The Goods and Services Tax (GST) is one of the most revolutionary indirect tax reforms that is being planned in India.GST is a comprehensive value added tax on the supply of goods and services. Introduced by France in 1954, it is now prevalent in over 150 countries. It’s been on the cards for some time now with constant deferrals over the past few years. However, finally the central government seems to be inching closer to an amicable agreement with the states to implement GST soon. While the date of implementation of GST is set on August 2012 GST might not be implemented before 1 April 2013.
Dual GST for India
Many countries in the world have a single unified GST system i.e. a single tax applicable throughout the country. However, in some countries like Brazil and Canada, a dual GST exists. In India, dual GST is proposed consisting of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) to be levied on the taxable value of every transaction of supply of goods and services.
Impact on the prices of goods and services
Since GST is expected to foster increased efficiencies in the economic system, it is expected to reduce the incidence of multiple indirect taxes in force, thereby reducing the overall price of goods. For services, the prices of services may increase in near term due to increase in tax from current 12% (Service Tax) to overall 14 – 16% under GST. However, in the medium to long term, the prices of both goods and services are expected to reduce since the sellers will pass on the benefits of increased efficiencies to customers by reducing prices. All goods and services, barring a few exceptions, will be brought under GST.
Benefits of Dual GST
The dual GST is expected to be a simple and transparent system with only one or two CGST and SGST rates leading to:
• Reduction in the number of taxes at central and state level – like Central Sales Tax (CST), Octroi, State-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services among others. It must be noted that Imports have so far been kept outside the GST regime, thus import duties will continue to be charged.
• Decrease in effective tax rates for many goods
• Removal of current cascading effect on taxes
• Reduction in transaction cost by avoiding multiple layers of taxes and their administrative compliances
• Increased tax collection through wider base and better compliance
Response from States
Some states like Madhya Pradesh, Chhattisgarh and Tamil Nadu have mentioned that administrative infrastructure is not ready yet while others fear that since the tax rates may be lower than their existing (state) rates, this may lower their tax kitty. However, the central government have assured protecting their revenues and it is widely believed that better compliance will actually increase tax collection by the states.
Preparation by the industry
Experience of VAT implementation suggests that there may not be enough lead-time available for the industry to prepare for the implementation of GST. Consequently, the industry has started preparing for GST. The Institute of Computer Accountants (ICA) the leading training institute in India specialising in Accounts and Tax Training has already introduced GST in its Certified Industrial Accountant (CIA) curriculum to prepare the upcoming accounts and tax professionals on GST. The institute is also holding seminars for professionals to spread awareness on GST.
Process and Rates of GST
Since GST is expected to replace other taxes, it is not an additional tax burden as is feared by many. In line with most countries, the rate is expected to be between 14% and 16%.
GST is collected on the value added at each stage in the supply chain. It will be taxed on “supply” of goods and services and the concept of manufacture, sale, rendition as applicable in current regime will be irrelevant.
GST paid on procurement of goods and services is available for set off against GST payable on supply of goods and services through a tax credit mechanism. Being consumption based tax; the idea is that the final consumer will bear the GST charged to him by the last person in the supply chain.
There is expected to be separate enactments for central and state GST with each state managing its own enactment to levy and collect SGST.