefitting.

Improvements and Developments

E-way bill (EWB):

From 1 April 2018, For all inter-state movement of non-exempted goods to improve compliance, an E-way Bill has been introduced.  It is a self-declaration that would be required to be submitted to the GSTN website to move certain goods above the value of ₹50,000;

• Exemptions: About 50% of CPI baskets are exempted from this requirement ~ 150 items.
• All consignments moving more than 10km from their origin will require prior registration & generation of the e-way bill through the GST Network, which will be valid for varying durations depending on the distance travelled.
  • About 15-16L e-way bills are likely to be filed daily.
• Rules empower commissioners to notify those officers who can intercept any mode of conveyance to carry out physical verification of e-way bills while goods are in transit.
• EWBs are to be issued also for Gold.

• E-way bill integrated with FASTag, RFID: In a move that will help curb tax evasion, GST authorities will now be able to track real-time data of commercial vehicle (CV) movement on highways by integration of the e-way bill (EWB) system with FASTag and RFID.
• Under the GST regime, EWBs are mandatory for inter-state transportation of goods valued over Rs 50,000 from April 2018.

Criticism of EWB:

• Compliance nightmare: for taxpayers with operations in multiple locations.
• Inspector Raj?: In the initial period few random vehicles would be stopped en route to check if the goods being transported were accompanied by an e-way bill.

SIGNIFICANCE:

• It will enable tax officers to undertake live vigilance in respect of EWB compliances by businesses and will aid in preventing revenue leakage by real-time identification of cases of recycling and/or non-generation of EWBs.
• Tax officers can now access reports on vehicles that have passed the selected tolls without EWBs in the past few minutes.
• Also, vehicles carrying critical commodities specific to the state and having passed the selected toll can be viewed. Any suspicious vehicles and vehicles of EWBs generated by suspicious taxpayer GSTINs, that have passed the selected toll on a near real-time basis, can also be viewed in this report.
• The officers can use these reports while conducting vigilance and make the vigilance activity more effective.
• The officers of the audit and enforcement wing can use these reports to identify fraudulent transactions like bill trading, and recycling of EWBs.

E-Invoicing

‘E-invoicing’ or ‘electronic invoicing’ is a system in which B2B invoices are authenticated electronically by GSTN for further use on the common GST portal.

• Regulation: It was to be mandatorily implemented from 1st April 2020 but has been pushed to 1st October 2020 for taxpayers with turnover over Rs.500 crore.
• Currently, there are three modes of generations of IRN(Invoice reference No.) in the NIC system:
  • Direct API interface of ERP(Enterprise resource planning) system of the taxpayer with NIC system.
  • API interface of ERP system of the taxpayer through GSP with NIC system.
  • Offline tool for bulk uploading of invoices and generating IRNs. Around 15% of the taxpayers are using the offline tool for the IRN generations and 85% are integrating through API.
• All invoice information will be transferred from this portal to both the GST portal and e-way bill portal in real time. Therefore, it will eliminate the need for manual data entry while filing GSTR-1 returns as well as the generation of part-A of the e-way bills, as the information is passed directly by the IRP to the GST portal.

Advantages:

• It resolves & plugs a major gap in data reconciliation under GST to reduce mismatch errors.
• It allows interoperability of invoices generated on one software to another and helps reduce data entry errors.
• Real-time tracking of invoices prepared by the supplier is enabled by e-invoice.
• Backward integration and automation of the tax return filing process – the relevant details of the invoices would be auto-populated in the various returns, especially for generating part A of e-way bills.
• Faster availability of genuine input tax credit.
• Lesser possibility of audits/surveys by the tax authorities since the information they require is available at a transaction level.

Sewa Bhoj Scheme:

It envisages reimbursing: CGST and Central Government’s share of IGST paid on the purchase of specific raw food items by Charitable/Religious Institutions for distributing free food to the public. It is applicable to all Charitable Religious Institutions such as Temples, Gurudwara, mosques, churches, Dharmik Ashram, Dargah, Matth, Monasteries etc. They must follow the following norms:

• They have been in existence for the preceding five years before applying for financial assistance/grants.
• They must have been distributing free food to the public for at least the past three years on the day of application.
• They must serve free food to at least 5000 people in a month.
• They should not be blacklisted under provisions of FCRA or any other Act/Rules of the Central/State Government.

Sabka Vishwas Scheme, 2019:

It was proposed in the Union Budget, 2019: to resolve all disputes relating to the erstwhile Service Tax and Central Excise Acts, as well as 26 other Indirect Tax enactments. This scheme offers several lucrative resolution benefits to taxpayers, such as

• Taxpayers can pay the outstanding tax amounts due and be free from any other consequences under the Law.
• Taxpayers will get substantial relief in the form of full waivers of interest, penalties, and fines.
• There will be complete amnesty from prosecution proceedings.

Tax slabs rationalization:

• 28% Tax Slab: Only around 50 items now under 28% from around 200 items initially. However, It is not yet clear as to what qualifies as a ‘Sin’ good(28% Tax slab).
  • Since cement yields ₹13,000 Cr in GST & auto parts another ₹20,000, the council has resisted rate cuts on these items. On Vehicles, additional cess ranging from 1% to 22%, depending on the length, engine size, and type of the vehicle is levied.
• Now 97.5% of goods are in 18% or lower GST Slab. The government has commented that it would bring 99% of the articles in 18% or lower slab. FM  wrote that the GST Council was close to completing the first set of rate rationalizations – phasing out the 28% slab except for luxury & sin goods.
• Tax Base: About 4.5Mn entities in the country’s tax net, most of which were so far cash-driven.

Reverse charge mechanism:

• Mechanism: If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier.
  • Self-Invoicing: The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.
  • Input-Tax Credit: The service recipient can avail of Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. In the Composition scheme input tax credit cannot be claimed.
• Implementation: The plan to pay GST under the Reverse charge mechanism has been deferred indefinitely, to avoid ‘inconvenience’ to trade and industry.
• Advantages of RCM:
  • A reverse charge mechanism would be necessary to make the matching of invoices possible. It solves the “Missing Trader Problem”. The matching of invoices has also been kept on hold.
  • Tax evasion would become difficult.
• Disadvantage: Due to the compliance burden, Registered establishments would not like to deal with those who are not registered.
• 100% government enterprise: The GST council has decided to convert GSTN into 100% government enterprise. State & Centre would hold 50% each.

Single Monthly GST filing:

Instead of 3 currently: the Council has approved a single-monthly return form that would become applicable in 6 months.

• New system: Businesses would only be able to avail input credit if their sellers have uploaded the invoices.
• The current system of filing GSTR-1 & GSTR-3B forms will continue till then.
• Problem: If the seller defaults on deposits & remains evasive; Provisional input credit will get reversed for the outstanding taxes, which the buyer would have to pay.

Composition Scheme:

It is a scheme that allows a registered taxpayer to pay lump sum tax at a rate not more than 1% for manufacturers, 2.5% for the restaurant sector, and 0.5% for other suppliers of turnover.

• Threshold Limits: annual turnover must be below 1.5Cr. For NE states it is 75Lakh.
  • However, It is available only for intra-state supplies.
• Advantages: Reduced compliance costs: A dealer is not required to maintain detailed records as in the case of a normal taxpayer.
• Provisions:
  • A composition Dealer is not allowed to issue invoices or avail of input tax credit of GST.
  • He is not allowed to collect tax.
  • Any tax payable under the Reverse Charge Mechanism will not be covered under the scheme. These taxes will be liable to be paid as a normal taxpayer.

Possible improvements for the future

• Similar tax rates in single supply chains: For example – subjecting the whole Textile sector to 5% GST removing input credit imbalances.
• A single, fungible e-cash ledger has been proposed to replace the present system in which credits available under Central GST cannot be set off against State GST dues.
• Bring average tax to 12%: But this may not lead to an immediate reduction in the prices of commodities.
  • Most essential commodities must be in the 5% category.
  • Keep exemption minimum: Keep it simple & a minimum number of tax slabs.
    • Frozen Uncooked/cooked Vegetables are introduced in exemption.
  • Include All sectors:
    • Alcohol & Petroleum: States nod is the key.
    • Electricity: Constitutional amendment required.
    • Real Estate Sector: It has strong economic multiplier effects through backward & forward linkages. It is 2nd largest employment generator and makes 7.4% of the GDP in 2013-14.
      • It will simplify & harmonize the indirect tax regime and result in more transparency, more efficient transaction-tracking methods, and improved enforcement & compliance.
      • But: Transfer of completed properties will continue to be outside the purview of GST & may be liable only to applicable stamp duties.
    • Digitalization: it is being reported that transactions are being done in Cash to evade compliance.
      • GST Council’s proposal to offer a 2% discount for electronic B2C transactions only; Capped at ₹100. It would not be available to the composition scheme.
        • Disadvantage: But may add to compliance burden the businesses –
          • Vendors will have to keep two sets of accounts; one digital & one non-digital.
          • It will require necessary changes in the GST return processes.
          • It may lead to a shortfall of ₹25,000Cr/year if 40% of all digital transactions get discounted.
        • Advantage: This will lead to a significant upsurge in digital payments.
      • Cess on Sugar: Under consideration by GoM(group of Ministers). But Cess would be out of Input credit. The idea of GST is contradictory to the idea of Cess.

Centralized Advance ruling authority: Review the Advance ruling authority decision at the State level.

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