Introduction

The importance and urgency of the introduction of goods and services tax (GST) was effectively demonstrated in the finance minister's recent speech. The minister reiterated that the new GST regime will come into force on April 1 2016.

The introduction of GST is expected to create a state-of-the-art indirect tax regime for India. According to the finance minister, along with a revamped direct tax regime, GST will bring greater transparency and investment opportunities; as such, it is expected to be a game-changing tax reform. The following excerpt from the finance minister's speech best expresses the focus on GST:

"GST is expected to play a transformative role in the way our economy functions. It will add buoyancy to our economy by developing a common Indian market and reducing the cascading effect on the cost of goods and services. We are moving in various fronts to implement GST from the next year."

Proposed changes to tax regime

The Economic Survey 2014-15 (February 27 2015) recognised the need for a well-designed GST regime, preferably one with an "internationally competitive rate and with narrowly defined exemptions".

In order to prepare for the introduction of GST, the following changes to the indirect tax regime were proposed:

  • exemptions from education cess and secondary and higher education cess on all excisable goods (effective from March 1 2015) and taxable services (the effective date has not yet been determined);
  • an increase in the effective rate of central excise duty from 12.36% (including cess) to 12.50%, as well as an increase in the effective rate of service tax from 12.36% to 14%;
  • pruning of the negative list of services and exemptions under service tax laws; and
  • a two-day turnaround for the grant of registration under central excise tax and service tax laws.

Comment

To achieve the April 1 2016 target date, the following key steps must be taken:

  • expeditious passage of the 122nd Constitution Bill 2014, which entails:
    • ratification of the bill by a majority of the total membership of each house of Parliament and by a majority of at least two-thirds of the members of the house present and voting;
    • ratification of the bill by at least half of the states through resolutions; and
    • assent by the president;
  • circulation of central and state model legislation, including point of supply rules;
  • encouraging consensus among the states by compensating them for loss of revenue arising from the implementation of GST;
  • designing an efficient and capable IT backbone to support the new regime; and
  • agreement between the central government and the states on threshold exemption limits and tax rates.

A concrete roadmap for the above steps would have complemented the optimism shared by investors. Instead, the finance minister announced that a political agreement on GST had been reached which will allow the 122nd Constitution Bill to be passed.

For further information on this topic please contact Rohan Shah, Aqeel Sheerazi or Santosh Maurya at Economic Laws Practice by telephone (+91 22 6636 7000) or email (rohanshah@elp-in.com, aqeelsheerazi@elp-in.com or santoshmaurya@elp-in.com).

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