GST explainer part-1: What's the tax all about, how does anti-profiteering work and other basic questions answered
Dated 28th June, 2017
The goods and services tax (GST) regime is going to be kicked in with much tamasha, true Narendra Modi style. A special session of Parliament, all chief ministers in attendance, a gong going off at midnight. Is all this warranted? Is GST going to be the gamechanger that a lot of people claim it will be? This is the first of a three-part series, helping you decode the whats, whys and hows of GST.
What exactly is GST?
It is a destination-based tax levied on consumption, which replaces all other indirect taxes. The tax is levied and paid when a consumer buys something (this could even be a company buying inputs for manufacturing a product). The tax is levied on every transaction in the supply of goods and services, barring certain exempted items. The tax levied at one stage can be set off or deducted from the tax to be paid at the next stage.
India has a dual GST. This means that the single rate set for a good or service has two components – a Central GST (CGST) and a State GST (SGST). So 9 percent of an 18 percent GST goes to the Centre and the other 9 percent goes to the state. There is also an integrated GST (IGST) on the inter-state supply of goods and services, which can be set off against CGST and SGST that is to be paid.
If it is just another form of indirect tax, why is there such a big deal over it?
Because it is the biggest and most far-reaching tax reform India has ever seen.
From July 1, India will move to a one-tax, one-nation regime. All goods and services will be taxed at 0 percent, 5 percent, 12 percent, 18 percent and 28 percent wherever they are purchased. So cooking gas will be taxed at 5 percent, jam at 12 percent, corn flakes at 18 percent and a refrigerator at 28 percent whether bought in Punjab or in Puducherry, Meghalaya or Maharashtra.
It reduces the tax burden on the final consumer since it ends the tax-on-tax phenomenon, also known as cascading effect. Earlier, at every stage of movement of, say, a bottle of shampoo from the factory to the shop shelf, some tax or the other was levied, which got added to the cost and this was again taxed at the next stage, pushing up the final price on which state VAT was applied. Now a tax paid at one stage can be deducted from the tax paid at the next stage, reducing the overall tax incidence on the item.
A service provider can offset the tax paid on goods used as inputs and a goods provider can offset the tax paid on services as an input. Airtel and Jio, for example, can offset the tax paid on mobile towers and Godrej and Videocon can offset the tax paid on the transport of inputs for manufacturing refrigerators.
It also writes a new chapter in the history of India’s federalism. Earlier the Centre could only tax the manufacture of goods and inter-state sales (the central sales tax which was levied by it but collected and kept by the states) as well as services. The states could only tax the sale of goods, not services. Now both levels of government can levy and collect GST.
Which items are not subject to GST?
Alcoholic drinks, electricity and five petroleum products (crude, petrol, diesel, natural gas and aviation turbine fuel). These will continue to attract VAT and central excise. The petroleum products have been excluded only temporarily. If these items had been included in GST, the tax rate could have come down further and perhaps even a single or two-slab system with lower rates overall could have been attempted.
Which indirect taxes does GST replace?
Central taxes: All central excise and additional duties of excise, service tax, countervailing duty in the case of customs duty and special additional duty of customs, central surcharges and cesses.
State taxes: State VAT, central sales tax, luxury tax, all forms of entry tax, entertainment and amusement tax (except those levied by local bodies), taxes on advertisements, purchase tax, tax on lotteries, betting and gambling, state surcharges and cesses.
Imports will continue to attract customs duty, which is not subsumed in GST. Besides this, they will also be treated on par with inter-state movement of goods and services, which means that apart from customs duty IGST will be levied, followed by CGST and SGST in the destination state. Input tax credit will be available on the IGST paid. This is meant to give local manufacturers a level playing field with importers.
Exports are zero rated, which means no tax will be paid on them. But exporters can avail input tax credit in the form of refunds. The finance ministry has said 90 percent of the refund due will be paid within one week. The IGST Act has a provision for this for allowing tourists to get a refund on GST paid on goods they have bought when they leave the country. However, the rules and other mechanics of the refund are still to be worked out.
Who decides the rates?
The GST Council, of which the Union finance minister and the finance ministers of all states are members. Decisions are taken by a majority of three-fourth of the weighted votes of members present and voting. The votes of all the states have a weight of two-thirds of the votes cast and that of the Centre one-third. So there can be no unilateral decision on rates by the Centre. The council also decides all other issues related to GST – threshold limits for registration, goods and services that are exempted and the like. What is particularly significant is that states have voluntarily given up their right to levy tax to the GST Council.
Can states decide to break away from this and set their own rates?
On paper, they can. Each state has to pass its own GST law and notify the GST rates separately. So a rogue state can decide to set its own rate if it feels it is losing out in revenues or needs more revenues because of higher expenditures. Noted lawyer Arvind Datar and professor at the National Institute of Public Finance and Policy (NIPFP) Pinaki Chakraborty have pointed this out. There is nothing that can be done to enforce the decision of the GST Council on a state government which chooses to defy it.
However the chances of this happening are low. States have spent enormous bandwidth in the meetings of the empowered committee of state finance ministers over 10 years and in GST Council meetings debating all these issues. They know the advantages of GST and have agreed to it. They are hardly likely to derail it now.
Will GST push up or pull down inflation?
Normally, it would have pushed up inflation. That is what happened in most countries that switched to GST; there was a spike in inflation lasting from anywhere between six months to two years. But whether this will happen in India, given the multiple rates similar to the earlier tax structure, remains to be seen. It all depends on whether manufacturers pass on the benefit of lower costs to the consumers in the form of lower prices.
Price reductions can come either because of lower tax on a product or because the cost or manufacturing a product or providing a service comes down because the manufacturer/service provider is now offsetting taxes paid on inputs. A large number of items of daily consumption have been kept in the 0 per cent and 5 per cent bracket. Revenue secretary Hasmukh Adia said in a television round table discussion that inflation could come down by 2 percent by the end of this financial year. But this is something that will need to be watched.
What’s all the fuss about the anti-profiteering clause?
This is the worrying part of the GST regime. The State and Central GST Acts have a provision which mandates that manufacturers and service providers have to pass on any benefits from reduction in tax rate or availing of input tax credit to consumers in the form of lower prices. This provision was introduced at quite a late stage because of apprehensions that companies may not lower prices even if it is warranted and inflation could go up. A five-member National Anti-Profiteering Authority (NAPA) will be set up to ensure that companies do reduce costs or at least not increase them. There are stiff penalties for companies not passing on the benefits, which includes companies losing their central GST registration. This article highlights the problems that could arise from this. The only saving grace is that NAPA has a life of only two years; it will get wound up after that.