News › Indirect Tax Article

Evaluation of GST in India

4 May 2017

In the first of a two-part series, Rajeev Dimri of Taxand India, BMR provides an update on the progress made with the implementation of GST in India. Abundant headway has been made in the recent past towards implementation of an integrated Goods & Services Tax (GST) in India.  It all began with the passage of the GST Constitution Amendment Bill by the Indian Parliament in August 2016, and consequent ratification by more than 50 percent of the state governments within a span of a few weeks. Shortly after its enactment, the GST Council was set-up, a key decision making body, which is responsible for overseeing and administering GST. The GST Council comprises representation from both the central and state governments, and is expected to take important decisions like determining the GST rate as well as the various bands which are applied. 

Recent progress and milestones achieved

Today, the GST Council has already met and deliberated upon important aspects with respect to GST implementation in India. In fact, progress has been made in leaps and bounds in moving towards implementation of the new tax regime.  

An important milestone was the power sharing arrangement between the central and state governments for collecting/appropriating GST. Fearing loss of fiscal autonomy and loss of revenue, state governments had been pushing against GST, afraid that they would not be appropriately remunerated. However, after much deliberation, consensus was reached amongst various stakeholders at the GST Council meeting regarding administrative control under the new GST regime. While the broad principles have been agreed, finer details on the jurisdiction issue are yet to be concluded. This agreement between the various state governments and the central government is a significant milestone towards the implementation of the new tax regime. 

Further developments were made when the GST Council approved key legislation and allied GST rules to be presented before the Parliament for ratification. Very recently, the Indian Parliament passed four key GST related bills. Thus Central GST, Integrated GST, Union Territory GST and Compensation Cess bills were all passed by the Parliament on April 6, 2017. With India now at the brink of GST being implemented, the next step for the GST Council is to give final approval to the pending rules and regulations. 

Draft rules pertaining to input tax credit, valuation, transition and composition (released in the public domain on April 1, 2017) are thus scheduled to be formalised and approved by the GST Council. These rules provide fairly comprehensive coverage on key areas, as they deal not only with procedural requirements, but also give insights on substantive aspects. This set of final GST laws and rules has given abundant insight for businesses with respect to the preparation required with respect to IT systems, key documentation and process requirements and action steps to be undertaken so that they can prepare for the implementation of GST. 

With the imminent introduction of GST, enabling amendments are also required in the current indirect tax legislations, to give effect to the exemplar changes proposed by GST.  Such amendments are being carried out by amending the current tax related legislations. 

The India GST design

The purpose of GST in India is that of a destination based consumption tax, which is significantly different from the current tax regime in place under which taxes are applied to different activities such as manufacturing and the onward supply. 

Under the proposed regime, only ‘supply’ would attract the levy of GST. GST would comprise of Central GST (CGST) and State GST (SGST) / Union Territory GST (UTGST) which would be applicable on all intra-state supplies and Integrated GST (IGST) would apply on all inter-state supplies, along with imports. While there would be federal laws dealing with CGST and IGST, the SGST/ UTGST would be governed by separate legislation at the State and Union Territory level. These laws are based on the model law recommended by the GST council and the proceeds would be apportioned between the central and the state governments.

Under GST, credit of input taxes paid at each stage will be available at a subsequent stage of value addition, making GST essentially a tax only on value addition at each stage. The final consumer would bear the GST charged by the last business in the supply chain, with the ability for GST set off applied to each stage of the supply chain.

Thus, the proposed GST legislation will look to provide a level of uniformity for taxation (the same tax on goods and services), will allow for the removal of the cascading effect of taxes and will also aid improved competition. It should also be easier to administer, as the multiple taxes levied today would be replaced by GST and this new system will be supported by a robust IT system, hopefully making it more efficient to administer.

Although the GST Council has communicated that the basic tax structure for taxing goods under GST would be across rates of 5 percent, 12 percent, 18 percent, a high rate of 28 percent and a peak rate of 28 percent plus for luxury items, currently it remains to be seen which item would exactly fall under each tax rate. This is something which still needs to be determined. Similar to goods, a multi-tier rate structure is also being considered for taxing services- with a basic rate of 12 percent, a standard rate of 18 percent and luxury rate of 28 percent.

IT infrastructure – business requirement

Implementation of GST demands a whole new IT interface which would record all the necessary details of the transactions of the taxpayers for both goods and services. For this purpose, the GSTN, or the Goods and Service Tax Network (GSTN) has been set up, as a non-profit private limited company.  The primary objective of the GSTN is to provide a shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders for implementation of GST and also to act as an interface between the taxpayer and the authorities. The first immediate action in respect of setting up the IT interface is for the migration of all existing registrations under the state VAT/ CST laws, excise duty laws and service tax laws across to the new GST regime. 

Your Taxand contacts for further queries are:
Rajeev Dimri
T. +124 339 5050

Your global tax partner

Taxand's Take

With the momentum with which the Indian government has been meeting various implementation milestones off late, looks like GST would be a reality soon and would be in place by July 2017.  As a next step, the industry awaits passage of respective SGST laws and list of exemptions by various States and GST rates on goods and services by the GST Council.  These will lend the final platform to all businesses to conclusively gear their operations and IT systems to be ready for the impending GST Implementation. 

Taxand's Take Author

Section 385 regulations - is your business prepared?