1.1 Background of GST
The present structure of Indirect Taxes in India is based on three lists in Seventh Schedule to Constitution of India, which came into effect on 26-1-1950. These lists are mostly based on Government of India Act, 1935. The provisions were based on situation prevailing in 1935. That structure has become outdated due to changes in situations, technology etc.
World has moved towards common Goods and Services Tax (GST) long ago. However, so far as India is concerned, GST is the tax for twenty first century [It is rightly said that India is like elephant. It takes time to start, but once started, it is very difficult to stop it].
Barring unforeseen circumstances, GST is likely to come into effect on 1-7-2017.
1.1-1 Major defects in present structure of indirect taxes
Following can be summarized as major defects in present structure of indirect taxes :
1.3 What is Goods and Services Tax?
Goods and Services Tax means a tax on supply of goods or services, or both, except taxes on supply of alcoholic liquor for human consumption [Article 366(12A) of Constitution of India inserted w.e.f. 16-9-2016]
Note that the word used is 'supply' and not 'sale'. Thus, stock transfers, branch transfers will also get covered under GST net.
GST will be payable on free supplies made to related persons. GST will not be payable to free gifts and free samples to unrelated person, but input tax credit in respect of such goods will have to be reversed.
IGST will be payable on inter-state stock transfers and branch transfers [Though CGST Act and IGST Act have not been extended to J&K, IGST will be payable].
For stock transfers or branch transfer within the State (except J&K), SGST and CGST will be payable only where the taxable person has more than one GST registrations within the State. If there is single registration within State, 'Bill of Supply' (challan) will be sufficient.
Basic scheme of GST is as follows —
1.3-1 Broad definition of 'service'
'Services' means anything other than goods [Article 366(26A) of Constitution of India inserted w.e.f. 16-9- 2016].
Definition of 'service' is risky. As it is presently worded, it can cover even immovable property. However, sale of land and fully constructed and completed buildings have been excluded from purview of GST.
The definition of 'service' is so broad that practically ,there is no limit for imposing any tax by Union or State Governments.
1.3-2 Dual GST for supply of goods and services within State
There will be dual GST - State GST (SGST) and Central GST (CGST) on supply of goods and services within the State [Article 246A of Constitution of India inserted w.e.f. 16-9-2016].
Territorial waters (i.e. 12 nautical miles inside the sea) will be part of State so far as GST is concerned.
SGST will also apply in Union Territories having legislature. These are - Delhi and Puducherry.
Both CGST and SGST will be on supply of goods and services within the State.
1.3-3 Union Territory Goods and Service Tax (UTGST)
In case of Union Territories which do not have legislature, UTGST (Union Territory Goods and Services Tax
will be payable. These are as follows [section 2(8) of UTGST Act and section 2(114) of CGST Act—
(a) the Andaman and Nicobar Islands;
(c) Dadra and Nagar Haveli;
(d) Daman and Diu;
(e) Chandigarh; and
(f) other territory.
For the purposes of CGST Act and UTGST Act, each of the territories specified in sub-clauses (a) to (f) shall be considered to be a separate Union territory.
Delhi and Puducherry have their own legislatures and they will pass their own SGST Act.
'Other Territory' - "Other territory" includes territories other than those comprising in a State and those referred to in sub-clauses (a) to (e) of section 2(114) - section 2(81) of CGST Act.
This will cover Exclusive Economic Zone (except territorial waters). Thus, 'other territory' means area inside sea between 12 nautical miles to 200 nautical miles inside the sea.
UTGST will apply for supply of goods and services within that area.
'Other Territory' will not cover Jammu and Kashmir and CGST Act and IGST Act have not been extended to J&K [see section 1(2) of IGST Act and section 1(2) of CGST Act].
1.3-4 IGST for interstate transactions
In case of Inter State supply of goods and services, there will be integrated GST (IGST) imposed by Government of India [Article 269A(1) of Constitution of India inserted w.e.f. 16-9-2016].
Equivalent IGST (CVD) will also be imposed on imports [Explanation to Article 269A(1) of Constitution of India]
The IGST Rate is double the CGST rate.
IGST and CGST rates will be same allover India and will not vary from State to State. Otherwise there will be utter chaos.
Revenue from IGST will be apportioned among Union and States by Parliament on basis of recommendation of Goods and Service Tax Council [Article 269A(2) and Article 270(1A) of Constitution of India inserted w.e.f. 16-9-2016].
This apportionment will be required as input tax credit of IGST can be used for SGST and vice versa.
Since IGST will be on 'supply of goods or services', IGST will be payable on inter-state stock transfers, branch transfers etc.
However, CGST, SGST, UTGST or IGST will not be payable if goods are sent for job work outside the factory.
1.3-4A GST is consumption based tax based on Vat principle
GST is consumption based tax, i.e. tax will be payable in the State in which goods and services are finally consumed. GST will be based on Vat system of a lowing input tax credit for payment of tax on output supply.
The States from which goods are supplied will not get any tax as goods are consumed in another State.
In case of inter-state supplies, IGST will be payable. Input Tax Credit of IGST paid in one State will be available to receiver of goods or services in another State.
1.3-5 Input Tax Credit
Allowability of input tax credit for payment of output tax is one of the key features of GST. This will avoid cascading effect of taxes.
IGST will ensure seamless movement of goods across the country (except J&K) as taxes will move along with goods.
1.3-6 Finance Cost will increase
Since IGST will be payable on inter-state branch transfers and stock transfers, finance will be blocked and interest burden of dealers having inter-state transactions will increase considerably.
1.3-7 Central Excise duty on petroleum and tobacco products
Central Excise duty will continue on petroleum products and tobacco products [Entry 84 of List I (Union List) of Seventh Schedule to Constitution of India as amended w.e.f. 16-9-2016].
Tobacco products will be subject to excise duty plus GST.
1.3-8 Sales tax on petroleum products and alcoholic liquor within State
States will have powers to impose sales tax on sale within the State on petroleum products and alcoholic liquor for human consumption [Entry 54 of List II (State List) of Seventh Schedule to Constitution of India as amended w.e.f. 16-9-2016].
Thus, petroleum products will be presently out of GST.
Petroleum Products means petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.
Petroleum products will be brought in GST network at a later stage on recommendation of GST Council - section 5(2) of IGST Act.
1.3-9 Tax on entertainment only by Municipalities, panchayat, regional council and district council
Municipality, Panchayat, Regional Council and District Council will have powers to impose tax on entertainment and amusement [Entry 62 of List II (State List) of Seventh Schedule to Constitution of India as amended w.e.f. 16-9-2016]
District Councils for administration of Tribal Areas in States of Assam, Meghalaya, Tripura and Mizoram will have powers to impose entertainment tax [paragraph 8(3)(d) of Sixth Schedule to Constitution of India inserted w.e.f. 16-9-2016].