The proposed goods and services tax (GST) moved one step closer to becoming a reality on 27 March when the Lok Sabha (lower house of the parliament) approved the four bills which are intended to subsume various central and state indirect taxes and to make India a single market for goods and services. The bills were introduced as money bills, which means that approval of the Rajya Sabha (upper house) is not required for passing the bills into law.
The central GST (CGST) law will give powers to the centre to levy tax on supply of goods and/or services and will subsume various central indirect taxes. The integrated GST (IGST) law will allow the centre to tax inter-state supplies of goods and services, while the union territory GST law will allow the centre to tax supplies in union territories without legislatures. Finally, the GST compensation to states law will give legal backing to the centre to compensate a state if its revenue growth rate falls below a prescribed percentage in the first five years of the GST roll-out.
After 10 years of delays, disruptions and changes to the GST proposals, the passing of these bills means that implementing GST from 1 July 2017 has become possible.
The GST Council, made up of central and state finance ministers, still has to make many significant decisions before GST is ready to be implemented. These include deciding rates of tax for over 5,000 categories for goods and services, various rules and procedures for executing GST and general administrative guidelines for assessment and tax collection. The GST Network – an IT backbone that requires all the taxpayers to report their GST transactions online – must also be ready by the commencement date.
In their present form, the CGST and IGST laws would not cover the state of Jammu & Kashmir. However, it is expected that this state will adopt the GST laws like the other states by the GST commencement date.
One of the contentious areas of GST has been the cap on the GST rate. The Opposition has suggested that the GST rate should be capped at 18% to ensure the burden of GST is contained. However, this has not been accepted by the government. The bills proposed to cap the GST rate at 40%. As noted above, the GST Council has yet to decide on rates and exemptions.
GST is likely to affect sectors such as real estate and infrastructure, banking and finance, manufacturing and e-commerce. The GST laws have streamlined the law relating to works contracts, which are composite contracts of goods and services for execution of works, but will have an impact on long-term contracts in this area. Transitional provisions for both manufacturing and trading sectors have been refined but require detailed study in certain situations.
The services sector has not been provided any option of centralized registration, despite repeated representations on the need for such an option. Unlike goods, services are intangible and need not be supplied from a single location. Therefore, multi-location service providers with offices in multiple states will need to ensure that the division of supply of services among the locations is neatly categorized and accounted to avoid any disputes relating to non-payment or wrong payment of tax to the centre or a state.
The banking sector continues to face a presumed disallowance of 50% of input tax credit due to non-taxed interest income for this sector. However, relief for this sector has been provided in the law where it relates to inter-unit supplies. The law provides that 100% of input taxes will be available to the receiving unit on inter-unit supplies.
The e-commerce sector continues to be a focus for GST. Provisions relating to tax collection at source and mandatory registration requirements for sellers on e-commerce platforms continue to be tricky areas for this sector. There are likely to be more guidelines in the rules and instructions as GST law evolves in this area.
GST will be Indian’s biggest tax reform and is an important achievement for the current government. While the proposed GST may contain certain shortcomings, it is expected to evolve rapidly over the next few years once implemented. It represents a substantial upgrade over the current law and is expected to achieve its goals of a simpler and more efficient indirect tax regime. Over the next few months, as the GST laws are understood and implemented, it is over to the taxpayers to organize and reap the benefits.
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