India plans to implement the Goods and Services Tax (GST) in October 2012 to create a unified indirect tax system. GST will combine multiple taxes into a single tax applied to the supply of goods and services. It will be administered as two separate taxes - Central GST and State GST. Inter-state transactions will be taxed under Integrated GST. While most taxes will be subsumed, some items like petroleum products, alcohol, and electricity may remain outside the GST regime. The government is considering a revenue neutral GST rate of 18-22% but rates for goods and services have not been finalized.

1. GOODS & SERVICES TAX - INDIA
Preamble:
India is at the behest of implementing an indirect tax reform, Goods and Service Tax (GST).
GST, as the term refers to, is a composite tax on goods and services. The objective of GST is
to create one common market for business and trade in India in terms of which GST would
be a multi-point tax with the benefit of set-off of tax paid on purchases. In this scheme,
every transaction involving supply of goods or services would be liable to tax, viz.,
production, distribution, consumption or supply, when effected from one person to another.
At this stage, it is envisaged that most of the Central and State levies prevalent under the
current regime would be subsumed into GST and accordingly, the credit mechanism would
work seamlessly, across, goods and services on one hand and across States on the other.
Current Status:
GST Structure:
India will be implementing a dual GST with the tax structure and powers split between the
Centre and the States, referred to as the Central GST (CGST) and State GST (SGST)
respectively. The GST would have a 4 rate structure with standard rate, concessional rate,
special rate for bullion & jewellery and exempted/ nil rate.
GST will be levied on supply of goods and services and the supplier will be allowed credit
for the GST paid on purchases of both, goods and services. The credit would be seamless
except that the credit of CGST paid will not be allowed for set-off against SGST payable and
vice-versa.
Local supplies would be subject to CGST and SGST at specified rates, inter-State supplies
would be subject to integrated or inter-State GST (IGST) and Exports would be zero-rated.
IGST:
The IGST is a tax on all inter-State transactions and is in the dual GST format to ensure
seamless flow of credits across States. The expression IGST would arithmetically be equal to
the aggregate of CGST and SGST payable on the relevant transaction. The IGST is a
mechanism whereby the tax charged by the seller will be remitted into the appropriate
account of the Central Government. Under the IGST model, the seller would pay the taxes
after adjusting the available credits.
To enable the buyer to avail the credit of IGST in the destination State, the component of
SGST used in discharging the IGST on supplies would be transferred by the exporting State
to the Centre and thereafter, the Centre would transfer to the importing State, the
component of IGST used in discharging SGST component by the seller.
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2. Progress made:
The commitment to implement GST in India was first made in Union Budget 2006 by the
then Hon’ble Finance Minister Mr. P Chidambaram. He proposed to implement GST on
April 01, 2010. Since then, the Central and the State Governments have initiated certain
steps in the direction of implementing GST. The prominent amongst them are,
Establishment of the Empowered Committee (EC) of State Finance Ministers also
referred to as Joint Working Group which functions as the nodal agency for all
initiatives on GST. Mr. Sushil Kumar Modi, Deputy Finance Minister of Bihar is
currently the Chairman of the EC;
Release of the First Discussion Paper by the EC which highlighted certain key proposals
and gave an indication of the thinking of the Government on GST matters;
Establishing an ‘Empowered Group on IT Infrastructure’ under the Chairmanship of Mr.
Nandan Nilekani, for strategizing the GST requirements and monitoring of the same, as
and when implemented;
Presenting the 115th Constitutional Amendment Bill, 2011, amongst others, to equally
empower, both the Central and State Governments for levy of tax on supply of goods
and services;
Granting approval to establish the GSTN (Goods and Service Tax Network) as an SPV
(Special Purpose Vehicle) for GST IT infrastructure requirements of which, the NSDL
(National Securities Depository Limited), Central Government and State Governments are
the stake holders;
Since 2006, while the pace on the above matters and other developments has rather been
slow, the introduction of the Constitutional Amendment Bill and Approval of the GSTN in
March 2011 and August 2011 respectively, reinforces the vision of the Government to
introduce GST. In terms of the secondary sources of information, the Constitutional
Amendment Bill is expected be placed before both the houses of the Parliament before the
end of the Winter Session 2011.
Specifically, on the information technology aspects for implementation of GST, Mr. Nilekani
has indicated that the basic framework providing a common portal for registrations, returns
and payments (core services) is ready and further that appropriate systems are provided to
facilitate reconciliation of transactions across taxes, viz., Income Tax, Central Excise and
VAT.
Once the initial deadline of April 2010 was missed, the target was to implement the GST
with effect from April 2012. However, due to lack of constitutional amendment, consensus
between States on various issues including compensation, release of draft laws and with a
view to provide adequate space and time to the trade and industry, the GST is now
proposed to be implemented effective October 2012.
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3. Discussions:
Rate of Tax:
It is understood that the Government is considering pegging the revenue neutral rate of GST
at a rate between 18% to 22%. This represents the aggregate of CGST and SGST payable on
the transaction. However, it may be noted that at this stage, the Government is yet to
indicate whether the revenue neutral rate of tax on goods and services would be the same.
Out of GST:
At this stage, based on the first discussion paper and subsequent comments and
recommendations by the Thirteenth Finance Commission and the Department of Revenue
read with the Constitutional Amendment Bill, 2011, while, the Central Excise, Central Sales,
Tax, Service Tax and Value Added Tax would be subsumed into GST, the following are
envisaged to be kept outside the GST framework.
Levies on petroleum products
Levies on alcoholic products
Taxes on lottery and betting
Basic customs duty and safeguard duties on import of goods into India
Entry taxes levied by municipalities or panchayats
Entertainment and Luxury taxes
Electricity duties / taxes
Stamp duties on immovable properties
Taxes on vehicles
Consequently, the taxation on the above products would continue as is currently prevalent,
viz., Central / State Excise and Value Added Tax / Sales Tax, as the case may be.
Insofar as it relates to the FMCG sector, the taxes / duties paid on alcoholic products such as
liquor for human consumption; and taxes paid on vehicles such as road tax, would not be
eligible for credits under the GST mechanism and thereby adding to the cost of production /
procurement. In addition to the above, entry tax would also be payable, as applicable and
levied by the municipalities and panchayats. Typically, under the current taxation scheme,
goods such as machinery including spares and parts, tobacco products, motor vehicles and
petroleum products attract entry tax.
Some concerns:
The framework contemplated for GST has raised certain key issues and concerns which the
industry may have and those which may arise consequent to the introduction of GST in the
currently proposed format.
Apropos, the industry expectations, the Governments and / or the EC are yet to
officially comment on the proposed GST rates, indicate the thinking on transitional
issues and commit on timelines for releasing the Draft law or more appropriately release
the roadmap for implementation of GST in India.
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4. There should be no distinction between goods and services under the GST regime.
Distinction between goods and services could lead to overlapping of taxes. The entire
purpose of GST is defeated since such a differentiation would not be materially different
from the current indirect tax regime prevalent in the country.
With changes in the business dynamics and the advent of information technology in
almost all activities, lot of business transactions are executed by way of bundled
contracts where there is supply of goods and rendering of services as part of the same
transaction which makes the distinction between goods and services rather blurred.
The current transaction tax laws do not specifically address e-commerce transactions.
Clarity on this is a must under the GST structure.
Government should consciously work towards achieving a common basic framework of
GST law between all States. This would include the initial exemption thresholds,
provisions relating to composite schemes / small scale industry schemes, general
exemptions, documentation, procedures and compliances, as far as practicable.
The taxable event should be clearly defined. Under the current excise and service tax
laws, there is considerable litigation on basic issues such as taxable event. Under the
GST regime, it is very important that taxable events and the situs of tax are defined in an
unambiguous manner.
One of the foundations of an effective GST implementation is that, the GST should be
simple and the tax structure should be transparent without any hidden levies or duty
impact. Accordingly, GST should subsume all the indirect taxes. As indicated supra, the
proposed GST model does not subsume all taxes and commodities.
Currently there are a plethora of export refund mechanisms and each of them are going
through various interpretational tests, which has resulted in blockage of funds for the
exporters. Under the GST, it is imperative that such scheme/s are minimal and
transparent which enable speedy refunds.
Under the current credit mechanisms, both at the Centre and the State, there are
considerable debates regarding the eligibility of credit on certain transactions. Again, it
is imperative that the system be transparent and simple under the GST structure.
Whilst the concerns on implementation of GST could be many, the trade and industry we
believe is eagerly looking forward for GST. With the seamless flow of credits and
congruence, amongst others, in the rates of tax, procedures and documentation across
States, the cost of goods and services are expected to reduce over a period of 12-18 months
and ‘doing business in India’ would be simpler.
Last but not the least, the experience of implementation of VAT in India was not one of the
most pleasing ones. While all the States are now under the VAT regime, despite intensive
efforts by the EC (EC established for implementation of VAT), all the States did not move into
the VAT regime simultaneously, viz., April 1, 2005. Prima facie, States ruled by parties other
than the party at the Centre chose to defer the implementation of VAT. This created
hardships to the trade and industry on one side and also the Government on the other. With
this backdrop, unlike VAT, the trade and industry earnestly expects that all States
implement GST simultaneously with effect from October 2012.
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should act on the information or views provided in this document without appropriate professional advise.