India has debated moving to a Goods and Service Tax (GST) for over 16 years. However, recent developments — many of which have been reported in this blog — strongly point toward the country adopting a GST in the next several months.
Since the Government ratified the GST Constitution Amendment Act on Sept. 16, 2016, India had one year to replace its existing indirect taxes with a GST. The original implementation date of April 1, 2017 was too ambitious due to unresolved issues, and India has postponed the date to July 1, 2017. The government has now reached a consensus, paving the way for the largest tax reform of the century.
As momentum built toward adopting a GST, defining the relative collection powers of the central and state governments was the last major hurdle. The GST Council — led by the Finance Minister and composed of Ministry-level representatives of both factions — was responsible for addressing this. The details of the compromise solution they reached last week, essentially creating dual control of the GST, can be found here.
Given the current momentum around GST adoption and the probably July 1 effective date, businesses need to take immediate steps to understand how the tax will work. This blog post details some of the GST’s foundational elements:
GST Rate Structure
The GST Council announced the GST Rate Structure on November 3, 2016, consisting of four tiers plus a zero rate and exemption:
- 18 percent “standard” rate to apply to common goods
- 28 percent “increased” rate to apply to luxury items
- 12 percent “reduced” rate to apply to certain goods
- 5 percent “super reduced” rate to apply to common household items
- Exemption to apply to “essential goods”
The rate structure applicable to services remains to be defined, as well as a detailed list of the items specifically subject to the increase, reduced rates and the exemption.
GST Registration for “Existing Taxpayers”
“Existing Taxpayers” are required to enroll online via the GST System Portal, www.gst.gov.in. The portal went live on Nov. 8, 2016, and enrollment commenced soon thereafter. While access to the portal is intermittent at best, note that there are no exceptions to the requirement and no ability to enroll by phone or mail.
The term “existing taxpayers” is defined as businesses registered under existing indirect taxes, e.g., Service Tax, State VAT, Central Excise, Entry Tax, Luxury Tax, and Entertainment Tax.
An enrollment schedule is available here. Enrollment timing is dictated based on the state (Deli, Puducherry, Punjab, etc.) where enrollees are currently registered for indirect tax. Organizations registered for the federal Service Tax only are the last on the list and must enroll between Jan. 9 and Jan. 31, 2017.
More Reform to Come
Additional details about the new GST will likely be included in the Union Budget for 2017, scheduled to be presented by the Finance Minister on Feb. 1, 2017.
Even though the existing service tax will be replaced with the GST, reports indicate the new budget may include a rate increase for the Service Tax from 15 percent to 18 percent. If true, such a rate change may signal India’s intent to apply an 18 percent standard GST rate on services.
Immediate Next Steps for Businesses
The GST Constitutional Amendment Act passed in Sept. 2016 allows the current indirect tax systems to continue for no more than one year. GST must be implemented no later than September 16, 2017 and it appears likely that GST will become a reality on July 1, 2017.
This date is approaching and businesses need to take immediate steps to ensure:
- Their compliance systems can account for a GST as of July 1
- Their systems will contain GST rules effective July 1
- GST logic is in place sufficiently early to allow for advance testing so as to ensure all transactions flow seamlessly before and after the transition
By no means is the full GST picture complete. Stay tuned for further insights and analysis in the days to come.
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