Do you know how GST will benefit you ? Are you ready to accept the upcoming law in India. Read this post to know future benefits of GST ( Goods and service tax in India.)
How GST will benefit you ?
Good and Services Tax (‘GST’ for short) is the single most significant indirect tax reform since the introduction of the Sea Customs Act in the year 1878 by the then British regime. This is for the simple fact that the Victorian concept of seeking to tax multiple events in a commercial transaction is being replaced by taxation of a single event under GST. For illustration: A product manufactured in India is currently subjected to excise duty at the time of manufacture, Entry tax at the time of entry of goods into a local area and sales tax at the time of sale. GST seeks to replace this by a single event i.e. ‘Supply’.
This article aims to cull out the incremental benefits that may accrue to the trade by introduction of GST. Before dwelling into the benefits it is pertinent to note that, as on the day this article is being written, the only enacted piece of legislation is the constitutional amendment, which enables the Central Government and various State Governments to enact the GST laws, and the model GST law circulated by the Ministry of Finance. Much of the benefits listed herein are based on the current model GST law.
The benefits of introduction of GST can be enumerated in two broad categories, as follows:
- Ease of doing business;
- Elimination of current tax disputes.
Ease of doing business:
- Currently, India is a fragmented marketplace vis-à-vis indirect taxes. This means that a single product is subjected to multiple levies by multiple governments at multiple rates with multiple exemptions and multiple trade barriers. This fragmented structure hinders the creation of conducive environment for businesses to function. GST aims to eliminate this fragmentation and exponentially amplify ease of doing business in India. The following paragraphs enumerate significant shift from the status quo that the GST ushers in.
- Single point of tax: As stated above, GST replaces multiple taxable event with single taxable event termed as ‘Supply’. This means irrespective of the activity undertaken by a business (manufacture, trading, wholesale etc) GST is applicable on supply of goods or services (refer to section of the model GST law). To a business entity, the interpretation issues arising from multiple laws are focused onto a single event i.e. supply, thereby creating stability and reducing uncertainty of tax exposure.
- Uniform rate of tax: Currently, each state government is empowered to fix its own rates on sale of goods. This has resulted in same products being subjected to different rates of tax in different states. For example: Consumer goods are taxed at 14.5% in the state of Karnataka whereas the same goods are taxed at 12.5% in the state of Andhra Pradesh. Under GST, it has been proposed that a uniform rate of tax for identical goods may be fixed. This will eliminate uncertainty for businesses having presence across multiple states.
- Credit of interstate taxes: Presently, sale of goods across states attract Central Sales Tax (‘CST’) (‘C-form’ and ‘non C-form sales’). CST is non creditable leading to costly and unwanted cascading effect throughout the supply chain system. GST eliminates the cascading effect by providing that all interstate GST paid by the purchasing dealer can be set off against Central GST and State GST payable against his sales (refer Section 7 of the Interstate GST model law). This long standing demand of the trade has been addressed in GST by creation of a single seamless credit chain.
- Composition scheme: Current composition scheme for small and medium traders of goods available in the state tax enactments are extended to the GST (Turnover limit is yet to be determined). One stand out feature of GST is the introduction of composition scheme to service providers (refer section 8 of the Model GST law). Hitherto, small and medium service providers had to undergo the rigours of procedural and compliance requirement applicable to normal service providers. By introduction of composition scheme, service providers need not be concerned about input credits, maintenance of input invoices, formal documentation, statutory registers and other compliance processes. The aim is to facilitate ease of business to the vast majority of service providers.
- Trade barriers: Multiple state legislation have enabled mushrooming of onerous trade barriers across states. These trade barriers are manifested by creation of check posts, stipulation of transit pass, way bills and collation of transport information by state authorities using various online and offline modes. By introducing uniform taxation and similar tax legislation across states, and single GST network, aim is to standardize transit documents and check post practices. This is will enable smooth flow of trade between states.
- E-commerce transactions: All indirect tax legislation currently in vogue were enacted in the pre-digital era. This means that e-commerce transactions were not envisaged at the time of enactment and it has been a continuous effort on the part of successive governments to adapt the laws to the ever changing and dynamic online environment. GST has dedicated separate chapter covering the E-commerce industry (refer chapter XI B of the model GST law) thereby recognizing e-commerce transactions and eliminating adaption issues and uncertainty of applicability of law.
Elimination of current disputes
- Dual control (Central and state government) and multiple levies have resulted in disputes arising out of levy of sales and service tax on the same transaction. GST, by pivoting the point of taxation to a single criteria i.e. supply, aims to eliminate much of the time consuming and academically pertinent but practically undesirable legal tangles. Some of the major disputes and GST’s role in eliminating them are listed below:
- Dual tax on software: Computer software have always been target of Central and state tax authorities. The crux of the dispute revolves around application of service tax by the Central Government and sales tax by the respective state governments on distribution of software. This issue came to a partial conclusion by the decision of the Honorable Supreme Court (refer TCS vs. State of Andhra Pradesh 1 SCC 308) which held that packaged software are in the nature of goods and therefore leviable to sales tax. However, the Honorable Court did not address modern modes of delivery of software especially sale of licenses online, Software as a Service (‘SaaS’) model, Annual maintenance contracts, bugging and debugging and the like. Conservative practice is to stay clear of both authorities by levying both service and sales tax on all the aforementioned transactions. Enactment of GST will eliminate this long standing issue by creation of a single levy based on supply of software, irrespective of the form of delivery or revenue models. This is a welcome and beneficial shift to the crucial software industry in India. This certainty in taxation will enable increased foreign direct investment in the sector.
- Dual tax on construction: Construction industry has been the go to sector for revenue starved governments over the years. Since independence, industry has been facing litigations (refer the State of Madras v. Gannon Dunkerly 1958 AIR 560), constitutional amendments (refer 46th amendment of the constitution) and departmental interference. One of the pertinent disputes in the industry is valuing construction service for sales tax and service tax purposes. Contradictory and mutually exclusive state and central legislation means the industry has for years been paying tax on overlapping values. GST, by introducing a single point of levy will lay to rest much of the litigation in the industry bringing much needed confidence and succor.
- Dual tax on restaurant: Restaurant industry have faced their own share of litigation over dual and sales tax. From initial non taxing period to the constitutional amendment (refer 46th amendment of the constitution) bringing the sector to the sales tax net and finally to the introduction of service tax on restaurants with Air conditioning facility, the industry has faced the issue of dual taxation. Currently, the industry collects sales and service tax on sale of food. On introduction of GST, this will be eliminated as the point of levy is only ‘supply’.
- Similar dual taxation faced by industries such as lodging and boarding, where in service tax and luxury taxes, are levied, work contract industry like maintenance, repairs plumbing etc, which faces sales and service taxes, equipment leasing, where there are significant interpretation issues as to what constitute sale of goods or sale of services, will be eliminated by introduction of GST.
Read about shortcoming of GST here
- The aim of introducing GST has always been to integrate the Indian market and provide a common tax platform for the trade to conduct its operations. The GST law in its current largely, in the opinion of the author, achieves the stated aim. Having said that, we should be mindful of the challenges ahead for all the stakeholders in a success implementation of the new law.
- With the looming implementation of GST (by all reports by April 1, 2017), it is imperative that the opportunities are mined as opposed to being bogged down by the apparent unfamiliarity and complexity. (This article is Authored by – Ashish Koppa CA, LLB)