TAXATION Structure in India
India currently has a dual system of taxation
of goods and services, which is quite different from dual GST. Taxes on goods
are described as “VAT” at both Central and State level. It has adopted value
added tax principle with input tax credit mechanism for taxation of goods and services, respectively, with limited
cross-levy set-off. The present tax structure can best be described by the
following chart:
SHORTCOMINGS
IN THE PRESENT STRUCTURE AND NEED OF GST
1. Tax
Cascading:
The most significant contributing factor to tax cascading is the partial coverage by Central
and State taxes. The exempt sectors are
not allowed to claim any credit for the Cenvat or the Service Tax paid on their inputs.
2. Levy of Excise Duty on manufacturing point
: The CENVAT is levied
on
goods manufactured or produced in India. Limiting the tax to the point of manufacturing is a severe impediment
to an efficient and neutral application
of tax. Taxable event at manufacturing point itself forms a narrow base. For example,
valuation as per excise valuation rules
of a product, whose consumer price is Rs. 100/-, is, say, Rs. 70/-. In such a case, excise duty as
per the present provisions is payable
only on Rs.70/-, and not on Rs.100/-.
3. Complexity in determining the nature of
transaction – Sale vs. Service
4. Inability of States to levy tax on services
: With no
powers to levy tax on incomes or the
fastest growing components of consumer expenditures, the States have to rely
almost exclusively on compliance improvements or rate increases for any
buoyancy in their own-source revenues.
5. Lack of
Uniformity in Provisions and Rates
6. Fixation
of situs:
– Local Sale vs. Central Sale
7. Interpretational
Issues:
whether an activity is sale or works
contract; sale or service, is not free from doubt in many cases.
8. Narrow Base
9. Complexities in Administration
GST (Goods and Service Tax)
GST means Goods and Service Tax. It is an
indirect tax levied on sale of goods and services. The reformists believe that
GST is one of the most awaited law which upon introduced will boost the
economic growth in the country. This law if passed by the parliament may come
into force from April 2016. As everyone is talking about it now, let’s get into
the basics of the proposed law in this article.
Present system – This can be better explained
through an example. Suppose you buy soap for Rs.50 per piece, it includes
Excise Duty, VAT or CST, Customs duty on the imported raw materials, etc. So,
currently you will have to pay multiple taxes on the same product. Let’s take another
example; the food you buy at hotels will have VAT as well as Service Tax.
Complexities
in the present system – The taxes are levied by central government as well as state
governments. So, the businessman has to maintain accounts which will comply
with all the applicable laws. It is perceived to be a complex system. Hence,
worldwide over 150 countries have adopted GST,
a simple tax system. Though it is late, India is catching up with the
global trends.
Is it easy
to implement in India? Not really.
Today states have autonomy in collecting state taxes. They have the feeling of
losing their rights! They want liquor, fuel to be out of GST tax system. They are
also worried about Central government sharing GST revenue with the states. If
India becomes one common market, then the states will have to share their
powers of taxing with the union government. (Which means states can’t increase
the taxes as and when, as much as they want)
If the GST
bill is passed : will it come into effect immediately? NO. The earliest day we can
see GST in India will be in *April 2016*. Again implementation depends upon the
initiative and involvement of state governments. Some of the states may act
quickly and some of them may take time to implement.
GST Rate- Today, one
pays Excise Duty of 12%, VAT of 14% on goods (totaling to 26%). 12% service tax
on services. So, the rates may be anywhere between 12% and 26%. The average worldwide
GST rate is around 18%.
FEATURES OF AN IDEAL GST
The main
features of GST are as under:-
(a) GST is based on the principle of value
added tax and either “input tax method” or “subtraction” method, with emphasis
on voluntary compliance and accounts based system.
(b) It is a comprehensive levy and collection
on both goods and services at the same rate with benefit of input tax credit or
subtraction of value of penultimate transaction value.
(c) Minimum number of floor rates of tax,
generally, not exceeding two rates.
(d) No scope for levy of cess, re-sale tax,
additional tax, special tax, turnover tax etc.
(e) No scope for multiple levy of tax on
goods and services, such as, sales tax, entry tax, octroi, entertainment tax,
luxury tax, etc.
(f) Zero rating of exports and inter State
sales of goods and supply of services.
(g) Taxing of capital goods and inputs
whether goods or services relatable to manufacture at lower rate, so as to
reduce inventory carrying cost and cost of production.
(h) A common law and procedures throughout
the country under a single administration.
(i) GST is a destination based tax and levied
at single point at the time of consumption of goods or services by the ultimate
consumer.
MODELS OF
GST
There
are three prime models of GST:
GST at Central (Union) Government Level only
GST at State Government Level only
GST at both, Union and State Government
Levels
3 Models of
GST
EXPECTED MODEL
OF GST IN INDIA- DUAL GST
In India, the GST model will be “dual GST”
having both Central and State GST component levied on the same base. All goods
and services barring a few exceptions will be brought into the GST base.
Importantly, there will be no distinction between goods and services for the
purpose of the tax with common
legislations applicable to both.
For Example, if a
product have levy at a base price of Rs. 100 and rate of CGST and SGST are 8%
then in such case both CGST and SGST will be charged on Rs 100 i.e. CGST will
be Rs 8 and SGST will be Rs.8.
Interestingly, as per the recommendations of Joint Working Group (JWG) appointed by the
Empowered Committee in May 2007, the GST in India may not have a dual VAT
structure exactly but it will be a quadruple tax structure. It may have four
components, namely – (a) a Central tax on goods extending up to the retail
level; (b) a Central service tax; (c) a State-VAT on goods; and (d) a State-VAT
on services.
The significant features of Dual GST
recommended in India, in conjunction with the recommendations by the JWG, are
as under:
1. There will be Central GST to be
administered by the Central Government and there will be State GST to be
administered by State Governments.
2. Central GST will replace existing CENVAT
and service tax and the State GST will replace State VAT.
3. Central GST may *subsume following
indirect* taxes on supplies of goods and services: Central Excise Duties
(CENVAT)· Additional excise duties including those levied under Additional
Duties· of Excise (Goods of Special Importance) Act, 1957. Additional customs
duties in the nature of countervailing duties, i.e.,· CVD, SAD and other
domestic taxes imposed on imports to achieve a level playing field between domestic
and imported goods which are currently classified as customs duties. Cesses
levied by the Union viz., cess on rubber, tea, coffee etc.· Service Tax·
Central Sales Tax – To be completely phased out· Surcharges levied by the Union
viz., National Calamity Contingent Duty,· Education Cess, Special Additional
Duties of Excise on Motor-Spirit and High Speed Diesel (HSD).
4. State GST may subsume following State
taxes: Value Added Tax· Purchase Tax· State Excise Duty (except on liquor)·
Entertainment Tax (unless it is levied by the local bodies)· Luxury Tax· Octroi
Entry Tax in lieu of Octroi· Taxes on Lottery, Betting and Gambling·
5. The proposed GST will have two components
– Central GST and State GST – the rates of which will be prescribed separately
keeping in view the revenue considerations, total tax burden and the
acceptability of the tax.
6. Taxable event in case of goods would be
‘sale’ instead of ‘manufacture’.
7. Exports will be zero rated and will be
relieved of all embedded taxes and levies at both Central and State level.
8. The JWG has also proposed a list of
exempted goods, which includes items, such as, life saving drugs, fertilizers,
agricultural implements, books and several food items.
9. Certain components of petroleum, liquor
and tobacco are likely to be outside the GST structure. Further, State Excise
on liquor may also be kept outside the GST.
10. Taxes collected by Local Bodies would not
get subsumed in the proposed GST system
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