GST in India

Welcoming the passage of Goods & Services Tax (GST) Bill in the Lok Sabha, industry and experts said roll out of the new tax regime would add  around 1.5 percentage points to the economic growth and create a common market across the country. This is certainly the first step in making India an unified market, and one of the most extensive and far-reaching reform in the tax domain, which would boost industrial growth & economic progress. The GST is a comprehensive value-added tax that will be levied concurrently by the Centre and the states in the form of a Central GST and State GST, and will replace almost all key indirect taxes (like Central excise, Service tax, VAT and Sales tax) barring customs duty and some local levies, on all transactions in goods and services be it sale of goods or services or even stock transfers.

GST is expected to result in a reduction in the cost of doing business by removing the cascading effect of taxes especially for automotive distributors, which attracts high rates of CENVAT duties as well as VAT at State level, in addition to other levies such as NCCD, Auto cess, entry taxes, octroi, registration charges and road taxes. Automobile exports are also likely to benefit, as embedded taxes in India’s export prices will be eliminated.

Under the GST regime, with no embedded tax costs on inter-state movement of goods (CST or entry taxes) and a shift in the point of taxation to the consumer ultimately, businesses would have greater flexibility to re-design their supply chains and thus, optimize logistics costs.

Significant progress has been made on the introduction of GST in the last 5 years, including the issuance of a White Paper and the First Discussion Paper by the Empowered Committee; reduction of CST from 4% to 2%; partial alignment of tax credits on goods and services under CENVAT Credit Rules; introduction of Negative list based taxation of services and Point of Taxation rules; creation of IT platform for processing of transactions & returns and introduction of the Constitutional Amendment Bill in the Parliament in March 2011.

However, there are still certain roadblocks which need to be cleared for timely  implementation of GST such as gaining the States’ consensus on key aspects such as rates, classification, threshold limits, exemptions etc. in order to achieve a smooth transition to GST. Further, the Government needs to relook at the exclusion of levies such as stamp duty or octroi/ cess from the proposed GST model, since due to such exclusion, the cascading impact of taxes for businesses is not fully eliminated. Also, there are various aspects which need clarity in order for the auto industry to be better prepared for the GST regime some key issues being treatment of ongoing area based exemption schemes (from Central Excise perspective) and the State level incentives in form of subsidy or deferment; continuation of end use based exemptions (e.g. for vehicles used as taxis or ambulances) and the continuation of export incentives linked to indirect taxes.

These are only some examples and there would be many similar challenges arising due to interpretational and transitory issues.

The Government needs to urgently address all these issues well within time. This will give the corporate world adequate time to efficiently align its operations with the GST regime and make a smooth transition. “The deadline for actual implementation of GST from April 1, 2016, would be feasible. It all depends on how quickly we are able to reach a consensus on critical issues,” Govt. of India’s Revenue Secretary Mr. Shakti Kanta Das commented recently.

The GST, which has been pending since 2006, is now at a crucial stage where States have proposed to keep products such as petroleum, tobacco and alcohol out of GST ambit and have demanded the exemption list be included in the Constitutional Amendment Bill. As regards the compensation structure, the States have sought a five-year compensation mechanism from the Centre and demanded the same be included in the Constitutional Amendment Bill.

However, the Govt. is quite optimistic that it will be able to reach convergence in the coming weeks or months.

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