Goods And Service Tax - A Consumption Based Destination Tax

By: Taxmannlaw | Posted: 16th September 2009

V. Gangadharan

The Goods and Service Tax (GST), a landmark in the history of tax reforms, after the implementation of VAT, has started its journey by the Finance Minister's public endorsement of the dual GST model.

The dual GST model will comprise of a Central GST and State GST. The Centre and the State will each legislate, levy and administer the Centre and State GST, separately. GST centres round evolving an efficient and harmonize consumption tax system in the country.

For the purpose, amendments to the Constitution are necessary as federal GST would extend beyond manufacturing stage and the States would be able to collect taxes on services.

1. France was the first country which introduced a comprehensive goods and service tax Regime in 1954. Today, it has spread to about 150 countries. The Goods and Service Tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level. Integration of goods and services taxation would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatments of manufacturing and service sector. The introduction of goods and services tax will lead to the abolition of taxes such as octroi, Central Sales Tax, State level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, and eliminate the cascading effects of multiple layers of taxation. GST will facilitate seamless credit across the entire supply chain and across all States under a common tax base.

As we have parallel systems of indirect taxation at the Central and State levels, each of the systems needs to be reformed to eventually harmonize them. The central excise duty should be converted into a full fledged manufacturing stage VAT on goods and services and the States sales tax systems should be transformed into a retail stage destination based VAT, before the two are integrated. At the central level, beginning has been made by converging widely varying tax rates and extending input tax credit to convert excise duties into CENVAT.

2. Through a tax credit mechanism, GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax. Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both Federal and State or provincial Governments. In India, a dual GST is being proposed wherein a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction.

3.About 150 countries across the world have introduced GST in one form or the other. The GST rate in various countries ranges from 5 per cent in Taiwan to 25 per cent in Denmark. GST, consumption based destination tax, would be a major deviation in the arena of the indirect tax administration. After the implementation of Value Added Tax (VAT) in the States during the year 2005, the Budget 2009 proposed to implement GST by April 1, 2010. In the Budget Speech, the Finance Minister repose confidence on the Empowered Committee of State Finance Ministers which had made considerable progress in preparing the roadmap and the design of GST. The Empowered Committee has reached an agreement on the basic structure of GST in keeping with the principle of fiscal federalism enshrined in the Constitution of India.

4. The model will be a dual GST comprising of a Central GST and State GST. The Centre and the State will each legislate, levy and administer the Centre and State GST separately. GST is a part of the proposed tax reforms that center round evolving an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the Central and State levels. Each of the systems needs to be reformed to eventually harmonize them. In the Union Budget for the year 2006-07, the Finance Minister proposed that India should move towards national level Goods and Services Tax that should be shared between the Centre and the States. He proposed to set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. The first step towards introducing GST is to progressively converge the service tax rate and the CENVAT rate.

5. The implementation of VAT encountered with several postponements of the cut-off date. The Government, the Empowered Committee and the Chief Ministers conference decided to switch over to VAT after overcoming several hurdles. For its implementation the Finance Ministry resorted to a constitutional amendment to allow States to tax services as recommended by the G.C. Srivastava Committee. Earlier G.C. Srivastava Committee on service tax had recommended either bringing services in the concurrent list or allowing States to tax services on the lines of the Central Sales Tax Act. Before the amendment, the power to levy tax on services is not mentioned either in the Union List or State List contained in the Schedule VII of the Constitution. With the then constitutional framework the only option is to invoke entry 97 of the Union List which has been vested with residuary powers to levy any tax not mentioned in the State List or the Concurrent List. The Central Government had invoked the entry 97 and taxed various services. Entry 97 which reads as ‘Any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists.'

6. The 95th Constitutional Amendment Bill for the inclusion of services for levying service tax has been approved by the Cabinet and passed by both Houses of the Parliament. By this amendment, the Bill proposed to insert a new entry 92C, and a new article 268A to enable the levy by the Union, but collected and appropriated by the States and to frame a law to determine how the proceeds of tax would be shared with the States.

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Tags: service sector, stamp duty, finance minister, goods and services tax, transportation of goods, tax levy