An historic meeting of the Goods and Services Tax Council on 18 and 19 May 2017, sealed the fate of some of the most critical aspects of the GST regime expected to be implemented in India, with effect from 1 July 2017. The GST Council is a body constituted by representatives of the Central Government and various State Governments in India, to decide on the framework of the new indirect tax regime, the manner of implementation, amendments to the law from time to time, tax rates, and procedural aspects, etc. This article highlights some of the salient features of the impending GST regime. However, it is first important to understand the existing indirect tax framework in the country, to better grasp the impact of the upcoming shift in India's GST regime.
One of the significant factors which currently disincentives foreign investments into India (as compared to other growing economies) is its complex indirect tax structure. As a result of having multiple taxes at various levels (Central and State levels), India's GST regime is riddled by the cascading impact of these taxes, the need to obtain multiple registrations, tedious compliance obligations, as well as the need to interact with multiple tax authorities. A high-level summary of the various taxes/levies is encapsulated in the table below:
The new GST regime will subsume all of the above levies (other than BCD on imports and entertainment taxes by municipalities) into a single unified tax regime, thereby introducing much needed simplicity to India's indirect tax regime. This change would allow businesses to focus on commercial and operational efficiencies, rather than tackling tax efficiencies in the conduct of their operations in India. An immediate preparatory step for companies would therefore be, in addition to setting up their processes to meet with various legal requirements of GST legislation, to undertake a 'product-plant allocation' analysis and a 'depot/warehouse rationalization' analysis with a view to synergize its operations and achieve overall operational efficiencies. The new GST regime is likely to change the face of India on the global map from an "ease of doing business" perspective, and encourage foreign investments, either by global entities setting up operations in India, or multinationals expanding their existing operations in India. Some of the significant features of the GST regime to be introduced in India are as follows:
- Dual GST structure: In keeping with India's federal system of government, India will adopt a 'dual GST structure' where the Central Government will levy a Central GST, and at the same time, State Governments/Union Territories (UT) will levy State GST/UTGST on all intra-State supplies, ie supplies of goods and/or services made to a recipient located in the same State. On inter-State supplies, an Integrated GST (IGST) will be levied by the Central Government. The IGST rate will be a sum total of the rate of the levies of CGST and SGST. The administration of all levies of GST will be unified, with a single return to be filed for inter-State and intra-State transactions and tax payments.
- Introduction of the concept of 'supply': GST is a tax on 'supply', which is defined to include all forms of supplies such as sale, transfer, barter, exchange, license, rental, lease and disposal for a consideration. Certain specified activities even if not for consideration are defined to be supplies, e.g . supplies between related persons or branches of an entity. The introduction of the concept of supply is a shift from the existing concepts of manufacture, service etc. for the levy of indirect tax.
- Place of supply of goods or services: Determining the Place of Supply is important in determining the appropriate State Government, in whose treasury the tax is to be deposited. As GST is contemplated as a destination / consumption based value added tax, the Place of Supply of goods is by default the location of the recipient. This is subject to certain exceptions for which the place of supply is prescribed.
- Addressing cascading of taxes at multiple levels: Under the GST regime, the restrictions on set-off for input taxes will be minimal and there will be full fungibility of credits between Central and State taxes through the mechanism of IGST. This will address the cascading of taxes that Indian businesses are presently faced with.
- GST rates: The GST Council has finalized the rates of GST for most goods and services. Goods are classified under six rate slabs, viz. 0%, 5%, 12%, 18%, 28% and 28%+cess, while services under four rate slabs, viz. 5%, 12%, 18% and 28%. Alcohol and petroleum products have been kept outside the purview of GST, while excise duty and VAT on these products will continue. Exports are zero-rated, while import of goods are subject to IGST and import of services are taxable (to IGST) under the reverse charge mechanism (ie tax will be payable by the recipient of service in India).
- Single point of contact: For the first time in India, Indian business will interact with tax authorities, as well as other Indian businesses, through a single pan-India platform called the GSTN portal. Every registered dealer will have to input all transaction-related information into the GSTN portal to ensure proper data exchange and cross-confirmation of credits between suppliers and recipients of goods and services.
- Turnover threshold: The turnover threshold for GST registration and compliance is INR 2,000,000 (INR 1,000,000 for North Eastern & Special Category States), except in certain specified cases where the person may be liable to pay GST even if the threshold limit has not been crossed by him. The new GST regime enables businesses to voluntarily register even without achieving the threshold turnover.
- Taxation of the digital economy: The GST legislation provides for the taxation of e-commerce transactions and Online Information and Database Access or Retrieval (OIDAR) services. Under the new GST regime, these services provided by overseas companies will also be taxable in India. Such companies would thus be required to obtain GST registration and be subject to compliance obligations in India, even if they do not have a place of business in India. To facilitate compliance, these overseas companies may appoint an agent or representative in India to carry out the GST compliance obligations.
The new GST regime, along with the effective operation of the GSTN, will make the indirect tax regime in India more hassle-free and business-friendly. However, given the short period of time to the implementation of the new regime, the challenge for businesses would be their preparedness and ability to adapt to the major shift in India's GST regime on 1 July 2017. This would involve, among other things, an understanding of new concepts now applicable under the GST legislation, as well as the positions taken by tax authorities.