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The complete guide to understanding India’s biggest tax reform—the GST

India-Goods and Services-GST
Reuters/Anindito Mukherjee
India’s finance minister is leading the charge to introduce the GST.
  • Abhishek A. Rastogi
By Abhishek A. Rastogi

Associate director, PricewaterhouseCoopers India

Published Last updated This article is more than 2 years old.

India’s biggest indirect tax reform since 1947 looks like it has finally arrived—the Goods and Service Tax (GST).

From its first official mention in 2009 when a discussion paper was introduced by the previous United Progressive Alliance government to the point when the current Modi government tabled the Constitution Amendment Bill in the parliament, building consensus on the GST hasn’t been easy.

The most prominent hurdle in introducing this new tax structure has been the ongoing struggle between the states and the centre on the loss of revenue. It’s taken years to resolve, but even now it is an issue that isn’t anywhere close to being completely fixed.

Nonetheless, the introduction of the Constitution Amendment Bill in the parliament seems like the first key step towards bringing in the belated GST reform.

Why does India need the GST?

The GST is being introduced not only to get rid of the current patchwork of indirect taxes that are partial and suffer from infirmities, mainly exemptions and multiple rates, but also to improve tax compliances.

The spread of GST in different countries has been one of the most important developments in taxation over the last six decades.

Owing to its capacity to raise revenue in the most transparent and neutral manner, more than 150 countries have adopted the GST.

With the increase of international trade in services, the GST has become a preferred global standard. All OECD countries, except the US, follow this taxation structure.

The proposed framework

The center and the states are now trying to settle on the design and implementation of a uniform GST across the country.

The unified tax will take the form of a “dual” GST, to be levied concurrently by both the levels of government. The unified tax will comprise of a Central GST and a State GST, which will be legislated, levied and administered by the respective levels of government. The same taxable base will be subject to both GSTs.

The words “legislate, levy and administer” are key, since the center and the state will legislate the respective GST Acts and both will have power to administer the taxes.

The proposed tax system will subsume a variety of central and state levies such as Central Excise Duty, Service Tax and VAT, thereby simplifying the complicated tax structure and reducing compliance costs.

For tackling the complicated issues related to inter-state transactions, an innovative Integrated Goods and Services Tax is also under consideration.

The fine print

The Bill, cleared by the cabinet on Dec. 17 and thereafter introduced in the parliament, has attempted to introduce the definition of GST.

It is defined as any tax on the supply of goods or services that will subsume CENVAT, service tax, central excise duty, additional excise duties, excise duties levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, service tax, additional customs duty (countervailing duty or CVD), special additional duty of customs (SAD), central surcharges and cesses, State VAT, State sales tax, entertainment tax not levied by local bodies, luxury tax, taxes on lottery, betting, and gambling, tax on advertisements, State cesses and surcharges related to supply of goods and services and entry tax not levied by local bodies.

The primary reason for introducing the Bill is to pave the way for the centre to tax sale of goods and the states to tax provision of services. The Bill further proposes that the central government will have the exclusive power to levy GST on imports and inter-state trade.

The bill has also recognized the need to have a GST council. The union finance minister, the union minister of state in charge of revenue or finance, and the minister in charge of finance or taxation or any other minister nominated by each state government would constitute the council to ensure that both the centre and the states are on an equal footings.

In addition, the Bill proposes to set up a Dispute Settlement Authority that would look into disputes between the States and the Centre. Appeals from the authority would directly lie with the Supreme Court.

But, for the time being, the Bill has kept certain goods out of the purview of GST, which have been a point of contention between state governments and the centre.

These include:

  • Petroleum crude
  • High speed diesel
  • Petrol
  • Natural gas
  • Aviation turbine fuel
  • Alcohol for human consumption.

States shall have the power to levy taxes on these items, except in the case of imports and inter-state trade.

Another important feature of the Bill is a proposal to levy additional tax on supply of goods on inter-state trade. The additional tax will not exceed 1% and will be collected by the central government for a period of two years. Finally, the amount so collected will be assigned to the states from where the supply originates.

How does this help you?

A unified GST is an economically efficient solution even for the multinationals, which have to compete with the companies in unorganized sector, as it simplifies the indirect tax structure to one general rate that can be paid by all companies.

Under the GST structure, every company gets a deduction on the taxes already paid by its suppliers. That results in every buyer ensuring that his supplier has paid his part to claim his deductions.

With the introduction of the Bill, the signal that the Modi government seems keen to send is that all the key decisions could well be in the hands of the GST Council. With both representatives from centre and states in place, the latter would likely have a say in the implementation of tax laws in their territories.

Moreover, full compensation for the first three years for any kind of revenue loss may work wonders to dilute the initial apprehensions of the states regarding losing income post the introduction of GST.

With the central government going that extra mile to take care of the interest of the states, one will have to wait and see if the states too return the favour by ratifying similar bills in their assemblies with the much needed two-third majority.

In the meantime, the GST implementation deadline of April 2016 is looming.

The views expressed are that of the authors in their personal capacity and do not reflect the views of PricewaterhouseCoopers.

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