GST and taxation reform in India

Release Date

14 March 2012

Current India taxation system

By SP Joshi, New Delhi

India is a democratic republic having 29 states and 7 union territories with a federal structure. With much cultural and geographic diversity, sales tax rules were designed keeping interests of many stakeholders in mind. The system has been in use for several decades. Laws were modified from time to time but with course of time they became complex and escaped simplicity.

Consequently, Indian sales tax regime became not only tedious but also complicated. Just consider the taxes applicable currently:

  • Excise duty (manufacturing duty for goods manufactured in India or counter veiling duty for imported goods) varying from zero to 14% depending on the product
  • Central Sales Tax (CST) collected by Federal government levied on interstate sales at 2% in general and 1% against submission of a form ‘C’ by buyer
  • State sales tax on local sales. For goods coming from other states, this tax is levied over and above CST
  • Value added tax (VAT): multi point sales tax with set off for tax paid on purchases
  • Service tax: payable by service providers.

The sellers have to deposit the taxes collected every month and have to file sales tax returns every quarter as statutory requirement. This necessitates maintaining of various records including stocks register which is reconciled by tax authorities from time to time. There are multiple agencies engaged in governance of sales tax and manufacturing duties. Currently, a manufacturer has to pay tax on manufactured goods moves and they are taxed at each stage of sales. 

Indian Government has been undertaking economic reforms in a gradual but committed manner. As a part of the reform process, Goods & Services Tax (GST) has been mulled over for past 5 years and state governments were also involved during discussions. 

An Empowered Committee of State Finance Ministers agreed to work with the Central Government to prepare a roadmap for introducing a national level GST. In May 2007 Empowered Committee (EC) in consultation with the Central Government, constituted a Joint Working Group (JWG), to recommend the GST model. Within 7 months of its constitution, JWG presented its report on the GST to the EC. The EC has accepted the report on GST submitted by the JWG.

What does GST mean in India?

GST is a part of the proposed tax reforms in India having a broad base that instigate the applicability of an efficient and harmonized consumption tax system. This system is basically structured to simplify current indirect tax system in India. It integrates the federal excise duties, customs duties, service tax and state VAT into a single point levy i.e. GST. It may be rightly termed as a national level VAT on goods and services with one of the differences that it also covers Service under its scope.

How does GST work in India?

Basically, GST is that tax credit mechanism wherein the tax is levied on goods and services at each point of sale or provision of service. Under this tax regime the seller of goods or the service provider can claim the input credit of tax paid by him (i.e. input GST) for purchasing the goods or procuring the service. Thereafter he can utilize that credit of GST to set off against the amount payable on the supply of goods or services. Precisely, it can be termed as a consumption tax collected on the value-addition made in the goods and services at each stage of the supply chain. Further the peculiarity of this tax structure is that the end consumer, being the last person in the supply chain, has to bear this tax.

India is planning to implement a dual GST system which would be levied at single point. In this GST system, both Central and State taxes will be collected at the point of sale. All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services. Currently, services are taxed at 10 per cent and the combined charge indirect taxes on most goods are around 20 per cent. The combined GST rate is being discussed by government. The rate is expected around 14-16 per cent. After the total GST rate is arrived at, the States and the Centre will decide on the central and state GST rates.

Alcohol, tobacco, petroleum products are likely to be out of the GST regime.

Imported services into India will be subjected to GST by way of a reverse charge. Under the reverse charge mechanism, the recipient of the imported services has to account for the GST on the imported services as if he is providing the services himself. He will then claim the GST accounted for on the imported services as his input tax to be credited against his output tax.

When will GST be introduced to India?

Indian Federal Finance Minister, while presenting the Union Budget in lower house of parliament on 28th February 2011said that the wide-ranging discussions on the Direct Tax Code (DTC) with stakeholders have been concluded and the government will be in a position to implement the DTC from April 1, 2011.Federal Finance Minister has had meetings with the Empowered Committee of State Finance Ministers to finalize the draft Constitutional Amendments on Goods and Services Tax. Based on discussions, some amendments were recommended and incorporated.

The proposed bill was cleared by Group of Ministers and has now been tabled in the parliament on 22nd March 2011. Interestingly, the main opposition party BJP (Bhartiya Janata Party) has favoured the bill and is likely to vote for it after suggesting a few amendments. Some states still have a few issues but Government is confident of resolving them soon. In spite of Government’s confidence, it may still take 5-6 months before GST reaches implementation stage. While April seems too optimistic, it is generally believed that it should go through by October 2011.

What GST means to Australian exporters in India

Companies coming into India to do business usually find it difficult to comprehend the complex tax laws and operational modalities. It sometimes becomes an irritant to conducting business smoothly and progressively. However, with introduction of GST, systems will get simplified and companies need not worry about sales tax implications while spreading sales across Indian states, and above will get rid of all the enormous amount of documentation. It may also result in lowering of overall tax rates due to merging of various components.
Wider market reach will now be possible as interstate transfers of goods will be much easier and faster. Cost of logistics will come down due to lower cost of transport, fewer warehouses and lesser handling.
After implementation of GST, imports into India would attract only basic custom duty and not the top ups like counter veiling and special duty etc. So it will then be only basic custom duty and GST. This would bring down the overall duties/taxes and would make Australian goods more competitive in Indian markets.

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