The Constitutional Amendment Bill (Bill) to facilitate the introduction of GST to replace multiple existing indirect taxes has been moved in Parliament on Friday, 19 December 2014, by the Finance Minister, after arriving at a consensus on the Bill with the States Governments. This Bill is to be passed by both houses of Parliament with two-thirds votes of the members present and by at least half the state legislatures by a simple majority.
The implementation of GST by April 2016 is the Government’s top priority today. It is understood that the procedural and documentary requirements for GST administration have been finalised and an essential computer network is in place. It is also indicated that draft model GST Bill is almost ready.
The introduction and implementation of GST will be a game changer for all stakeholders and not just a simple change in the tax structure. It will change the way organisations do business, requiring them to review their business models and business processes. Those who proactively take action and are ready to implement GST without transitional tax losses will be the winners in the present competitive environment.
Unlike other countries which have implemented GST, India will have a unique dual GST structure under which tax will be levied by both the Centre and the States on each transaction throughout the supply chain. Central and State GST will be levied on the same base value of each transaction and seamless credit of input taxes will be available throughout the supply chain. Thus, GST will cover the entire value chain and with seamless credit, cascading effect of the multiple existing taxes will be eliminated. GST will be levied on the supply of goods or services, which includes inter-state stock transfer by the same legal entity. There will be a single indirect tax applicable uniformly across the country.
Most of the existing taxes such as excise duty, countervailing duty, service tax, State value added tax (VAT), entry tax, various cesses and surcharges etc., on goods and services will now be subsumed within GST. There are, however, certain exceptions to the comprehensive GST. Petroleum products including crude oil will continue to be taxed under excise duty and VAT during the initial few years of GST implementation. Moreover, an additional tax of 1% will be levied on the inter-state supply of goods for the initial 2 years or more. Hence, the cascading effect will not be completely eliminated, at least for a few years.
A ‘GST Council’ will be constituted under Article 279A of the Constitution within 60 days of the amendment of the Constitution. The GST Council will determine the GST rates, tax exemptions to specific products, special tax provisions for states in the North East, Himachal and Uttaranchal, threshold limits for applicability of GST to a business entity, a model GST law and other GST related matters.
Impact of GST on the Indian economy and stakeholders
GST will integrate the Indian market and stimulate economic activities, potentially leading to an increase in GDP growth. It will reduce the cost of the indigenous manufacture of goods via the removal of tax cascading and therefore serve to make Indian industry more competitive. The tax base will be widened and compliance will be improved, bringing tax buoyancy and an improved tax to GDP ratio. Exports will become more competitive due to zero-rating and consequently, import parity will change. Services and distributive trade will have a higher tax incidence as both Central and State taxes will be applicable to these sectors, as compared to the single tax at present.
Corporates now have to gear up for GST
The move to the new tax structure will have a number of transitional issues. These include protection of unutilised taxes under CENVAT and State VAT, the modification of the computer system (to facilitate tax compliance under Central and State GST and availing full eligible tax credit), registration under the new tax system, GST compatible invoice formats, documentary and procedural compliance, identification of the implications of GST on units located in tax holiday regions etc. Hence, corporates and other tax payers will need to create awareness about the new tax structure among their operating management and gear up to keep pace with the changes and take appropriate actions relevant to their organisations.
The move to the GST structure provides a unique opportunity to re-engineer business models and processes and to improve one’s profitability and competitive advantage. The corporates and other tax payers can optimise the benefit by reviewing their supply chain, including their procurement system, manufacturing strategy, distribution and sales model and business processes involving operating management.
The introduction of GST will create a win-win situation for all stake holders, provided they can gear up and take advantage of this acute change in tax laws.