In India, significant progress has been made towards the implementation of what is being referred to as the largest tax reform in the country since the inception of the Indian Constitution, the Goods and Services Tax (GST). The first week of the Indian financial year of 2017 (April to March), witnessed the Indian Parliament passing the final set of GST laws, including legislation for central GST, integrated GST, Union Territory GST and Compensation Cess. Given the significant developments on the legislative front, it has been made very clear by the Indian Government that it has no intention of deferring the implementation of GST beyond 1 July 2017.
Current Indirect Tax structure in India
In order to appreciate the nuances of the much-awaited Indirect tax reform, it would be relevant to broadly understand the existing Indirect tax structure in India. The present Indirect tax system is complex due to various reasons, primarily because the present system is a multi-tiered rate structure. By way of example, the current federal Indirect taxes on goods (namely excise and customs duties) have 8 rate bands and several specific rates of tax which apply to different product types. This is coupled with the fact that there are exemptions provided for approximately 300 items. On the other hand, the state value added tax (VAT) laws provide for fewer rate bands and exemptions for taxing goods. Further, the base on which state level VAT is imposed considers the taxes levied from Central Government, resulting in a cascading of taxes. With respect to services, although the Central Government provides for a single rate, there are close to 10 rate bands in practice after accounting for the ‘abatement’ and valuation norms which are applied.
New GST Rules
GST ushers in a significant shift from the multiple triggers for taxation (‘Manufacture’ for excise duty, ‘Sale’ for VAT etc.) applied under the existing legislation, to a single trigger of ‘Supply’. It is therefore important to understand what will be considered as a supply in the context of GST, as this would be the starting point of any tax liability under the new rules. For a transaction to be taxable under GST, there must be a supply of goods, or services, or both (this would cover all forms such as sale, transfer, barter, exchange, license, rental, lease or disposal) and such supplies should be made, or agreed to be made, for a consideration in the course or furtherance of business. Similar to other existing GST systems in place across the globe, credit for GST paid on procurements, would be available as credit and such credit may be used to set off their GST liability in respect of the output GST due to the Indian Tax Authorities on their supplies. Another unique feature, more significant for businesses who have offices across India, is that intra-entity supply of goods and/or services, with or without consideration, between different offices/ branches in different Indian States will be considered a ‘supply’ for the purposes of GST, and therefore will attract a levy of GST.
The rate structure of GST, as decided by the GST Council, which comprises of various State Finance Ministers and is headed by the Union Finance Minister, has now been finalised. The decision process has taken into account the expansion of a credit base for various sectors, coupled with a conscious effort to maintain the present rate structure as far as possible. In addition to this, due to the disparity between the rates on luxury products and non-luxury products, the Government’s GST policy has clearly taken this into consideration, and there is a focus on taxing such luxury goods at a higher rate. By way of example, large cars and SUVs would attract the peak GST rate of 28%, along with compensation of 15%, while ordinary household items have been given either an exemption from GST or have been levied at either 5% or 12%. As far as services are concerned, there is likely to be a shift from a uniform tax rate regime to a multi-tier structure under GST. Services will fall under GST brackets of 5%, 12%, 18% and 28%, and this appears to be in sync with the overall intent of increasing the GST rate for high-end services, while keeping the impact on essential services to a bare minimum.
Indian GST reform – Almost 20 years in the making……..
Whilst the idea of a nationwide Indirect tax reform was conceived as early as the year 2000, it has taken the Indian Government approximately 2 decades to finalise the steps for the implementation of GST. The journey towards GST implementation has not been so smooth for the Union Government of India as it has time and again dealt with resistance from different States due to various political, social and economic grounds. However, more recently, there has been a more cohesive effort between legislative bodies to make GST a reality in India. From a business perspective, whilst companies are understandably apprehensive of the transitional phase, they realise that in the long run, GST is beneficial for the wider Indian economy and for trade and enterprise in the country.
Despite the various challenges faced by the Indian Government, it has continued to show a steel resolve to implement GST from 1 July 2017 and the Government is focused on ensuring a smooth and successful transition. While the GST law may not be free from anomalies and is likely to evolve over a period time, the initial implementation will certainly be a focus for both businesses and tax practices across the globe who will be waiting to see if the roll out achieves its overarching objective of ‘One nation, One tax, One market’.