Dual GST — turning into reality     

The Goods and Services Tax (GST) is no longer a distant dream. The Empowered Committee of State Finance Ministers has released the First Discussion Paper on the proposed GST, which lays down the proposed GST framework and the steps being taken for its successful implementation at the earliest.

This Discussion Paper is most relevant to the trade at large, be it a large conglomerate or a small-scale industrial unit. GST assumes this significance in view of the fact that it will affect the entire supply chain from procurement to distribution of every entity operating above a meagre threshold limit prescribed.

It has already been announced by the Finance Minister and reconfirmed in the Discussion Paper that India is going to implement the dual GST model, wherein the Centre and the States shall levy GST concurrently.

The genesis of this dual GST model, as opposed to a single unified GST across the country, can be said to be largely influenced by the federal structure of taxation followed by India where both the Centre and States have a role to play in levy and administration of indirect taxes.

Globally tested

This kind of dual GST model, though not quite identical, is already tried and tested internationally in Brazil and Canada, among others, which have adopted versions of dual GST.

It is widely acknowledged that the dual GST model has been well implemented in Canada compared to Brazil. It is essential for the Indian Government authorities to take a close look at the success story of dual GST implementation in Canada, to enable smoother transition to GST.

The Canadian model gives us important lessons that could be taken for a better implementation of dual GST. The GST system works better if a single rate is imposed by each taxing jurisdiction.

Inter-governmental co-ordination is an essential requirement for the success of dual GST. Uniformity in rate structure has been considered by the Empowered Committee while preparing the GST framework as emphasised in the Discussion Paper.

Also, the manner in which inter-State transactions are going to be dealt with through an Integral GST (IGST) mechanism reflects the intention of having a better co-ordination between governments.

The questions as to how many of the entire existing transaction taxes would be subsumed into the proposed GST have now been answered with an elaborate list of taxes proposed to be covered in the CGST and SGST respectively. It appears from the suggested list that stamp duty would continue to remain outside the purview of the dual GST, which may impact the transactions in the real estate sector.

Effect of the model

This kind of GST model where all the supplies (not the event of manufacture/sale of goods or provision of services) are subject to both CGST and SGST is going to impact the different set of players in the industry as under:

The manufacturers will be liable to CGST, SGST and IGST in place of the current Central Excise duty and State-level Value Added Tax (VAT)/Central Sales Tax (CST)

The traders who were hitherto liable to pay only State-level VAT/CST depending on the situs of sale, will be liable to CGST and SGST along with IGST in case of inter-State sales.

The service providers who were hitherto liable to pay only service tax levied by the Central Government, will be liable to CGST and SGST along with IGST.

Thus, it prima facie appears that there would be additional burden of compliance on the traders and service providers under both the pieces of GST legislation. In addition to compliance requirements, the working capital impact that could arise in view of the fact that there is a restriction of utilisation of credits of CGST and SGST against respective taxes only needs to be taken into consideration.

The concept of IGST is also set to create complexities in the manner of taxing inter-State transactions, particularly in the area of services. This is primarily in view of the fact that the concepts of usage, consumption, receipt of services are open to wide interpretations as has already been seen in the case of cross border service transactions under service tax.

The chances of litigation seem to be more when the tax is sought to be levied is disputed by two different State authorities by differently interpreting the provisions for determining situs of supply.

The success of GST lies in its implementation. It will be interesting to see how the Centre and the States resolve the open issues and provide India with framework that will boost the economic activity.