Goods and Services Tax—A Beacon of Hope for Indian Economy
Amid economic crisis prevailing across the globe, India has posed a beacon of hope with ambitious growth targets, supported by a bunch of strategic undertakings such as the ‘Make in India’ and ‘Digital India’ campaigns and now it is the ‘Goods and Services Tax (GST’), which is likely to be rolled out from coming July 1, and will subsume central excise, service tax, Value Added Tax (VAT) and other local levies. It is another such undertaking that is expected to provide the much needed stimulant for economic growth in India by transforming the existing base of indirect taxation towards the free flow of goods and services. GST is also expected to eliminate the cascading effect of taxes. India is projected to play an important role in the world economy in the years to come. The expectation of GST being introduced is high not only within the country, but also within neighboring countries and developed economies of the world.
As multiple taxation will be eliminated and replaced by a single tax, the tax structure is expected to be much easier to understand. Paperwork will become simpler and there will be a reduction in accounting complexities for businesses. A simple taxation regime will also enhance the ease of doing business, making the manufacturing sector more competitive and saving both money and time. Experts opine that the implementation of GST would push up the GDP by 1% -2%. For most industrial products, GST rates have been slated at 18%. Today a manufacturer pays about 28-30% as taxes, so this means an average saving of around 10%. The lower tax rate is not the only benefit GST offers. It will provide a push to manufacturing in three big ways.
One, GST replaces eight central and nine state taxes such as central excise duty, service tax, state VAT and entry tax. This means the end of an era of multiple taxes levied at central, state and local levels, each with a different tax compliance system.
Two, GST reduces the cascading effect of taxes. An example will explain the current system. A manufacturer pays central excise at 20% on a shirt of value Rs 100. Next, the state government charges VAT not on Rs 100 but on Rs 120 which is the value of shirt and the tax already paid. VAT rate of 15% in effect becomes 18%, leading to a higher price of the shirt. GST resolves the issue by integrating tax systems of Centre and state. Also, GST is to be paid only on the value addition and not on absolute value.
Three, GST would lead to lower transportation and distribution costs. Currently, firms spend a high 5-8% as product distribution and warehousing cost. The main reason for the high cost is the expense incurred on branches and warehouses that exist due to tax saving rather than business considerations. This would further reduce cost.
The lower taxes, simplified tax structure, seamless tax credit facility and technology driven easy tax compliance system offered by GST provide an ideal platform to increase manufacturing’s share of GDP from the current 17.4% to 25% by 2025.
This would require India to expand its manufacturing value add to US Dollar 837.7 billion and manufacturing gross output to US Dollar 3.8 trillion by 2025. These are ambitious targets. Getting there would require a laser-like focus on the following four manufacturing categories.
Benefits of GST to the Indian Economy
- Removal of bundled indirect taxes such as VAT, CST, Service tax, CAD, SAD, and Excise.
- Less tax compliance and a simplified tax policy compared to current tax structure.
- Removal of cascading effect of taxes i.e. removes tax on tax.
- Reduction of manufacturing costs due to lower burden of taxes on the manufacturing sector. Hence prices of consumer goods will be likely to come down.
- Lower the burden on the common man i.e. public will have to shed less money to buy the same products that were costly earlier.
- Increased demand and consumption of goods. Increased demand will lead to increase supply. Hence, this will ultimately lead to rise in the production of goods.
- Control of black money circulation as the system normally followed by traders and shopkeepers will be put to a mandatory check.
- Boost to the Indian economy in the long run.
These are possible only if the actual benefit of GST is passed on to the final consumer. There are other factors, such as the seller’s profit margin, that determines the final price of goods. GST alone does not determine the final price of goods. By eliminating barriers such as entry taxes, GST will result in a unified national market for goods and services that will be accessible to the smallest entrepreneur. It could potentially make sourcing, distribution and warehousing of goods easier and faster between the Indian states. Also, as companies will no longer need to pay interstate taxes, implementation of GST will free up capital that they can now use in their business.
Though GST is not the solution to all the problems of India’s economy, it is nevertheless a revolutionary and long-pending reform. It is hoped that GST will boost economic growth and jobs, the ease of doing business, and higher tax collection. Even though it may be mostly beneficial, the implementation of GST will pose some challenges in the near-term, but it is hoped that such challenges and hurdles, if any, will be sorted out as GST is finally rolled out in India.
The key Dos and Don’ts While Claiming the Input Tax Credit
For claiming any input tax credit, all vendors in the supply chain have to be tax compliant. There is also a plan to rate all taxpayers on their GST score card — putting additional pressure on vendors to be GST-ready. Under the current system, a supplier can claim tax credit from the government irrespective of whether the vendor has met his tax obligations. That is set to change in the GST regime.
As experts say, “Vendor should pay tax before the same is claimed as input tax credit. The recipient must receive the tax invoice and supplies before claiming credit. Given the credits can be availed of only within the specified time limit, the date of issuance of invoice becomes important. “Monitor the payment of value for the goods or services within the period of 180 days, while keeping a track of the debit or credit notes. According to the draft rules, vendors should be paid within 180 days of claiming credit. “Credit should be claimed only for procurements related to taxable business supplies only,” opined an expert on GST.
Dos and Don’ts for Enforcement Agencies
Tax evasion of over Rs 5 crore under the Goods and Services Tax (GST) regime would be nonbailable offence, with the police having authority to make an arrest without a warrant. The Central GST (CGST) Act provides that if the offences relating to taxable goods and/or services where the amount of tax evaded or the amount of input tax credit wrongly availed or the amount of refund wrongly taken exceeds Rs 5 crore, shall be cognizable and non-bailable.
On Goods and Services Tax (GST), the Central Board Excise and Customs said other offences under the act are non-cognizable and bailable. Cognizable offence means serious category of offences in respect of which a police officer has the authority to make an arrest without a warrant and to start an investigation with or without the permission of a court. Non-cognizable offence means relatively less serious offences in respect of which a police officer does not have the authority to make an arrest without a warrant and an investigation cannot be initiated without a court order, it said.
If a person is arrested for a non-cognizable and bailable offence, the Deputy/ Assistant Commissioner of CGST/SGST can release him on bail and he will be subject to the same provisions as an officer in-charge of a police station under section 436 of the Code of Criminal Procedure, 1973.
If a person does not appear before a CGST/SGST officer who has issued the summons, he is liable to a penalty of up to Rs 25,000. Also, the tax department have guidelines to ensure that summon provisions are not misused by field officers.
As per the guidelines, summons is to be issued as a “last resort where assesses are not co-operating and this should not be used for the top management. Also the language of the summons should not be harsh and legal which causes unnecessary mental stress and embarrassment to the receiver,” it said.
Further, summons by the superintendents should be issued after obtaining prior written permission from an officer not below the rank of Assistant Commissioner with the reasons for issuance of summons to be recorded in writing.
“Senior management officials such as CEO, CFO, General Managers of a large company or a Public Sector Undertaking should not generally be issued summons at the first instance. They should be summoned only when there are indications in the investigation of their involvement in the decision making process which led to loss of revenue,” said the guidelines.
The Central GST (CGST) and State GST (SGST) Act have empowered the officers from Police, Railways, Customs, village officers, and any other government officers to assist CGST and SGST officers under the GST regime.
Provision for a higher cash flow requirement in the new system
Levy of GST on inter-state stock transfers would be one of the many reasons which would push up the requirement of cash flows. For instance, a company transferring goods from one warehouse to another across different states will come under the ambit of IGST. This means taxes have to be paid upfront, increasing the cash requirement for the business.
Another reason for higher cash flow requirement for businesses would be the higher average rate of service tax under the GST regime. Businesses currently pay around 15 per cent (including the various cesses) on services. This is likely to jump to 18 per cent in the GST regime. Experts note exporters too would need to bear the brunt of the tax, before claiming rebate.
The likely challenges in determining the place of supply for services
Service providers such as banks and insurance companies have to register separately in all the states in which they are providing services. This state-wise registration will substantially increase compliance costs of businesses. Experts note the place of supply rules under the current regime of service tax is applicable only to cross border transactions.
Going forward, similar rules would be applicable to every transaction whether domestic or international. Most experts feel the rules for the place of supply of services has the potential to trigger legal dispute for taxpayers.
GST impact on Indian Economy
Reduces tax burden on producers and fosters growth through more production. The current taxation structure, pumped with myriad tax clauses, prevents manufacturers from producing to their optimum capacity and retards growth. GST will take care of this problem by providing tax credit to the manufacturers.
Different tax barriers, such as check posts and toll plazas, lead to wastage of unpreserved items being transported. This penalty transforms into major costs due to higher needs of buffer stock and warehousing costs. A single taxation system will eliminate this roadblock.
There will be more transparency in the system as the customers will know exactly how much taxes they are being charged and on what base.
GST will add to the government revenues by extending the tax base.
GST will provide credit for the taxes paid by producers in the goods or services chain. This is expected to encourage producers to buy raw material from different registered dealers and is hoped to bring in more vendors and suppliers under the purview of taxation.
GST will remove the custom duties applicable on exports. The nation’s competitiveness in foreign markets will increase on account of lower costs of transaction.
A Brighter Economy
The introduction of the Goods and Services Tax is going to be a very noteworthy step in the field of indirect tax reforms in India. By merging a large number of Central and State taxes into a single tax, GST is expected to significantly ease double taxation and make taxation overall easy for the industries. For the end customer, the most beneficial will be in terms of reduction in the overall tax burden on goods and services. Introduction of GST will also make Indian products competitive in the domestic and international markets. Last but not least, the GST, because of its transparent character, will be easier to administer. Once implemented, the proposed taxation system holds great promise in terms of sustaining growth for the Indian economy.
India should move quickly as the factories are easy to develop and can employ millions of people who can move from agriculture or informal sector to formal jobs. Labour law reforms are a critical factor in facilitating large scale employment.
GST will raise India’s productivity and reduce prices. Combining GST with a clearly articulated manufacturing strategy would attract global investments, create jobs and make India a large manufacturing nation within a few years.