Taxes Subsumed under GST & the Components of GST

With the Goods and Services Tax (GST) set to roll out on July 01, 2017, expectations and anxieties are high with individual taxpayers and businesses trying to gear up for a brand new tax regime.

Components of GST

To be able to make the most of the new indirect taxation law, taxpayers need to understand its components well.

The GST Council which was set up by the Central Government to execute GST implementation, has proposed a new tax framework-structure for GST.

First and foremost, GST represents a “One Nation, One Tax” outlook, which is necessary to do away with multi-tax regimes that lead to inefficiencies such as cascading taxes, levy of excise at the point of manufacturing and lack of uniformity in tax levies. Currently, Goods and Services are taxed under various disparate tax categories such as Excise Duty, VAT or Central Sales Tax, Service Tax (in the case of services dispensed) and Customs Duty (for imports). Some of these taxes are levied by the Central government, and others by the state government. A unified approach— GST— will help do away with these complexities by enabling a single tax regime right from manufacturer to consumer. It is important to know that GST is a destination-based tax i.e., the tax is credited to the taxation authority whose jurisdiction prevails at the place of consumption (also called the place of supply). Moreover, GST will be levied on value-addition, by allowing for input tax credit at each stage of the transaction chain.

GST Structure

GST will have four slabs of indirect taxation: 5%, 12%, 18% and 28%, with goods and services attracting any of these slab percentages depending on various factors such as being a luxury good/service. The current indirect tax structure will give way to a Dual GST model, with the Centre and States simultaneously levying GST on a common tax base, as follows:

  • Central GST Bill (CGST): For intra-state transactions related to supply of goods and/or services, levied by the Centre.
  • State or Union Territory GST Bill (SGST or UTGST): For the supply of goods and/or services in the States and Union Territories, levied by the States/Union Territories.
  • Integrated GST Bill (IGST): For inter-state transactions and imports related to supply of goods and/or services, carried out by the Centre.

Under this structure, the CGST and SGST/UTGST will be levied simultaneously on the same price or value. Here is an example of how this will happen: Consider a steel supplier who manufactures in Jharkhand and supplies steel to another company within Jharkhand. Let us assume the rate of CGST to be 10% and SGST to be 7% and the selling price of the steel to be Rs. 100. The supplier will charge the client a CGST of Rs 10 and SGST of Rs 7. The supplier needs to deposit Rs 10 in his Centre taxation account, and Rs. 7 in the State taxation account. Due to input credit facility, the supplier has the option of setting off the total payment (Rs 17) against the tax he paid on his purchases or inputs. However, these credit values cannot be mixed—for CGST-setoffs he can utilize only the CGST credit; for SGST-setoffs he can utilize only SGST credit.

Dual GST

A Dual-GST is particularly suitable for the Indian economy because in India both the Centre and States are assigned the duty of levying and collecting taxes. So far, the Constitution clearly demarcated the tax levying and collection duties of the Centre and State, with the Centre responsible for taxing the manufacture of goods, and the State responsible for taxing the sale of goods. For services, only the Centre was allowed to levy Service Tax. To override this segregation of power, and enable the smooth implementation of GST, a Constitutional amendment (Constitution Act, 2016) was made so as to simultaneously empower the Centre and the States to levy and collect this tax. With this amendment, the Dual GST regime will now align well with the fiscal federal protocols of India.

Taxes subsumed under GST

The following are the disparate taxes (levied by the Centre and States) which will be subsumed under the new dual-GST regime.

(A) Taxes currently levied and collected by the Centre:

  • Central Excise Duty
  • Duties of Excise (Medicinal and Toilet Preparations)
  • Additional Duties of Excise (Goods of Special Importance)
  • Additional Duties of Excise (Textiles and Textile Products)
  • Additional Duties of Customs (commonly known as CVD)
  • Special Additional Duty of Customs (SAD)
  • Service Tax
  • Central Surcharges and Cesses so far as they relate to supply of goods and services

(B) Taxes currently levied and collected by the States:

  • State VAT
  • Central Sales Tax
  • Luxury Tax
  • Entry Tax (all forms)
  • Entertainment and Amusement Tax (except when levied by the local bodies)
  • Taxes on advertisements
  • Purchase Tax
  • Taxes on lotteries, betting and gambling
  • State Surcharges and Cesses so far as they relate to supply of goods and services

The taxes to be subsumed were decided after intense debate and consideration of some core principles that were in line with the GST ethos. Each tax was first examined to ensure it qualified for indirect taxation and was related to the supply of goods or services. Moreover, a tax which was to be subsumed needed to be part of the transaction chain right from imports through manufacturing to the provision of services and the consumption of goods/services. Another important criteria to allow a tax to be subsumed was that the subsumation should lead to free flow of tax credit at Intra- and inter-State levels. Also, the revenue considerations of both the Centre and the State were taken into perspective while arriving at the final list of subsumed taxes.

Clearly, the change is huge, and the sooner consumers and businesses get familiar with the implications on Term finances, the better they will be equipped to benefit from the new GST reforms.

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