As a part of the Goods and Services Tax (GST) reform, a new levy called the “GST Compensation Cess” has been introduced by the government in order to compensate the loss of the manufacturing States in the first five years of GST implementation.
- The Cess has been introduced through the GST (Compensation to States) Act, 2017.
- The cess is levied on inter- and intra-State supply of notified goods such as aerated drinks, coal, tobacco, automobiles and the ambiguous category of ‘other supplies’.
What is the meaning of cess?
- A cess is a levy for a specific purpose.
- Under Article 270 of the Constitution, a cess tax has special privilege as the proceeds can be retained exclusively by the Union and need not be shared with States.
- Section 18 of the 122nd Constitution Amendment Bill, 2014 proposed a 1% additional tax to compensate States but this was withdrawn while enacting the Amendment Act.
- Surcharge on the GST is prohibited under Article 271.
- As per Article 279A(4)(f), the GST Council’s power to recommend a special rate is confined to raising additional resources during any natural calamity or disaster.
- According to the 101st Constitution Amendment Act, 2016, Article 271 has been amended to state that an additional tax/surcharge cannot be imposed over and above the GST tax rates.
What is Goods and Services Tax (GST)?
- GST is an indirect tax reform which aims to remove the tax barriers between states and create a single market.
- It is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
- The Government had introduced the 122nd Amendment Bill, 2014, in the Parliament to facilitate the introduction of GST in the country.
- The Bill was finally passed by both the Houses in 2016
- It is a consumption based tax/levy. It is based on the “Destination principle.”
- GST is applied on goods and services at the place where final/actual consumption happens.
- It came into force from 1 July, 2017.
- It is levied at multiple rates ranging from 0% to 28%.
There are three components of GST:-
- Central GST (CGST) – it will be Levied by Centre
- State GST (SGST) – It will be levied by State
- Integrated GST (IGST) – It will be levied and collected by Central Government on supply of goods and services
Detailed provisions of GST Act:
- The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services.
- In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services.
- Under current laws only the Centre can impose a tax on services. GST will empower states to collect service taxes
What are the taxes that have been subsumed under GST?
- Central Level Taxes – Central Excise Duty, Additional Excise Duty, Service Tax, Countervailing Duty and special Additional Duty of Customs
- State Level Taxes – State Value Added Tax or Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase tax, Luxury Tax, Taxes on Lottery, Betting and Gambling
- All goods and services have been placed under four slab rates 5, 12, 18 and 28 percent, along with a cess on luxury and demerit goods such as tobacco, pan masala and aerated drinks.
- Most services, except those in the negative list of essential services such as healthcare and education, will come under GST.
- An ‘anti-profiteering’ clause has been provided in the Centre GST (CGST) and State GST (SGST) laws, to ensure that business passes on the benefit of reduced tax incidence on goods or services to the consumers.
What was the need for GST?
- The exclusive division of fiscal powers between the states and centre government has led to a multiplicity of indirect taxes in the country.
- Multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry.
- In the prevailing tax systems, there were several cases where the government has not been able to detect evasion and loss of tax revenues.
- VAT rates and regulations differ from state to state. And it has been observed that states often resort to slashing these rates for attracting investors. This results in loss of revenue for both the Central as well as State government.
- Before implementation of GST, taxes used to ‘cascade’, with the levied on several inputs (good or service) that have already been taxed, along with inputs to those inputs.
- Cascading of tax leads to inefficient tax collection and evasion of taxes.
What are the objectives of GST?
- To eliminate the cascading effects of taxes: for example tax on tax, on production and distribution of goods and services across the country.
- One Nation, One Tax: Uniformity of tax rates across the India by subsuming all indirect taxes at the centre and state levels.
- To reduce tax evasion and corruption.
- Increasing tax to GDP ratio and revenue surplus.
What are the various challenges in implementation of GST?
- Financial challenges: GST is expected to cause a downfall in state revenue and the bill ensuring compensation from the union government has still not been passed.
- Federal system: The states would lose their autonomy to levy indirect taxes and will be totally dependent on the centre government.
- Administrative challenges: some states are demanding control over taxing all businesses. It is contentious issue as the central government also needs funds for its policies and for compensating the states.
- GST Council: With one-third voting share in the hands of Union government, may states feel the share of the states should be more.
- No parliamentary approval is needed for GST rates. The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament.
- Lack of skilled manpower to effectively migrate from older system to GST
- The requirement of e-way bills for inter-State movements has also been a cause of concern.
Effects on States
- According to the Reserve Bank of India (RBI), even as the fiscal position at the Centre remains stable (Central budget deficit for 2017-18 pegged at 3.2% of gross domestic product), there has been a marked deterioration in the gross fiscal deficit of states.
- The figure for 2016-17 is not finalized yet but could be as high as a deficit of 3.4%.
- Revenue expenditure of the states has risen sharply in recent years with greater financial devolution and increased expenditure.
- In aggregate, the states spend about 30% more than the Centre. This gap will further increase with GST.
- The GST is a destination-based tax, and as such is viewed as being to the advantage of the consuming States and to the detriment of the producing States.
- However the formula for compensating to states for such loss has been devised in GST.
What are the benefits of GST?
Benefits from GST:
- It will help to get rid of the current patchwork of indirect taxes by simplifying them.
- It will enlarge the tax base for larger resource generation.
- Due to simplification of tax structure, large scale sectors will benefit as there will be one general rate to be paid by all companies.
- The cascading effect of taxes will reduce in the supply chain thereby reducing production costs making exports more competitive
- It can facilitate seamless movement of goods across states
- It will reduce the transaction costs of businesses.
- The GST is expected to reduce manufacturing costs as logistics cost will decline. It will boost productivity through efficient resource allocation and greater tax compliance.
- GST will accelerate the growth and economy of the nation as it will make the industry more competitive and efficient.
- positive credit profile of India at rating agencies because this shows government’s will to improve ease of doing business
- Will facilitate MAKE IN INDIA by making one India oppose to current regime which fragment India along state lines which levied different states tax.
What are the criticisms of GST?
- The new tax system does away with the barriers to free trade within and between States, effectively turning India into a single free market for goods and services.
- GST being a Consumption tax decreases the income in some states where consumption is low and every state will see some revenue loss as many other local body taxes are also merged with GST.
- Some kept out of Basket: Alcohol, real estate, electricity are kept out of GST which defeats the very own purpose of having one tax.
- Though anti-profiteering provisions are given the act, chances are high that due to high rates the seller may keep the profit to himself, putting the load on consumers.
How GST will help in achieving Cooperative Federalism?
The participation of all States and Centre in the framing of GST laws has led to the following features in the GST Laws. These features signify spirit of cooperative federalism.
- Harmonisation of GST law: Even though Centre and each state legislature have passed their own GST Acts, they all are based on the Model GST law co-drafted by the Centre and the States.
- Common Definitions: There are common definitions in the CGST and SGST Act.
- Though GST will be jointly administered by Centre and State, for ensuring ease of doing business, but the individual taxpayer will have a single interface with only one Tax Authority either Centre or State.
- Joint Implementation Committee: In order to ensure smooth rollout of GST, the GST Council has formed a three tier structure consisting of :
- GST Implementation Committee(GIS)
- Standing Committees
- Sectoral Groups have representation of Centre and State Officers in the spirit of cooperative federalism to ensure quick administrative decisions.
What implications GST would have on India’s federal structure?
GST has the following implications on India’s federal structure:
- It resulted in the passing of four laws-Central GST, Interstate GST, State GST and Compensation Law affecting the federal distribution of financial powers.
- It created a new institution promoting cooperative federalism in the form of GST Council.
- Improves synchronization between states and between state-centre.
- It redistributes indirect tax enforcement authority between the states and the centre.
- The uniform taxation throughout all the states will strengthen federal structure with free movements of goods and services within the states.
- It will reduce regional disparity as the price of the product will be uniform throughout the country.
What are the suggestions?
- It may be worth reconsidering these rates and bringing them down to the 5 per cent slab for stronger linkages between farmers and the food processing industry and creating jobs in rural areas.
- Since the raw material could be sourced directly from farmers instead of being entirely depending on middlemen in mandis, e-NAM provides this opportunity to graduate to a real pan-India market for agricultural products.
- GST would ensure that farmers in India, who contribute the most to GDP, will be able to sell their produce for the best available price.
- A smooth GST regime can break inter-state barriers on movement and facilitate direct linkages between processors and farmers. This can transform the operations of mandis too if other necessary reforms to free up agricultural markets are undertaken.
What are the current updates on GST?
- The President has promulgated an ordinance enabling an increase in the goods and services tax (GST) cess on motor vehicles, including medium-sized cars, large cars and sports utility vehicles (SUVs), from 15% to 25%.
- The GST (Compensation to States) Amendment Ordinance, 2017 has amended the law to raise the maximum cess that can be levied on cars to 25%.
- With GST collection going for a toss, the government may soon be sending notices to several firms on transitional tax credit being claimed back
- The indirect tax body Central Board of Excise and Customs (CBEC) had earlier issued a directive to tax commissioners to verify GST transitional credit claims of over Rs 1 crore made by 162 entities.
- The government received a rude shock with a whopping Rs 65,000 crore of the Rs 95,000 crore collected as GST in July being claimed back as transitional credit by taxpayers.
- The Goods and Services Tax (GST) regime allows tax credit on stock purchased during the previous tax regime.
- Recently, Committee on Exports to resolve the Tax credit refund issue of exporters
What is the issue all about?
- Exporters were expecting the Integrated GST (IGST) refund or refund of input tax credit (ITC) in August, 2017 for the exports made during July.
- The filing of (GST returns) GSTR-1, 2 and 3 for July has been extended tillOctober 10, October 31 and November 10, respectively.
- Exporters will not be able to get the refund by November.
Why is there skepticism?
- Considering 15 days for issuance of acknowledgement and another seven days for getting provisional refund of 90% of the total refund claim – Technically, the exporters would have to wait till around December.
- The blocked amount for the four months’ time is estimated to be about $10 billion.
- If the issue is not handled in urgent basis, it could lead to huge job losses.