GST by Ashok Batra
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Transcript of GST by Ashok Batra
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Ashok Kumar BatraA.K.Batra & Associates
Chartered AccountantsA-36, First Floor, Ring Road,
Rajouri Garden, New Delhi-110027Ph. 25161015, 25161016
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Concept
Authorities involved in the decision making process.
Constitutional background and amendments required
Various possible models
Challenges in decision making
Impact on business under different models
Conclusion
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Existing System of Indirect Taxes:
Customs Duty on Imports
Excise Duty on Manufacture of Goods
Service Tax on rendering of services VAT on sale of goods and deemed sales
Central Sales Tax on Interstate sales
Entry Tax, Octroi on entry of goods in state
Luxury Tax on services in Hotel and Restaurants.
Entertainment Tax
This is indicative but not exhaustive list.
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GST
All indirect taxes to subsume in one taxation laweffective April 2010 : GST.
Taxes on property and Taxes on Income being part ofdirect taxes continue to coexist as the only other twoforms of taxes.
No other tax on a transaction is levied in any other form.Transaction tax Better terminology
All transactions for all goods or services shall be liable totax without discrimination, except the rate of tax.
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Area based exemptions to promote a state or region shall go.
Person based exemptions shall go. Eligible persons shall apply
for refunds. Exports remain zero rated.
GST shall operate in VAT mode.
All trade barriers to be removed, so that taxes on all inputs be
eligible to credit / setoff against output tax. This is like making
the country as single free market.
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State Governments
Central Government - Finance Ministry
Commission on centre-state relations
Interstate council of India
Empowered Committee of State Finance Ministers
Thirteenth Finance Commission
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Implementation of GST shall depend upon suitableamendments in the constitution of India.
Constitution permits states and centre to levy, collectand appropriate taxes.
List I (Union List) to the Seventh Schedule to the
constitution enumerates matters on which Parliamenthas exclusive power to make laws.
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List II (State List) enumerates matters, exclusively inthe domain of the states. Sales Tax on sale / purchaseof goods lies in this list.
List III is the concurrent list empowering both to levy
tax on a subject.
In terms of a residuary clause in the List I, the powerto tax services could fell upon the central government.
Article 268A was inserted in the constitution on May8th, 2003.
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Article 268A is subject to ratification by a requisite
number of states and provides:
Taxes on services shall be levied by the GOI and such
proceeds shall be collected and appropriated by the Centre and
the states.
Parliament shall have exclusive power to formulate law for
collection and appropriation of the proceeds for any financial
year, amongst the states and the centre.
Consequently, entry 92C Taxes on Services was inserted in
List I.
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Thus GST is proposed to be a single law to taxsubjects that lie in different lists as far as powers tolevy and collect taxes are concerned.
Without suitable amends in the constitution, the levyof GST as a single tax is not possible. Any effort tolevy the taxes separately by various governments andcollecting and appropriating such taxes jointly, shall
be a compromise.
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Models may vary in terms of:
Various laws that get subsumed in GST
Manner of Implementation
xSingle Chain Inter state VATable
x Dual Chain Separate chains for states and Centre
with zero interstate / inter-chain VATability.
Nature of items included in the respective chains
Machinery for Levy, Collection & Appropriation
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Jharkhand
Iron ore sold for Rs.100/-
Maharashtra
Pallets & Sheets
sold for Rs. 150/-
Gujarat
Utensils sold for Rs.250/-
Delhi
Product consumed
for Rs. 300/-
GST Rs. 10/- GST Rs. 5/- GST Rs. 10/- GST Rs. 5/-
NO GST NO GST NO GST GST Rs. 30/-
State
Jharkhand
Maharashtra
Gujarat
Delhi
Model I
(Not- Vat-able)
10
5
10
5
Model II
(Interstate vat-
ability)
0
0
0
30
MODEL-I
MODEL-II
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Jharkhand
Maharashtra
Interstate sale
Gujarat
Dealer
A
Dealer
B
Dealer
C
Sale Price Rs. 110/-
GST Rs.11/-
Credit Rs.0/-
Sale Price Rs. 125/-
GST Rs. 12.5
Credit Rs.11/-
Sale Price Rs. 150/-GST NIL
Credit Rs. 12.5
Sale Price Rs. 100/-GST - Nil
T-1
T-2
T-4
T-3
Conclusion : Revenue to States = NIL
Maharashtra Revenue=11+1.5-12.5 = 0
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The Joint Working Group (JWG) ofEmpowered
Committee (EC) laid down variousrecommendations. Few of them are:
The committee has suggested that GST, when it rolls out
on 1 April 2010, have two components - a Central tax and
a single uniform state tax across the country;
A tax over and above GST may be levied by the states on
tobacco, petroleum and liquor; may likely help the report
find favour with the states; This is however against the
spirit of GST and has a cascading impact. States must tax intra-state services while inter-state
services must remain with the Centre.
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The GST may not have a dual VAT structure but aquadruple tax structure. It may have four
components, namely a central tax on goods extending up to the retail level;
a central service tax;
a state-VAT on goods, and
a state-VAT on services.
Given the four-fold structure, there may be at leastfour-rate categories- one for each of the components
given above. In this system the taxpayer may berequired to calculate tax liability separately for thedifferent rates of tax;
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The report had also mooted elimination of the area-basedand sectoral excise duty exemptions that are being given
by the Centre.
Proposed GST rate is 20%
Central cess like education and oil cess may be keptoutside the dual GST structure to be introduced fromApril 2010. Besides central cess, purchase tax and octroi,which are collected at state and local levels is also
proposed to be outside the GST framework;
There is no clarity on the collection machinery and themethod and formula of appropriation.
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Both, state and centre have a strong tax collection
and administrative machineries and one of these maybe left redundant .
The report has also recommended keeping stamp
duty, which is a good source of revenue for states,out of the purview of the GST. Stamp duty is leviedon transfer of assets like houses and land;
It has also suggested keeping levies like the toll tax,environment tax and road tax outside the GST ambit,as these are user charges; and
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The levies which are in the nature of user chargers androyalty for use of minerals must also be kept out of the
purview of the proposed tax.
The report is contradictory to the report of the KelkarTask Force (KTF) in as much as KTF recommendations
vouched for implementation of a single union GST andthis poses a lot of constitutional hurdles demandingmany amendments to the existing articles of ourconstitution.
The EC report reflects unwillingness of the states to loseto the power of the centre.
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Model A
Common code of law with defined revenue share for stateand centre and a common and independent administrativemachinery. Possible only with major constitutionalamendments.
State GST : Local Taxes on manufacture and sale of goodsalong with tax on identified localized services. 77 Services
have been so identified of which 44 are still out of servicetax list.
Central GST : Tax on remaining nature of transactions.
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Interstate transactions to be taxed at special rates with
facility of input credit against state VAT of destination
state. Inter Chain VAT-able
Unified TIN for countrywide operations, with compulsory
bifurcation of data based on region of operations.
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Model B
Separate but uniform code of law for each state with asingle code for central GST. Defined revenue share forstate and centre and a separate administrative machineryfor each state. Possible with adoption of common law bystates.
State GST : Local Taxes on manufacture and sale of goodsalong with tax on identified localized services. 77 Serviceshave been so identified of which 44 are still out of servicetax list.
Central GST : Tax on remaining nature of transactions.
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Retail interstate transactions to be taxed at central GST.
Wholesale interstate business to be at zero rate againstforms.
Inter-chain VAT-ability not available. No loading on costs
due to availability of local GST credit. Inequitable shift oftaxes from Value Adding state to consuming state.
National Tax Tribunal to be fully activated for all dispute
settlements.
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Rendering of services can not be equated to selling ofgoods in terms of: Transfer of property.
Movement from one state to another.
Storage and stocks
Services are normally produced and delivered at thesame time and are seldom capable of being stored.
Thus defining the basis of tax shall be a critical issue.
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If the criteria of tax continues to distinguish between
goods and services, taxing them at different rates, theexisting controversies shall continue .
A new series of classification disputes may arise for
borderline items of the two chains.
Indivisible Work contract transactions involving multiple
states shall not only continue to be vexed, they shall be
more complicated. The additional issue, which chain totax in, may arise.
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Import & Export of services are already vexed issues
and become more complicated when individual stateinterest shall be involved.
Taxes on Petroleum products as a policy have been
kept high with no VAT or CENVAT availability. Thisresults in cascading effect on taxes. Shall have to becurbed.
Need for multiple registrations in all states shallcontinue for omnipresent enterprises. This is not a costeffective model.
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States can be classified in to:
Industrial
Agricultural & Mining
Trading
Consuming
The GST model shall have to account for the
classification differences of the states. Financially
equitable solutions may be Politically inequitable.
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In the absence of a robust electronic control of
transactions, the system shall malfunction.
With two chains facilitating inter chain credit the
complexity shall grow many fold. With a 70% rural area
and a higher rural population this target is difficult to
achieve.
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The nature of constitutional changes required in this casealter the fundamental shape of the constitution.
Analytical data between goods & services may be lost.
In the absence of a robust electronic control of transactions,the system shall malfunction. With a 70% rural area and ahigher rural population this target is difficult to achieve.
Economy for small units may be disrupted.
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Booster to TAX : GDP ratio. Barrier Free input creditavailability across goods and services and across statesand UTs shall give unbeatable competitive advantageto a VAT chain constituent over the Parallel Economy
constituent. This will result in mass conversion to VATchain thereby improving on tax collections.
Equitable geographical distribution of taxes makecountry a single competitive market.
Exports become cheaper and competitive.
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Cascading impact of taxes shall reduce thereby bringing down
prices and boosting sales.
Relief from classification blues between goods and services
and works contracts.
Number of tax rates are likely to reduce. Tax content in sale
price is also likely to reduce.
Reduction in dispute percentage is likely to be achieved.
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India becomes an attractive FDI destination.
Blanket coverage of transactions, if any, is
likely to kick-start a new series of litigation.
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GST
IS
AWELCOME
REFORM
May good sense prevail upon all
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THANKSAshok Kumar Batra
A.K.Batra & Associates