Rajeev Dimri and Jayashree Parthasarathy
BMR & Associates LLP, India
Rajeev Dimiri is Partner and Jayashree Parthasarathy is Director at BMR & Associates LLP, India
A spate of recent announcements by central government on its intention to introduce the Goods and Services Tax (“GST”), effective from April 1, 2016, has reignited discussions around the GST framework as well as its implementation in India.
It could be argued that India has been planning to transition into the adoption of a GST regime for some time now. Replacement of the state level, single point sales tax with the Value Added Tax (“VAT”) system of taxation of goods in the early part of the millennium as well as the more recent unification of credits and tax rates under the federal levies of central excise and service tax are often touted as the logical first steps for India's move into a comprehensive GST regime. However, overall progress has been rather slow with successive deadlines for the formal introduction of GST being missed.
To recap, India has a federal structure of taxation with both the Union as well as state governments taxing specific activities/supplies. GST is set to replace the following key transaction taxes in India:
|Key Central Taxes Set to be Subsumed Under GST|
|Central excise duty levied on “manufacture” of goods|
|Countervailing duties levied on “import” of goods|
|Service Tax levied on provision of “services”|
|Central Sales Tax (“CST”) levied on “interstate sale” of goods (expected to be abolished)|
|Cesses and surcharges levied on the above|
|Key State Taxes Set to be Subsumed Under GST|
|Value Added Tax (“VAT”) levied on “intra-state sale” of goods|
|Entry Tax (other than entry tax levied by local bodies)|
|Entertainment Tax levied on specific types of “entertainment” and “amusements”|
|Luxury Tax levied on certain “luxuries”|
|Cesses and surcharges levied on the above|
It is expected that a GST at both central and state levels shall apply on every transaction of supply of taxable goods and services. It is further expected that cross-border supply of goods and services from one Indian state to another shall attract an “Integrated GST” or IGST (comprising of a central GST plus state GST).
Against this backdrop, there has been much debate on the GST structure, rate, threshold as well as taxes/items that need to be subsumed under it.
The following attempts to capture some key recent developments on these aspects including the potential impact GST could have on businesses in India.
While a dual GST structure has been finalized for India, there are still deliberations with respect to the ideal rate of GST. Specifically, the RNR rate of GST—RNR is that GST rate which would ensure that both central as well as state governments' current tax collections are preserved under the GST.
A task force appointed by the central government had initially recommended a GST rate of 12% (state GST at 7% and central GST at 5%) under the assumption that:
• all prevailing indirect taxes will be subsumed by GST; and
• GST shall apply on all goods and services (with a small list of exemptions).
This was followed by another proposal of staggered central and state GST rates finally culminating in a GST rate of 16% on goods as well as services (comprising of state GST at 8% and central GST at 8%).
However, recent reports indicate that a sub-committee comprising both central and state government officials has recommended an RNR of almost 27% comprising of central GST at 12.77% and state GST at 13.91%.
|Intra-State Supply of Goods/Services||All amounts in INR|
|Value of goods/services supplied||100.00|
|Central GST at 13%||13.00|
|State GST at 14%||14.00|
|Total invoice value||127.00|
|Interstate Supply of Goods/Services||All amounts in INR|
|Value of goods/services supplied||100.00|
|IGST at 27%||27.00|
|Total invoice value||127.00|
|Note: The rate mentioned is indicative, based on recent news reports,and is one amongst several rates under consideration|
The above RNR rate (arrived at based on FY 2011-12 tax collections) is expected to be calibrated to present day tax figures as well as GST coverage. While this is one amongst several rates presently under consideration, if implemented, this would perhaps be one of the highest prevailing GST rates in the world. The average GST rate internationally is in the band of 16-20% with very few countries below or above this band.
The RNR rate is nothing but a reflection of the GST threshold as well as coverage, in other words, the lower the threshold and wider the coverage of goods and services, the lower the GST RNR. The National Institute of Public Finance and Policy, according to some media reports, has suggested as many as 16 rates, corresponding to different scenarios depending upon the inclusion or exclusion of key products such as petroleum, sugar, textile etc. under GST.
It is hoped that the Indian government borrows from international best practices by applying a reasonable GST rate on the majority of goods and services.
Most countries have a two or three-tiered rate system of a 0% rate, a merit rate in the region of 6–8 % and a standard rate in the region of 16–18% with no differentiation of the rate applicable on goods and services.
In India, both central excise and VAT levies have sought to adopt a similar taxation system of goods (i.e. lower or merit rate for essential goods with a standard rate applying on other goods); however, the list of goods eligible for the merit rate is not uniform across central and state tax lawsand across states. Further, all services (essential or otherwise) are taxed at a single standard service tax rate.
A key step is for unification of the list of goods and services eligible for exemption, including a decision on whether a single or tiered GST rate (merit rate as well as standard rate) should apply for goods and services. While current indications are that a single rate may eventually apply across all taxable goods and services, a formal decision on this aspect is pending and under consideration.
It is hoped that a uniform and reasonable GST rate will bearrived at for implementation. This could include a tiered approach of a 0% rate, merit rate and standard rate being applied on a uniform list of goods and services under central and state GST across all states.
The threshold for taxation of goods and services varies widely in India:
|Threshold for central excise levy||INR 15 million|
|Threshold for levy of Service Tax||INR 1 million|
|Threshold for of VAT||INR 0.5 million|
Recent media reports indicate that a threshold of 2.5 million rupees ($40,000) has been proposed by central government and 1 million rupees ($16,000) by some states. The threshold is expected to be finalized with respect to GST levy on goods as well as services in the coming months.
While the threshold seems to have significantly reduced for small or medium-sized manufacturing businesses (which currently enjoy exemption from central excise levies), these manufacturers would in any case be under a VAT levy and therefore covered under the current tax net. Small traders and service providers (currently under the VAT/Service Tax net) will however fall outside the purview of GST levy should a threshold of INR 2.5 million be implemented.
The taxation of goods/services supplied from one state to another assumes importance in a federal structure such as in India. The treatment of such supplies is in some sense likely to be similar to intra-community supplies within the EU.
As things stand, GST revenue in respect of interstate supplies is expected to be determined as follows:
• Interstate supplies are expected to be taxed with IGST (i.e. central GST plus state GST rates combined).
• In respect of interstate supply of goods, the state GST component is expected to accrue to the destination state.
• In respect of interstate supply of services, the state GST component is expected to accrue to the state where the service is determined to have been provided/supplied by the “place of supply” rules.
In relation to the above, draft “place of supply rules” have apparently been finalized—while these rules are yet to be published, they are expected to be aligned to the Place of Provision of Services Rules 2012, which currently determine the place of supply of cross-border supply of services into and out of India.
Further, at this stage, unlike in the EU, it does not appear that India will have specific rules for B2B vis-à-vis B2C supplies.
Some contentious items are petroleum, alcohol and tobacco products, historically, key revenue generators, especially for state governments. The inclusion or otherwise of these products under GST (a major revenue earner for the states) is likely to affect the RNR. Further, the central and state governments are yet to mutually agree on a list of goods and services to be exempted under GST.
A decision on this aspect is also expected to hinge on specific goods and services that are of special importance to specific states. For example, mineral rich-exporting states (with a relatively small consumption base) are clamoring for a retention of a part of GST revenue due to apprehension of steep fall in revenue collections should the entire GST revenue accrue to the destination state(s).
While there is no dispute on key transaction taxes levied by central and state governments being subsumed under GST, debate has been fixed on various entry controls imposed by state and local governments in the form of an “Entry Tax” on goods entering into a state for consumption in that state.
The hallmark of a successful GST regime should be free flow of goods and services across states—retention of such entry controls at state or municipal/local level could distort and impede a harmonized GST regime across the country. While it is hoped that all forms of entry taxes will be subsumed under GST, the fate of levies such as “Octroi” imposed by local bodies remain to be decided.
Clarity is also needed on a proposal for dealers to report to either the central or state GST authority (rather than deal with both authorities).
A key area of dispute between central administration and the states, and arguably a key reason for delays in GST implementation, is the level of compensation the states are entitled to by virtue of introduction of the GST (i.e. to compensate for the potential shortfall in state tax revenue). Recent reports indicate consensus is being reached on quantum as well as the period for which such compensation shall be paid.
It is expected that central and state tax exemptions, if any, will be converted into refund schemes. However, clarity on this is also awaited.
Current concerns include the transfer of the entire CENVAT and VAT credit balances of businesses into GST as central and state GST credits respectively. Any lapse of such accumulated credits will result in costs to businesses.
(Click below image to enlarge.)
Presently the effective rate of service tax is 12.36% and the same is payable to the central government; whereas, the RNR under consideration for GST is a much higher 27%. There is however, the possibility that services may attract a separate slab and the rates may not be increased for some time. While, additional credits should be available to a service provider under GST (i.e., GST credits on purchase of goods; currently VAT credits are not available); the potential cash-flow impact in the event of a higher rate would need to be evaluated and addressed.
A key impact area for service providers is likely to be decentralized compliance across multiple states from a state GST levy perspective. Under the current regime, a service provider has the option of using input tax credits, issuing output tax invoices and discharging liability as well as applying for refunds on a centralized basis in respect of all premises, irrespective of their location. Under GST, it is expected that compliance in terms of using credits, issuance of invoices, payment of taxes as well as applying for refunds would be decentralized and liable to be undertaken state-wise, at least with respect to state GST. Additionally, maintenance of state-wise books of accounts as well as undergoing audits, investigations and assessments across states could raise the compliance burden of service providers.
Relatively less impact should be felt by a manufacturer engaged in the sale of goods; especially, a manufacturer engaged in the production and sale of goods attracting the standard rate of excise duty (12.36%) and VAT (14.5%). In fact, the ill-effects of tax cascading should be avoided under GST (i.e. presently, VAT is applied on excise duty). However, the abolition of CST on interstate supplies of goods and replacement of CST at 2% with a standard GST as well as a levy of a standard/higher GST rate on goods currently taxed at a concessional rate of central excise and VAT is likely to impact cash-flow as well as pricing of products.
From a compliance perspective, a manufacturer presently undertakes decentralized central excise and VAT compliance across factories/states and this should not significantly change under GST. The impact on this front, if any, should be confined to decentralization of compliance from a service tax perspective.
GST can be expected to have a significant impact on traders. Traders are currently ineligible to use credit of excise duty (12.36%) as well as service tax (12.36%). However, under GST, with these costs converting into potential GST credits, evaluation of tax cost as well as pricing strategy is likely to assume importance. Further, from a compliance perspective, a trader presently undertakes decentralized VAT compliance across states and this should not change under GST.
Specifically, with the origin-based CST levy set to be replaced with a destination-based GST, the need for regional warehousing from a pure tax focus (i.e. to avoid CST costs) should be replaced with such warehouses being retained purely from a business need (such as just-in-time supplies) perspective.
While progress is evident and the government seems to be working towards a deadline of April 1, 2016 for GST implementation, several key steps remain to be actioned.
• Introduction of the GST Constitution Amendment Bill, a key enabler for the introduction of GST in parliament. This bill seeks to incorporate enabling provisions in the Indian Constitution for empowering the central and state governments to levy GST on goods and services. For the deadline of April 2016 to be met, it is imperative that this bill be passed in the Indian Parliament in the current Winter Session. Should this deadline be missed, there is the potential danger of the GST implementation process getting derailed yet again.
• Finalization of draft GST legislation and passing of the same in state legislatures.
• Educating and disseminating GST information to the industry as well as administrators.
With the imminent introduction of GST, businesses may wish to undertake the following:
• Understanding and estimating the potential (financial, operational, infrastructural) impact of GST on its business operations.
• Identifying areas of high GST impact, implementing measures to address the same including identifying opportunities/efficiencies that GST ushers in and capitalizing on the same.
• Educating and disseminating information to internal stakeholders.
• Developing and implementing processes (including updating of IT systems) to ensure GST related compliances across all Indian states.
It is expected and hoped that the next year will be used by the central as well as state governments to educate the industry as well as tax departments of the provisions and implications of as well as compliance for GST. This should ensure that both the tax administrators as well as taxpayers are well equipped to meet GST requirements and successfully and smoothly transition into the new regime.
Rajeev Dimri is Partner at BMR & Associates, LLP in India and can be contacted by email at: firstname.lastname@example.org. Jayashree Parthasarathy is Director at BMR & Associates, LLP, in India and can be contacted by email at: email@example.com. The views of the authors are personal and prior professional advice is recommended before implementing any aspects covered in this article
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