GST Implementation will have likely effect on the digital India economy

We in India are influenced by what is happening in the foreign world especially when it is the US, UK, Europe and Australia. The GST itself has its bearing in the UK, Europe and Australia and has been implemented there. We have been struggling with the GST implementation in India for a decade but the serious action has been there in the last two years.

In the beginning of 2015, the European Union extended its consumption tax to include broadcasting and electronic service providers based on the location of their customers. The digital downloads and services sold to European retail consumers are taxed at VAT rates of up to 27 per cent. Thus, the digital retail economy is a significant source of tax revenue there.

In Australia the local digital product and service providers have to charge the GST on retail sales. They were at a disadvantage as compared to the overseas suppliers who were not liable for taxation. In the 2015-16 budget the Australian government has extended the GST to offshore intangible supplies to Australian consumers. This will come into effect from July 2017.

Not to be left far behind the CBDT panel in India has recommended the imposition of 6 to 8 per cent tax on certain digital services. The private biggies like Amazon and Flipkart were a part of this panel which worked on the taxation of e-commerce. The panel has identified thirteen digital services for a levy of this tax which is being termed as an equalisation levy.

The services offered digitally like online collection of payments, website hosting, design and creation of websites, email, blogs, radio and television advertising may attract the equalization levy. In future, the online sale of goods and services that include software, movie and song downloads, books and games, and even online consumption of news may be brought under the ambit of this levy. At present, the B2B transactions may only be taxed and the individual consumers may be spared.

Before the GST is implemented in India the country seems to be following the footprints of the developed world in taxing the digital economy. These proposals will affect the entities like Google and Facebook but the start-ups that rely heavily on digital marketing will also be affected.

The government is pushing through for digital payments to bring the money under the taxman’s scanner. This will also limit the flow of black money in the system. All people are now eyeing the GST bill which is a critical requirement for the tax reforms in this direction. Today, a large number of taxpayers do not use the ERP based systems for their financial transactions. With the digitisation campaign, it is expected that the e-disconnected taxpayers will be brought online at the time of GST implementation.

The government in office has announced the digital India reform. Suitable measures are being planned along with RBI to usher India into a cashless or digital economy. There have to be incentives for online transactions and taxes for cash withdrawals and payments.

To summarize, on one hand the government is bringing more and more digital services under the tax net and on the other it is promoting the use of digital transactions to bring them under the tax scanner. The delay in the GST is only giving them more time to enforce the digital economy in order to reap the benefits when the GST is finally implemented.

GST Implementation: Moving One Step at a Time

Implementation of GST regime and ensuring a smooth transition from the current regime is indeed a mammoth task for the Indian government. Nonetheless, the government is leaving no stone unturned.

Instead of taking one giant leap and imposing everything at one go, the government is trying to take small steps towards their ultimate goal.
In an attempt to create a conducive environment for the acceptance and implementation of GST, the government today hinted towards increasing the threshold limit of Service Tax exemption from Rs. 10 lacs to Rs. 25 lacs.

This would not only mean less compliance for small businesses but would also help in bringing their cost of services down enabling them to compete and survive in today’s challenging environment.

The step as proposed to be taken will not only boost small businesses and enterprises but would also mean moving a step ahead towards GST implementation as the increase in exemption limit will be in accordance with GST.

The move will further help authorities to get adapted to the new tax regime. It will also give time to the concerned authorities to focus on big tax payers.

Apart from Service tax, CENVAT also needs to be considered. It is required that it also be aligned to the GST limits for smooth functioning but that seems difficult before GST is implemented.

GST is likely to end the tax exemption

GST is a welcome change: At present, there is a general consensus among the industry which is largely in support of the GST. However, it is mainly led by the manufacturing sector as they expect a reduction in the taxation. There are many others sectors that are benefiting because of simplification in inter-state taxation and subsuming of many tax variants. The taxes including CGST, SGST, and IGST will all be payable online and process will be simplified. Keeping all this in mind the industry is welcoming the GST and wants it implemented.

Firm stance on exemptions: The surprise factor that is coming out the industry wants to continue with the exemptions. They want that keep on getting the incentives in future also. The government is very clear in its stance, “You cannot have the cake and eat it too.” The GST implementation and the continuation of exemptions cannot go hand in hand. The exemptions are responsible for breaking the CENVAT chain. There is a tax tag on certain items which the next man in the chain has to absorb. Why should he be doing it? The government is bent upon bringing the maximum industry under the ambit of taxation and doing away with exemptions. They believe this to be the right path for the smooth implementation of GST.

Process simplification: The government is also trying to sort out the rules that are complex and result in litigations. Examples of this are the CENVAT Rule 6 and Rule 7 that accounted for around 11 per cent of the litigations. The government has revamped and simplified these rules. The impact of this would be around 1000 Crores but the government is willing to take it as the cost of litigation was higher than the revenue earned through it. The Central board of Excise and Customs is also working on withdrawing all old pending prosecutions also. The logic behind all this exercise is to make the system simple for the tax payer and reduce the interaction with the tax department.

The basis of the Goods and Services Tax is not only to simplify the tax mechanism but also to bring the maximum number of sectors under the tax net. Only the manufacturing sector contributes around 17 per cent to the country’s GDP of 110 lakh crore. A large part of the industry is out of the ambit of taxation and this includes the small scale industries, textiles, and edible oil etc. On top of it, comes the area based exemption that is costing the economy around one lakh crore.

Similar changes are being worked out in the Customs Act. These will allow for removal of goods directly from the port without going through a container freight station. Also, deferment of payment of customs duty is being permitted. The purpose behind the whole exercise is to simplify the entire process of complying with the tax laws while getting the maximum industry, trading companies and dealerships under the tax net. The government wants to bring in the GST with a wider tax base and limited or practically no exemptions.

Is Government Taking Step Closure to GST

With the GST implementation deadline of April 2016 becoming a non-event, questions are up once again on the fate of the Goods and Services Tax. In this year’s budget speech in the Parliament, there was not much ado on the GST. This was in stark contrast to the last year’s budget session when there was a firmness to move towards GST regime within a year. Is it that the government is resigned to the fact that they do not have a majority in the Upper house and till they get it, the GST bill cannot be passed?

No, the government does not seem to be sitting idle on the GST issue. A recent statement from the finance minister that he is in agreement that the highest rate of GST should not go beyond 18% had raised hopes that the bill may be passed in the budget session. However, the Congress party demand for a cap of 18% in the constitutional amendment bill was not heeded to. With the second part of the Parliament session beginning from the 25^th of April there is hope once again that the government is likely to push through the tax reform.

Another noticeable action that reiterates the government’s resolve to go ahead with the GST is the focus on the administrative reforms on the tax front. The items that had been enjoying exemptions are being brought under the tax regime. This includes the jewellery items with the exception of silver jewellery and the branded apparel & clothing accessories with a retail sale price of INR 1000 and above. The reaction from the jewellers was an agitation where they said they were not willing for a 1% and 12.5% excise duty rates. The government is firm on its stand to bring this sector under taxation.

The concessional notification on the apparel and clothing accessories have been withdrawn and excise duty is proposed. It is very clear that the excise duty will be subsumed under the GST. The tax changes at this time are an indicator that irrespective of the passage of the GST bill in the parliamentary session, the government is busy with the groundwork for the reform. It is doing away with the concessions and getting more and more sectors under the tax ambit. It is now very clear to them that higher the number of concessions, more will be the Revenue Neutral Rate (RNR) of the GST.

Over the years, the Service Tax rate has also gone up. The government has upped the rate to 14.5% in the budget this year and a krishi Kalyan cess of 0.5% from June 2016 will take it up to 15%. This move is also an indicator that the government is bringing the service tax rate closer to the RNR rate of 17 to 18% in the GST  This will avoid a steep hike for the service tax rate when the GST is finally implemented.

The indicators from the government are firm and clear that it is going ahead with its GST reform process. They are utilizing the time delays to set the tax administration in order. The industry, trade and dealerships would do well to iron out their tax issues and gear up their infrastructure and resources for the biggest tax reform of the times, in India.

Excluding power out of GST to increase the cost of power

As the time to roll out GST draws closer, the soup of controversies around it thickens. This time the focus is on the power sector. The government’s recent decision to keep electricity out of the scope of GST bill has raised many eyebrows.

 

The exclusion of electricity from the proposed bill is likely to increase the cost of power by around 6-18% for the consumers.

Currently power is subject to duties levied by different state governments and these duties are paid by the consumer. However, captive power generation is exempted in some cases. Currently, the inputs required by industries generating power are taxed but the companies are able to offset these input taxes against liabilities on outputs other than power.

There are issues with output tax credit in the current regime also but the condition may get aggravated under GST. Under the proposed GST regime, the companies will continue to pay tax on their inputs of fuel and machinery but will not be able to claim credit on the output, electricity being exempted from GST.

Therefore, consensus is on either including power under the ambit of GST or in bringing about a provision to refund the taxes levied on inputs along with zero-rated output.

The worst to be hit would be the renewable energy sector as the inputs of machinery and equipment would be taxed at around 18% under GST and since tax credit on output will not be available, it will mean a direct increase in the cost of power to consumers by 18%. The power companies will also be at a disadvantage due to high input costs. Further, this can lead to inflation in the entire economy because power is used for the generation and supply of goods and services.

The solution to the entire problem could be inclusion of electricity under the proposed GST regime and make it zero-rated. The companies and firms engaged in power production would then be able to claim credit on tax inputs.

Recent Updates on GST News and GST Tax System

As the citizens of any country there are certain duties which are applicable to every citizen of that country. The fundamental duty of any citizen of a particular country is to pay taxes on time so that they can get all the services from the government. There are various kinds of taxes like service tax, income tax, value added tax, sales tax, etc. Payment of taxes on time is really very important as it helps the government to function properly. In Indian parliament one new tax bill was introduced in 2014 and passed by the government and it is popularly known as “The Constitution Bill” or The “GST Bill”



What is GST System?

GST or the Goods and Services Tax are already presented in many countries and in India it was introduced in the Lok Sabha in December 2014 which will be implemented from April 2016. The main purpose to introduce such bill in the Indian parliament was to remove number of indirect taxes and also accelerate India’s GDP growth up to 1.7%. In details of GST news this is targeted to be a simple and efficient system of indirect taxation which is already adopted by number of other countries. This system is mainly based upon VAT system of tax implemented by states and it will also modify the present complex tax system and will also help in development of national market. This tax system will be implemented in two stages, one by the centre and the other by the state. Excise duties, service tax, entertainment tax, state vat, etc. will all be under this GST Tax.

Proposals of GST Tax System:

The GST Tax system was proposed in December 2014 and the main features of this proposed bill are as follows.

• The GST rates would typically be in between 15-20% in India, it would bring down the tax rate but eventually it would increase the number of assesses by 5-6 times.
• It would have two components namely Centre GST which would be handled by the central government and secondly State GST which would be handled by the state government.

This Tax system will have its impact on dealers and retailers. No doubt this taxation system would benefit the dealers in India as it will create business friendly environment. It is proposed that when any business registers with the tax authorities it would be provided a unique identification code and the entire business would be correlated with this code and the business would be legally recognized. A lot is being expected from this tax system and get benefited from this kind of tax system.

Budget 2016: GST Rollout: One Target Different Perspectives

With the budget session of the Union Ministry right around the corner, the taxpayers are keeping their fingers crossed. Pinning up lot of hopes and expectations, they are waiting eagerly for the budget to unfold. Where on one side, the upcoming budget may be a cause of anxiety for many; it is an ideal opportunity for the government to bring about changes in the current tax regime so as to help it align with the GST.

To begin with, the government may increase the service tax rate to 16-17% in order to bridge the gap between current tax regime and the proposed GST regime.  They may also rationalise the service tax exemptions that are presently available to the taxpayer in order to align it with the exemptions as proposed under GST.

Another important aspect that needs to be looked into is the CENVAT credit. At present, there are various restrictions imposed on it which prevents one to claim full credit on the tax inputs. Moreover, these limitations are not in accordance with the principles of GST. Therefore, for efficient implementation of GST and to ensure smooth flow of proceedings, these restrictions must be removed altogether.

There is also a need to clarify ambiguity surrounding interpretation of Rule 6(3A) of CENVAT Credit Rules, 2004. The current rule doesn’t expressly provide that inputs and input services used exclusively for taxable service should not be considered for reversal of credit. The government may clarify that such credit is wholly permissible and there is no requirement of reversal.

Taxability of services pertaining to sourcing of goods and services also needs attention. While such services are considered as exports worldwide, in India they are taxable. Ideally they should be considered as exports as per global standards.

The problem of lack of provision for adjustment of service tax paid on bad debts may also be rectified. There are cases where, based on the issuance of invoice or completion of service as per the Point of Taxation Rules, 2011, service tax payment is made, but service charges collection could not be made from service recipients. In such a scenario, service charges become bad debts for which the service tax law does not provide any adjustment.

All in all, it appears that ease of doing business and laying further groundwork for GST would be the two cornerstones on which service tax changes would be based in Budget FY17

Expectations of Common Man

Common Man or an Aam Aadmi knows little about the GST but what he expects is the reduction of his monthly grocery bill. But to the contrary, his grocery bill would be increased post GST implementation. There are various grocery items that currently are not subjected to any excise tax or a tax of as low as 6%. However, under the proposed GST regime, the government is planning to do away with excise exemptions for some items. As a result of which, items like cheese, yoghurt, ice-cream, ready-to-eat foods, frozen foods etc could witness a rise in excise duty to even up to 12.5% thereby affecting the end consumer.

At present, the excise duty structure is laden with various exemptions with around 300 goods being exempted from the list but under GST, the list of exempted items needs to be revised substantially so as to keep the GST rate low. Only essential items need to have exemption post-GST implementation.

The roll out of GST is an opportunity for the government to do away with practices that are hampering the overall growth. It is the time to clean up the system off various exemptions that are available and that result in a complicated system. Applying a universal rule of tax will help simplify things.

Expectations of Government and Tax Authorities

The Chinese and US slowdown could adversely affect the global economy. In the wake of these apprehensions, India lowered its GDP growth protection by 1% from the earlier forecasted rate for the coming year. The lowering of GDP has become a growing cause of concern for the government as it is likely to affect their ability to meet the fiscal deficit target. It is believed that until and unless major reforms are brought about, the situation is not likely to improve.

For 2015-16, indirect tax collections are way ahead of target. The direct tax collection is slightly behind but is narrowing down on the target. So, overall tax collection this year is reasonably comfortable. As per the mid-year review report of the economy, the improvement in buoyancy reflects improved tax administration, especially in relation to indirect taxation. By implementation of GST, the government is expecting to further narrow down this gap and also increase its revenue through indirect taxes by bringing in more businesses in tax net.