The Country’s attempt to build and create a common market with a unified indirect tax structure received a boost on Tuesday, the 10 November 2009. The Empowered Committee of State Finance Ministers introduced the First Discussion Paper on the GST.
The architecture for the proposed GST is however silent on the actual tax rates and the deadline for implementation (previously set at 1 April 2010 & which looks unrealistic now).
Basic structure
- Dual GST one levied by Centre (Central GST – CGST) and other levied by the States (State GST – SGST) to apply to all transaction of goods and services
- SGST to apply only when supplier and recipient are both located within the State
- For inter-State transactions, innovative model of Integrated GST (IGST) to be adopted
- Threshold limit for SGST proposed at Rs. 10 lakhs and for CGST at Rs. 1.5 crores
- Composition/ Compounding proposed with upper ceiling of Rs. 50 lacs with a floor tax rate of 0.5% across the States
- CGST to be administered by Centre and SGST by respective States
Constitutional Amendments and legal framework
- States to be empowered to levy service tax and GST on imports
- Multiple statues (one for CGST and SGST statute for every State)
- A Joint Working Group to prepare a draft legislation for Constitutional Amendments and the proposed models of CGST, SGST and IGST
Rate structure and coverage
- Goods to be taxed at two rates, a lower rate for basic items & standard rate for others
- Single rate for taxation of services for both CGST and SGST
- Exports including supplies to Special Economic Zones (SEZ) would be zero-rated.
- Import of goods and services would attract both CGST and SGST
- Specified list of exempted goods (considering special needs of each State)
- Alcoholic beverages and petroleum products to be kept out of GST purview. VAT/Sales tax to continue.
- Views of rate structure of natural gas would be further deliberated
- Tobacco products would be subjected to GST with input tax credit. Centre may be allowed to levy excise duty over and above GST without input tax credit
Taxes to be subsumed in GST
- Central levies – excise duty, additional excise duty, service tax, countervailing duty special additional duty, surcharges, cesses and excise duty on medicinal & toiletries preparation act
- State levies – VAT/ sales tax, state entertainment tax, luxury tax, taxes on lottery, etc, state cesses/ surcharges and entry tax not in lieu octroi
GST on Imports
- Import of goods and services would attract both CGST and SGST
- Incidence of tax to follow the destination principle
- Tax revenue in case of SGST will accrue to the State where supplies are consumed
- Full and complete set-off will be available
Integrated GST (IGST)
- Centre to levy IGST (CGST+SGST) on all inter-State transactions of goods & services
- Separate provisions for consignment or stock transfers
- Seller to pay IGST on value addition after adjusting IGST, CGST and SGST on inputs
- Exporting State will transfer to Centre credit of SGST used in payment of IGST
- Importing dealer will claim credit of IGST to discharge his output tax in his own State
- The Centre will transfer to importing State the credit of IGST used in payment of SGST
Credit mechanism
- Credit of CGST and SGST allowed but without cross utilisation
- Cross utilisation of credit of CGST between goods and services would be allowed. Similar cross utilisation would be allowed for SGST
- Cross utilisation would be allowed in case of inter-State supplies under IGST
- Credit accumulation to be avoid and refunds to be completed in time bound manner
Other important highlights
- Existing exemption/ incentives to be converted to cash refund schemes and any new exemption or continuation of earlier scheme would not be allowed
- Taxpayers would be allotted a PAN-linked identification number with a total of 13/15 digits in line with Income tax
- Taxpayers to submit periodical returns in common format (as far as possible) to both Central and State authorities
- Adequate and continuing compensation to be provided to States for the next five years on account of various taxes being subsumed
Run-up to the GST
In the light of the above major step, all businesses, whether engaged in trading, manufacturing or provision of services would be impacted. The impact would be on supply chains, ERP, valuation of goods, pricing strategies, etc. Thus every business needs to gear up for the introduction of GST and it would be obligatory to have a basic structure in place
- In-depth study and analysis of the impact of GST on business
- Review of existing compliance, procedures, documentation and IT infrastructure
- Develop or modify existing, software and systems to capture tax liability and credits
- Dialogue/ meeting with suppliers and customers to explain Company’s GST structure
- Prepare and create a manual for SOPs for implementation and administration
- Training the stakeholders
- Transition from existing tax laws to GST
- Test run and final implementation