In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle. The fiscal powers between the Centre and the States are clearly demarcated in the Constitution with almost no overlap between the respective domains. The Centre had the powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics etc.) while the States had the powers to levy tax on sale of goods. In case of inter-State sales, the Centre had the power to levy a tax (the Central Sales Tax) but, the tax was collected and retained entirely by the originating States. As for services, it was the Centre alone that was empowered to levy service tax.

Since the States are not empowered to levy any tax on the sale or purchase of goods in the course of their importation into or exportation from India, the Centre levies and collects this tax as additional duties of customs, which is in addition to the Basic Customs Duty. This additional duty of customs (commonly known as CVD and SAD) counter balances excise duties, sales tax, State VAT and other taxes levied on the like domestic product. Introduction of GST would therefore require amendments in the Constitution so as to concurrently empower the Centre and the States to levy and collect the GST.

Institutional Mechanism of GST

The assignment of concurrent jurisdiction to the Centre and the States for the levy of GST required a unique institutional mechanism that would ensure that decisions about the structure, design and operation of GST are taken jointly by the two. For it to be effective, such a mechanism also needed to have Constitutional force.

To address all these and other issues, the Constitution (122nd Amendment) Bill was introduced in the 16th Lok Sabha on 19.12.2014. The Bill provides for a levy of GST on supply of all goods or services except for Alcohol for human consumption. The tax shall be levied as Dual GST separately but concurrently by the Union (central tax - CGST) and the States (including Union Territories with legislatures) (State tax - SGST) / Union territories without legislatures (Union territory tax- UTGST). The Parliament would have exclusive power to levy GST (integrated tax - IGST) on inter-State trade or commerce (including imports) in goods or services. The Central Government will have the power to levy excise duty in addition to the GST on tobacco and tobacco products. The tax on supply of five specified petroleum products namely crude, high speed diesel, petrol, ATF and natural gas would be levied from a later date on the recommendation of GST Council.

GST Council

Constitutional Changes for GST

Article 246 (A)

This is a new article inserted in the constitution. It says that (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Notable Points from Article 246A

• Both Union and States in India now have “concurrent powers” to make law with respect to goods & services
• The intra-state trade now comes under the jurisdiction of both centre and state; while inter-state trade and commerce is “exclusively” under central government jurisdiction.

Article 269A

This is a new article which reads as follows:

269A. (1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

Explanation - For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.

(2) The amount apportioned to a State under clause (1) shall not form part of the Consolidated Fund of India.

(3) Where an amount collected as tax levied under clause (1) has been used for payment of the tax levied by a State under article 246A, such amount shall not form part of the Consolidated Fund of India.

(4) Where an amount collected as tax levied by a State under article 246A has been used for payment of the tax levied under clause (1), such amount shall not form part of the Consolidated Fund of the State.

(5) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.’

Notable Points from Article 269A

• This article says that in case of the inter-state trade, the tax will be levied and collected by the Government of India and shared between the Union and States as per recommendation of the GST Council.
• The article also makes it clear that the proceeds such collected will not be credited to the consolidated fund of India or state but respective share shall be assigned to that state or centre. The reason for the same is that under GST, where centre collects the tax, it assigns state’s share to state, while where state collects tax, it assigns centre’s share to centre. If that proceed is deposited in Consolidated Fund of India or state, then, every time there will be a need to pass an appropriation tax. Thus, under GST, the apportionment of the tax revenue will take place outside the Consolidated Funds.

Article 279-A

This article provides for constitution of a GST council by president within sixty days from this act coming into force. The GST council will constitute the following members:

• Union Finance Minister as chairman of the council
• Union Minister of State in charge of Revenue or Finance
• One nominated member from each state who is in charge of finance or taxation

The GST council will be empowered to take decisions on the following:

• The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;

Changes in the 7th Schedule

This amendment has made following changes in 7^th schedule of the constitution:

Union List

• The entry 84 of Union List earlier comprised the duties on tobacco, alcoholic liquors, opium, Indian hemp, narcotic drugs and narcotics, medical and toilet preparations. After this amendment, it will comprise of Petroleum crude, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel, tobacco and tobacco products. Thus, these are now out of ambit of GST and subject to Union jurisdiction.
• Entry 92 (newspapers and on advertisements published therein) has been deleted thus, they are now under GST.
• Entry 92-C (Service Tax) has been now deleted from union list.

State List

• Under State list, entry 52 (entry tax for sale in state) has been deleted.
• In Entry 54, Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List I.; has been now replaced by Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”
• Entry 55 (advertisement taxes) have been deleted.
• Entry 62 (Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling) has been replaced by these taxes only to be levied by local governments (panchayats, municipality, regional council or district council.

Other Important amendments in existing articles

• The residuary power of legislation of Parliament under article 248 is now subject to article 246A.
• Article 249 has been changed so that if 2/3rd majority resolution is passed by Rajya Sabha, the Parliament will have powers to make necessary laws with respect to GST in national interest.
• Article 250 has been amended so that parliament will have powers to make laws related to GST during emergency period.
• Article 268 has been amended so that excise duty on medicinal and toilet preparation will be omitted from the state list and will be subsumed in GST.
• Article 268A has been repealed so now service tax is subsumed in GST.
• Article 269 would empower the parliament to make GST related laws for inter-state trade / commerce.

Further, the amendment also provided that Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. This resulted into the Compensation Cess Bill.

GST Council

The GSTC has been notified with effect from 12th September, 2016. GSTC is being assisted by a Secretariat. Fifteen meetings of the GSTC have been held so far. The following major decisions have been taken by the GSTC:

• The threshold exemption limit would be Rs. 20 lakh. For special category States enumerated in article 279A of the Constitution, threshold exemption limit has been fixed at Rs. 10 lakh.
• Composition threshold shall be Rs. 1.5 Crore. Composition scheme shall not be available to inter-State suppliers, service providers (except restaurant service) and specified category of manufacturers.
• Existing tax incentive schemes of Central or State governments may be continued by respective government by way of reimbursement through budgetary route. The schemes, in the present form, would not continue in GST.
• There would be four tax rates namely 5%, 12%, 18% and 28%. The tax rates for different goods and services have been finalized.
• Besides, some goods and services would be under the list of exempt items. The exempted services has been finalized which is same as the services exempted under existing service tax law, except services supplied by Goods and Services Tax Network which is the addition to the list of exempted services under service tax.
• Rate for precious metals is an exception to ‘four-tax slab-rule’ and the same has been fixed at 3%.
• A cess over the peak rate of 28% on certain specified luxury and demerit goods, like tobacco and tobacco products, pan masala, aerated waters, motor vehicles, would be imposed for a period of five years to compensate States for any revenue loss on account of implementation of GST.
• The list of services in case of which reverse charge would be applicable has also been finalized.
• The five laws namely CGST Law, UTGST Law, IGST Law, SGST Law and GST Compensation Law have been recommended.

Salient features of GST

• GST would be applicable on “supply” of goods or services as against the present concept of tax on the manufacture of goods or on sale of goods or on provision of services. GST would be based on the principle of destination based consumption taxation as against the present principle of origin based taxation
• It would be a dual GST with the Centre and the States simultaneously levying it on a common base. The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States [including Union territories with legislature] would be called State GST (SGST). Union territories without legislature would levy Union territory GST (UTGST).
• An Integrated GST (IGST) would be levied on inter-State supply (including stock transfers) of goods or services. This would be collected by the Centre so that the credit chain is not disrupted.
• Import of goods would be treated as inter-State supplies and would be subject to IGST in addition to the applicable customs duties. Import of services would be treated as inter-State supplies and would be subject to IGST.

Taxes subsumed by GST

GST would replace the following taxes currently levied and collected by the Centre:

a) Central Excise Duty;

b) Duties of Excise (Medicinal and Toilet Preparations);

c) Additional Duties of Excise (Goods of Special Importance);

d) Additional Duties of Excise (Textiles and Textile Products);

e) Additional Duties of Customs (commonly known as CVD);

f) Special Additional Duty of Customs (SAD);

g) Service Tax;

h) Cesses and surcharges insofar as they relate to supply of goods or services.

State taxes that would be subsumed within the GST are:

a) State VAT;

b) Central Sales Tax;

c) Purchase Tax;

d) Luxury Tax;

e) Entry Tax (All forms);

f) Entertainment Tax (except those levied by the local bodies);

g) Taxes on advertisements;

h) Taxes on lotteries, betting and gambling;

i) State cesses and surcharges insofar as they relate to supply of goods or services.

Note: GST would apply to all goods and services except Alcohol for human consumption. Thus existing central and state taxes will continue for it.

• GST on five specified petroleum products (Crude, Petrol, Diesel, ATF & Natural gas) would be applicable from a date to be recommended by the GSTC.
• Tobacco and tobacco products would be subject to GST. In addition, the Centre would continue to levy Central Excise duty.
• Exports would be zero-rated

A common threshold exemption would apply to both CGST and SGST. Taxpayers with an annual turnover of Rs. 20 lakh (Rs. 10 lakh for special category States as specified in article 279A of the Constitution) would be exempt from GST. A compounding option (i.e. to pay tax at a flat rate without credits) would be available to small taxpayers (including to specified category of manufacturers and service providers) having an annual turnover of up to Rs. 50 lakh. The threshold exemption and compounding scheme would be optional.

Input tax Credit

Input tax credit means at the time of paying tax on output one can deduct the tax already paid on input.

Credit of CGST paid on inputs may be used only for paying CGST on the output and the credit of SGST/UTGST paid on inputs may be used only for paying SGST/UTGST.

In other words, the two streams of input tax credit (ITC) cannot be cross utilized, except in specified circumstances of inter-State supplies for payment of IGST. The credit would be permitted to be utilized in the following manner:

• ITC of CGST allowed for payment of CGST & IGST in that order;
• ITC of SGST allowed for payment of SGST & IGST in that order;
• ITC of UTGST allowed for payment of UTGST & IGST in that order;
• ITC of IGST allowed for payment of IGST, CGST & SGST/UTGST in that order.

ITC of CGST cannot be used for payment of SGST/UTGST and vice versa. The transfer of funds would be carried out on the basis of information contained in the returns filed by the taxpayers. Input Tax Credit (ITC) to be broad based by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used in the course or furtherance of business. An audit of registered persons is to be conducted in order to verify compliance with the provisions of Act.

Benefits of GST

Make in India

• Will help to create a unified common national market for India, giving a boost to Foreign investment and “Make in India” campaign;
• Will prevent cascading of taxes as Input Tax Credit will be available across goods and services at every stage of supply;
• Harmonization of laws, procedures and rates of tax;
• It will boost export and manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive economic growth;
• Ultimately it will help in poverty eradication by generating more employment and more financial resources;
• More efficient neutralization of taxes especially for exports thereby making our products more competitive in the international market and give boost to Indian Exports;
• Improve the overall investment climate in the country which will naturally benefit the development in the states;
• Uniform SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighboring States and that between intra and inter-State sales;
• Average tax burden on companies is likely to come down which is expected to reduce prices and lower prices mean more consumption, which in turn means more production thereby helping in the growth of the industries . This will create India as a “Manufacturing hub”.

Ease of Doing Business

• Simpler tax regime with fewer exemptions;
• Reductions in the multiplicity of taxes that are at present governing our indirect tax system leading to simplification and uniformity;
• Reduction in compliance costs - No multiple record keeping for a variety of taxes- so lesser investment of resources and manpower in maintaining records;
• Simplified and automated procedures for various processes such as registration, returns, refunds, tax payments, etc;
• All interaction to be through the common GSTN portal- so less public interface between the taxpayer and the tax administration;
• Will improve environment of compliance as all returns to be filed online, input credits to be verified online, encouraging more paper trail of transactions;
• Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax return, common tax base, common system of classification of goods and services will lend greater certainty to taxation system;
• Timelines to be provided for important activities like obtaining registration, refunds, etc;
• Electronic matching of input tax credits all-across India thus making the process more transparent and accountable.

Benefit to Consumers

• Final price of goods is expected to be lower due to seamless flow of input tax credit between the manufacturer, retailer and service supplier;
• It is expected that a relatively large segment of small retailers will be either exempted from tax or will suffer very low tax rates under a compounding scheme- purchases from such entities will cost less for the consumers;
• Average tax burden on companies is likely to come down which is expected to reduce prices and lower prices mean more consumption.

Goods and Services Tax Network

For the implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders. The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/UT governments.

Goods and Services Tax Network (GSTN) has been set up by the Government as a private company under erstwhile Section 25 of the Companies Act, 1956. GSTN would provide three front end services to the taxpayers namely registration, payment and return.

Besides providing these services to the taxpayers, GSTN would be developing back-end IT modules for 27 States who have opted for the same. The migration of existing taxpayers has already started from November, 2016. The Revenue department of both Centre and States are pursuing the presently registered taxpayers to complete the necessary formalities on the IT system operated by GSTN for successful migration. About 80 percent of existing registrants have already migrated to the GST systems.

GSTN has selected 34 IT, ITeS and financial technology companies, to be called GST Suvidha Providers (GSPs). GSPs would develop applications to be used by taxpayers for interacting with the GSTN.

Project SAKSHAM Introduction of GST will result in a several-fold increase in the number of taxpayers and resultant document load on the system. CBEC's current IT system was set up in 2008. It cannot cater to the increased load under GST without an immediate upgrade of its IT Infrastructure. Further, CBEC has implemented the Indian Customs Single Window Interface for Facilitating Trade (SWIFT) and is integrating other partner agencies involved in Customs clearance in order to make the process simple and fast. The Customs EDI system which is currently operational at about 140 locations in India has to be extended to many more locations with improved response time and better service delivery. Taxpayers have to be given a facility for Upload of Digitally Signed Scanned Documents in order to reduce the physical interface with tax authorities and to increase the speed of clearance. CBEC also aims to introduce mobile services for taxpayers and departmental users to increase the outreach of its services. The Project SAKSHAM will help in: Integration of CBEC IT systems with the Goods and Services Tax Network (GSTN). Extension of Indian Customs Single Window Interface for Facilitating Trade (SWIFT) Other taxpayer-friendly initiatives under Digital India and Ease of Doing Business of CBEC. PROJECT INSIGHT The Project Insight is an ambitious project of the Income-Tax (IT) Department to effectively utilize the vast amount of information at its disposal more effectively to track tax evaders. This integrated platform would play a key role in widening of tax base and data mining to track tax evaders. The new technical infrastructure will also be leveraged for implementation of Foreign Account Tax Compliance Act, Inter Governmental Agreement IGA) and for Common Reporting Standard (CRS). Project Insight, through implementation of reporting compliance management system, will ensure that third party reporting by entities like banks and other financial institutions, is timely and accurate. It will also set up a streamlined data exchange mechanism for other government departments

Key challenges

GST preparedness among clients is missing

Clients' understanding of GST provisions and its impact on their business is still at a nascent stage, and many are still identifying the locations and places they need to be registered in. These businesses are also assessing the mandated GST-compliance their relevant functional departments need to adhere to, including their Supply Chain, IT Systems, and Legal. This is necessary for identifying their new Working Capital, Cash Flow, and Fund Flow needs. To be on the right side of the GST anti-profiteering clause, businesses are also assessing their cost sheets while performing Comparable Analysis of the pricing of goods and services, pre-and post GST.

Lack of Clarity on GST Provisions (Rules and Regulation)

Various provisions of GST are still ambiguous. Categorisation of goods and services in various cases is still unclear. Provisions for antiprofiteering, as well as the now-deferred e-way bill(till 1^st feb 2018), which tracks consignments across states, are unclear. The new tax regime requires transporters to generate e-way bills on the GST portals which includes incurring substantial costs to install radio frequency identification devices (RFIDs). Currently there is no clarity on who will bear the bill for the infrastructure. The government has also made the rules related to assessment and audit public, but the absence of actual forms in the public domain challenges the effectiveness of the rule.

Increased compliance, with increase in the number of returns to be filed annually

Businesses will need to file multiple returns, a minimum of 37 in most cases for assessees, and this can increase multifold in accordance with business models. Clients will need to ensure timely compliance by registered suppliers to ensure there is no loss of input credit. This will necessitate correct data and reports to fill accurate GST returns.

Preparedness of IT Systems

Various businesses are yet to map the accounting software and IT systems in line with the new tax provisions, to create GST invoices, and extract required reports. Tax and accounting professionals jointly need to ensure that their clients' current systems are compatible with their GST Service Provider (GSP). With GST demanding compliance, only days after guidelines were issued in their entirety, India Inc is rushed for time to modify the entire IT framework. Seamless implementation will require six million micro, small, and medium enterprises (MSMEs) to adapt their invoicing approaches for which they do not have adequate IT support and systems.

Lack of skilled resources and need for re-skilling

With GST rates and their complexities only recently becoming a part of our policy framework, skilled staff with updated GST subject knowledge and training are not easily available. This has placed an additional work load on personnel across industries, and created an urgent need for additional GST-skilled resources to ensure swift implementation.

While GST aims to streamline business and protect consumer interests, the legislation should not allow a sense of apprehension to impact industrial interests. GST is both a challenge and an opportunity for tax and accounting professionals, and a knowledge of cloud, big data, analytics, and business applications along with financial knowledge is the need of the hour.

Basic questions

GST and VAT: are they similar or different?

The full expression of the tax is Value Added on Goods and Services Tax. So it can be called VAT or GST, for short. So, both are same when both include service tax. But if service tax is not included, then it is only VAT.

What is an e-way bill?

E-way bill is an electronic way bill for movement of goods which can be generated on the GSTN (common portal). A ‘movement’ of goods of more than Rs 50,000 in value cannot be made by a registered person without an e-way bill. E-way bill will also be allowed to be generated or cancelled through SMS. When an e-way bill is generated a unique e-way bill number (EBN) is allocated and is available to supplier, recipient, and the transporter.

When should an e-way bill be generated?

E-way bill will be generated when there is movement of goods –

• In relation to a ‘supply’
• For reasons other than a ‘supply’ ( say a return)
• Due to inward ‘supply’ from an unregistered person

What is a ‘supply’ in case of e-way bill?

A supply may be –

• Supplied for a consideration (means payment) in the course of business
• Supplies made for a consideration (payment) which may not be in the course of business
• Supplies without consideration ( without payment)

Basically supply means –

• Sale – sale of goods and payment made
• Transfer – say branch transfers
• Barter/Exchange – Payment by goods instead of money.

Therefore, e-way bills must be generated on the common portal for all types of movements.

Who can generate e-way bill?

• E-way bill must be generated when there is a movement of goods of more than Rs 50,000 in value to or from a Registered Person. Registered person or the transporter may choose to generate and carry e-way bill even if value of goods is less than Rs 50,000.
• Unregistered persons or his transporter may also choose to generate e-way bill. Which means eway bill can be generated by both registered and unregistered persons. However, where a supply is made by an unregistered person to a registered person, the receiver will have to do all the compliances as if he’s the supplier.

How will be Inter-State Transactions of Goods and Services be taxed under GST in terms of IGST method?

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 Article 269A (1) of the Constitution. The IGST would roughly be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.

A diagrammatic representation of the working of the IGST model for inter-State transactions is shown in the following Figure:

Recent Reforms in GST

1. Rationalization of GST rate structure by the GST Council for a number of goods in terms of rate cuts, shifting from higher GST rate to lower GST rate, etc.
2. Rationalization of GST rate structure for a number of services by shifting them from higher GST rate to lower GST rate, exemption from levy of GST in case of certain services.
3. Ease of doing business for small traders by raising exemption limits for GST registration from Rs.20 lakh to Rs.40 lakh annual turnover in case of goods (for hilly and northeastern states, exemption limit was raised from Rs.10 lakh to Rs20 lakh).
4. Threshold for annual turnover for composition scheme extended to Rs.1.5 croreand Rs.50 lakh for manufacturers and suppliers of goods and services respectively.
5. Input-Tax Credit will be available to the taxpayer  only if the supplier has uploaded the invoice in GSTR-1 and filed it within the due date and the invoice is reflecting in the GSTR-2B of the taxpayer.
6. E-invoice has become mandatory for all the registered persons whose aggregate turnover exceeds Rs.50 crore.