gst by ashok batra

8/8/2019 GST by Ashok Batra

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Ashok Kumar BatraA.K.Batra & Associates

Chartered AccountantsA-36, First Floor, Ring Road,

Rajouri Garden, New Delhi-110027Ph. 25161015, 25161016


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Concept

Authorities involved in the decision making process.

Constitutional background and amendments required

Various possible models

Challenges in decision making

Impact on business under different models

Conclusion

A.K.Batra & Associates


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Existing System of Indirect Taxes:

Customs Duty on Imports

Excise Duty on Manufacture of Goods

Service Tax on rendering of services VAT on sale of goods and deemed sales

Central Sales Tax on Interstate sales

Entry Tax, Octroi on entry of goods in state

Luxury Tax on services in Hotel and Restaurants.

Entertainment Tax

This is indicative but not exhaustive list.



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GST

All indirect taxes to subsume in one taxation laweffective April 2010 : GST.

Taxes on property and Taxes on Income being part ofdirect taxes continue to coexist as the only other twoforms of taxes.

No other tax on a transaction is levied in any other form.Transaction tax Better terminology

All transactions for all goods or services shall be liable totax without discrimination, except the rate of tax.



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Area based exemptions to promote a state or region shall go.

Person based exemptions shall go. Eligible persons shall apply

for refunds. Exports remain zero rated.

GST shall operate in VAT mode.

All trade barriers to be removed, so that taxes on all inputs be

eligible to credit / setoff against output tax. This is like making

the country as single free market.



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State Governments

Central Government - Finance Ministry

Commission on centre-state relations

Interstate council of India

Empowered Committee of State Finance Ministers

Thirteenth Finance Commission



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Implementation of GST shall depend upon suitableamendments in the constitution of India.

Constitution permits states and centre to levy, collectand appropriate taxes.

List I (Union List) to the Seventh Schedule to the

constitution enumerates matters on which Parliamenthas exclusive power to make laws.



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List II (State List) enumerates matters, exclusively inthe domain of the states. Sales Tax on sale / purchaseof goods lies in this list.

List III is the concurrent list empowering both to levy

tax on a subject.

In terms of a residuary clause in the List I, the powerto tax services could fell upon the central government.

Article 268A was inserted in the constitution on May8th, 2003.



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Article 268A is subject to ratification by a requisite

number of states and provides:

Taxes on services shall be levied by the GOI and such

proceeds shall be collected and appropriated by the Centre and

the states.

Parliament shall have exclusive power to formulate law for

collection and appropriation of the proceeds for any financial

year, amongst the states and the centre.

Consequently, entry 92C Taxes on Services was inserted in

List I.



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Thus GST is proposed to be a single law to taxsubjects that lie in different lists as far as powers tolevy and collect taxes are concerned.

Without suitable amends in the constitution, the levyof GST as a single tax is not possible. Any effort tolevy the taxes separately by various governments andcollecting and appropriating such taxes jointly, shall

be a compromise.



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Models may vary in terms of:

Various laws that get subsumed in GST

Manner of Implementation

xSingle Chain Inter state VATable

x Dual Chain Separate chains for states and Centre

with zero interstate / inter-chain VATability.

Nature of items included in the respective chains

Machinery for Levy, Collection & Appropriation



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Jharkhand

Iron ore sold for Rs.100/-

Maharashtra

Pallets & Sheets

sold for Rs. 150/-

Gujarat

Utensils sold for Rs.250/-

Delhi

Product consumed

for Rs. 300/-

GST Rs. 10/- GST Rs. 5/- GST Rs. 10/- GST Rs. 5/-

NO GST NO GST NO GST GST Rs. 30/-

State

Jharkhand

Maharashtra

Gujarat

Delhi

Model I

(Not- Vat-able)

10

5

10

5

Model II

(Interstate vat-

ability)

0

0

0

30

MODEL-I

MODEL-II



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Jharkhand

Maharashtra

Interstate sale

Gujarat

Dealer

A

Dealer

B

Dealer

C

Sale Price Rs. 110/-

GST Rs.11/-

Credit Rs.0/-

Sale Price Rs. 125/-

GST Rs. 12.5

Credit Rs.11/-

Sale Price Rs. 150/-GST NIL

Credit Rs. 12.5

Sale Price Rs. 100/-GST - Nil

T-1

T-2

T-4

T-3

Conclusion : Revenue to States = NIL

Maharashtra Revenue=11+1.5-12.5 = 0


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The Joint Working Group (JWG) ofEmpowered

Committee (EC) laid down variousrecommendations. Few of them are:

The committee has suggested that GST, when it rolls out

on 1 April 2010, have two components - a Central tax and

a single uniform state tax across the country;

A tax over and above GST may be levied by the states on

tobacco, petroleum and liquor; may likely help the report

find favour with the states; This is however against the

spirit of GST and has a cascading impact. States must tax intra-state services while inter-state

services must remain with the Centre.



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The GST may not have a dual VAT structure but aquadruple tax structure. It may have four

components, namely a central tax on goods extending up to the retail level;

a central service tax;

a state-VAT on goods, and

a state-VAT on services.

Given the four-fold structure, there may be at leastfour-rate categories- one for each of the components

given above. In this system the taxpayer may berequired to calculate tax liability separately for thedifferent rates of tax;



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The report had also mooted elimination of the area-basedand sectoral excise duty exemptions that are being given

by the Centre.

Proposed GST rate is 20%

Central cess like education and oil cess may be keptoutside the dual GST structure to be introduced fromApril 2010. Besides central cess, purchase tax and octroi,which are collected at state and local levels is also

proposed to be outside the GST framework;

There is no clarity on the collection machinery and themethod and formula of appropriation.



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Both, state and centre have a strong tax collection

and administrative machineries and one of these maybe left redundant .

The report has also recommended keeping stamp

duty, which is a good source of revenue for states,out of the purview of the GST. Stamp duty is leviedon transfer of assets like houses and land;

It has also suggested keeping levies like the toll tax,environment tax and road tax outside the GST ambit,as these are user charges; and



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The levies which are in the nature of user chargers androyalty for use of minerals must also be kept out of the

purview of the proposed tax.

The report is contradictory to the report of the KelkarTask Force (KTF) in as much as KTF recommendations

vouched for implementation of a single union GST andthis poses a lot of constitutional hurdles demandingmany amendments to the existing articles of ourconstitution.

The EC report reflects unwillingness of the states to loseto the power of the centre.



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Model A

Common code of law with defined revenue share for stateand centre and a common and independent administrativemachinery. Possible only with major constitutionalamendments.

State GST : Local Taxes on manufacture and sale of goodsalong with tax on identified localized services. 77 Services

have been so identified of which 44 are still out of servicetax list.

Central GST : Tax on remaining nature of transactions.



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Interstate transactions to be taxed at special rates with

facility of input credit against state VAT of destination

state. Inter Chain VAT-able

Unified TIN for countrywide operations, with compulsory

bifurcation of data based on region of operations.



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Model B

Separate but uniform code of law for each state with asingle code for central GST. Defined revenue share forstate and centre and a separate administrative machineryfor each state. Possible with adoption of common law bystates.

State GST : Local Taxes on manufacture and sale of goodsalong with tax on identified localized services. 77 Serviceshave been so identified of which 44 are still out of servicetax list.

Central GST : Tax on remaining nature of transactions.



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Retail interstate transactions to be taxed at central GST.

Wholesale interstate business to be at zero rate againstforms.

Inter-chain VAT-ability not available. No loading on costs

due to availability of local GST credit. Inequitable shift oftaxes from Value Adding state to consuming state.

National Tax Tribunal to be fully activated for all dispute

settlements.



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Rendering of services can not be equated to selling ofgoods in terms of: Transfer of property.

Movement from one state to another.

Storage and stocks

Services are normally produced and delivered at thesame time and are seldom capable of being stored.

Thus defining the basis of tax shall be a critical issue.



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If the criteria of tax continues to distinguish between

goods and services, taxing them at different rates, theexisting controversies shall continue .

A new series of classification disputes may arise for

borderline items of the two chains.

Indivisible Work contract transactions involving multiple

states shall not only continue to be vexed, they shall be

more complicated. The additional issue, which chain totax in, may arise.



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Import & Export of services are already vexed issues

and become more complicated when individual stateinterest shall be involved.

Taxes on Petroleum products as a policy have been

kept high with no VAT or CENVAT availability. Thisresults in cascading effect on taxes. Shall have to becurbed.

Need for multiple registrations in all states shallcontinue for omnipresent enterprises. This is not a costeffective model.



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States can be classified in to:

Industrial

Agricultural & Mining

Trading

Consuming

The GST model shall have to account for the

classification differences of the states. Financially

equitable solutions may be Politically inequitable.



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In the absence of a robust electronic control of

transactions, the system shall malfunction.

With two chains facilitating inter chain credit the

complexity shall grow many fold. With a 70% rural area

and a higher rural population this target is difficult to

achieve.



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The nature of constitutional changes required in this casealter the fundamental shape of the constitution.

Analytical data between goods & services may be lost.

In the absence of a robust electronic control of transactions,the system shall malfunction. With a 70% rural area and ahigher rural population this target is difficult to achieve.

Economy for small units may be disrupted.



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Booster to TAX : GDP ratio. Barrier Free input creditavailability across goods and services and across statesand UTs shall give unbeatable competitive advantageto a VAT chain constituent over the Parallel Economy

constituent. This will result in mass conversion to VATchain thereby improving on tax collections.

Equitable geographical distribution of taxes makecountry a single competitive market.

Exports become cheaper and competitive.



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Cascading impact of taxes shall reduce thereby bringing down

prices and boosting sales.

Relief from classification blues between goods and services

and works contracts.

Number of tax rates are likely to reduce. Tax content in sale

price is also likely to reduce.

Reduction in dispute percentage is likely to be achieved.



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India becomes an attractive FDI destination.

Blanket coverage of transactions, if any, is

likely to kick-start a new series of litigation.



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GST

IS

AWELCOME

REFORM

May good sense prevail upon all



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THANKSAshok Kumar Batra

[email protected]


gst by ashok batra

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